As one who has represented small and emerging growth companies over the past 36 years in navigating access to the capital markets, I have closely followed the legislative and regulatory developments in Washington, D.C. since the enactment of the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). Spurned by many factors, political, economic and technological, the JOBS Act represented a major breakthrough in capital market regulatory reform – one long overdue – 80 years to be exact –since the Securities Act of 1933 emerged in the post-depression era of the 1930’s.
So too, the JOBS Act was a silver lining in the economic cloud that hung over our economy since the bubble exploded in 2008.
Though the Dodd-Frank Act of 2010 was a politically inspired (gag) reflex to the Great Recession in a Democratically controlled Congress, it did little to help the average business or investor – let alone job creation. And it certainly was not the type of kitchen table issue that garners votes in an election year. Hence, in a rare display of overwhelming bi-partisan support the JOBS Act was born in 2012 – a grab bag for businesses, large and small alike. And to the extent the JOBS Act provisions have since been implemented, there has been nothing but good news for the U.S. financial community.
Title I of the JOBS Act, the “IPO On Ramp,” has already shown tangible results. Witness the resurgence in the IPO markets, particularly in the biotech area – which has suffered amidst a financial draught in the public markets for many years. However, the remaining provisions, Title II (general solicitation for private placements), Title III (retail crowdfunding), and Title IV (popularly referred to as Regulation A +) were slower out of the starting gate.
Title II – Despite a JOBS Act mandate that the SEC promulgate rules within 90 days of the enactment of the JOBS Act, more than a full year passed before the Commission issued final enabling rules. Though many in the industry are first getting their feet wet with this new way of doing business, and admittedly there are some wrinkles to be ironed out, the reception has generally been positive, and there is a growing consensus that what is known as Rule 506(c) has earned itself a permanent place on Wall Street. Witness areas such as real estate where the on-line world provides an efficient mechanism for investor due diligence, and syndication has long been a part of the historical real estate landscape.
The remaining JOBS Act provisions, however, have yet to even leave the starting gate – more than 2 ½ years after the enactment of the JOBS Act – thanks to the glacial speed of SEC rulemaking. Meanwhile, many Republicans in the House of Representatives, notably Congressman Patrick McHenry, have been busy introducing “fix-it” bills in the House Financial Services Committee, to further expand Titles II, III and IV. Most have been voted out of Committee on a straight party line vote, but have languished on the Hill in view of a Democratically controlled Senate.
The last time Congress came together on comprehensive legislative reform aimed at reducing the regulatory burden on small and emerging companies was back in 1980. As with the JOBS Act, these initiatives had broad bi-partisan support. Out of one of these bills came a mandate to the SEC: Every year it was to hold an annual forum, bringing together representatives from the SEC and the states, and stakeholders in the small business community, to address capital formation issues in need of regulatory reform.
A stated purpose of the SEC Forum was set forth in the SEC’s 2013 Forum Report:
“A major purpose of the Forum is to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced. Each Forum seeks to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection.”
So how has that been working out? Well, it depends who you ask.
The last person at the SEC to go on record on the subject was Keith Higgins, Director, SEC Division of Corporation Finance – in response to questioning at an oversight hearing held on July 24, 2014,before the House Financial Services Committee. When asked what happens to recommendations made by SEC Small Business Forum participants, his answer:
They are “presented to the Commission.” And when queried as to why recent SEC Forum recommendations have not been acted upon by the Commission, his response: None of the recommendations were given a “high” priority – instead all of the Forum recommendations were given a “medium” or “low” priority by Forum participants. Though I admired Mr. Higgins for the alacrity in which he answered (dodged) the question, perhaps from a script borrowed from his predecessors, one familiar with the official rating scale used by the Commission to prioritize Forum recommendations, on a 1-5 arithmetically weighted scale, would discern that it is almost mathematically impossible for any proposal to achieve a “high” rating.
A look back at the track record of Forum recommendations going back to at least the 1990’s, available for public viewing on the SEC’s website, shows that for the most part well intentioned recommendations have been routinely ignored by the Commission. And those few recommendations which have been implemented were largely the result of Congressional action.
Hence, in my opinion the history of the annual gathering known as the SEC Small Business Forum has been more reflective of Ground Hog Day. However, recent events suggest that this year’s Forum on November 20 and its aftermath may prove to be different – and could be a lightning rod for long overdue Congressional and SEC SME regulatory reform in 2015
So What’s Changed? Plenty
Perhaps of greatest significance, the House of Representatives (colored Red), now has a Senate with matching colors, courtesy of the American electorate on November 4. In fact, this is huge. Until now, well intentioned bills improving and expanding upon all of the JOBS Act titles have been stalled in the House of Representatives. Until now there was no way to even get a companion billintroduced in the Senate in a sharply divided, and Democratically controlled Senate. That will change in January 2015 when the Committee Chairmanship of the Senate Banking Committee is handed over to veteran Alabama Senator Richard Shelby, and control over introduction of bills on the Senate floor is wrestled from Democrat Harry Reid.
