Sept.Joint HFS -HOGR Subommittee Hearing Examines the JOBS Act
AT YESTERDAY’S JOINT HEARING, members from the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises and the House Oversight and Government Reform Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs discussed the Jumpstart Our Business Startups (JOBS) Act with a panel composed of entrepreneurs, small-business owners, and an academic.
Republican lawmakers slammed the Securities and Exchange Commission’s (SEC) hesitance to pass an interim final rule lifting the prohibition against general solicitation in a Rule 506 offering, provided that all participants are accredited investors. On August 29, the SEC voted 4-1 in favor of a proposed rule to eliminate the prohibition.
Chairman of the Capital Markets Subcommittee Rep. Patrick McHenry (R-N.C.) said the JOBS Act “should have been seen as a walk in the park to the SEC,” adding that SEC Chairman Mary Schapiro “abandoned her commitment” to finish the Act’s first deadline.
Rep. Scott Garrett (R-N.J.) said he was “dismayed to learn the SEC had again delayed implementation, even after staff proposed moving forward with an interim final rule.” Garrett said the delay was “unacceptable.”
Rep. Spencer Bachus (R-Ala.) said the SEC has already missed three JOBS Act deadlines and the provisions currently being reviewed by the SEC should be acted upon “without further delay.”
Democrats criticized Republicans for pressuring the SEC to finalize certain provisions under the JOBS Act, while at the same time attempting to delay Dodd-Frank derivatives provisions, the Volcker Rule, as well as asking the SEC to conduct costly cost-benefit analyses without supporting an increase in the SEC’s budget levels.
Rep. Maxine Waters (D-Calif.) stated that the hearing was unnecessary and criticized Republican accusations against the SEC. “Complaints about the slow pace of rulemakings under the [JOBS] Act is simply unreasonable,” she said. Waters said she is “pleased” that the SEC is seeking public comment on the provision lifting the ban on general solicitation. Waters also said she was disappointed that the SEC “did not require more robust verification procedures on behalf of issuers,” adding that the SEC should also have considered comments from investor advocates and other stakeholders.
Testimony
In his testimony, Rory Eakin, Co-founder and Chief Operating Officer of CircleUp, said lifting the ban on general solicitation will “provide more access to capital for growing businesses, more information and choice for investors” and more jobs. Eakin called the current start-up market “inefficient,” adding that investors “lack choice and access.”
Regarding transparency and accountability issues, Eakin said once the ban on general solicitation is lifted, “issuers will still be, and should be, subject to antifraud provisions under the federal securities laws. We believe having the capital raised in public will reduce, not increase the rate of fraud,” Eakin said.
Alison Bailey Vercruysse, Founder and CEO of 18 Rabbits, discussed the importance of being able to access capital and how angel investors played a key role funding her business.
Jeffrey Van Winkle, a lawyer testifying on behalf of the National Small Business Association (NSBA), said the NSBA is “deeply concerned that either the SEC or FINRA or both will impose such a high regulatory burden on issuers and crowdfunding portals that important aspects of the JOBS Act may become a dead letter.” Van Winkle dissected the JOBS Act in his testimony, before explaining some of the issues left out of the JOBS Act that should be addressed in the near future.
On Rule 506 offerings, Van Winkle said the NSBA would like the SEC to refrain from modifying Regulation D “in such a way as to actually impede rather than enhance the ability of small firms to raise capital.” NSBA members “strongly urge that if the SEC imposes additional requirements on Rule 506 issuers who engage in general solicitation or general advertising, that it bifurcate the Rule so that these new requirements do not apply to issuers that do not engage in general solicitation or general advertising,” Van Winkle said in his testimony.
Van Winkle also said the “reasonable belief standard” should be retained.
On crowdfunding, Van Winkle said there “is every indication” that the SEC and FINRA are moving too slow on adopting rules necessary to implement the crowdfunding exception by December 31, and that they will miss the deadline “by a very wide margin.”
Naval Ravikant, CEO of AngelList, warned that attempts by the SEC to implement a tighter verification standard when general solicitation is employed or tighten rules related to crowdfunding may drive off entrepreneurs or confuse them. Ravikant said Congress “should avoid a perverse outcome in which crowdfunding becomes associated with desperate companies guaranteed to be bad investments,” nor create a mechanism “in which a company must choose either crowdfunding or sophisticated, accredited investor funding.”
To discourage fraud, Funding Portals should be allowed to decide what gets featured and what gets buried on the site and in communications, provide clarity on what qualifies as errors and omission, and keep crowdfunding compatible with fundraising from accredited investors, Ravikant said.
In his testimony, Robert Thompson, Professor of Business Law at Georgetown University Law Center, said the JOBS Act added two new exemptions “which is frankly unheard of over the 80 year history of the Securities Act,” and substantially expands the general solicitation exemption.
Thompson discussed his concerns with the use of Regulation A and crowdfunding as a means for start-ups to obtain capital. Thompson said that start-ups are likely to continue to use Rule 506 to reach accredited investors as “it’s going to be more attractive.”
