Many of you who have been following the unfolding of the various provisions of the JOBS Act of 2012. And some of you have been asking: Where are those damn Regulation A+ and investment crowdfunding final rules the SEC has been promising?
For an inside look at what has happened in Washington in 2014 and what to expect in 2015, my article of December 16, 2014 is a must read. To read the article click here.
Wishing all of you Happy Holidays and a Happy, Healthy and Prosperous New Year!!!!!!
In what is likely to be a precursor of what can be expected when the 114th Congress convenes in January 2015, with a Republican-controlled House and Senate, the House on December 3 overwhelmingly approved H.R. 4569, entitled “Disclosure Modernization and Simplification Act of 2014”. The bill is now in the hands of the Senate for consideration in Committee.
The bill requires the SEC to both conduct a study of existing SEC disclosure rules, and to propose new disclosure rules within one year of the date of the bill’s enactment. The SEC study and the mandated rules to follow are required to “modernize and simplify such requirements in a manner that reduces the costs and burdens on issuers while still providing all material information.” The scope of the rule revisions would impact both periodic disclosures by reporting companies as well as registration statements for the sale of securities by both reporting and non-reporting companies.
The SEC has studied ways to simplify disclosure for reporting companies a number of times over the past several decades, and some rule changes have been made from time to time. And currently, Keith Higgins, Director of the SEC’s Division of Corporation Finance, has taken on disclosure reform as a priority for the Commission.
Apparently, however, the House is overwhelming of the view that legislation which mandates both study and rule implementation is necessary to make disclosure reform a reality. And history appears to bear out the concerns of these legislators. Back in 2008 the SEC initiated a major initiative to advance disclosure reform for reporting companies and those companies required to furnish registration statements in connection with the sale of their securities. However, this major initiative died a quiet death in 2009, most likely because the SEC’s priorities and resources shifted dramatically in the wake of the 2008 financial markets meltdown and the implementation of the Dodd-Frank Act in 2010.
Undoubtedly this will be one of many bills we can expect to see the light of day in the Senate in 2015, as Congress works through a backlog of bills either voted out of Committee or the House in 2014, and simply languished in the face of a Democratic Senate. With a Republican controlled Senate, look for a slew of new legislation to come up for a vote in the House and Senate in 2015, including legislation aimed at improving and expanding the JOBS Act of 2012. Currently, the SEC has yet to issue final rules on two key sections of the JOBS Act, Title III (investment crowdfunding), and Title IV (Regulation A+).
For a copy of the new bill, click here.
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[Note – The picture above is Circa 1932, New York, NY: a Depression Era “Sweat Shop.” Pictured fifth from the right is the author’s Grandfather, Samuel Guzik]
It could have been the kickoff of a grand political campaign – a slogan that would be proud to adorn a bumper sticker for the most ambitious of politicians – and a sound bite that would be sure to grab the next day’s headlines in the Washington, D.C. press – one that would make a Washington Democrat blush with pride. No sooner had the words been uttered, than they were greeted by resounding applause by the audience.
The words: “Millionaires can fend for themselves”.
They were spoken not by a politician running for office. Rather, this was an incumbent speaking, whose term was safe for at least another year. And his name, surely not a household word. The man: Daniel M. Gallagher, SEC Commissioner- The place – The 2014 Annual SEC Government – Small Business Forum on Small Business Capital Formation at the SEC’s Headquarters in Washington, D.C.
But this was no bumper sticker slogan – intended to generate an immediate visceral reaction and a single message – “ vote for me.” Rather, it was a message which, when considered against a broader context, was intended to make those who heard it think – and hopefully, react.
You see, on the surface the narrow issue being addressed by Commissioner Gallagher was the wisdom of revisiting the definition of exactly who ought to be an “accredited investor”, that privileged class of investors who are empowered to invest in business ventures deemed “too risky” for the average American. Indeed, this was an issue that had not been addressed by the SEC since 1982. One of the many gems that emerged out of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) was a directive to the SEC to revisit this definition no less than once every four years. After all, weren’t “accredited investors” the real
casualties of the economic bubble that exploded in 2008, giving rise to the greatest economic calamity since the Great Depression of the 1920’s and ‘30’s?
However, what likely lies on one side of this debate are much broader issues – often articulated by Commissioner Gallagher. Could it be that what was at the root of Commissioner Gallagher’s consternation over the focus by the Commission on the definitional issue of “accredited investor” was the issue of prioritization of the Commission’s resources and, more fundamentally, the need for the Commission to regain its stride and focus. Perhaps the debate was simply ill-timed – coming at a time when a more than five year backlog of Dodd-Frank rulemaking at the SEC had broken the Commission’s back – and when the conversation needed to be directed to more pressing and neglected core missions of the SEC – enhancing capital formation and healthy secondary markets – especially for what has universally come to be viewed as the economic engine for a robust, job-creating economic recovery – small and emerging businesses.
For those who are students of Commissioner Gallagher’s many public exhortations in recent years, the message he was conveying was a simple one. Government regulation of financial markets had gone too far – and in the wrong direction. In the process the SEC has been detoured – indeed blocked – from pursuing its principal mission of promoting capital formation in U.S. markets – especially where small and emerging businesses were concerned.
Had Commissioner Gallagher been given more time to address the SEC’s 2014 Annual Small Business Forum, he undoubtedly would have waxed prolific on many of the countless gifts that Congress had endowed the Commission with, neatly packaged in 2,300 pages – such as the recently enacted “Volker Rule,” the subject of years of SEC rulemaking and more than 14,000 comment letters – intended to restrict large financial institutions from trading in securities – and the “say-on-pay” rule, which remains bogged down in SEC rulemaking after receiving more than 20,000 comment letters from the public – to name but a few. Yes, the say-on-pay rule – another by-product of Dodd Frank, requiring the SEC to implement rules requiring companies to disclose the median salaries of its ordinary employees, and conspicuously disclose to investors the compensation ratio between the company’s employees and its CEO.
After all, wasn’t it those grossly overpaid CEO’s in private industry who caused the unravelling of the U.S. and world economy in 2008. And surely, by requiring the SEC to mandate disclosure of these inequities couldn’t one expect the U.S. and world economy to right-size itself – by redistributing compensation in a more equitable fashion. And if nothing else, this newly disclosed data would give testament to those who believe that it was capitalism itself that had caused the American Dream to go awry. And the fix: more government and regulatory oversight of private enterprise.
