McHenry JOBS Act Hearings
Last week, the House Subcommittee on TARP held two hearings on JOBS Act implementation, much focused on crowdfunding. The topic is not directly related to the subcommittee’s mission of overseeing TARP (Troubled Asset Relief Program, 2008) and other government bailouts, but its chair is crowdfunding advocate/hero Rep. Patrick McHenry (R-NC), who introduced the first crowdfunding bill (HR2930).
Kristine Gloria of PolitiHacks wrote a good summary of both hearings geared towards the Silicon Valley crowd (see below), and CFIRA posted a nice summary of the first three testimonies from the first hearing.
The June 26th hearing, “The JOBS Act in Action: Overseeing Effective Implementation That Can Grow Jobs,” included testimony from Brian Cartwright, a B-school professor at USC and former SEC General Counsel; Alon Hillel-Tuch from RocketHub; Prof. Steven Bradford from University of Nebraska; and Prof. John Coffee, Jr. from Columbia.
McHenry started the hearing by expressing displeasure that “a few senators, who I think misinterpreted the spirit and promise of crowdfunding” made “11th hour changes” that rendered the crowdfunding legislation in the JOBS Act “ambiguous and inconsistent.”
3-to-1: The first three witnesses clearly favored “light touch” implementation of crowdfunding by the SEC, but Prof. Coffee was more skeptical, as previously, arguing that “the greatest enemy of job creation today is not overregulation, but the loss of investor confidence.” Coffee raised the possibility that new SEC rulemaking might be overturned by the DC Circuit Court of Appeals. Subcommittee vice chair Frank Guinta (R-NH) later asked whether the SEC’s new requirement to provide cost/benefit analysis for all of its rulemaking might prevent such legal battles (video 45:52), and Coffee answered that he hopes so.
Liability: Coffee also said that most securities lawyers would recommend that small businesses raise money via the existing private placement exemptions rather than the “still novel and still very esoteric crowdfunding exemption” (1:08:40). One reason for this, Coffee explained, is that as drafted (in Senate revisions), the crowdfunding exemption could actually place a higher liability burden on investors than private exemptions for larger offerings. But then he helpfully pointed out the possible solution of generalizing to crowdfunding the existing “innocent and immaterial” exemption for private placements that’s already under Reg D Rule 508 (1:11:15).
The wrong model: Cartwright nicely summed up the problems that some lawmakers and regulators have had with crowdfunding: “The original idea behind crowdfunding was to have a quite different mode, now that the internet among other things makes communication so easy, to raise quite modest sums for entrepreneurial purposes. And what’s happened is, we’ve overlain on that original idea the model of a big offering. So you need lawyers and accountants and financial intermediaries, and they all need compliance infrastructures. And you need financials that are in accordance with [garbled] — I mean, all these additional requirements which are the model of a big dollar offering. But it doesn’t work if you’re raising $40,000 for a company that’s going to make cases for iPads.”
Beer: McHenry told the story of how he was initially inspired to file HR 2930 by the Pabst Blue Ribbon “Buy a Beer Company” campaign (59:10), and ranking member Mike Quigley (D-IL) later remarked, “In regards to your earlier point about Pabst Blue Ribbon, I want you to know that we are in perfect agreement regarding purchasing beer. I’ve served here for three years now, and the longer I serve, the more I support purchasing beer.” (1:04:30)
The June 28th hearing, “The JOBS Act in Action Part II: Overseeing Effective Implementation of the JOBS Act at the SEC” featured SEC chair Mary Schapiro as the sole witness. The Supreme Court’s decision on the Affordable Health Act came out on the same day, and McHenry got some laughs at the beginning by saying, “We’re going to hear from the chairman of the Securities Exchange Commission, and as we know from all the headlines in the newspapers today, this is the largest news in the world.” (There is a roar from outside the room as the decision is announced, at 45:35, and Schapiro remarks, “I don’t think that was for crowdfunding.”)