Thompson said offerings under Rule 506 exemption “have grown substantially even before the JOBS Act changes. With the demise of the general solicitation ban, Thompson said “we can expect more aggressive selling than we have had in the past, including more selling via the internet.”
Thompson said the removal of the ban on general solicitation “contributes to an as yet unrecognized impact on the growth of the resale market for securities initially issued in private offerings,” and that such a resale “could destroy the issuer’s original exemption thus threatening the economic benefit of the exemption.”
Question & Answer
Throughout the hearing, Republicans questioned the panelists about the importance of the JOBS Act, how it will help expand businesses and foster employment, and repeatedly emphasized that investor protections are not forgotten in the JOBS Act.
During the hearing, Democrats focused their questioning on whether the JOBS Act, especially lifting the general solicitations ban, will lead to increased fraud in the marketplace.
Waters asked whether the panel thought it reasonable to propose a rule rather than issue an interim final rule and whether the elimination of the ban on general solicitation should be open to “a robust dialogue.”
Thompson said SEC rulemaking in recent years has faced growing litigation with a focus on cost-benefit analysis. “The SEC has to worry about whether this rule will stand up to the challenge that is likely to come,” he said. By not opening up a rule for comment, “the SEC was increasing the risk of litigation and increasing the risk of the rule not being implemented as quickly as it might otherwise.”
Waters also asked about whether the SEC should move slowly with the way it lifts the general solicitation ban.
Ravikant said a lot of companies “accidentally or not knowingly” violate the general solicitation ban “on a regular basis,” adding that the rule needs to be modernized “rather quickly.”
In response to criticism that the JOBS Act could lead to increased fraud and relaxed standards, Rep. Francisco Canseco (R-Texas) asked Van Winkle to explain why protections from fraud are not weakened by the JOBS Act and whether the SEC erred on the side of caution “thus damaging the intent of the JOBS Act.”
Van Winkle said Title II “greatly expands the opportunity and the potential investor pool,” which “may or may not lead” to the increased probability of fraud. He added that the disclosure regime is still going to remain for issuers under Rule 506. “My experience has been that issuers are very concerned about making sure that they have a reliable and viable business before they bring in investors.”
Rep. Stephen Lynch (D-Mass.), in questions proceeding Canseco’s, pressed Van Winkle on the general solicitation issue and whether lifting it will increase fraud as “you have a general population that is more vulnerable… and they don’t have the ability to protect themselves.” Van Winkle defended his previous statements and again reiterated that “almost every single potential investor looks at the issuer and asks questions.”
For more information on the hearing, please click here.
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AT YESTERDAY’S JOINT HEARING, members from the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises and the House Oversight and Government Reform Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs discussed the Jumpstart Our Business Startups (JOBS) Act with a panel composed of entrepreneurs, small-business owners, and an academic.
Republican lawmakers slammed the Securities and Exchange Commission’s (SEC) hesitance to pass an interim final rule lifting the prohibition against general solicitation in a Rule 506 offering, provided that all participants are accredited investors. On August 29, the SEC voted 4-1 in favor of a proposed rule to eliminate the prohibition.
Chairman of the Capital Markets Subcommittee Rep. Patrick McHenry (R-N.C.) said the JOBS Act “should have been seen as a walk in the park to the SEC,” adding that SEC Chairman Mary Schapiro “abandoned her commitment” to finish the Act’s first deadline.
Rep. Scott Garrett (R-N.J.) said he was “dismayed to learn the SEC had again delayed implementation, even after staff proposed moving forward with an interim final rule.” Garrett said the delay was “unacceptable.”
Rep. Spencer Bachus (R-Ala.) said the SEC has already missed three JOBS Act deadlines and the provisions currently being reviewed by the SEC should be acted upon “without further delay.”
Democrats criticized Republicans for pressuring the SEC to finalize certain provisions under the JOBS Act, while at the same time attempting to delay Dodd-Frank derivatives provisions, the Volcker Rule, as well as asking the SEC to conduct costly cost-benefit analyses without supporting an increase in the SEC’s budget levels.
Rep. Maxine Waters (D-Calif.) stated that the hearing was unnecessary and criticized Republican accusations against the SEC. “Complaints about the slow pace of rulemakings under the [JOBS] Act is simply unreasonable,” she said. Waters said she is “pleased” that the SEC is seeking public comment on the provision lifting the ban on general solicitation. Waters also said she was disappointed that the SEC “did not require more robust verification procedures on behalf of issuers,” adding that the SEC should also have considered comments from investor advocates and other stakeholders.
Testimony
In his testimony, Rory Eakin, Co-founder and Chief Operating Officer of CircleUp, said lifting the ban on general solicitation will “provide more access to capital for growing businesses, more information and choice for investors” and more jobs. Eakin called the current start-up market “inefficient,” adding that investors “lack choice and access.”
Regarding transparency and accountability issues, Eakin said once the ban on general solicitation is lifted, “issuers will still be, and should be, subject to antifraud provisions under the federal securities laws. We believe having the capital raised in public will reduce, not increase the rate of fraud,” Eakin said.
