Senate Banking Subcommittee Reviews the JOBS Act
AT
OCTOBER 30TH’S SENATE BANKING SUBCOMMITTEE HEARING ON THE JOBS ACT, Senators expressed
dismay at the pace of the rulemaking and questioned panelists on how to strike
the right balance between capital formation and federal and state regulation.
In
their opening remarks, Subcommittee Chairman Jon Tester (D-Mont.) and Ranking
Member Mike Johanns (R-Neb.) both were unhappy with the pace of the Jumpstart
Our Business Startups (JOBS) Act implementation, especially concerning
Regulation A Plus.
In
his testimony,
Keith Higgins, Director, Division of Corporation Finance at the U.S. Securities
and Exchange Commission (SEC), discussed the division’s role with the JOBS Act,
as well as recent events that have taken place since July including the
implementation of Title II by adopting amendments to Rule 506 and Rule 144A,
the adoption of rule amendments that disqualify felons and bad actors from participating
in Rule 506 offerings, and proposed additional rule and form amendments related
to offerings conducted in reliance upon Rule 506. Just last week, the SEC
issued proposed rules that would implement Title III and the comment period
will remain open for 90 days after publication in the Federal Register.
On
Regulation S-K, SEC staff is conducting a review “to determine how it may be
modernized and simplified to reduce the costs and other burdens for emerging
growth companies,” which is expected to be finalized and made public “very
soon.”
On
Title IV of the JOBS Act, Higgins stated that the SEC staff has met with
various stakeholders and other interested parties and is working hard to
finalize rule recommendations for the Commission’s consideration.
On
Titles V, VI, and VII, SEC staff is “preparing recommendations for rule
proposals for the Commission’s consideration to address the new requirements of
Title V and VI,” and is in the process of conducting outreach efforts to inform
small and medium-sized businesses of changes made to the JOBS Act.
Question
and Answer w/ Higgins
Timeline
Tester asked when Congress
can expect the JOBS Act to be finalized and operational, to which Higgins said
it was “impossible” for him to give an exact date, but noted that completing
the rulemaking is a “top priority” at the SEC.
Pressed
further if SEC would get everything completed by the end of the first quarter
next year, Higgins said the SEC will get the proposals out “in relatively short
order.”
Qualified
Purchaser Definition & Exemption
Tester
noted that Regulation A Plus has not been finalized yet and questioned whether
SEC staff is still coming to terms with how to structure the qualified
purchaser definition.
Higgins
said the SEC is trying to reach a balance in this area as some prior comments
have described the costs and burdens associated with state registration and
qualification under the existing Regulation A, while others have stressed the
importance of state registration and qualification for investor protection.
“We’re
trying to look at both sides of the coin and balance those views,” he added.
Higgins
also stated that the SEC “is looking at ways in which we can design a system
where between a combination of our review of a register or qualification or
offering materials under Reg A, as well as some characteristics of the
purchaser could work to create a qualified purchaser under Reg A.”
JOBS
Act Outreach
Tester
asked what the SEC can do to better educate entrepreneurs and investors about
the JOBS Act.
Higgins
stated the SEC has put out guidance on the JOBS Act and is willing to work with
industry stakeholders and market participants once the final rules are
implemented. “We’re willing to work with any groups to try to make our rules
more workable and usable,” Higgins said.
Accredited
Investor Standard
Johanns
asked
if income or net worth really was the best indication of a quality investor,
noting that “you also want to make sure you have a place for those outside the
top 1 percent.”
Higgins
replied that SEC staff has begun work on a review of the accredited investor
standard “as it applies to natural persons,” which the income and net worth
tests pertain to. SEC staff will publish a report on this by mid-July 2014,
Higgins said, while also noting that the Government Accountability Office (GAO)
recently put out a study on accredited investors that described what else could
be added to the standard.
The
“holy grail” Higgins said, is defining “the sophistication necessary to be able
to understand investment risks.”
He
added, “I don’t know if anybody has quite yet found what the answer is to that
question. The GAO suggested investor education… participation by an investment
adviser or broker dealer in the investment… investment limitations… all of
those are on the table for natural persons and our work has begun” to try to
figure out this question.
“It’s
an issue, and I don’t think anyone is particularly happy with the current $1
million net worth or $200,000 in annual income,” he said.
Johanns
asked whether the report would involve recommendations for Congressional
action, to which Higgins replied that he believed the SEC “has the necessary
authority” to address the issue.