And for those who think I have been smoking something, well it looks as though the pipe has been passed to none other than Jeb Hensarling, Chair of the House Financial Services Committee. Even before all of the votes had been counted on Election Day 2014, he issued a statement in which he could barely contain his glee, reading in part:
“As Chairman of the House Financial Services Committee, I look forward to working with Republicans and Democrats alike to promote economic growth by fostering the deepest, most liquid, competitive, efficient, innovative and transparent capital markets the world has ever seen.”
Look for similar statements from the Senate Banking Committee by time the 114th Congress convenes in January.
And what about that man in the White House yielding veto power. Well, leave that to what I call the “L Factor” – “L” as in legacy. Undoubtedly President Obama’s focus will be on polishing up some of his signature legislation which is capable of garnering bi-partisan support. No, not The Affordable Care Act. And certainly not new initiatives such as immigration reform. Nothing attracts more votes than that three letter word- jobs. And though some of the more thorny initiatives may get caught short of the 60 Senate votes necessary to avoid a filibuster, many Democrats in Congress will undoubtedly be more concerned about their own jobs – and earning the good will of their local constituents come 2016.
The idea that post-JOBS Act legislation would be President Obama’s best legacy candidate was first floated to me in private months ago by JOBS Act industry pioneer and thought leader Kim Wales, founder of Wales Capital and Executive Board Member of Crowdfunding Intermediary Regulatory Advocates (CFIRA). With Congress now turning bright Red on Election Day, I think she has hit the nail on the head.
Signs of Change are Already Upon Us
Good ideas without the right voices speaking up at the right time and in the right places are of little value. However, against the backdrop of what many anticipated would be a much needed solution to Congressional gridlock, there are a number of harbingers of change already in motion.
Recent Appointments of Two JOBS Act Pioneers and Industry Advocates to a Previously Dormant SEC Advisory Committee
A few rays of sunshine have already broken through the clouds over Washington in the past two months alone. The SEC’s Advisory Committee on Small and Emerging Companies, formed in 2011, and dormant since September 2013, saw a spark of life the other week when it was reported that SEC Chair White had appointed CFIRA co-founder DJ Paul to the Committee. And Sara Hanks, a veteran securities attorney who has been active in advancing the JOBS Act legislation, and founder and CEO of CrowdCheck, a third party due diligence provider formed to support both JOBS Act Title II and Title III crowd finance platforms, has disclosed her recent appointment by Chair White to the Advisory Committee as well.
Not only does it appear that this Committee is about to come out of hibernation, but coupled with the recent appointments of DJ Paul and Sara Hanks to the Committee, this signals a recognition by the Commission of the need to pay closer attention to the importance of capital formation for SME’s. It also may be viewed as tangible evidence that the Commission is not tone deaf to the changed political landscape which was ultimately ushered in on Election Day 2014.
Some at the Commission are Speaking Out for Small Business – Loudly
And then there was a major address by Commissioner Daniel M. Gallagher at The Heritage Foundation in September 2014, entitled “What Ever Happened to Small Business Capital Formation,” a must read for anyone interested in invigorating the capital markets for SME’s. Commissioner Gallagher outlined a broad, ambitious agenda to revitalize the capital markets for small and emerging growth businesses, noting the neglected place that small business has long occupied in Washington. In presenting his proposed agenda he made it clear that there was much work ahead for both Congress and the Commission, not the least of which was moving along the stalled SEC rulemaking under Title III and IV, and proposing additional legislative fixes which he urged the SEC to publicly support. And in implicit recognition of the historical irrelevancy of both the SEC Small Business Forum and the SEC Advisory Committee on Small and Emerging Companies, he called for the establishment of a new office at the SEC to take the reins, one housing a small business advocate, a counterpart to the SEC Office of Investor Advocacy mandated by the Dodd-Frank Act.
“ . . . just as the Investor Advocate now runs the Investor Advisory Committee, the Small Business Advocate could take charge of the SEC’s Advisory Committee on Small and Emerging Companies and the Government-Business Forum, an incredibly important group that does not have the profile it deserves at the Commission.”
Clearly this was a carefully timed call to action to SME stakeholders at the venerable conservative Think Tank, The Heritage Foundation, in anticipation of a changed political landscape in Washington.
And then there are tangible signs that the small business Forum crowd which attends the Annual SEC Forum is no longer content to simply come, listen and – and then leave with platitudes and empty pockets. This year’s Forum is bookended by two private events keying off the SEC’s Small Business Forum, both of which appear intended to give much needed vitality to the event which goes beyond a one day event and, more importantly, its mission.
Leading off is the inaugural Growth Capital Summit at The National Press Club on the afternoon of November 19, denominated as “A Primer for Professionals and Press Ahead of the SEC’s Government-Business Forum on Small Business Capital Formation.” Included amongst the Faculty for the Event, besides myself, are:
- David Lynn, former Chief Counsel at the SEC Division of Corporation Finance – now a partner at the law firm of Morrison & Foerster.
