The House Committee on Oversight and Government Reforms held hearings last week on the JOBS Act as it relates to provisions on equity crowdfunding. Shortly after the hearings, reports on delays to the official January 2013 date of implementation for the JOBS Act yielded some harsh criticism. Below are our notes from the meetings. Following these are our comments on why Launcht CEO Freeman White remains optimistic about crowdfunding advocates’ continuing to collaborate positively with the Financial Industry Regulatory Authority (FINRA) and the SEC.
Chairman Patrick McHenry (R-NC), who sponsored the House version of crowdfunding legislation, stated in his opening remarks that he was unhappy with some measures added to the bill by the Senate. This would set the stage for a hearing that generally called for both more clarity in the SEC’s rules and more flexibility for crowdfunding portals. At various points in the hearings, participants raised the concern that too many stringent regulations would price entrepreneurs out of the equity crowdfunding market, as they would need to hire accountants and lawyers with money that they did not yet have. Filing a prospectus as long and detailed as many organizations file for their IPOs would also be difficult for startups that, in the words of Rockethub founder Alon Hillel-Tuch, are “starting from a timeline of zero.”
McHenry brought up the point that the SEC under its 1930s regulations wouldn’t have allowed for something like eBay to exist. His point: times have changed, and risk of fraud is often overstated. Hillel-Tuch stressed the role of the crowd as an able regulator against fraud. We’ve seen the crowd expose fraud before, and a recent article in The Economist argued the point that “crowds may be harder to cheat than individuals.”
Steve Bradford, a professor at the University of Nebraska College of Law, built on the Chairman’s point about eBay. He noted that eBay has successfully regulated itself, indicating that crowdfunding platform hosts can serve as valuable regulators. Hillel-Tuch also suggested that portal hosts provide the bulk of crowdfunding regulation. When crowdfunding intermediaries take on this work, Bradford and Hillel-Tuch explained, equity crowdfunding becomes less cost-prohibitive for startups.
When prompted on his primary concern about crowdfunding moving forward, Professor Bradford said he worries about the amount entrepreneurs will have to disclose about future plans, since their future plans will not be as concrete as more firmly established businesses. This is the very nature of startups. Bradford’s second worry is with advertising on the platforms. The language must be clear and direct regarding what intermediaries can and can’t do.
Former SEC General Counsel Brian Cartwright emphasized the positive outcome that the JOBS Act incentivizes companies to go public again. To Cartwright, the burden of going public had become too large over time, leading companies like Google to hold out as long as possible before going public. Instead, he noted that more and more startups had the ambition of becoming acquired by larger companies. This causes job losses, Cartwright argued, because companies that are acquired are consolidated, but when they go public, it usually leads to more jobs in the economy.
Despite grumblings about the SEC’s delays, there is ample reason to be optimistic. The House hearings are evidence of a broader momentum for rules to be implemented on the JOBS Act, and the public continues to discuss the prospects for equity crowdfunding. The SEC and FINRA are collaborating as they move forward in establishing rules. This is all positive news heading into the July 13 symposium hosted by CFIRA that will bring together lawmakers, regulators, and crowdfunding advocates to discuss the rules on equity crowdfunding under the JOBS Act.