Sen.
Jack Reed (D-R.I.) questioned
Higgins on the methods of verifying accredited investors.
Higgins
responded that it is a “principles based” method of verification in which one
looks at the nature of the offering, the purchaser, the information already
known about the purchaser, the size of the offer, and the size of the
investment limitations in the offering, and noted that this verification is not
a one-size-fits-all approach. Since commenters asked for certainty, including a
safe harbor, the SEC created four safe harbors in the final rules (annual
income test, net worth test, registered CPAs, attorneys, broker-dealers,
investment advisers providing certification, and self-certification for those
who were accredited investors prior to the JOBS Act) to balance the principles
based approach with an approach that gives issuers certainty.
Pressed
on whether the SEC has the ability to spot check issuers, Higgins said the SEC
requires issuers to explain the verification procedures it undertook in Form D.
The SEC Office of Compliance and Examinations has added to its examination
report for broker-dealers and investment advisers “questions about what they’re
doing to ensure in offerings with which they’re involved that the reasonable
verification procedures are in place.”
Reed
noted that the SEC does not have the ability to go in to an issuer to look at
the records and what issuers have done versus what they have said.
Higgins
replied that he would have to check with SEC enforcement on what they are
planning to do in this area, but noted that “they will be asking for records
from the broker-dealers and investment advisers. I’ll have to check to see what
we’re planning on the issuers.”
PANEL
II
Alan
Lewis, Director of Special Projects at the Natural Grocers by Vitamin Cottage,
Inc., discussed
his early experiences with the JOBS Act and how it helped the company navigate
the market successfully during its IPO.
Robert
Kaplan, Managing Partner at Kaplan Voekler Cunningham & Frank, PLC, touched
on the benefits of Regulation A Plus and noted that forms and procedures
currently in existence under Regulation A can be “readily applied” to
Regulation A Plus and that there should be no need for delay.
Kaplan
also discussed the need to tailor the qualified purchaser definition to address
state concerns related to investor protection by defining a purchaser as
having, excluding (in the instance of natural persons) the value of a
purchaser’s primary residence, either a net worth of at least $500,000 or a
gross annual income of at least $150,000 and a net worth of at least $250,000.
In addition, the amount of investment by a natural person(s) who would be a
qualified purchaser may not exceed 20 percent of the net worth of such natural
person(s).
Rick
Fleming, Deputy General Counsel with the North American Securities
Administrators Association, Inc. (NASAA), remarked
that state oversight “is essential” under Title II of the JOBS Act and stressed
the importance of protecting investors.
That
being said, Fleming warned that without a requirement that the Form D be filed
prior to the use of general solicitation, “there is no way for state securities
regulators to respond to these basic questions.”
In
his testimony, Fleming also discusses how NASAA believes that Congress should
study the impact of high frequency trading “and take steps to ameliorate any
associated risk of harm to retail investors.” Suggested ways to combat HFT
include a transaction tax, a penalty on excessive cancellations, or “a
randomized pause so that the first order placed in the system queue is not
necessarily the first to be executed.”
NASAA
also supports “more aggressive” steps to tackle the numerous electronic
glitches that have recently paralyzed the markets, and requested that Congress
study the issue. In addition, state securities regulators support efforts that
would authorize the SEC to collect “user fees” from federally registered
investment advisers to fund “more frequent” examinations of such advisors.
NASAA also encourages the Subcommittee to reject consideration of legislation
like the JOBS Act 2.0 “until at least after the full impact of the JOBS Act on
investors and securities markets can be determined.”
Sherwood
Neiss, Principal at Crowdfund Capital Advisors, LLC, discussed
the benefits of crowdfunding investing. Neiss noted that there are potential
drawbacks with the crowdfunding rules including compliance costs, the fact that
accredited investors are capped at $100,000, the challenges associated with
compiling disclosure requirements for directors and officers, the
impracticality of audited financials for offerings in excess of $500,000, and
the need for oversight from industry participants not FINRA. Another serious
issue is that the proposed rules “don’t allow funding portals much flexibility
when determining who can list on their sites.”
Striking
the Right Balance
Both
Tester and Johanns touched Regulation A Plus and the importance of balancing
capital formation concerns with investor protection concerns.