And in case the Volker Rule and say-on-pay would not be enough to stabilize the U.S. economy, perhaps one or more of the dozens of additional rules which the SEC was charged with promulgating would do the trick.
But what about those millions of American jobs that vanished overnight in 2008 and 2009, drawing historic comparisons to the bread lines of the Great Depression? How was Dodd-Frank going to solve that problem? Well, Barney Frank was way ahead of all of us – simply package Dodd-Frank as the “new, new deal” and add “consumer protection” to the name of the bill following his moniker. Though this did little to assuage the concerns of his fellow Republicans in the House of Representatives, all of whom voted against Dodd-Frank, this legislation sailed through a Democratic Congress and White House in record time – within months of President Obama’s historic inauguration.
Seems that Congressman Barney Frank was more a student of politics and rhetoric than the history of the Great Depression – and the time tested wisdom of FDR’s New Deal. Though like Dodd-Frank, the Securities Act of 1933 also sailed through Congress during the first few months of FDR’s administration as part of his New Deal, with legislation creating a comprehensive regulatory scheme for financial markets, followed by the Securities Exchange Act of 1934, and the creation of the Securities and Exchange Commission, this is where the comparison with Dodd-Frank both begins and ends.
Perhaps the Barney Franks of the world could use a history lesson as to what FDR’s New Deal looked like, when this country was faced with The Great Depression and historic levels of unemployment which followed in its wake.
Like his counterpart Barack Obama, FDR surely was the epitome of a Democratic liberal, not one of those conservatives who had steered this country off course leading up to the economic calamities which surfaced in 2008. FDR summed up his political leanings best in this quote:
“A conservative is a man with two perfectly good legs, who, however, has never learned to walk…. A liberal is a man who uses his legs and his hands at the behest of his head.”
But this is where FDR’s New Deal, and the raw deal of Dodd-Frank, part company.
The excesses of the 1920’s which culminated in the 1929 Stock Market Crash and the economic depression which succeeded it have been well documented. The financial markets where securities traded were only loosely regulated, with insiders dominating what essentially was in many respects a rigged and unsavory market. Insider trading was the order of the day, with unrestricted short selling and market manipulation, replete with “wash sales” etc. And many an average American was lured from the more protective New York Stock Exchange with promises of easy riches to unregulated “curb exchanges”, where shares changed hands, literally on the sidewalk, free of Big Board listing rules.
Indeed, it seemed as though the U.S. securities markets in the 1920’s were for many average Americans the hope, the path, to achieving the American Dream. “Everyone ought to be rich,” pronounced a Ladies Home Journal article published in the heyday of the 1920’s. In hindsight, the lure of the American dream proved to be illusory, indeed disastrous, for many Americans, So too did the unbridled lending practices facilitated by the government regulated Fannie Mae and Freddie Mac since the late 1990’s – under the not so watchful eye of Congress – in what in hindsight was the perfect political storm: the promise of homes for all Americans – with government backed financing – and handsome, seemingly endless profits for Wall Street through the resale of bundled mortgages to an unsuspecting market with a seemingly voracious appetite.
In hindsight, the intersection of Main Street and Wall Street in the 1920’s, fueled by greed, the American Dream and poorly regulated financial markets, proved to be the undoing of the American Dream – indeed, the scene of an economic wreck.
Out of the debacle of the 1920’s came both a new President, and a “New Deal”, intended to both rekindle confidence in this country’s capital markets and to move Americans from the bread lines to full time gainful employment. Likewise, Dodd-Frank was intended to rekindle confidence in America’s financial markets. But to what end for the average American?
An important piece of the New Deal legislation was the Securities Act of 1933, regulating sales of securities by issuers, and the Securities Exchange Act of 1934. And unlike Dodd-Frank, which was rushed through a politicized Congress in a matter of months before Congressional hearings took place, to identify the real causes of the 21st Century global economic meltdown, the regulatory reforms embedded in these two historic post-1929 pieces of legislation were the result of careful study and a multitude of Congressional hearings spanning over a period of years. According to one historical account, early New Deal legislation legislation “was an attempt by FDR at compromise – an effort to get both private enterprise and the federal government working together to create a stronger, more equitable economy.”
And to administer this new regulatory regime the U.S. Securities and Exchange Commission was created, with an initial reported budget of $300,000 and offices shared with the Federal Trade Commission. Indeed the FTC was the agency initially charged with overseeing this new regulatory scheme – at least until FDR decided that it would be much wiser, and more efficient, to have an agency with a single, focused purpose to regulate U.S. capital markets.
Placed in charge of this enormous undertaking by FDR as the SEC’s first Chair was Joseph P. Kennedy, who by his own admission reaped enormous profits in the 1920’s from trading on inside information, short sales and market manipulation – all perfectly legal at the time. He was also one who knew a bubble when he saw one – selling his positions and placing his capital into safer government securities before the markets came crashing down.
History records that shortly following the enactment of the Securities Exchange Act of 1934, the sluggish capital markets, distrusted by small investors and big business alike, had come back to life.
Meanwhile, back in 2010 it seems that the average American worker (or would be worker) fared no better at the White House than it did with Dodd-Frank in the halls of a Democratically controlled Congress. Though the rhetoric of President Barack Obama emanating from the White House was hopeful, like Dodd-Frank it was focused on the wrong place – and at the wrong time. Indeed, it seemed as though while Rome was burning – Nero was fiddling – with the wrong tune.
It was April 2010, where President Obama proudly presided over the inaugural Global Entrepreneurship Summit at The White House – something he considered one of his first signature accomplishments of his nascent presidency. Surely our President would understand the need to re-grow our sagging economy “from the bottom up,” expanding the opportunity of the average American to receive a paycheck instead of a handout – and pursue the American Dream. Indeed, his words were inspirational:
“We’re forging new partnerships in which high-tech leaders from Silicon Valley will share their expertise — in venture capital, mentorship, and technology incubators . . . .
And tonight, I can report that the Global Technology and Innovation Fund that I announced . . . will potentially mobilize more than $2 billion in investments. This is private capital, and it will unlock new opportunities for people . . . in sectors like telecommunications, health care, education, and infrastructure.
And finally, I’m proud that we’re creating here at this summit not only these programs that I’ve just mentioned, but it’s not going to stop here. Together, we’ve sparked a new era of entrepreneurship — with events all over Washington this week, and upcoming regional conferences . . .”
And as to the rhetorical question posed by the President: “why a summit on entrepreneurship? “ In his words: “The answer is simple”.
