The US Securities and Exchange Commission proposed rules to allow small and medium sized companies to raise up to $50 million via crowdfunding. Some have claimed that the SEC "has taken an important step toward implementing the so-called JOBS Act, making it easier for small and mid-sized businesses to raise capital through small public offerings." Others claim, somewhat breathlessly, that "the SEC is Changing the Rules for Startup Investing."
Nonsense.Here is why this is move is not as exciting as some claim:
As the Washington Post noted, the SEC "approved rule changes that allow companies to raise up to $50 million a year, up from a longstanding cap of $5 million, through what’s known as Regulation A offerings. These offerings are exempt "from registering with state financial regulators in every state in which they’re prospective shareholders reside." The table below lists the features of this new rule, which becomes effective on May 24, 2015:
From an operational perspective, this is backwards. Title III, small scale equity crowdfunding, should have come first. This would have allowed the SEC to use experience gained in small scale offerings to set the stage for and improve the larger scale offerings that will be generated from Title IV. (Note to the SEC - This is probably why Title III came before Title IV in the JOBS Act.) But, the SEC is looking out for the interest of large, non-minority industry interests. They want them to get the benefits of crowdfunding first. Given how greedy most of these firms are, we also expect that these large firms will probably engage in unethical behaviour that will then be used as an excuse to slow, if not stop, the implementation of Title III.
I'm not sure I'd want to be the first to use this new Title IV facility. State Regulators who have been bypassed are sure to object to the diminution of their authority. . This means they will examine each offering issued under these new rules with a microscope. This means further delays in your ability to actually use the law. So, while this rule proposal appears to be a major advance, it is not.
What's really going on is this. The SEC is still seeking to delay the implementation of Title III of the JOBS Act. This is the truly exciting and revolutionary part of the Act. Title III allows anyone to buy equity in very small (micro) companies and startups. They were to have enacted this section of the law by 12/31/2012. (That's right. The SEC is 815 days late in implementing Title III of the JOBS Act (1,085 days late from the April 5, 2012 enactment date). Imagine your boss if you were 1,000 days late with a project at work.)
The facts above are an indication that the Agency has been captured by the large financial institutions it is supposed to regulate. After all, these large financial firms, the same ones who caused the financial crisis, are the only institutions who will be left out under Title III.
We suspect the SEC will propose that “venture exchanges” become the preferred mechanism for meeting the SEC’s obligations under Title III of the JOBS Act (non-accredited equity crowdfunding).
These will be owned and operated by the NASDAQ and the NYSE. This is prima facie proof of regulatory capture, BTW.
(a) IN GENERAL.—Section 3(b) of the Securities Act of 1933 (15 U.S.C. 77c(b)) is amended— (1) by striking ‘‘(b) The Commission’’ and inserting the following: ‘‘(b) ADDITIONAL EXEMPTIONS.— ‘‘(1) SMALL ISSUES EXEMPTIVE AUTHORITY.—The Commission’’; and (2) by adding at the end the following:
‘‘(2) ADDITIONAL ISSUES.—The Commission shall by rule or regulation add a class of securities to the securities exempted pursuant to this section in accordance with the following terms and conditions:
‘‘(A) The aggregate offering amount of all securities offered and sold within the prior 12-month period in reliance on the exemption added in accordance with this paragraph shall not exceed $50,000,000.
‘‘(B) The securities may be offered and sold publicly.
‘‘(C) The securities shall not be restricted securities within the meaning of the Federal securities laws and the regulations promulgated thereunder.
‘‘(D) The civil liability provision in section 12(a)(2) shall apply to any person offering or selling such securities.
‘‘(E) The issuer may solicit interest in the offering prior to filing any offering statement, on such terms and conditions as the Commission may prescribe in the public interest or for the protection of investors.
‘‘(F) The Commission shall require the issuer to file audited financial statements with the Commission annually.
‘‘(G) Such other terms, conditions, or requirements as the Commission may determine necessary in the public interest and for the protection of investors, which may include— ‘‘(i) a requirement that the issuer prepare and electronically file with the Commission and distribute to prospective investors an offering statement, and any related documents, in such form and with such content as prescribed by the Commission, including audited financial statements, a description of the issuer’s business operations, its financial condition, its corporate governance principles, its use of investor funds, and other appropriate matters; and ‘‘(ii) disqualification provisions under which the exemption shall not be available to the issuer or its predecessors, affiliates, officers, directors, underwriters, or other related persons, which shall be substantially similar to the disqualification provisions contained in the regulations adopted in accordance with section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 77d note).
‘‘(3) LIMITATION.—Only the following types of securities may be exempted under a rule or regulation adopted pursuant to paragraph (2): equity securities, debt securities, and debt securities convertible or exchangeable to equity interests, including any guarantees of such securities.
‘‘(4) PERIODIC DISCLOSURES.—Upon such terms and conditions as the Commission determines necessary in the public interest and for the protection of investors, the Commission by rule or regulation may require an issuer of a class of securities exempted under paragraph (2) to make available to investors and file with the Commission periodic disclosures regarding the issuer, its business operations, its financial condition, its corporate governance principles, its use of investor funds, and other appropriate matters, and also may provide for the suspension and termination of such a requirement with respect to that issuer.
‘‘(5) ADJUSTMENT.—Not later than 2 years after the date of enactment of the Small Company Capital Formation Act of 2011 and every 2 years thereafter, the Commission shall review the offering amount limitation described in paragraph (2)(A) and shall increase such amount as the Commission determines appropriate. If the Commission determines not to increase such amount, it shall report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on its reasons for not increasing the amount.’’. (b) TREATMENT AS COVERED SECURITIES FOR PURPOSES OF NSMIA.—Section 18(b)(4) of the Securities Act of 1933 (as amended by section 303) (15 U.S.C. 77r(b)(4)) is further amended by inserting after subparagraph (C) (as added by such section) the following: ‘‘(D) a rule or regulation adopted pursuant to section 3(b)(2) and such security is— ‘‘(i) offered or sold on a national securities exchange; or ‘‘(ii) offered or sold to a qualified purchaser, as defined by the Commission pursuant to paragraph (3) with respect to that purchase or sale;’’. (c) CONFORMING AMENDMENT.—Section 4(5) of the Securities Act of 1933 is amended by striking ‘‘section 3(b)’’ and inserting ‘‘section 3(b)(1)’’.