Tester
asked Kaplan for his views on the qualified purchaser exemption. Kaplan
responded that the primary benefit of the exemption “is that right now we’re
dealing with a situation where we have federal government oversight and we have
layered upon that the potential state oversight of 50 states. The reality is we
are dealing with 50 different state administrators, they apply their rules
differently… if issuers of the size that I’m talking about who really create
the majority of jobs in this country… there’s got to be some definition that
gives them confidence to efficiently raise capital.”
Acknowledging
state and federal regulators concerns regarding investor protection, Kaplan
added “I do think we need to strike a balance here and get this market stimulated.”
Johanns
followed up by asking Fleming what the right balance is, to which Fleming
replied that NASAA sees Regulation A Plus as a “step forward.” However, NASAA
believes the state should take the lead when it comes to providing oversight
over small business offerings, and Fleming noted that Regulation A Plus allows
states to be primary regulators in this area.
However,
Fleming agreed that there needs to be consistent rules across the 50 states and
NASAA is currently developing a one-stop filing system to make Reg A Plus “as
successful as possible.”
Pressed
when the system will be operational, Fleming said that NASAA is “getting ready
to go out for public comment with our proposal this afternoon. We’ll have a 30
day comment period…. If things follow their normal course, this type of rule
proposal would be considered at the next face-to-face meeting of our members
which is scheduled for next April.”
Kaplan
disagreed with Fleming’s remarks that the federal government defers to the
state in regulating Regulation A securities, and added that “these securities
actually go through a very thorough process of being vetted for disclosure and
adequacy of that disclosure at the federal level.”
Kaplan
argued that the qualified purchaser exemption is an exemption from
registration, “it does not exempt them from regulation at the federal level.”
In addition, Kaplan noted that many state securities regulators defer to the
federal government in the review of Regulation A securities.
“But
the biggest point of concern I have… is with all the things NASAA is doing,
respectfully, NASAA does not police the actual examiner who’s working with the
potential issuer and that’s where we’re seeing the breakdown here” that have
caused unnecessary delays in registrations, for instance, Kaplan said.
“The
motivation for our qualified purchaser definition is look, this is going
through a very sophisticated process at the federal level, we’re layering more
on to that in Regulation A Plus, we certainly understand that there’s got to be
a line, but at the same time we’ve been given this qualified purchaser
opportunity, let’s find a reasoned definition….”
For
more on the hearing, please click
here.
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AT
OCTOBER 30TH’S SENATE BANKING SUBCOMMITTEE HEARING ON THE JOBS ACT, Senators expressed
dismay at the pace of the rulemaking and questioned panelists on how to strike
the right balance between capital formation and federal and state regulation.
In
their opening remarks, Subcommittee Chairman Jon Tester (D-Mont.) and Ranking
Member Mike Johanns (R-Neb.) both were unhappy with the pace of the Jumpstart
Our Business Startups (JOBS) Act implementation, especially concerning
Regulation A Plus.
In
his testimony,
Keith Higgins, Director, Division of Corporation Finance at the U.S. Securities
and Exchange Commission (SEC), discussed the division’s role with the JOBS Act,
as well as recent events that have taken place since July including the
implementation of Title II by adopting amendments to Rule 506 and Rule 144A,
the adoption of rule amendments that disqualify felons and bad actors from participating
in Rule 506 offerings, and proposed additional rule and form amendments related
to offerings conducted in reliance upon Rule 506. Just last week, the SEC
issued proposed rules that would implement Title III and the comment period
will remain open for 90 days after publication in the Federal Register.
On
Regulation S-K, SEC staff is conducting a review “to determine how it may be
modernized and simplified to reduce the costs and other burdens for emerging
growth companies,” which is expected to be finalized and made public “very
soon.”
On
Title IV of the JOBS Act, Higgins stated that the SEC staff has met with
various stakeholders and other interested parties and is working hard to
finalize rule recommendations for the Commission’s consideration.
On
Titles V, VI, and VII, SEC staff is “preparing recommendations for rule
proposals for the Commission’s consideration to address the new requirements of
Title V and VI,” and is in the process of conducting outreach efforts to inform
small and medium-sized businesses of changes made to the JOBS Act.
Question
and Answer w/ Higgins
Timeline
Tester asked when Congress
can expect the JOBS Act to be finalized and operational, to which Higgins said
it was “impossible” for him to give an exact date, but noted that completing
the rulemaking is a “top priority” at the SEC.
Pressed
further if SEC would get everything completed by the end of the first quarter
next year, Higgins said the SEC will get the proposals out “in relatively short
order.”