“Entrepreneurship — because you told us that this was an area where we can learn from each other; where America can share our experience as a society that empowers the inventor and the innovator; where men and women can take a chance on a dream — taking an idea that starts around a kitchen table or in a garage, and turning it into a new business and even new industries that can change the world.”
“Entrepreneurship — because throughout history, the market has been the most powerful force the world has ever known for creating opportunity and lifting people out of poverty.”
“And social entrepreneurship — because, as I learned as a community organizer in Chicago, real change comes from the bottom up, from the grassroots, starting with the dreams and passions of single individuals serving their communities.”
Leaving no doubt that this intense focus on entrepreneurship borne back in the spring of 2010 was an overwhelming success, The White House had this to say on the eve of the fifth World Entrepreneurship Summit in November 2014:
“President Obama elevated entrepreneurship to the forefront of the United States’ engagement agenda . . .. The Administration has delivered on this commitment, greatly expanding support for entrepreneurship and economic opportunity . . .. Signature achievements in the past five years include:
“The Administration has committed roughly $3.2 billion to support micro, small, and medium sized enterprises and mobilized $80 million in private capital for startup accelerators . . . .”
And to showcase the importance of the Fifth Entrepreneurial Summit, attended by nearly 4,000 people, was a slew of U.S. dignitaries, including Vice President Joe Biden, SBA Administrator Maria Contreras-Sweet and a host of cabinet members, senior U.S. Government officials and other heads of U.S. agencies – paid for by “ours truly” – the American taxpayer.
Vice President Biden’s words to the audience captured the importance of the entrepreneurial undertakings:
“The single most valuable resource on this planet I think we could all agree on in this room is not what’s in the ground, but what’s in the mind. It’s the single least explored part of the world, the mind. The things that are going to happen in the next two, five, 10, 15 years are breathtaking. Investors, they have to be willing to expand the horizon and invest in early stage entrepreneurs — not only in Silicon Valley — but . . . everywhere, everywhere where there’s talent.”
“Governments have to unlock the marketplace of ideas by allowing people to express their views openly about what they’re thinking and what they’re trying.”
“They must unlock the commercial marketplace by eliminating barriers to access to capital; ensuring that rules are fair and predictable, removing excessive cumbersome regulations.”
“The government can’t grow the economy by itself. As a matter of fact, it’s not the major reason. It’s a catalyst for growth — no matter how big the megaproject. To prosper in the 21st century, you also need to grow from the bottom up, allowing your people to unlock their talents through private enterprise and political and economic freedom and action”
Sadly, however, neither our President nor our Vice-President was addressing the American Dream – rather, they were addressing another dream: to export American entrepreneurialism, and capital, to countries around the World. However noble these aspirations may have been, they were focused on the wrong place – and at the wrong time.
And four and one half years later, at practically the same moment that Vice President Biden was addressing the Fifth Global Entrepreneurial Summit, in Marakech, Morocco, Commissioner Gallagher made his plea for economic and regulatory sanity at the SEC’s 2014 Annual Small Business Forum, in the shiny glass headquarters of the SEC, within arm’s reach of Chair Mary Jo White, and with more than enough empty seats to accommodate the President’s entire Cabinet and Senior Economic Advisors. He did so by seemingly dismissing the importance of an issue which, according to Dodd-Frank, the SEC was duty bound to reconsider – every four years – who would qualify as an accredited investor? And he did so in front of a gathering of people who had come from across the country to discuss and debate regulatory impediments to small business capital formation – with the definition of accredited investor being one of the three issues teed up by the Commission for discussion at the Forum. Yet instead of being met by jeers from the throngs that had gathered from across the country to discuss and debate this seemingly important issue – he was met with a round of applause.
To Commissioner Gallagher, the real issue was not simply the wisdom of spending Commission resources on revisiting the definition of “accredited investor.” Rather, the issue was one of priorities: Ought the Commission’s resources be overburdened with rulemaking dictated by Dodd-Frank, which had already overwhelmed the limited resources of the SEC – estimated to take at least an additional five years to complete? Or should the Commission be able to maintain its focus on protecting investors, maintaining orderly capital markets, and facilitating the flow of capital to those in the U.S. who needed it most in the midst and aftermath of The Great Recession – especially those businesses who are widely viewed as being the engine for job creation and economic growth – the American small business.
In Gallagher’s view, it was the American small business which was most in need of the Commission’s resources and Congresses’ attention. And unlike the audience of thousands gathered in Marakech, Morocco for the Fifth Global Entrepreneurial Summit, judging by the applause those in the audience in the basement of 100 F Street, like Commissioner Gallagher, this Washington, D.C. audience grasped both the immediate mission at hand and its importance to the U.S. economy.
There is nothing like an election year to help our Congress focus on issues that matter most to voters – and nothing garners votes better than the promise of more – and better paying – jobs. So in the spring of 2012 a normally divided Congress, together with the White House, rallied around a comprehensive patch quilt of legislation, ostensibly designed to improve the flow of capital to small and emerging businesses, with four of its principal sections stealing the spotlight: Title I, the so-called “IPO Onramp,” intended for companies to both stay private longer, and raise money from the public with 
less burdensome SEC regulation; Title II, a provision intended to allow businesses large and small to publicly solicit investors in otherwise “private placements” to accredited investors; Title III, investment crowdfunding, bringing the Main Street world of Kickstarter and the like to Wall Street – to allow startups and small businesses to raise money from accredited and unaccredited investors, without registration, through internet solicitation, and Title IV, dubbed Regulation A+, intended to allow small and emerging businesses the opportunity to complete an IPO through a short form SEC registration, with lighter ongoing reporting, and without the entanglement of a maze of state blue sky regulations.
Was this to be a good law – or a bad law? Part of the answer lies in the question that New Deal President FDR posed to Ferdinand Pecora, a former Manhattan District Attorney and one of the first five SEC Commissioners, when FDR signed the Securities Exchange Act of 1934 into law:
“. . . now that I have signed this bill and it has become law, what kind of law will it be?” Replied Pecora, “It will be a good or bad bill, Mr. President,”depending upon the men who administer it.”
More than 2 ½ years after the enactment of the JOBS Act of 2012, not to mention a few SEC Chairs, the two titles of the JOBS Act focused exclusively on small business which are dependent on SEC rulemaking have yet to become operative, waiting on, among other things, a backlog of SEC rulemaking, including dozens of rules mandated by Dodd-Frank – none of which will ever help small business.