McHenry explained that he reached across the aisle and worked closely with Carolyn Maloney (D-NY) to carefully revise his original crowdfunding bill, HR2930. The resulting changes succeeding in giving the bill bipartisan appeal, resulting in an endorsement from the White House and a 407-17 vote in the House– but that the Senate’s hasty, last minute revisions basically screwed it up. (15:18)
SEC Timeline: Schapiro said that the SEC will be a bit late in their rulemaking for lifting the ban on general solicitation, originally due out this week, but that it will happen this summer, and they will publish a timeline in the next two days (24:25). She also said that she does not anticipate delays in the rulemaking on crowdfunding, which is due by the end of the year. (27:27) The SEC is crazy busy with still-pending rulemaking for Dodd-Frank (2010) plus the JOBS Act, both of which are major reforms, but she said that the SEC has benefited enormously from all the public comment letters that they have received, and the meetings they have had with funding portals, industry associations, and others. “We’re building up a base of knowledge very quickly at the SEC for handling this. (28:30)
Schapiro seemed more sympathetic to crowdfunding than she was in March, when the Senate was considering the JOBS Act, and she wrote a letter criticizing the bill to the Senate Banking Committee’s chair and ranking GOP member. McHenry asked Schapiro whether she was committed to telling the committee if it seemed that the SEC rulemaking around crowdfunding would price out small issuances, for example due to lawyer, accountant, intermediary costs. (29:35) Schapiro said that she absolutely would, and that the requirement of an intermediary, which HR 2930 did not include, would not only help with investor confidence, but also routinize requirements in a way that would lowers cost. (30:05) “We will be very sensitive to these issues about cost.”
On Schapiro’s March 13th letter specifically, McHenry asked why, if she had these concerns, didn’t she bring them up when the original crowdfunding bill was in the House: “Do you have my address? […] At the time, if you had raised these objections to me or to Carolyn Maloney, we would have addressed these provisions, and I think the President would have liked to have heard that before he issued his statement of policy advocating HR 2930. You sent this letter right as the Senate was taking this up, and […] I view that as being sideswiped by a regulatory body at the 11th hour […] I don’t think that was the most responsible thing.” (36:45) Schapiro answered: “I appreciate that and with future bills, I will talk to you or sponsors of those bills. I did testify about concerns we had with respect to capital raising for small businesses, but I hear your point.” (40:15)
McHenry asked Schapiro to confirm the SEC’s commitment to enabling crowdfunding, to regulating funding portals differently from broker-dealers, and that they understood how it differed from other investments: “The nature of somebody investing $20 in a local coffee shop that they go to every day, they want to own a piece of it, is structurally and motivationally different [from] somebody investing $10,000 in the Facebook IPO… Is that structural difference something you see the SEC incorporating?” (43:20) Schapiro answered positively on all points.
McHenry also asked Schapiro about Prof. Coffee’s suggestion that the “innocent and immaterial” exemption from Reg D Rule 508 be extended to crowdfunded issuances. Schapiro answered that she can’t predict how the rulemaking will turn out, but the “innocent and immaterial” liability exemption makes sense. “We’re not looking to catch people with foot faults, insignificant deviations shouldn’t blow the exemption up, and it has worked in other contexts.”
Quigley asked if Schapiro was concerned about JOBS Act rulemaking leapfrogging overdue Dodd-Frank implementation. Schapiro answered that the SEC is making good progress on both. The biggest remaining pieces for Dodd-Frank are the OTC derivatives rules, and with the JOBS Act, it’s general solicitation, crowdfunding, and Reg A. (51:30)
As previously discussed, I favor there being just one crowdfunding industry association, but three now seem to exist. Here’s an update on some of their activities (full disclosure: I have a position with the CFPA):
CFIRA staff have met with the SEC on three occasions: April 20, May 24, and June 18. To follow up on the ongoing discussion and open it up to lawmakers and others, CFIRA will hold a symposium in DC on July 13th. Among the attendees will be the SEC’s heads of the SEC’s departments of Compliance, Corporate Finance, and Trading and Markets.
August 8-9, Boulder CO – VIM Events “Simply Crowdfunding”
October 9-11, Lake Las Vegas, NV – CFPA and Crowdfunding Roadmap “Crowdfunding Bootcamp”
Public comment letters sent to the SEC by CFIRA leadership include:
May 15 – Jason Best, Candace Klein, and Vince Molinari propose types of communications permitted as “crowdfunding notices” to the general public.
May 30 – Candace Klein and Vince Molinari offer many suggestions, including: requiring that each issuer give a live (and subsequently archived) video presentation via their funding portal; an exemption from the auditing requirement for companies less 1 year old; and exempting institutional and accredited investors from the individual investor caps, which would enable crowdfunding investment funds and possibly decrease investor counts for some issuances.