Qualified
Purchaser Definition & Exemption
Tester
noted that Regulation A Plus has not been finalized yet and questioned whether
SEC staff is still coming to terms with how to structure the qualified
purchaser definition.
Higgins
said the SEC is trying to reach a balance in this area as some prior comments
have described the costs and burdens associated with state registration and
qualification under the existing Regulation A, while others have stressed the
importance of state registration and qualification for investor protection.
“We’re
trying to look at both sides of the coin and balance those views,” he added.
Higgins
also stated that the SEC “is looking at ways in which we can design a system
where between a combination of our review of a register or qualification or
offering materials under Reg A, as well as some characteristics of the
purchaser could work to create a qualified purchaser under Reg A.”
JOBS
Act Outreach
Tester
asked what the SEC can do to better educate entrepreneurs and investors about
the JOBS Act.
Higgins
stated the SEC has put out guidance on the JOBS Act and is willing to work with
industry stakeholders and market participants once the final rules are
implemented. “We’re willing to work with any groups to try to make our rules
more workable and usable,” Higgins said.
Accredited
Investor Standard
Johanns
asked
if income or net worth really was the best indication of a quality investor,
noting that “you also want to make sure you have a place for those outside the
top 1 percent.”
Higgins
replied that SEC staff has begun work on a review of the accredited investor
standard “as it applies to natural persons,” which the income and net worth
tests pertain to. SEC staff will publish a report on this by mid-July 2014,
Higgins said, while also noting that the Government Accountability Office (GAO)
recently put out a study on accredited investors that described what else could
be added to the standard.
The
“holy grail” Higgins said, is defining “the sophistication necessary to be able
to understand investment risks.”
He
added, “I don’t know if anybody has quite yet found what the answer is to that
question. The GAO suggested investor education… participation by an investment
adviser or broker dealer in the investment… investment limitations… all of
those are on the table for natural persons and our work has begun” to try to
figure out this question.
“It’s
an issue, and I don’t think anyone is particularly happy with the current $1
million net worth or $200,000 in annual income,” he said.
Johanns
asked whether the report would involve recommendations for Congressional
action, to which Higgins replied that he believed the SEC “has the necessary
authority” to address the issue.
Sen.
Jack Reed (D-R.I.) questioned
Higgins on the methods of verifying accredited investors.
Higgins
responded that it is a “principles based” method of verification in which one
looks at the nature of the offering, the purchaser, the information already
known about the purchaser, the size of the offer, and the size of the
investment limitations in the offering, and noted that this verification is not
a one-size-fits-all approach. Since commenters asked for certainty, including a
safe harbor, the SEC created four safe harbors in the final rules (annual
income test, net worth test, registered CPAs, attorneys, broker-dealers,
investment advisers providing certification, and self-certification for those
who were accredited investors prior to the JOBS Act) to balance the principles
based approach with an approach that gives issuers certainty.
Pressed
on whether the SEC has the ability to spot check issuers, Higgins said the SEC
requires issuers to explain the verification procedures it undertook in Form D.
The SEC Office of Compliance and Examinations has added to its examination
report for broker-dealers and investment advisers “questions about what they’re
doing to ensure in offerings with which they’re involved that the reasonable
verification procedures are in place.”
Reed
noted that the SEC does not have the ability to go in to an issuer to look at
the records and what issuers have done versus what they have said.
Higgins
replied that he would have to check with SEC enforcement on what they are
planning to do in this area, but noted that “they will be asking for records
from the broker-dealers and investment advisers. I’ll have to check to see what
we’re planning on the issuers.”
PANEL
II
Alan
Lewis, Director of Special Projects at the Natural Grocers by Vitamin Cottage,
Inc., discussed
his early experiences with the JOBS Act and how it helped the company navigate
the market successfully during its IPO.
Robert
Kaplan, Managing Partner at Kaplan Voekler Cunningham & Frank, PLC, touched
on the benefits of Regulation A Plus and noted that forms and procedures
currently in existence under Regulation A can be “readily applied” to
Regulation A Plus and that there should be no need for delay.
Kaplan
also discussed the need to tailor the qualified purchaser definition to address
state concerns related to investor protection by defining a purchaser as
having, excluding (in the instance of natural persons) the value of a
purchaser’s primary residence, either a net worth of at least $500,000 or a
gross annual income of at least $150,000 and a net worth of at least $250,000.