In September 2014, at a major address delivered by Commissioner Gallagher at The Heritage Foundation in Washington, D.C., he spoke to what he believed the Commission’s priorities ought to be, and lamented the low priority historically afforded to small business in Washington, D.C.
“But small business has a big collective action problem here in Washington, where it is regularly and systematically underrepresented in the legislative and regulatory process. Small business owners are focused on making ends meet and growing their businesses, not hiring high-priced lobbyists to influence policy. Big businesses and unions, by contrast, can afford to hire lobbyists to develop relationships with politicians and regulators—which is the way business in the U.S. increasingly gets done.”
What followed in this speech was more akin to a Bill of Rights at the SEC for small business. Some of the points:
It seems that in recent years our government in Washington, D.C. has lost its way in its pursuit of the American Dream – and the values that surround it. It was a rejection of excessive economic, political and social regulation, coupled with a healthy dose of what some might call greed, which drove the aspirations of early settlers of the U.S. and the generations that followed in their footsteps. And the risks they faced were not the ones that typically grace the pages of securities prospectuses today. Early Americans risked not only their life savings, but their lives and the lives of their families, in search of what most around the world look up to with hope and admiration – the American Dream.
With all due respect to Messrs. Dodd and Frank, for the sake of this generation, and generations of Americans to come, it is time to change the conversation in Washington, D.C., both in Congress and at the SEC, and to return to this country’s, and the SEC’s core priorities. And for those at the Commission, it is time to re-prioritize its Agenda – and move from being a 
passive agency which in some important respects has lost its way, to a thought leader actively in pursuit of its core missions, with greater attention and focus on the most important job creator in this country – America’s small businesses.
And if the fault lies with Congress, perhaps it is time for former U.S. Attorney Chair White to march over to Capitol Hill to answer for the Commission, from its perspective, questions in the vein similarly posed by FDR many years ago to another former government prosecutor: Were Dodd-Frank and the JOBS Act of 2012 a good law or a bad law?
Though SEC Commissioners Daniel M. Gallagher and Kara Stein may have travelled on the same plane on the way to the Los Angeles County Bar Association Annual Securities Regulation Conference to address a room of securities industry professionals on October 24, judging by their public remarks they were certainly not on the same page – or, perhaps more importantly, in the same “time zone.”
Though I applaud Commissioner Stein for highlighting important issues and generally asking the right questions, I was somewhat taken aback by her views on the raging battle in Washington over the scope of federal pre-emption of the states’ authority to review and approve JOBS Act Title IV Regulation A+ offerings.
For those not immersed in the details of the law and proposed regulations, Congress attempted to remove a major roadblock to the use of the existing, largely dormant, Regulation A, by raising the dollar ceiling from $5 million to $50 million and eliminating the power of the states to review and approve these offerings on a state by state basis. The quid pro quo for an issuer to avoid the labyrinth of state “blue sky” regulation: sell a security listed on a national securities exchange, or limit the offering to “Qualified Purchasers.” Congress left the task of defining exactly who would be a Qualified Purchaser to the Commission.
Last December the Commission issued proposed rules for public comment – taking the bold, and somewhat controversial, step of designating all investors as Qualified Purchasers, thus avoiding state by state review and approval. The rules proposed a new criterion not found in the JOBS Act: limiting the amount any person could invest, rich or poor, smart or otherwise, to 10% of the greater of their income or net worth, exclusive of principal residence.
This broad proposed definition of Qualified Purchaser met with a loud, continuous cry of foul from the North American Securities Administrators Association, their lawyers and professional lobbyists. As the SEC records reflect, there have been countless comment letters and visits by NASAA to both the Commissioners and the Staff, to address this issue. After all, they said, who better to review and regulate primarily local businesses than the state securities administrators?
However, nearly 11 months after the SEC issued its proposed rules, and more than seven months after the public comment period officially closed, in her October remarks addressing the Los Angeles County Bar Association Commissioner Stein seemed to try to change the conversation, spinning a different take on the apparent hiatus in the SEC’s rulemaking:
“It’s interesting to note that much of the debate around the Commission’s proposed rules implementing Regulation A+ centers around the role of the state securities regulators.[9] But this controversy somewhat puzzles me. I think that half of the problem is already solved, and the rest can be resolved in a simple, modest way.”
Interestingly, footnote [9] is a citation to a Crowdfund Insider article on Regulation A+, which in turn cites to an article I wrote back in April 2014 – framing the controversy which “puzzles” Commissioner Stein.
In her October remarks Commissioner Stein appeared to echo the NASAA talking points, albeit with reasoning that was incomplete and, more importantly, by simply ignoring the plain directive of Title IV of the JOBS Act.
“First, for those who emphasize the importance of federal preemption to making Regulation A+ work, it’s already there: Congress provided for preemption for Reg A+ securities listed on a national securities exchange. Why did Congress do that? I suspect because the federal securities laws have long recognized the benefits for retail investors that come with an exchange listing. These protections include, for example, listing standards and reputational checks, as well as the secondary market liquidity that is facilitated by an exchange.”
So far, so good. But wait, there is more:
“But what about securities not listed on exchange? I recognize that a 50-state blue sky approach has long been seen as complex and costly. In part, I think that the compliance challenges of a 50-state approach actually helps keep in check the public circulation of over-the-counter securities, which can be hotbeds for fraud. . . . .
“Moreover, the state securities regulators have evolved and modernized. Just this year, the North American Securities Administrators Association (NASAA) put in place a streamlined review regime for Regulation A offerings with a single point of contact for all states, time limits on regulatory review, and a one-shot approval –meaning sign off for one and all. This unified regime is designed to review smaller offerings in a fast, efficient way. State regulators really are – or should be – the best equipped and most logical overseers for these mostly smaller, regional businesses and the investments in them.”
But what Commissioner Stein failed to address, indeed ignored, was the plain language of Title IV. It directs the SEC to implement rules that not only exempt exchange listed securities from state blue sky review, but also securities sold to Qualified Purchasers, regardless of whether they trade on an exchange. So while Commissioner Stein may be correct in her views that the rest of the problem can be solved in a simple, modest way, I respectfully remind her, as a sitting SEC Commissioner and former Congressional staffer, that such a view would require a new act of Congress to implement – one not likely to happen anytime soon in a Republican controlled Congress. In the meantime, I would hope that at least three of the five Commissioners can agree on a path forward which implements the currentprovisions of the JOBS Act – it being nearly a full year since the proposed rules were issued.
