The NLCFA's SEC Committee had a representative in this week’s JOBS Act hearings on Capitol Hill when crowdfunding was
mentioned. These are his notes:
Notes from 6/26/12 House subcommittee
hearing on The JOBS Act in Action: Overseeing Effective Implementation That Can
Grow Jobs
Scholar-in-Residence,
Marshall School of Business, University of Southern California
Former General
Counsel, U.S. Securities & Exchange Commissioner
Earl Dunlap
Distinguished Professor of Law
University of
Nebraska College of Law
Co-Founder and CFO of
RocketHub
Adolf A. Berle
Professor of Law
Columbia University
Law School
- Much
talk about high costs for small businesses to enter the crowdfunding industry
if the regulations are too strict. Hard for small business and startup to have
to pay for legal and financial advice and regulatory fees when they are
attempting to crowdfund in order to get the capital they already are short of. Professor
Bradford believed there cannot be an expensive mandatory disclosure option
because of the extra costs to entrepreneurs.
- Alon
Hillel-Tuch felt that these fees and the need for entrepreneurs to pay extra
costs before they crowdfund has potential to kill crowdfunding. Also some
adamant talk about the endline profits these companies could raise in order to
make crowdfunding more attractive and more worthwhile for business to equity crowdfund.
His suggestion is raise the crowdfund exemption from $1 million to $5 million. Another note from Alon Hillel-Tuch is that if
the SEC regulations are too strict Rockethub may not look to become an equity
portal and this could be a similar theme with other donation-based portals not
wanting to expand to equity crowdfunding.
- On
the issue of crowdfunding leading to fraud, Alon Hillel-Tuch and Professor
Bradford both felt that the transparency that is inherent in crowdfunding will
allow most of the crowd to root out fraudsters and that portals will be able to
regulate and perform their own due diligence, meaning there should be less
overall regulation through the SEC and more through the portals. Professor
Bradford felt similarly but at the same time emphasized the need for investor
education in order for the crowd to effectively help in preventing fraud.
Investor education, he believes, is something the portals could provide but
overall “lack of clarity and inability of entrepreneurs to understand what they
can/cannot do could kill crowdfunding”. Mr. Cartwright was the staunchest
believer in the growth of fraud following the start of equity-based
crowdfunding noting the amount of low level “street level” securities fraud
that takes place and the portals, SEC or whomever the regulations to protect
investors against fraud falls upon are going to need to have extensive
anti-fraud measures. Mr. Cartwright proposed an expanded SEC force to deal with
this type of fraud.
- Another
main theme of the hearing was the stress put on the fact that these regulations
are going to need to be written to be easily understood by the entrepreneurs,
many of whom will be uneducated in the field of securities law. Not only will
many errors be made by small businesses who do not understand the act but
additional fees needed to pay for legal and financial advice could compound the
inability of these companies to enter the crowdfunding market and grow. John
Coffee noted that Rule 508 in Regulation D -- “innocent and immaterial
exemption” could be applied in equity based crowdfunding in order to preserve
the offering. As he noted the rules are ambiguous so far as to what happens if
a business is raising funds within a portal and then found they had made a
mistake under the guidelines; this exemption could help protect business.
Notes from 6/28/12 House subcommittee
hearing on The JOBS Act in Action: Overseeing Effective Implementation That Can
Grow Jobs
Chairman U.S.
Securities and Exchange Commission
- After
initial comments Chairman McHenry asked about the ways in which the SEC has
been reaching out to the public community for comments. Chairman Schapiro
mentioned the comment board on the SEC website along with FAQ pages and the availability
to send remarks through email.
- The
July 4th deadline for rules relating to general solicitation cannot
be met as it does not allow enough time for drafting a new rule and the SEC is
working towards the drafting but the deadline will not be met. From the
testimony: “time limits imposed by the JOBS Act are not achievable”.
- McHenry
noted that the Senate changes to the jobs act causes concerns because of the
added regulations could limit the growth of crowd funding and the ability for
startup companies to benefit. Schapiro notes the SEC is very sensitive to the issues
of cost and that the use of intermediaries will be major factor so that small
business’s due not have to deal with extra fees through legal and financial
council that could “stillbirth” equity crowdfunding and startups entrance into
the market. There still needs to be oversight and regulation outside of the
intermediaries to ensure there is a standard level of protection for investors.
Schapiro quote on the need for regulation, “if the exemption is fraught with
fraud it won’t be useful for anyone”
- Schapiro
quote on meeting the December 31st deadline for crowdfunding rules: “I don’t
foresee not meeting the deadline”.
- The
need for deeper “economic analysis guidance” throughout the regulations
creating process has added extra time to the process. Schapiro notes the
commission is working hard to implement strong economic analysis to coincide
with rule creation. McHenry is skeptical about the fact that the large majority
of recent hires for the drafting of regulations are lawyers by trade and not
economists downplaying that the greater stress on stringent economic analysis
isn’t supported by this fact. Schapiro backs the commissions continued effort
to implement the economic analysis guidance throughout the job act regulations.
- Rep.
McHenry asks about regulation for SROs. Chairman Schapiro agrees for some
regulation but believes it would be a mistake to have blanket requirements
across all SROs. Rep. McHenry notes that since SROs can react faster than
government bodies and regulate themselves there should be more regulation of
SROs. Schapiro replies Commission will strive to do more but burdened by
timeline.
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