The Jumpstart our Business Startups (JOBS) Act is only just two years old but there are already apparently Congressional initiatives to revise one of the centerpieces of the legislation, the much-vaunted crowdfunding provisions that have not yet in fact even gone into effect. According to a May 1, 2014 Wall Street Journal article entitled “Frustration Rises Over Crowdfunding Rules” (here), “several House Republicans are now pushing forth ‘JOBS Act 2’ proposals, arguing that legislation Congress passed in 2012 is too restrictive for small firms.”
The JOBS Act’s crowdfunding provisions were intended to allow small businesses to raise capital by selling equity or debt securities to non-accredited investors via the Internet. The provisions were not self-implementing but rather required the SEC to issue implementing regulations. As discussed in detail here, the SEC issued proposed regulations for review and comment in October 2013. The final regulations have not been issued. The proposed rules, which run to some 585 pages, have been criticized for their intricacy and burdensomeness.
As discussed in the Journal article, the JOBS Act’s crowdfunding provisions contain a number of restrictions that are reflected in the SEC’s proposed rules. Among other things, the provisions limit the amount issuers can raise in a year and specify a number of disclosures that the issuers must make. As the Journal article notes, many entrepreneurs “find some of the provisions too burdensome,” while others say that the changes for which House Republicans are now pushing “could weaken investor protections.” There is, as the article notes, in both camps, a “sense of frustration with how the JOBS Act is playing out.”
Among the revisions that the change advocates propose are alterations that would increase the annual amount that a private company could raise through equity crowdfunding from $1 million to $5 million, and increase the amount the companies could raise without providing financial statements to $3 million from $500,000. Other revisions that are under discussion would ease the requirements on crowdfunding websites by allowing them to select which offerings to list without being liable for fraud by the listing companies.
The JOBS Act’s provisions allowing equity crowdfunding are not the only parts of the legislation under scrutiny. In addition, the provisions in Title II of the JOBS Act allowing general solicitation and advertising of private placement securities offerings to accredited investors has also raised concerns. The Journal article cites data from a market data firm stating that 2,384 private issuers are currently trying to use the new advertising provisions to raise money online, but just 394 of them have reported receiving investor commitments and only 64 have secured commitments totaling more than $500,000.
According to the article, in addition to proposals to revise the JOBS Act’s crowdfunding provisions, there are also proposals circulating that would ease the burdens on private companies that are conducting private placements to accredited investors, to allow them to take greater advantage of the general solicitation rules. Among other things, at least one House member is looking at ways to make it tougher for the SEC to cancel an offering in instances where the SEC believes the company didn’t take reasonable steps to verify that investors meet the qualification requirements to be considered an accredited investor.
While there is a widespread concern that many of the JOBS Act’s innovations are not living up to expectations, there is still at the same time a view that it is still far too early to start tinkering with the legislation’s provisions. As noted above, the crowdfunding provisions still have not yet even gone into effect. The article quotes Columbia Law School professor John Coffee as saying “We need to have some experience with [equity crowdfunding] before we take away the safety net. This is a new and dramatically different procedure with a high potential for fraud.”
As noted here, almost from the very outset, the JOBS Act’s provisions have been criticized on the one hand for being too burdensome to prospective issuer companies, while on the other hand allowing too great of an opportunity for possible fraud.
The burdensomeness of the crowdfunding requirements in the JOBS Act itself, which is carried over into the SEC’s proposed rules, reflects a fundamental Congressional ambivalence in the Act’s provisions. On the one hand, the Act’s Congressional sponsors wanted to make it easier for small companies to raise capital. On the other hand they didn’t want to open things up for fraudsters or leave small investors vulnerable. The resulting compromise is unlikely to satisfy either set of concerns.
The JOBS Act itself is a sort of a mishmash of seemingly unrelated capital-raising novelties, collectively reflecting nothing so much the haste with which the legislative package was put together and enacted into law. For that reason, it is not really all that surprising that there is, as the Journal notes, a “sense of disappointment and frustration with how the JOBS Act is playing out.”
But despite the concerns and the sense of disappointment, it seems unlikely that the prospective revisions will get through the current Congress. As the Journal article notes, the proposals are “a long shot” as “there is little appetite to further roll back securities laws in the Democratic-controlled Senate.”
So while there may be a sense of frustration with how the JOBS Act’s initiatives are playing out, at this point, it seems probable that the legislation’s various initiatives will be implemented according to the statutory provisions original design. The crowdfunding provisions will likely go into effect in some form at some point this year.
The JOBS Act presents at least two challenges for those of us concerned with the liability exposures of directors and officers. The first is that the JOBS Act’s provisions create a number of potential liability exposures for companies seeking to take advantage of the JOBS Act’s capital raising provisions, as well as for their directors and officers. The second is that many of the Act’s provisions seem to blur the previously sharp distinction between companies that are publicly traded and private companies.
Both of these sets of concerns are explored in an interesting series of three blog posts written by my good friend Randy Hein of Chubb and published on the Risk Conversation blog. The first of the three posts, dated April 7, 2014, discusses Title II of the JOBS Act, which allows public advertising of private placement securities offerings directed at accredited investors. The second, dated April 22, 2014, and which can be found here, discusses Title III of the Act, which allows, subject to limitations, issuers to raise capital from non-accredited investors via the Internet. Finally, the third, dated April 23, 2014, and which can be found here, discussed Title IV of the Act, which allows companies to conduct “mini-IPOs” of up to $50 million per year without having to register the securities with the SEC, subject to limits on individual investment and subject to period SEC reporting requirements.
Readers interesting in knowing more about “mini-IPOs” pursuant Regulation A+ offerings under Title IV of the JOBS Act may want to take a look at the January 15, 2014 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation about the SEC’s proposed rules for Reg. A+ offerings (here).