And Commissioner Stein overlooked one other very important detail. Though to be sure there are sound policies embedded in many states’ blue sky laws, some states still retain the power to conduct a “merit review.” Essentially, this allows a state regulator to impose his or her judgment as to what securities are simply too risky for their state residents to be exposed to – discretion which many have referred as being “arbitrary.” For these states it is not enough to simply ferret out fraud before an investor parts with its money. Investors must also be protected from their own poor judgment. This is exactly the barrier Congress sought to eliminate by pre-empting state review for offerings sold only to Qualified Purchasers – regardless of whether they were listed on a national exchange.
Having recently attended a conference which included two high ranking NASAA officials, I can tell you that they are still blushing at the mention of the now infamous “merit review” of Apple Computer in 1980, which resulted in non-institutional investors being barred from purchasing Apple shares in its “hot” IPO in Massachusetts and more than a dozen other states. The reason? Apple shares were deemed to be “overvalued” relative to their financial prospects. Really?
Commissioner Gallagher, in his remarks at the same conference, got it right on Regulation A+ one more time:
“We took a big step forward by issuing proposed rules to amend Regulation A in December of last year, but we have to finish the job as soon as possible. Regulation A+, as our proposed rules have come to be called, would democratize capital formation, allowing equity in small, pre-IPO companies to be sold to the ordinary investor.”
Ignoring major operative provisions of Title IV of the JOBS Act as well as the substantive hurdles embedded in a non-uniform 50 state Blue Sky regime will lead the Commission nowhere. My strongest recommendation to the Commission, after receiving hundreds of public comment letters on Regulation A+ (including three from me): it’s time to bite the bullet, convene, find a solution that both fits within the JOBS Act and meets the requirements of at least three of the five Commissioners, and embed it in final regulations.
And if indeed, as a practical matter, compromise is the order of the day, I respectfully direct the Commissioners and the Staff to my third Comment Letter on Regulation A+, submitted to the Commission one day after Commissioner Stein delivered her October 24 address to my professional colleagues in my home town of Los Angeles.
A copy of my letter to the Commission outlining a proposed compromise is available here.
The time for comment and debate at the SEC on Title IV (not to mention Title III investment crowdfunding) has come and gone. It’s time to put pen to paper, vote and move forward!
For those of you who have been reading my articles over the past four months, I have tried to create heightened awareness of a perennial SEC event, the SEC Government-Small Business Forum, an annual event borne out of bi-partisan legislation in 1980. Its primary purpose: to highlight and address unnecessary impediments to small business capital formation.
Though I previously had never attended an SEC Forum, from my perspective this event in recent years had fallen short of its promise.
Indeed, at the 2013 Forum according to the SEC’s website not a single Commissioner found the time to attend in person. So sunlight being the best disinfectant, I did my part to call more attention to the 2014 SEC Forum, with all of its warts, to raise its visibility, with the hope that the Forum could serve with renewed vigor as a genuine catalyst for ideas that ultimately would be put into action – and rise above a perception by some that the Forum was more akin to “Ground Hog Day.”
It seems that some people took notice of my articulated disappointment with past SEC Forums, not the least of whom was Jeb Hensarling, Chair of the House Financial Services Committee. He issued this statement on the day preceding the 2014 SEC Forum:
“Year in and year out the SEC has failed to act on many, if not most, of the recommendations provided by the Forum. In fact, a number of reforms contained in the bipartisan JOBS Act and other bipartisan bills passed by the Financial Services Committee are based on Forum recommendations that the SEC ignored. It’s not enough for the SEC to simply talk about promoting small business; it needs to take action – like Congress and our committee has done – on innovative ideas that will help small businesses and create jobs.”
I am happy to report that it seems, to me at least, that this year the Commission got the message before learning of Congressman Hensarling’s published remarks.
All five of the SEC Commissioners were present at the 2014 Forum – and participating. Two of the Commissioners, Piwowar and Stein, participated in the morning panels which followed the speeches by each of the five Commissioners. And the Director of the Division of Corporation Finance, Keith Higgins, was actively engaged in the morning session, including moderating one of the panels.
Chair Mary Jo White opened the Forum with welcoming remarks. For me what was notable was the early part of her remarks, where, seemingly on defense – she pointed to five specific initiatives over the past decade which were born out of past SEC Forums.
Commissioner Kara Stein’s early remarks seemed to reflect a genuine understanding as to what was at stake – nurturing and channeling America’s entrepreneurial spirit.
“On a recent trip to Los Angeles’s “Silicon Beach,” I had the privilege of visiting a technology venture accelerator at University of Southern California’s Viterbi School of Engineering called the Start-Up Garage. The people I met, as well as their ideas, were truly exciting.”
From my vantage point in the audience I truly believe that this remark reflected her realization of the importance of nurturing the entrepreneurial spirit from the bottom up – and the importance of opening up US capital markets to serve this community.
Commissioner Daniel Gallagher, in the short time allotted to speak, managed to cap off his remarks with an overwhelming round of applause from the audience. And for good reason. He not only came with high minded thoughts and concrete objectives, but was one who was clearly committed to doing what needed to be done, even if he had to roll up his sleeves and do it himself:
“ I will conclude with a final thought. This Forum has advanced some truly excellent recommendations in the past, and I’m sure will continue to do so in the future. And yet there is at least a perception that these recommendations are not given their due. So I hope that, going forward, we can commit to respond to each Forum recommendation in writing, as a way of validating that the proper attention has been paid to your voices. If the Commission cannot make that commitment, at least this Commissioner will”.
Commissioner Gallagher did not squander an opportunity to stress the importance of the need for venture capital exchanges, tailored to the needs of “microcap” and “nanocap” companies.
“I also hope and expect that we will complete our Regulation A+ rulemaking, mandated by the JOBS Act, in the very near future. To fully activate the benefits of this new exemption, however, we need to consider how to create secondary markets in these shares. I am a strong proponent of an idea that this Forum has floated in the past: Venture Exchanges, where Regulation A+ shares could be listed and traded by anyone, not just accredited investors, and could do so with an exemption from state blue sky laws and with scaled listing standards appropriate for Regulation A+ issuers. I believe this could truly revolutionize small business capital formation.”
Nor were these words hollow rhetoric intended to play to his small business base. This Commissioner does more than simply walk and chew gum at the same time. Though not known to those in the audience who greeted Commissioner Gallagher with loud applause, he was scheduled to spend part of the day before the Forum briefing the Staff of a House Financial Services Subcommittee member on – you guessed it – Venture Exchanges.
