The Jumpstart Our Business Startups Act, as amended by
the Senate, was voted on by the House of Representatives yesterday and passed
380 to 41. That makes it a very bi-partisan bill, even though all 41 "Nays" were
Democrats. If I remember my Schoolhouse Rocks song
correctly, it's up to the President to sign it or veto it.
The White House has already expressed support for the
concept of crowdfunding. I expect President Obama will sign it into law very
soon. He may actually have signed it by the time you are reading this.
As with the big Dodd-Frank law of 2010 that increased
regulatory oversight, this law that decreases the regulatory burden tasks the
Securities and Exchange Commission with many tasks. There are several studies
and rulemakings thrown at the SEC. (I didn't see any budget increase to go
along with these tasks.)
The one I'm most focused on is in Title II-Access to
Capital for Job Creators. Section 201(a) requires the SEC to
"revise its rules issued in section 230.506 of title 17,
Code of Federal Regulations, to provide that the prohibition against general
solicitation or general advertising contained in section 230.502(c) of such
title shall not apply to offers and sales of securities made pursuant to
section 230.506, provided that all purchasers of the securities are accredited
The law gives the SEC 90 days to make the revision.
WWSECD? (What Will the SEC Do?)
The SEC could simply insert the new language into Rule
506. It's exactly what Congress demanded. However, the SEC could provide some
clarity and other restrictions around the advertising. There could be rules
about record-keeping or submission of advertisements. The SEC still has its
ant-fraud mandate so it could impose other requirements. Some of the SEC
commissioners have already spoken out against the law. But given the short
timeframe, I doubt the SEC will do anything except insert the new language.
However, the SEC does need to act before the late-night
TV advertisements begin. There may be some regulatory limbo if the SEC does not
enact the revision by the end of the 90 day period. Why would the SEC pick this
fight with Congress? Get ready for a new wave of advertisements for
unregistered securities starting this summer. But you can only buy them if you
are an accredited
The SEC will have to study the "tick rule" to determine
if penny increments are too small for the new category of emerging companies
under Title I of the JOBS Act: Reopening American Capital Markets to
Emerging Growth Companies. Section106 tasks the SEC with this study. I
guess Congress thinks the trading on public companies with less reporting on
executive compensation, lesser financial reporting obligations, and less
auditing would trade differently than companies that meet the more exacting
standards of a public company. Of course this is just for small companies, with
less than $1 billion in gross revenues. (When did a billion get to be so
small?) I'm sure the brokerage houses would love to see a bigger spread
on the tick.
Title I also tasks the SEC with a review of Regulation
S-K. Section 108 gives the SEC 180 days to study how to streamline the
Title IV-Small Company Formation
expands the Regulation A exemption allowing a more streamlined approach for
smaller issues. The limit is raised from $5 million to $50 million. (When did
$50 million get to be so small?) The Comptroller General gets tasked with study
of the state blue sky laws on Regulation A offerings.
Title V- Private Company Growth and
Flexibility Act, or as I call it the let's not make Facebook
go public section. It raised the 12(g)(1)(A) standard from 500 shareholders to
2,000 or 500 who are not accredited. Section 503 tasks the SEC with
revising the definition of "held of record" and safe harbor provisions for
employee compensation. The SEC also look at its authority to enforce Rule 12g5-1 and
report its recommendation back to Congress.
Title VI-Capital Expansion
makes a shareholder increase for banks and bank holding companies and gives the
SEC a year to issue final regulations to implement the changes.
Title VII makes the SEC tell people about the JOBS Act.
The Securities and Exchange Commission shall provide
online information and conduct outreach to inform small and medium sized
businesses, women owned businesses, veteran owned businesses, and minority
owned businesses of the changes made by this Act.
I expect we will see a new web page or domain from the
SEC on the JOBS Act.
Those are not very sexy changes and probably leave you
scratching your head about why Congress would pass these changes and do so very
quickly. It leaves me curious as well. Many of the SEC commissioners took that
rare action of publicly stating their opposition to the law. The state
regulatory association stated:
Election-year politics have blinded Congress and the
White House to the unintended consequences of the JOBS Act, which while well
intentioned, could do little more than open the floodgates to investment fraud.
I suppose it was election year politics. And good
marketing. The bill sponsors were able to give it the acronym JOBS, even though
the bill has little to do directly with jobs. The sponsors have draped small
businesses with the flag of job creators and opening the floodgates of capital
to them will allow them to grow and re-create the millions of jobs lost in
There was also the sexy piece of the JOBS Act that I have
not mentioned, Title III-CROWDFUND. It's designed to enable aspiring
entrepreneurs to access capital using the internet to gather small dollar
investments from would-be investors across America. William Carleton has done a
great job of covering the crowdfunding aspect of the law.
Don't expect Kickstarter to
start offering equity funding any time soon. The SEC has 270 days to enact the
rules around crowfunding and regulation of funding portals.
additional commentary on developments in compliance and ethics, visit Compliance Building,
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