The House Financial Services Committee approved 13 bills, many of which are JOBS Act related. The bills that were approved by the Committee are described here: http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=399125.
On May 20th, the Committee will be meeting beginning at 10am in an open session to mark up eleven bills that relate to various capital formation and JOBS Act measures. We have reported on a number of these bills in prior posts. The Committee memo, available here: http://financialservices.house.gov/uploadedfiles/052015_fc_memo.pdf, provides a summary of the bills under consideration.
Americans are standing on the cusp of a revolution in how we access and use money, a revolution that could make our economic lives more secure and our economy more robust. Just as e-commerce freed merchants and customers from geographic boundaries in the delivery of goods, advances in financial technology promise to make it easier for businesses, investors, and consumers to raise capital, make investments, and transfer money to anyone, anywhere. This technological revolution brings the promise of greater opportunity, particularly for those who live outside the wealthiest parts of the country.
Unfortunately, our outdated regulatory structure, made up of a patchwork of state regulations, could stifle this revolution before it starts. A minefield of inconsistent requirements could make it impossible for innovative companies, especially small businesses, to establish a foothold. Fortunately, Congress has the power to protect both innovators and consumers from this regulatory morass and to create a fair and uniform playing field for all participants, if they have the courage to use it.
There should be no question that Congress has the power to do so. The Founders understood the danger that too many overlapping state rules posed to the development of a national economy. The Commerce Clause was intended to prevent this by granting Congress the power to regulate interstate commerce and shield it from the burden of excessive state regulation. As technology changes the fundamental nature of financial transactions that were once intrastate but that now regularly reach beyond state lines, it is essential that the regulations governing those transactions are fair and uniform. Frequently the only way to ensure this is for the federal government to make the rules.
A recent example of the need for congressional action is the debate surrounding the Security and Exchange Commission’s (SEC) changes to Regulation A, an exemption to the requirement that companies “fully” register with the SEC prior to seeking investment via the sale of securities. Regulation A was intended to help smaller companies access capital by allowing an abbreviated registration process while allowing regular investors to buy stock in companies that still had early growth potential, provided they sought no more than $5 million in investment. But, only one qualified Regulation A offering was conducted in 2011, compared to more than 8,000 Regulation D offerings that same year.
Why? A major reason was that Regulation A not only required companies to undergo a significant vetting and disclosure process from the SEC, but also to comply with the varying and often onerous registration requirements of each and every state in which they sought investment. So, unsurprisingly, companies overwhelmingly chose Regulation D, which, unfortunately for smaller investors is effectively limited to wealthy people and institutions.
The JOBS Act was supposed to fix this, but Congress failed to preempt the states and instead simply increased the amount of money a company could raise under Regulation A (apparently to make the hassle worthwhile, but only for companies seeking a very large amount of money). The SEC, using some regulatory jujitsu, found a way to preempt the states for certain offerings, but at the cost of expensive ongoing disclosure obligations. The rules force companies to choose between dealing with the states or gaining preemption and having to face expensive ongoing and burdensome disclosures. Understandably this has not pleased the states, who feel their authority was unjustly stripped by the SEC. Some small business advocates are also disappointed at the compromise, fearing that instead of one unusable Regulation A, we now have two.
The SEC isn’t to blame; it has done what it can to make this work under significant political pressure. Rather, Congress should have acknowledged that while private and quasi-private securities offerings may have once been primarily local affairs, thanks to the internet, investing in a company on the other side of the country can be almost as easy as buying clothes on Amazon, rendering state borders moot. To be viable, any policy that seeks to expand access to capital will need to take this into account, and apply a uniform standard. Congress is the appropriate body to make that decision.
Securities are by no means the only industry where technology is transforming local transactions to national ones. Lending, money transmittal, and a host of other financial activities are being profoundly changed by the ease with which technology allows people to interact over distance. While this shift has great promise to make finance more accessible and inclusive the uncertainty of having to navigate over fifty separate legal regimes will stifle innovation. To prevent this, Congress must be willing to both reevaluate where preexisting divisions of authority are now obsolete and be willing to provide innovative industries clear, exclusive, and limited rules for entrepreneurs to follow. The scope of interstate commerce is much broader now than it once was, and Congress should take the lead to ensure an economy where innovation and prosperity can cross state lines.
Brian Knight is the Associate Director for Financial Policy at the Milken Institute’s Center for Financial Markets.