With all due respect to the 2014 Forum and the participants, perhaps some of the most important statements affecting small business capital formation were made the day before – outside the walls of the SEC.
On the same day that Commissioner Gallagher was to address HFSC staffers, I too made a visit to Capitol Hill, to both brief and de-brief those who had their ear to the new bosses on Capitol Hill – the Republican leadership. But it was a chance meeting with Frank Luntz on the steps of the Capitol that for me set the tone for SEC Forum week. For those of you who do not know of Mr. Luntz, he is a gentleman who Atlantic magazine earlier this year described as “America’s best known public opinion guru,” even scoring an appearance on the popular TV Show The View in 2014.
Being somewhat in awe of both my surroundings and the presence of Mr. Luntz, I introduced myself and my humble mission that day – to speak to some Congressmen about issues important to small business. Apologetically I told him, there were not enough people in this town speaking up for small business. After a long, cool pause, Luntz disrupted the silence:
“No one is speaking up for small business.”
Being one of curious mind, I did a little digging, pulling up an interview Mr. Luntz gave to Atlantic magazine earlier this year. Mr. Luntz reportedly is a dyed in the wool Republican:
“You should not expect a handout,” . . .You should not even expect a safety net. When my house burns down, I should not go to the government to rebuild it. I should have the savings, and if I don’t, my neighbors should pitch in for me, because I would do that for them.” . . .”We have now created a sense of dependency and a sense of entitlement that is so great that you had, on the day that [President Obama] was elected, women thinking that Obama was going to pay their mortgage payment, and that’s why they voted for him – And that, to me, is the end of what made this country so great.”
Sounds a bit like crowdfunding, huh?
On the same day that SEC Commissioner Gallagher was set to meet with members in the House, encouraging words on the importance of entrepreneurship and the need for government to unlock excessive regulatory barriers to small business capital formation, were spoken by none other than that dyed in the wool Democrat, Vice President Joe Biden. The VP was not speaking at the SEC’s Small Business Forum, however. Rather, he was addressing the Fifth Annual Global Entrepreneurial Summit, an event originated by President Barack Obama back in 2010 to foster U.S. partnerships with foreign entrepreneurs – specifically targeting entrepreneurship in the Muslim world. The venue for this event: Marakech, Morocco. In attendance were a number of leading voices in the U.S. entrepreneurial community, including the recently appointed Administrator of the U.S. Small Business Administration, Maria Contreras – Sweet.
Vice President Biden remarked to the Global Entrepreneurial Summit:
“The single most valuable resource on this planet I think we could all agree on in this room is not what’s in the ground, but what’s in the mind. It’s the single least explored part of the world, the mind. The things that are going to happen in the next two, five, 10, 15 years are breathtaking. Investors, they have to be willing to expand the horizon and invest in early stage entrepreneurs — not only in Silicon Valley — but . . . everywhere, everywhere where there’s talent.”
“Governments have to unlock the marketplace of ideas by allowing people to express their views openly about what they’re thinking and what they’re trying.”
“They must unlock the commercial marketplace by eliminating barriers to access to capital; ensuring that rules are fair and predictable, removing excessive cumbersome regulations.”
“The government can’t grow the economy by itself. As a matter of fact, it’s not the major reason. It’s a catalyst for growth — no matter how big the megaproject. To prosper in the 21st century, you also need to grow from the bottom up, allowing your people to unlock their talents through private enterprise and political and economic freedom and action.”
Pretty enlightening rhetoric, particularly coming from someone who reportedly does have difficulty walking and chewing gum at the same time: “Growing from the bottom up,” removing barriers to capital formation at the lower end of the food chain, encouraging investment outside of the traditional VC havens.
So perhaps it is not unrealistic to hope and expect that once the partisan wrangling dies down on Capitol Hill in the early months of 2015, both Congress and the President can come together one more time in a bi-partisan manner, continuing a task they began with the JOBS Act of 2012, to adopt a laundry list of much needed measures truly intended to unlock avenues of capital formation for small business.
I have written a great deal since May 2014 as to my concerns over recent SEC interpretations regarding the use of the Internet and social media in intrastate crowdfunded offerings relying on SEC Rule 147 – an exemption from federal registration for securities offerings made by a local company to investors within its states borders. A dozen or so states have enacted local crowdfunding legislation which is based upon this federal exemption from the Securities Act of 1933.
Recent SEC rulings have put a damper on the use of the internet and social media in intrastate crowdfunding by requiring that internet and social media solicitation be made available only to residents of the state, and not visible by persons outside the state.
Though the New York Times has recently argued that the SEC’s inaction on JOBS Act Title III rules has unintentionally given a boost to intrastate crowdfunding, some states are seeing a different picture as a result of a second SEC ruling on the subject issued in October 2014, which supplements a ruling issued in April 2014.
Here are the two articles on the subject which appeared this week. I would love to hear your point of view!
New York Times: http://nyti.ms/1uQhGP3
The View from Michigan: http://bit.ly/1ushdO9
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
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 bill
introduced 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.
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.
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:
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:
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.”
Really? Did he mean the 100 or so rules left by Dodd-Frank to the SEC, which the Commission has publicly stated on more than one occasion will take until at least 2019 to write?
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
The place was Washington, D.C. The occasion was the Annual Meeting of the Angel Capital Association at the Hilton Hotel in March 2014. Hundreds of attendees were gathered for lunch in the main Ballroom, the largest in the City.
The lineup of luncheon speakers was impressive, including Keith Higgins, Director of the SEC Division of Corporation Finance, U.S. Senator Blumenthal from Connecticut, and Congressman Patrick McHenry, Congressman from North Carolina, architect of Title III of the JOBS Act (at least before it was savaged by Democrats in the U.S. Senate) and a House sponsor of proposed 2014 legislation impacting small business. Though Congressman McHenry’s words were inspiring to small business, the introduction was somewhat chilling. In typical fashion Congressman McHenry did not mince words: Referring to D.C. politics, he stated: “It’s not where your business is made – it is where your business is destroyed.”
For those of us advocating for legislative and regulatory reform, both pre- and post-JOBS Act, these words needed no further elaboration.
After casting my ballot on Election Day 2014, where control of the Senate, and Congress, hangs in the balance, I thought it an appropriate time to put pen to paper with some hopeful observations of my own. As you might suspect, as an advocate for deregulation of small business capital formation, I am “All In on Red” when it comes to regulation of SME’s.