In addition, the amount of investment by a natural person(s) who would be a
qualified purchaser may not exceed 20 percent of the net worth of such natural
person(s).
Rick
Fleming, Deputy General Counsel with the North American Securities
Administrators Association, Inc. (NASAA), remarked
that state oversight “is essential” under Title II of the JOBS Act and stressed
the importance of protecting investors.
That
being said, Fleming warned that without a requirement that the Form D be filed
prior to the use of general solicitation, “there is no way for state securities
regulators to respond to these basic questions.”
In
his testimony, Fleming also discusses how NASAA believes that Congress should
study the impact of high frequency trading “and take steps to ameliorate any
associated risk of harm to retail investors.” Suggested ways to combat HFT
include a transaction tax, a penalty on excessive cancellations, or “a
randomized pause so that the first order placed in the system queue is not
necessarily the first to be executed.”
NASAA
also supports “more aggressive” steps to tackle the numerous electronic
glitches that have recently paralyzed the markets, and requested that Congress
study the issue. In addition, state securities regulators support efforts that
would authorize the SEC to collect “user fees” from federally registered
investment advisers to fund “more frequent” examinations of such advisors.
NASAA also encourages the Subcommittee to reject consideration of legislation
like the JOBS Act 2.0 “until at least after the full impact of the JOBS Act on
investors and securities markets can be determined.”
Sherwood
Neiss, Principal at Crowdfund Capital Advisors, LLC, discussed
the benefits of crowdfunding investing. Neiss noted that there are potential
drawbacks with the crowdfunding rules including compliance costs, the fact that
accredited investors are capped at $100,000, the challenges associated with
compiling disclosure requirements for directors and officers, the
impracticality of audited financials for offerings in excess of $500,000, and
the need for oversight from industry participants not FINRA. Another serious
issue is that the proposed rules “don’t allow funding portals much flexibility
when determining who can list on their sites.”
Striking
the Right Balance
Both
Tester and Johanns touched Regulation A Plus and the importance of balancing
capital formation concerns with investor protection concerns.
Tester
asked Kaplan for his views on the qualified purchaser exemption. Kaplan
responded that the primary benefit of the exemption “is that right now we’re
dealing with a situation where we have federal government oversight and we have
layered upon that the potential state oversight of 50 states. The reality is we
are dealing with 50 different state administrators, they apply their rules
differently… if issuers of the size that I’m talking about who really create
the majority of jobs in this country… there’s got to be some definition that
gives them confidence to efficiently raise capital.”
Acknowledging
state and federal regulators concerns regarding investor protection, Kaplan
added “I do think we need to strike a balance here and get this market stimulated.”
Johanns
followed up by asking Fleming what the right balance is, to which Fleming
replied that NASAA sees Regulation A Plus as a “step forward.” However, NASAA
believes the state should take the lead when it comes to providing oversight
over small business offerings, and Fleming noted that Regulation A Plus allows
states to be primary regulators in this area.
However,
Fleming agreed that there needs to be consistent rules across the 50 states and
NASAA is currently developing a one-stop filing system to make Reg A Plus “as
successful as possible.”
Pressed
when the system will be operational, Fleming said that NASAA is “getting ready
to go out for public comment with our proposal this afternoon. We’ll have a 30
day comment period…. If things follow their normal course, this type of rule
proposal would be considered at the next face-to-face meeting of our members
which is scheduled for next April.”
Kaplan
disagreed with Fleming’s remarks that the federal government defers to the
state in regulating Regulation A securities, and added that “these securities
actually go through a very thorough process of being vetted for disclosure and
adequacy of that disclosure at the federal level.”
Kaplan
argued that the qualified purchaser exemption is an exemption from
registration, “it does not exempt them from regulation at the federal level.”
In addition, Kaplan noted that many state securities regulators defer to the
federal government in the review of Regulation A securities.
“But
the biggest point of concern I have… is with all the things NASAA is doing,
respectfully, NASAA does not police the actual examiner who’s working with the
potential issuer and that’s where we’re seeing the breakdown here” that have
caused unnecessary delays in registrations, for instance, Kaplan said.
“The
motivation for our qualified purchaser definition is look, this is going
through a very sophisticated process at the federal level, we’re layering more
on to that in Regulation A Plus, we certainly understand that there’s got to be
a line, but at the same time we’ve been given this qualified purchaser
opportunity, let’s find a reasoned definition….”
For
more on the hearing, please click
here.