JOBS Act 2.0: Unfinished business?
This week, the House Financial Services Committee will hold a markup on a series of bills designed to expand access to capital for startups and small businesses. Of the 15 bills being considered, the majority make changes to or are in the spirit of the original JOBS Act which was signed into law on April 5, 2012. To date, many of the key provisions of the JOBS Act have not gone live, as they await final SEC action. In recognition of the two-year anniversary of the JOBS Act, a House subcommittee held two hearings on April 9 and May 1, respectively, to review the proposed bills.
Of the pending JOBS Act-related bills, a few are noteworthy in their current form because they have already attracted or have the potential to attract bipartisan support – a required outcome to have a future in the Senate. They include:
- A bill that directs the SEC to allow issuers to submit a summary page to make annual disclosures easier to understand for investors, and calls upon the SEC to properly tailor disclosure rules as they apply to emerging growth companies (EGCs) [i.e. a response to the complexity and size of required disclosures];
- A bill that would instruct the SEC to revise Form D (private offering) filing requirements by allowing an issuer offering or selling private securities to file a single form, which the SEC would make available to all state securities commissions; and
- Two bills discussed in greater detail below that mark important changes to the original JOBS Act crowd-investing and Regulation A provisions.
The bills that most directly impact the original JOBS Act legislation essentially re-write the crowd-investing rules (Title III of the JOBS Act) and make notable changes to the so-called Regulation A+ exemption (Title IV). These bills were offered by Rep. Patrick McHenry (R-NC), who along with Rep. Carolyn Maloney (D-NY) drafted the original crowd-investing provisions in the law that were subsequently amended in the Senate. McHenry’s new crowd-investing proposal is the result of widespread concern that the final version of the prior legislation, coupled with the SEC’s proposed rules, render this new capital access tool non-viable.
McHenry’s bill tacks back to his and Maloney’s original legislation, but does include elements found in the current JOBS Act, including the required use of crowd-investing intermediary platforms and caps on individual investments. Some of the other notable elements of the bill include:
- Increasing the amount a company can raise in a 12-month period from $1 million to $5 million. The thinking here is that this will render crowd-investing a more viable option for businesses given the costs of a raise. That said, it is unclear how many companies will be able to raise up to $5 million from the crowd, let alone $1 million under the current cap (though Pebble Watch and Oculus do demonstrate the possibility).
- Decreasing the financial reporting burdens on businesses by permitting executive certification of financials for raises under $500,000 (up from $100,000), CPA review for raises under $3 million (up from $500,000), and CPA audit only for raises over $3 million (up from the prior requirement at over $500,000). These changes would go a long way to decreasing costs and making crowd-investing a more viable option.
- Allowing funding portal intermediaries more flexibility to filter (or curate) the offerings made available on their platforms. Allowing platforms to curate in order to screen out questionable offerings should serve to enhance investor protection.
- Permitting the creation of separate investment vehicles in order to pool crowd-investors into a single-investment entity. This model of investment is being utilized by accredited-investor platforms, such as AngelList, and can benefit both the issuers and investors. Investors can benefit from uniform deal terms and protections negotiated by lead investors, and issuers are not left with a messy cap table. Of course, the ultimate devil is in the detail of the deal terms.
Another bill offered by McHenry would make further changes to Regulation A offeringsbeyond what the SEC has currently proposed under the JOBS Act. Currently, Regulation A permits the sale of up to $5 million of securities in a 12-month period to retail investors so long as the issuer qualifies a streamlined registration with the SEC and complies with relevant state laws. Under the SEC proposals, commonly referred to as Reg A+, offerings would consist of two tiers: A Tier 1 offering of securities up to $5 million in a 12-month period; and a Tier 2 offering of securities up to $50 million, with preemption of state securities registration requirements.
We previously noted concern with the SEC proposed rules, however, in that Tier 1 offerings do not include state preemption, which could disfavor companies looking to raise between $1-to-$5 million compared to companies involved in crowdfunding or Tier 2 offerings, which are exempt. The McHenry bill seeks to address this issue, while incorporating other notable elements, including:
- Raising the Tier 1 offering amount of a single public securities offering from $5 million to $10 million and expanding the scope of state preemption with regard to these offerings; and
- Exempting securities acquired under Tier 1 and Tier 2 offerings from thresholds that trigger public reporting company obligations.
In both hearings, some lawmakers and witnesses questioned whether it was too soon to adopt measures addressing potential shortcomings in the JOBS Act. Some members also expressed concern that the deregulatory provisions would undermine investor protection. The North American Securities Administrators Association (NASAA) has similarly raised concerns on a number of pending bills. This week’s markup will be a key indicator of whether any JOBS Act 2.0 measures will make their way through Congress before year-end.