Like it or not, the center of the regulatory universe for small business is in D.C., both in Congress and at the SEC. Both of them historically have presented barriers to small business capital formation– ones not easily penetrated. But alas, there is life outside the Washington Beltway, and people outside are watching and listening – and voting. If the pre-election day polls are any indicator, it appears that the voting electorate is about as fed up with Washington as is Congressman McHenry. Hopefully, when the dust settles on the ballot boxes across the nation, a rejuvenated Congress will be ready to both listen more closely – and act. And so, hopefully, will the SEC.
Though final rules have yet to see the light of day on Title III and IV (Regulation A+) of the JOBS Act, if the polls hold, the folks outside the Washington Beltway may finally have something to cheer about in 2015 – perhaps sooner – at least when it comes to deregulation of small business capital formation.
The Washington Bubble is About to Burst
SEC Commissioner Daniel M. Gallagher, a vocal champion of the needs of small business, was perhaps prescient in his remarks at The Heritage Foundation in September 2014. In the midst of presenting in many broad strokes, his vision for deregulation of small business capital formation, he made the following observation:
“It is important for Commissioners, as well as senior staff based in Washington, to get outside the Beltway. While I’m on the road, I like to speak directly with businesses—and particularly small businesses. That takes some extra effort to arrange, but getting outside the Washington bubble is eye-opening.”
Seems that the bubble is about to burst following Election Day. So like it or not, the time has come for those in Washington to listen with an attentive ear to those outside the Beltway – think outside the partisan box – and act.
And then – there is the trickle-down effect. With a change of control in Congress, one may expect those at the SEC – seemingly frozen in place on JOBS Act rulemaking 2 ½ years after the passage of the JOBS Act of 2012 – will see the wisdom of completing their statutory rulemaking duties – and getting ahead of the Congressional steamroller. At least that is my hope – primarily for Regulation A+ rulemaking – and perhaps even for Title III crowdfunding – where JOBS Act 2.x proposed legislation has been the order of the day in 2014 in the Republican-controlled House Financial Services Committee. Hopefully, with a new Republican Chair in the Senate counterpart to the House Financial Services Committee, the Senate Banking Committee, under the tutelage of Alabama Senator Richard Shelby, bi-partisan bills aiding small business capital formation will once again see the light of day on the Senate floor.
And Then There is the “L Factor”
With President Obama’s presidency in its final two years, one can expect increased attention at The White House on issues which will bolster President Obama’s legacy. Undoubtedly in a sharply partisan environment, with both parties posturing for the 2016 elections, these will not be new initiatives, but rather improving signature legislation of the Obama Administration – in areas capable of bi-partisan support. Hopefully, with a new Congress, and the White House in its closing years, Congress will be able to come together one more time, as it did with the JOBS Act in 2012, to correct some of its failings, and break new ground for further deregulation of small business capital formation.
Expected to be high on the “to-do” list of Congressional JOBS Act fix-its will undoubtedly be Regulation A+. Three areas are likely to get attention:
Title III Crowdfunding may also be expected to benefit from the prospect of further federal legislation, though perhaps not at the same pace, or with the same vigor, as other JOBS Act fixes. Despite strong bi-partisan support in 2012, support has eroded in some corners as a result of ongoing anti-crowdfunding lobbying. And others, though supportive, may withhold support for further legislation until final SEC rules are issued and there is an opportunity to observe this new market in operation. Ironically, this could result in a “chicken and egg” type stalemate, where the SEC withholds approval of final rules until Congress makes some fixes, but many in Congress have a “wait and see” attitude before adopting new legislation.
So hopefully, when the dust settles on Election Day 2014, there will be only winners, and no losers, at least insofar as small business is concerned.
[Reprinted from November 3, 2014 Edition of CrowdfundInsider]
By
November is a big month in Washington, DC. Not only is it the mid-term election season that happens to have a bit of excitement in the air with the Senate being up for grabs, but also there are several events targeting the small business community. The SEC has traditionally hosted its annual Government-Business Forum on Small Business Capital Formation during this month. Once a sleepy affair ignored by many outside the beltway but now, with pressure being applied regarding hot button items to aide small business, the event has become a popular ticket for SME advocates. This year in advance of the Small Business Capital Forum, there will be a Growth Capital Summit held at the National Press Club.
The organizers invite interested individuals to join them for a pre-forum briefing where issues such as the following will be discussed;
There are several well known names in the crowdfunding – small business finance space including Crowdfund Insider Contributor Sam Guzik, CFIRA co-founder DJ Paul, Heritage Senior Fellow David Burton and CFIRA Chair Chris Tyrell and more.
The place: Washington, D.C. – the occasion: the swearing in of a new federal agency head – one charged in part with regulating the flow of capital to small businesses. President Obama and others listened with a hopeful ear.
Her words were inspiring, especially to small businesses and budding entrepreneurs:
This country was founded by risk-takers, resourceful pioneers who built this prosperous nation. Entrepreneurialism is our heritage. The American Dream has always been about the opportunity to earn a good education and the keys to your own home, but the expanding American Dream is also about the opportunity to start your own business. I’ve lived that Dream. And as [an] Administrator, I’m determined to help others realize theirs, as well.
* * * *
John F Kennedy once said “All of us do not have equal talent, but all of us should have an equal opportunity to develop our talents.” I’ve come to realize that access to the American Dream means access to capital. Entrepreneurs are the difference-makers in our economy.
[W]e’re working to create the next great American success story and have “. “ helped launch an iconic American ice cream brand, Ben and Jerry’s.”
Unfortunately, this was not the swearing in of the current SEC Chair – Mary Jo White. And the Ben and Jerry’s launch referred to was not the result of their notable Regulation A offering back in the 1980’s, only one of a handful over the past several decades. Rather, these were the words of the current head of the SBA, Maria Contrares-Sweet, in April 2014.
In all fairness, the SBA and SEC do have somewhat divergent missions. Though the SEC’s mission differs primarily in the breadth and focus of its duties – its responsibility to promote capital formation and functional secondary markets for all businesses, big and small, is and remains an integral part of the SEC’s charter.
Sadly, I have no good news to report on the small business rulemaking front at the SEC – despite meetings this past week with some of the biggest luminaries in crowdfunding, including the father of Title III of the JOBS Act, Congressman Patrick McHenry. Perhaps, even sadder, this is only the most recent chapter in what has been, in my opinion, a long history of neglecting the interests of small business at the SEC.
To be sure, the SEC does have some things to crow about. After all, they did promulgate rules allowing businesses of all sizes to publicly solicit investors without registering their offering, so long as they limited their sales to “accredited investors.” Yet even that took an act of Congress – and 18 months of SEC rulemaking to get that endeavor off the ground. And at the end of the day, the biggest beneficiary of the legislation is, once again, big business.