Alison Bailey Vercruysse, Founder and CEO of 18 Rabbits, discussed the importance of being able to access capital and how angel investors played a key role funding her business.
Jeffrey Van Winkle, a lawyer testifying on behalf of the National Small Business Association (NSBA), said the NSBA is “deeply concerned that either the SEC or FINRA or both will impose such a high regulatory burden on issuers and crowdfunding portals that important aspects of the JOBS Act may become a dead letter.” Van Winkle dissected the JOBS Act in his testimony, before explaining some of the issues left out of the JOBS Act that should be addressed in the near future.
On Rule 506 offerings, Van Winkle said the NSBA would like the SEC to refrain from modifying Regulation D “in such a way as to actually impede rather than enhance the ability of small firms to raise capital.” NSBA members “strongly urge that if the SEC imposes additional requirements on Rule 506 issuers who engage in general solicitation or general advertising, that it bifurcate the Rule so that these new requirements do not apply to issuers that do not engage in general solicitation or general advertising,” Van Winkle said in his testimony.
Van Winkle also said the “reasonable belief standard” should be retained.
On crowdfunding, Van Winkle said there “is every indication” that the SEC and FINRA are moving too slow on adopting rules necessary to implement the crowdfunding exception by December 31, and that they will miss the deadline “by a very wide margin.”
Naval Ravikant, CEO of AngelList, warned that attempts by the SEC to implement a tighter verification standard when general solicitation is employed or tighten rules related to crowdfunding may drive off entrepreneurs or confuse them. Ravikant said Congress “should avoid a perverse outcome in which crowdfunding becomes associated with desperate companies guaranteed to be bad investments,” nor create a mechanism “in which a company must choose either crowdfunding or sophisticated, accredited investor funding.”
To discourage fraud, Funding Portals should be allowed to decide what gets featured and what gets buried on the site and in communications, provide clarity on what qualifies as errors and omission, and keep crowdfunding compatible with fundraising from accredited investors, Ravikant said.
In his testimony, Robert Thompson, Professor of Business Law at Georgetown University Law Center, said the JOBS Act added two new exemptions “which is frankly unheard of over the 80 year history of the Securities Act,” and substantially expands the general solicitation exemption.
Thompson discussed his concerns with the use of Regulation A and crowdfunding as a means for start-ups to obtain capital. Thompson said that start-ups are likely to continue to use Rule 506 to reach accredited investors as “it’s going to be more attractive.”
Thompson said offerings under Rule 506 exemption “have grown substantially even before the JOBS Act changes. With the demise of the general solicitation ban, Thompson said “we can expect more aggressive selling than we have had in the past, including more selling via the internet.”
Thompson said the removal of the ban on general solicitation “contributes to an as yet unrecognized impact on the growth of the resale market for securities initially issued in private offerings,” and that such a resale “could destroy the issuer’s original exemption thus threatening the economic benefit of the exemption.”
Question & Answer
Throughout the hearing, Republicans questioned the panelists about the importance of the JOBS Act, how it will help expand businesses and foster employment, and repeatedly emphasized that investor protections are not forgotten in the JOBS Act.
During the hearing, Democrats focused their questioning on whether the JOBS Act, especially lifting the general solicitations ban, will lead to increased fraud in the marketplace.
Waters asked whether the panel thought it reasonable to propose a rule rather than issue an interim final rule and whether the elimination of the ban on general solicitation should be open to “a robust dialogue.”
Thompson said SEC rulemaking in recent years has faced growing litigation with a focus on cost-benefit analysis. “The SEC has to worry about whether this rule will stand up to the challenge that is likely to come,” he said. By not opening up a rule for comment, “the SEC was increasing the risk of litigation and increasing the risk of the rule not being implemented as quickly as it might otherwise.”
Waters also asked about whether the SEC should move slowly with the way it lifts the general solicitation ban.
Ravikant said a lot of companies “accidentally or not knowingly” violate the general solicitation ban “on a regular basis,” adding that the rule needs to be modernized “rather quickly.”
In response to criticism that the JOBS Act could lead to increased fraud and relaxed standards, Rep. Francisco Canseco (R-Texas) asked Van Winkle to explain why protections from fraud are not weakened by the JOBS Act and whether the SEC erred on the side of caution “thus damaging the intent of the JOBS Act.”
Van Winkle said Title II “greatly expands the opportunity and the potential investor pool,” which “may or may not lead” to the increased probability of fraud. He added that the disclosure regime is still going to remain for issuers under Rule 506. “My experience has been that issuers are very concerned about making sure that they have a reliable and viable business before they bring in investors.”
Rep. Stephen Lynch (D-Mass.), in questions proceeding Canseco’s, pressed Van Winkle on the general solicitation issue and whether lifting it will increase fraud as “you have a general population that is more vulnerable… and they don’t have the ability to protect themselves.” Van Winkle defended his previous statements and again reiterated that “almost every single potential investor looks at the issuer and asks questions.”
For more information on the hearing, please click here.