This post was originally featured on Real Clear Markets, available at http://www.realclearmarkets.com/articles/2015/05/19/americans_stand_on_the_cusp_of_a_money_revolution_101673.html
If you are required to address issues arising from the Dodd-Frank Act and/or Basel III, you may find our recently updated Regulatory Reform Glossary a handy reference. Here is a link: http://media.mofo.com/docs/pdf/150514-Regulatory-Reform-Glossary/
Last week, the House Small Business Committee held a hearing to discuss the rise of peer-to-peer lending and the availability of capital for small businesses. The testimony from leaders in the P2P sector provides an overview of the state of the industry and their recommendations regarding additional measures that should be considered to promote continued growth of P2P lending. You can access the hearing materials and a webcast here: http://smallbusiness.house.gov/calendar/eventsingle.aspx?EventID=398060.
The House Agricultural Committee passed the CFTC authorization bill late last week, HR 2289. HR 2289 incorporates in Section 312 a provision that was part of a bill introduced by Congressman Fincher to harmonize the treatment of funds that use general solicitation. If the bill is passed, the section would have the effect of codifying the ability of funds that are commodity pools relying on either the de minimis exception from registration or on certain provisions available to registered investment advisers to use general solicitation in Rule 506 offerings. In prior posts, we had discussed the limited relief provided by the CFTC to certain funds that use general solicitation subject to compliance with certain conditions.
You can see the full text of the bill here: http://agriculture.house.gov/sites/republicans.agriculture.house.gov/files/pdf/hearings/CONAWA_006
Today, May 13th, the Subcommittee on Capital Markets and GSEs is holding the second part of its hearings, “Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens,” at 2pm. Among the topics to be covered during today’s session are bills that would establish venture exchanges to promote secondary market liquidity for the securities of smaller companies (the proposed bill, introduced by Congressman Garrett, is titled The Main Street Growth Act); change the research safe harbors to address ETF and mutual fund related research; modify the shelf registration process to make it more accessible to more issuers; and require a retrospective review of SEC rules. Additional information about today’s hearing, including the texts of the proposed bills, is available here: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=399019.
The first part of these hearings, which were held on April 29th, considered 12 bills, many of which had been introduced in the last session of Congress and all of which are intended to promote capital formation. Those include:
HR 432, the “Small Business Investment Company Advisers Relief Act of 2015”
HR 686, the “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015”
HR 1317, a bill amending clearing requirements
HR 1334, the “Holding Company Registration Threshold Equalization Act of 2015”
HR 1525, the “Disclosure Modernization and Simplification Act of 2015”
HR 1675, the “Encouraging Employee Ownership Act of 2015”
HR 1723, the “Small Business Freedom and Growth Act of 2015”
HR 1847, the “Reforming Access for Investments in Startup Enterprises Act of 2015”
HR 1965, the “Small Company Disclosure Simplification Act”
H4 1975, which would make certain technical amendments to the Exchange Act
HR __, titled the “Improving Access to Capital for Emerging Growth Companies Act
We will be providing our perspective on the measures constituting a “JOBS Act 2.0” in an upcoming blog post.
Corporate governance has changed dramatically in the nearly 13 years since passage of the Sarbanes-Oxley Act of 2002 and in the nearly five years since enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Likewise, the level of shareholder engagement and institutional investor expectations regarding governance practices have also changed significantly. The passage of the Jumpstart Our Business Startups Act in April 2012, which helped spur a dynamic initial public offering market, raised concerns among certain groups that new initial public offering (“IPO”) candidates would view certain of the accommodations available under the Act as a rationale to relax certain governance practices and to rely on phase-in periods. However, emerging growth companies, or EGCs, availing themselves of the JOBS Act’s Title I “IPO on-ramp” provisions, generally have adopted rigorous governance policies and procedures.
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Today, the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Financial Services Committee has scheduled a hearing entitled “Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens.” At the hearing, various bills that are intended to promote capital formation. The memorandum with the full list of bills to be considered may be accessed here: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=398911. Among the measures under consideration are: a bill to address the treatment of savings and loan holding companies under the JOBS Act to harmonize their treatment with that for bank holding companies for purposes of the Exchange Act 12(g) threshold; various disclosure modernization measures, including a bill that would permit forward incorporation of information in registration statements on Form S-1 by smaller public companies; and a bill to modernize the Rule 701 exemption.
Reg A (pron.: reg•gae) has the potential to become an important capital-raising alternative for emerging companies. With the final rules becoming effective on June 19th, turn to Morrison & Foerster for timely advice whether you are contemplating an offering or simply planning ahead.