Congressional Committee Contemplating JOBS Act 2.0 to Make Crowdfunding More Workable
The United States House Financial Services Committee held hearings last week on bills that would rewrite legislation from the 2012 JOBS Act. At this preliminary stage the bills, which relate to crowdfunding, Reg A, and other securities laws, are only “discussion drafts of legislation.” For these bills to actually be finalized, they would have to get out of the committee, be passed by the House of Representatives, be passed by the Senate, and be signed into law by the President. Here’s a quick update on what those bills would do if enacted into law:
The Equity Crowdfunding Improvement Act of 2014
Rep. Patrick McHenry (R., N.C.) put together the draft of this bill, which would totally overhaul the crowdfunding portion of the JOBS Act. Rep. McHenry discusses the JOBS Act and the JOBS Act 2.0 proposal:
Here’s the basics of the bill Rep. McHenry is proposing:
- Ups limit companies may raise during 12 month window from $1,000,000 to $5,000,000 (if the company doesn’t provide audited financials it can still raise $3mm)
- Individuals may invest 10% of annual income even if their annual income is less than $100,000, the current legislation states that these individuals can only invest 5% of their annual income
- For offerings raising $500,000 or less a company officer can certify the financial statements (no requirement for review by CPA)
- Investors self-certify cumulative investment cap
- Platforms (now called “intermediaries”) can curate offerings by selecting transactions in which to serve as an intermediary and by terminating transactions–the hope here is that the platforms can protect investors by allowing only selected offerings on their site
- Allows for companies to raise capital from single entity, so that there’s only one investor on the cap table rather than 100’s, by providing exclusion from investment company definition in the Investment Company Act
- Crowdfunding as passed under the JOBS Act was unworkable–this proposed bill makes crowdfunding a more palatable option for companies looking to raise money. I suspect investors’ rights advocates may not be a big fan of the bill as proposed, because it removes some of the investor protections found in the JOBS Act legislation.
The SEC must have been doing face-palms when they heard about this. In 2012 Congress asked the SEC to implement rules for unworkable legislation. 18 months later the SEC produced a 585 page document with proposed rules for implementing the JOBS Act crowdfunding legislation. The SEC received 100’s of comment letters on the proposed legislation and has presumably been working to get final rules implemented.
Startup Capital Modernization Act of 2014
Representative McHenry also penned this draft, which updates Regulation A. Reg A is an infrequently used way for companies to raise up to $5,000,000. The JOBS Act created a new type of Reg A exemption called Reg A+, but also left Reg A in tact. The Startup Capital Modernization Act would update the original Reg A by:
- allowing companies to raise up to $10,000,000
- preempting state regulators so that companies would not have to comply with blue sky laws in addition to the SEC requirements for Reg A issuers
- excluding investors of Reg A offerings from the Exchange Act shareholder cap, which requires companies to become a public reporting company (very time consuming and expensive) if the company reaches a certain amount of shareholders
Rep. Scott Garrett (R., N.J.) drafted this proposed bill which would direct the SEC to put the brakes on the rules proposed in 2013 which, if implemented, would update filing requirements for Form D and impose advertising restrictions on private funds. The SEC had proposed rules that would require advanced filings of Form D, and updates to Form D. Rep. Garrett’s bill nixes the advanced and multiple filings. The discussion draft would also remove the enhanced verification requirements from Rule 506(c). Rule 506(c) is a product of the JOBS Act, and allows investors to raise an unlimited amount of funds from accredited investors. The verification requirements have been seen by some (although we generally disagree) as a major hurdle to widespread use of general solicitation in private offerings.
These new legislative changes may signal some exciting new developments in securities law, and may substantially impact your company’s ability to cost-effectively raise investment. Stay tuned for updates on these and other securities law related matters.