SEC Staff “Working Hard” to Implement Crowdfunding Rules by December; Lawmaker Wants Changes to JOBS Act

Jul
2012
14

posted by on Articles and Commentary

Washington, DC – July 13, 2012.  Securities and Exchange Commission staff members assured participants at a crowdfunding symposium here that the SEC was “mindful” and “working hard” to meet a deadline under the federal JOBS Act to implement regulations that would govern online equity crowdfunding.  They also dropped some hints on the SEC’s thinking about such rules. Earlier in the day, Rep. Patrick McHenry (R-NC) urged a “light touch” to crowdfunding rules.

CFIRA Crowdfunding Symposium, Washington, DC, June 13, 2012.

The Jumpstart Our Business Startups Act (JOBS Act) became law on April 5, 2012, and, among other things, enables small businesses to seek up to $ 1 million per year from small investors through online crowdfunding portals. The Act requires the SEC to implement rules to regulate crowdfunding by December 31, 2012.  The Crowdfund Intermediary Regulatory Advocates (CFIRA), a sister organization of the Crowdfunding Professional Association, sponsored the day-long symposium here entitled “The Crowdfund Act – Framing the new regulatory landscape Symposium,” in which law makers and staff from the SEC and the Financial Industry Regulatory Authority (FINRA) fielded questions and provided comments to members of the crowdfunding industry about crowdfunding.

Issues covered during the symposium included:

  • What role social media will play in crowdfunding? Representatives from the SEC and Financial Industry Regulatory Authority (FINRA) both urged the public to provide comments on the role social media may play in crowdfunding. FINRA likely will serve as the self-regulatory organization for intermediaries.
  • How to regulate broker-dealers if they operate crowdfunding portals. Should broker-deals abide by stricter regulations imposed under current SEC rules?
  • Where will intermediaries — or crowdfuding portals — be deemed investment advisers regulated by the Investment Adviser Act when they post offerings on their portals.
  • Will the SEC rely on a simpler online registration process for portals that seek to register as crowdfunding intermediaries under the crowdfunding provisions of the JOBS Act?

SEC staff members alerted participants that there was still “a lot of heavy lifting” that the SEC will have to do to implement crowdfunding rules, according to SEC’s David Blass. “There’s a fair amount of rule-making,” Mr. Blass said, “we are mindful of the deadlines.”

SEC staff told participants it was analyzing, among other things:

  • How broker-dealers should be regulated if they offer crowdfunding portals and
  • what limits may be imposed on intermediaries regarding questions of investment advice, which is regulated under the Investment Adviser Act of 1940.

Lona Nallengara, Deputy Director in SEC Division of Corporation Finance, expressed his view that any type of equity regulated under federal law likely can be offered through crowdfunding. “I don’t think there is anything inherent in the type of securities that can be offered,” he said. But there is a need for disclosing the terms of the securities, “including the risk of securities.” Mr. Nallengara reminded participants that his comments did not express an official position of the SEC.

Mr. Nallengara repeatedly emphasized the need to provide investors with adequate disclosures. “They should know what they’re investing in,” he said. While offering common stock may be easier to disclose, Mr. Nallengara stressed that investors need to know the implications if they are investing in subordinated classes of securities.

SEC staff members warned that the SEC will scrutinize any activity by an intermediary that suggests the portal is giving investors advice on what type of offers to buy. They pointed out that the Act prohibits crowdfunding portals from giving investment advice.  On the other hand, the SEC were less troubled by intermediaries providing standard forms to help businesses set up an investment offer on the portal. “Part of the reason of the intermediary is to guide issuers through the process,” said Mr. Nallengara.  Advising businesses on how to set up their offerings on a portal is not the same as advising an investor on what to buy, Mr. Nallengara added.

The SEC staff members believed that broker-dealer rules are more likely to apply to broker-dealers who meld their crowdfunding portal business into their broker-dealer business. SEC staff members alerted participants that there was still “a lot of heavy lifting” that the SEC will have to do to implement crowdfunding rules, according to SEC’s David Blass. “There’s a fair amount of rule-making,” Mr. Blass said, “we are mindful of the deadlines.” However, Mr. Blass warned that the proposed rules “may not be all what you want to hear.”

Rep. Patrick McHenry

Rep. McHenry told participants that they should realize the impact that crowdfunding can have on “small business folks,” claiming the JOBS Act “can have a major impact on small business and a small community.”  He said the basic construct of the crowdfund provisions of the JOBS Act was a “light touch to regulation.” While rooting out fraud is a major goal in implementing rules to regulate crowdfunding, Rep. McHenry believes there is power in the crowd.  He pointed out reviews that people post about vendors on eBay as an example. “If you get a bad review, they are done,” he noted.  ”The worst thing is fraud,” he said. “We’re going to have people try to do bad things no matter what. This stuff will happen, but we want to minimize it.”

Rep. McHenry said the Act, as signed into law, has flaws and that technical changes are needed, however, “the good news is that we now have a crowdfunding law in the United States.” Rep. McHenry suggested that the Act should be amended to allow investors with a net worth of under $100,000 to invest up to $5,000 per year and that the crowdfunding ceiling be raised from $1 million to $5 million.

Andy Green

“This is a real testimony to the democratic process,” Andy Green, Legislative Counsel to U.S. Senator Jeff Merkley (D-Oregon), told the symposium. Green said Congress will scrutinize crowdfunding over the “long term.” Such review will include the success based on new companies that grow from crowdfunding and whether investors will return to make new crowdfunding investments. Green likewise observed that the Act does not limit crowdfunding to any specific type of securities.

 

2 comments

Trackback e pingback

  1. » SEC Staff “Working Hard” to Implement Crowdfunding Rules by …
    […] SEC Staff “Working Hard” to Implement Crowdfunding Rules by … Go to this article […]
  2. SEC Staff “Working Hard” to Implement Crowdfunding Rules by … | Immersive World Crowd Funding – News, Ideas, Projects, Successes, Jobs, Sustainability | Scoop.it
    […] Washington, DC – July 13, 2012. Securities and Exchange Commission staff members assured participants at a crowdfunding symposium here …