- David Burton, Senior Fellow For Economic Policy at The Heritage Foundation, and recently the General Counsel for the National Small Business Association.
- DJ Paul, co-founder of the leading JOBS Act Advocacy group, CFIRA, and recent appointee to the SEC Advisory Committee on Small and Emerging Companies
- Chris Tyrrell, current Chair of CFIRA and CEO of Offerboard, a major Rule 506 platform.
- Sara Hanks, JOBS Act pioneer, founder and CEO of CrowdCheck, and recent appointee to the SEC Advisory Committee on Small and Emerging Companies
- Georgia Quinn, a securities attorney and thought leader active in the post-JOBS Act arena, recently being distinguished as a “Top NY Female Attorney.”
And on the morning following the SEC Forum CFIRA is sponsoring its second Regulatory Summit, focusing on Title III and Title IV issues, among others. No coincidence that it is being held in the Hart Senate Office Building. According to a CFIRA Press Release:
Attendees will network with fellow crowdfunding advocates, members of Congress, policymakers and industry thought leaders. The event’s half-day agenda will include a keynote address and span three core panels:
- Post-Election Review of Outcomes and How it Could Affect Regulations
- Crowdfinance Data
- Title III and Title IV Regulatory and Industry Updates
Included among the confirmed panelists are myself, DJ Paul, David Burton, Douglas Ellenoff of Ellenoff Grossman and Schole, a prominent New York securities attorney who has been a leading advocate for JOBS Act implementation, CFIRA Chair Chris Tyrrell, and Daniel Gorfine, Director of Financial Policy and Legal Counsel at the Milken Institute.
So it seems that, with a new Congress set to convene in January, the Forum’s impact will extend beyond a routine one day event. Rather, the Forum week in D.C. is expected to serve as both a call to action by those able and willing to have a hand in moving the interests of SME’s forward, as well as highlighting issues which will serve as a blueprint for post-JOBS Act legislative reform in 2015.
Strong Post-JOBS Act Headwinds for SME’s are About to Dissipate
Contrast the regulatory environment in post-Election 2014 DC with the regulatory environment only months following the signing of the JOBS Act into law – with both the House and Senate firmly in the control of the Democratic Party.
For those of you who believe that the delay in final rulemaking for Regulation A+ and Title III crowdfunding is a by-product of an overburdened Commission – think again. There are powerful groups in Washington, D.C. who until now have largely had their way, both in Congress and at the SEC, when it comes to implementing post-JOBS Act rulemaking and reform – most notably the North American Securities Administrators Association (NASAA). Don’t take my word for it – just take a look at the SEC’s final rulemaking calendar and the cold, hard record since the JOBS Act was enacted – the Congressional Record that is.
For starters, check out the testimony of then NASAA President A. Heath Abshure, before the House Subcommittee on Capital Markets, on September 13, 2012, barely five months after the JOBS Act was signed into law.
The title of his formal statement before the Subcommittee seemed hopeful:
“The JOBS Act: The Importance of Prompt Implementation for Entrepreneurs, Capital Formation, and Job Creation.”
Well, if there was ever a book that ought not to have been judged by its cover, this is IT. After opening his statement with the usual prefatory remarks this NASAA President wasted no time in cutting to the chase:
“we note that many of the rulemakings required by the Dodd-Frank Act are long overdue. We have encouraged the SEC to prioritize its investor-protection rules ahead of the exemptions in the JOBS Act, and we urge Congress not to pressure the SEC to act hastily.”
We are well aware that the Commission overshot the 90 day Congressional deadline for Title II rulemaking to implement Rule 506(c) general solicitation for accredited investor private placements – by more than one year. And judging by the calendar it seems that NASAA is well on its way to accomplishing its SEC JOBS Act rulemaking “hold” as far as Title III and Title IV rulemaking are concerned.
And then, there was the four person NASAA “team” introduced by Mr. Abshure to work with the SEC on JOBS Act implementation. One of the team members, then Deputy General Counsel Rick Fleming, has since managed to land himself a job at the SEC in February 2014 – as the first Chief of the newly formed Office of Investor Advocate. Undoubtedly Mr. Fleming has had some involvement in the Title III and IV rulemaking – on both sides of the fence at 100 “F” Street.
Some Well Timed Words from a Former SEC Commissioner
I conclude with the words of former SEC Commissioner Troy Paredes at a recent meeting I attended as a member of the one year old Heritage Foundation Securities Regulation Working Group, Chaired by Senior Fellow David Burton. His words could not have been more timely:
“The efforts of groups like Heritage [Foundation Securities Regulation Working Group] is important and can have an impact – advisory committees and thoughtful groups – it matters to [the SEC] Staff and Commissioners – thoughtful and good ideas. The more voices . . . that much greater chance for there to be momentum and get traction.”
In closing, some words of wisdom for us all:
“Be the change you wish to see in the world.” Mahatma Ghandi