June 5 – Candace Klein and Vince Molinari argue that funding portals should not be deemed investment advisers, even if they only post selected offerings, include automated “matching” tools, and enable peer-to-peer lending. Also, they should host discussion forums.
Membership dues. During the first year, general (individual) membership in CFPA is free. Higher level (sponsor, founder, board) memberships are also available for $100 and up.
Recorded Conference Call Follow-up
My last post reported that NLCFA director David Marlett recorded the conference call that he conducted before his announcement, “Crowdfunding Industry Launches National Association,” during which no one voiced any objections to his plan. A couple of readers asked me whether people on the call knew that they were being recorded, and if so, whether Marlett would release the recording. I asked Marlett, and he replied, “I said it at the beginning of the call, but because others got on later and I forgot to ask them, I erased it.”
The SEC met with representatives of the NLCFA on May 14.
A public comment letter sent to the SEC by NLCFA leadership was sent on April 30 by Sara Hanks. In it, she argues that crowdfunding service companies such as CrowdCheck (discussed here previously) are neither advertisers for CF-exempt offerings, nor funding portals themselves.
Events, Programs, Partnerships
As of last week, the NLCFA has no major events planned in the coming weeks, but Marlett reports that, “a lot of activity going on, and work with specific groups, etc.” Announcements about their veterans program and education partnership, described here previously, should be coming soon.
Membership dues. The NLCFA had restructured its membership pricing. Now it’s $200 for individuals, and $750 for portals, brokers, and technology providers. There is also a free, non-voting membership available to faculty and students with proof of employment or enrollment.
I have no news on this organization since May 24, when they announced that “Over Compliance Has Arrived.” No website has yet been built at their domain icfausa.com.
Bylaws and Elections
In talking with others who have experience starting industry associations (thanks Berkeley and St. Clair!), I’ve become convinced that any such org needs two things to continue having credibility: published bylaws and an elected leadership. Industry associations typically adopt their bylaws and conduct elections at their first annual convention. To my knowledge, none of the crowdfunding industry associations has scheduled either of these actions.
ASBC, Massachusetts Securities
The American Sustainable Business Council, the first lobbying organization to advocate a crowdfunding exemption, met with the SEC to discuss crowdfunding on June 13. They visited the White House around the same time and met with senior staff there, as reported by Doug Rand, the White House’s crowdfunding guy. Doug’s great write-up recalls the socially positive effectiveness of donation-based crowdfunding, and ties it to the promise of equity-based crowdfunding for revitalizing underserved communities and offering opportunities for investors who consider social and environmental impact in addition to economic return (i.e. the “triple bottom line“).
On May 2, the Securities Division of the State of Massachusetts sent a public comment letter to the SEC expressing an interest in crowdfunding rulemaking, and offering to help. Presumably as a result of their offer, they met with the SEC on June 27th.
“JOBS Act Tangled in Red Tape, Coming 2014 at the Earliest” by Trevor Gilbert (PandoDaily, June 29) cites unnamed sources to argue that SEC rulemaking on the JOBS Act will be delayed significantly, SEC Chair Mary Schapiro’s previous day testimony notwithstanding. I wonder about this article, which also cites one source claiming that “SEC and FINRA have held exactly zero official meetings to discuss the JOBS act,” which is easily proven incorrect. The article also says, “there are reports that FINRA is delaying the implementation of the bill for direct financial gain” — any such rumors are irresponsible if false, but certainly demand investigation if true.
“The JOBS Act: How To Ensure It Pays Off For Entrepreneurs” by Google VP for Corporate Development David Lawee, (Forbes, June 25) argues that if equity crowdfunding is going to work, the SEC must listen to the needs of entrepreneurs and write rules that encourage internet-based systems of trust and cooperation. (I’m the “one entrepreneur” who first blogged the idea in 2009.)
“Hail Crowdfunding! The Wicked VC is Dead” by Eric T. Wagner (Forbes, June 25) is a nice “fasten your seat belts” editorial: “So, wow — this crowdfunding thing really looks like a potential game-changer.”
“The Kickstarter Recession” by Matthew Yglesias (Slate, June 17) is interesting in that the author seems to have never heard of the crowdfunding portion of the JOBS Act, or else hasn’t made the connection that it will support what he calls “Profit-driven traditional finance.”
UPDATE (Aug 2012)
Here’s the Forbes
piece by David Lawee mentioned above:
25 Jun 2012