The absence of attention to the capital formation needs of small business at the SEC can be attributed to many factors. However, my immediate focus is more forward-looking – the here and the now.
What appears to be lacking at the SEC, at least with sufficient visibility and intensity, at least as concerns small business, is twofold: leadership and accountability. Though the jury is still out on the former element, leadership, I nonetheless remain cautiously optimistic that Chair White will soon come to the Commission table and settle what appears to be a sharply divided rulemaking Commission – in particular, Title III Crowdfunding and Title IV Regulation A+ (what some have termed “a mini-IPO”).
The passage by Congress of the crowdfunding provisions of the JOBS Act of 2012 gave many would-be entrepreneurs renewed hope that one more potential source of capital would become available to the smallest of enterprises. But despite the admonition of Congress, that implementing rules be promulgated by the SEC within nine months of April 2012, it took 18 months for the SEC to pen proposed rules. And now a full year later, many are losing hope that final rules will ever be released. Meanwhile,many states are stepping in to fill the void as best they can, given their limited authority under the current federal regulatory scheme.
As to the “when” question – when will final rules be adopted by the Commission? – no one at the SEC is talking. Indeed, in recent oversight hearings at the House of Representatives Financial Services Committee all the director of Corporation of Finance had to say on the subject was “we are working on it.” And even the President of the North American Securities Administrators Association (NASAA) acknowledged privately just last week that he too has no idea when final Title III rules will come out, or what they will say – though according to the SEC’s website he visited with an SEC Commissioner as recently as October 9 to discuss both Title III and Title IV. They are good listeners at the SEC, to be sure, but they are keeping their cards very lose to their vests.
And besides the “When” question, many are beginning to question “why.” Why has it taken so long, especially after the SEC carefully crafted proposed rules in a detailed 585 page release one year ago and expending thousands of hours of government manpower?
Is this a resource issue? I doubt it – not after one year of living with proposed rules, a multitude of comments and most of the heavy lifting accomplished through thousands of hours of Staff time.
Many, including myself, speculate that there are deep divides on the wisdom of crowdfunding, both at the Staff and the Commission level, with its fate hanging on a single swing vote – Chair White. Perhaps some at the Commission are concerned as to how the rules will impact their careers and reputations when they “exit” from the SEC into private enterprise.
And while crowdfunding advocates have repeatedly made their voices heard for the 2 ½ years following passage of the JOBS Act, both at the Commission and in the halls of Congress, even with an act of Congress in hand containing a statutory rulemaking deadline that passed nearly two years ago, crowdfunding advocates are no match for the forces opposed to crowdfunding in Washington D.C., who are well organized and well funded – complete with professional lobbyists and high powered lawyers in tow.
Perhaps the swing vote at the Commission level is waiting to see which way the winds are blowing in the November Congressional elections – especially with control of the U.S. Senate hanging in the balance. Then again, perhaps this is nothing more than wishful thinking on my part.
It is beyond reasonable debate that when it comes to small business the SEC has presented itself as not being accountable to anyone, most notably a nearly unanimous Congress, at least in the area of recent federal legislation of interest to small business – and perhaps not surprisingly. After all, small businesses are the riskiest of investments – with 75% of new businesses ending in failure. No one at the SEC wants their reputation or career tied to a risky initiative. But, small businesses are also the foundation of the U.S. economy – with an ever growing role in job creation – by some estimates half of all jobs created. And when the U.S. Congress speaks, one would hope it not be too much to ask – indeed – insist – that the SEC act.
To be sure, Congress handed the SEC a tall order when it presented it with Title III crowdfunding. But with that said, Congress entrusted the Commission with a great deal of latitude in the rulemaking process – in hindsight, perhaps too much.
In all honesty, I have been lulled into a hypnotic state by the painfully long rulemaking process – so much so that I resisted cries by some crowdfunding supporters in recent months to light a fire under (not in) the Commission with pleas to get the rules out. After all, I reasoned, after three comment letters on the subject, the SEC surely had its fill of me.
The Wakeup Call
But the wakeup call for me came last week in the most unexpected of places – a series of three crowdfunding panels I participated on which included the likes of both a current and former NASAA President, and the General Counsel for a State Securities Administrator.
On the question of why crowdfunding had not taken off at the state level in his state, the answer of one state official surprised me. The expected answer: it’s a dumb idea, and the small investor will be the loser in the end anyway. The actual answer: It’s our agency’s fault – we haven’t spent as much time as we should on outreach – educating the public on the availability of this new tool for capital formation. Excuses? No. Accountability? Yes.
And even more enlightening, another State Securities Administrator said he took the lead to fashion a crowdfunding statute in his state because he wanted to fashion it the way he envisioned it – and not simply leave it to chance with the legislature. Wow! Initiative and Leadership combined. A far cry from what happened when the JOBS Act legislation wound itself through the Congressional sausage making process – when the SEC stood back in apparent horror.
Perhaps even more enlightening was this same State Administrator’s view on the requirement of audited financial statements for crowdfunded offerings at the state level. In his mind this was a no brainer. Of course you would not burden a small business by requiring it to provide audited financial statements for a crowdfunded offering under $1 million.
Contrast that statement against the position of the Commission on the same issue in the proposed rules. When faced with a statutory requirement of audited financial statements for crowdfunded raises over $500,000, the Commission gave lip service to the other part of the statute which gave the SEC unbridled discretion to modify or eliminate the requirement for audited financial statements in all crowdfunded offerings. In the view of the SEC: No need to tinker with the audited financial statement requirement – at least not yet. Let’s “wait and see” what happens after final rules are implemented. The likely answer to the SEC’s query – crickets.
Could it be that the SEC Staff does not want to see retail equity crowdfunding see the light of day as a useful and used tool, despite the strong Congressional mandate? In my view, regardless of the answer to this question, the ultimate outcome is firmly and squarely in the hands of a single individual at the SEC – Chair White – who as a practical matter is subject to many pressures, both internal and external, political and otherwise.
I know that I am not alone in hoping that when the dust settles following Election Day, Chair White will take the bull by the horns, as some state securities czars have already done – and lead through decisive action – with a dose of common sense to boot. And by doing so the Commission can finally make the JOBS Act provisions which hold promise for small business – Crowdfunding and Regulation A+ – a reality.
Let’s Get it Right (Now) – Chair White!
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