The beginning of a new year is typically accompanied by renewed hope and positive expectations. 2017 is no exception. As a staunch advocate of promoting the interests of small business generally, and smart regulation of capital formation, in particular, 2017 stands out to me as one of high hopes and great expectations:
- We will very shortly have a new President move into the White House, one who has promised to be the greatest “jobs” President of all time, and has promised to cut out overly burdensome government regulation.
- We will have a Commission at the SEC comprised of five Commissioners, three of whom will be Republican appointees.
- We may have a Chair of the SEC by the name of Paul Atkins, currently head of the Finance branch of the Trump transition team and former SEC Commissioner, widely rumored to be the next Chair of the SEC – a vocal proponent of deregulation of financial markets.
- And the icing on the cake – with the passage of HR 3784 unanimously by Congress in December 2016, the SEC will have a new, permanent office in 2017 – Office of Small Business Advocate – an independent office reporting directly to Congress, with the singular mission of protecting the interests of small business and small business investors at the SEC.
On the legislative front, 2017 could be the year that investment crowdfunding has its hands untied through further legislation – largely to undo restrictions imposed under Title III of the JOBS Act that were the result of political horse-trading back in 2012.
Of most significance, raising the annual investment crowdfunding limit from $1 million to $5 million would have the immediate effect of generating a great deal of interest and visibility in this nascent market – and with it more, and larger deal flow. And allowing “special purpose vehicles” to invest in Regulation CF transactions would provide a number of benefits, including (1) channeling accredited investors from other accredited investor platforms, such as AngelList, and (2) providing some bargaining power to investors over the terms of the investment, who now are faced with a “take it or leave it” investment proposition.
Med-X Could be a Potential Dark Cloud for Regulation A+ in 2017?
On the SEC regulatory front, do not be surprised if the failed Med-X Regulation A+ offering of 2016 becomes an “Ascenergy-like” poster child in 2017 for what not to do in a Regulation A+ offering. Back in September 2016, Med-X had its Regulation A+ exemption temporarily suspended by the SEC, with an administrative hearing set in January 2017 in which the SEC seeks to make the suspension permanent. Med-X failed to timely file its annual and semi-annual reports on time, triggering this administrative action. Though ultimately these reports were filed by Med-X, this apparently has not slowed the SEC’s quest for a permanent suspension.
There has been a great deal of public speculation as to why Med-X is the subject of this apparently relentless pursuit by the SEC. Some have speculated that this is due to the nature of the business of Med-X – serving the cannabis industry. However, Med-X did manage to clear its SEC Reg A+ review with but a single initial comment from the Staff. And other cannabis companies have already cleared a full SEC review.
Clearly, there is more than meets the eye here.
At the very least, I believe that the SEC has a general concern with failed Regulation A+ issuers running out of money, becoming dormant, and then being brought back to life as a shell company with another private company – through a reverse merger or otherwise. This is an area that has plagued the SEC in the past with fully reporting companies. Undoubtedly, the SEC does not wish to create an easy path for unscrupulous promoters to generate shell companies for “resale,” as a byproduct of failed Regulation A+ issuers, as has been done with reverse mergers prior to Regulation A+. Barring delinquent filers from permanently utilizing Regulation A+ would put a halt to this potential abuse before it begins.
But do not be surprised if there is more than currently meets the eye with Med-X – with another shoe (or two) to drop in 2017. The hearing was originally scheduled for a single day, in December 2016. For reasons not yet clear, the hearing has been continued to January 2017, and the hearing time expanded from one day to three. Many factors could account for this. For now, those of us closely tied to the success of Regulation A+ offerings will simply have to wait and see.
Time will be the ultimate arbiter of 2017. But from where I sit, 2017 is shaping up to be one of the best years ever for small business, our country’s greatest job creator.”
Samuel S. Guzik, a Senior Contributor to Crowdfund Insider, is a corporate and securities attorney and business advisor with the law firm of Guzik & Associates, with more than 30 years of experience in private practice. Guzik is also former President and Board Chair of the Crowdfunding Professional Association (CfPA) and currently CfPA Legislative & Regulatory Special Counsel. A nationally recognized authority on the JOBS Act, including Regulation D private placements, investment crowdfunding and Regulation A+, he is and an advisor to legislators, researchers and private businesses, including crowdfunding issuers, service providers and platforms, on matters relating to the JOBS Act. As an advocate for small and medium sized business, he has engaged with major stakeholders in the ongoing post-JOBS Act reform, including legislators, industry advocates and federal and state securities regulators. In 2014, some of his speaking engagements have included leading a Crowdfunding Roundtable in Washington, DC sponsored by the U.S. Small Business Administration Office of Advocacy, a panelist at the MIT Sloan School of Business 2014 Crowdfunding Roundtable, and a panelist at a national bar association event which included private practitioners, investor advocates and officials of NASAA. His articles on JOBS Act issues, including two published in the Harvard Law School Forum on Corporate Governance and Financial Regulation, have also served as a basis for post-JOBS Act proposed legislation.