Updated: Jumpstarting Jobs is “Too Urgent to Delay,” Panel Tells Congressional Committee on Crowdfunding
Washington, DC, June 26, 2012. Keep crowdfunding costs down and crowdfunding rules simple, a panel of experts testified today before the House Oversight and Government Reform Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs (Committee). The panel, composed of industry and academic experts, also declared that crowdfunding “can spark a revolution in small business funding.” The Committee is holding two hearings during the week of June 25, 2012 to examine the implementation of portions of the JOBS Act to ensure the proper elimination of government barriers to small business capital formation and growth.
The Jumpstart Our Business Startups Act (JOBS Act) became law on April 5, 2012 and requires the SEC to implement rules within 270 days to allow entrepreneurs to raise up to $ 1 million in equity from small investors through crowdfunding platforms. Brian Cartwright, Scholar-in-Residence, Marshall School of Business, University of Southern California, and Former General Counsel and Commissioner of the US Securities and Exchange Commission (SEC), urged the panel that the SEC “needs to be encouraged to move with all deliberate speed,” adding “Jumpstarting jobs is too urgent to delay.”
Cartwright pointed out that public companies originally backed by venture funding make up 20% of the US’s current GDP. Cartwright testified he is observing a disturbing trend where most start-ups ultimate funding are derived through acquisitions, rather than venture capital. “Acquisition, rather than grow companies, often cause decline in the number of jobs, because of efficiencies imposed through the acquisitions.” In additional written testimony submitted to the Committee, Cartright concluded “While my experience as the SEC’s general counsel has left me sensitive to the challenges facing the SEC in rulemaking, the priority assigned to a rulemaking project matters. I urge you to encourage the SEC to give these rulemakings high priority.”
1. Audited financial statements should not be required unless the issurer seeks to raise $ 1 million. The current threshold is $500,000. “Audited historical financial statements of these types of companies, which may have little or no operations, do not provide investors with more meaningful information as compared to unaudited financial statements, Hillel-Tuch testified, “yet they impose a significant cost on the entrepreneur.”
2. Minimize up-front expenses to entrepreneurs and small businesses that seek to crowdfund. Hillel-Tuch suggested that one solution is that crowdfunding platforms and use the current models of charging fees only for successful projects.
3. Raise the crowdfunding exemption from $1 million to $ 5 million.
C. Steven Bradford, Law Professor at the University of Nebraska, urged that the SEC regulations should be as “light-handed and unobtrusive as possible.” Professsor Bradford testified that the current JOBS Act imposes a fairly substantial disclosure cost on small businesses. “Additional regulation would significantly reduce the utility of the exemption and would be inconsistent with the intent of the JOBS Act – to reduce the regulatory burden on small business capital formation.” Regulations should be drafted in “plain english” that does not require a lawyer to interpret. “Otherwise,” Professor Bradford testified, “most of the offering proceeds will be eaten up the cost of complying with regulation.”
Professor Bradford further testified that the SEC should adopt a “Substantial Compliance” rule, to protect issuers and crowdfunding intermediaries against minor technical violations of the JOBS Act. “Given the complexity of the exemption’s requirements, inadvertent violations are likely, and the consequence of even a minor violation is drastic.” In written testimony, Professor Bradford gave as an example a situation in which a crowdfunding intermediary inadvertently allowed a single investor to participate without answer just one of the required questions about risk under the JOBS Act. “The issue would lose the exemption for the entire offering. If the issuer inadvertently sells an investor securities that exceed the cap for that investor by $1, the exemption would be lost for all of the sales, not just those of the purchaser.” Professor Bradford testified that the SEC has blanket authority to “issue such rules as the Commission determines may be necessary or appropriate for the protection of investors to carry out sections 4(6) and . . . 4A” under the JOBS Act.
The Committee will hold a second hearing scheduled for 9:30 am on June 28, 2012. The Crowdfund Intermediary Regulatory Advocates (CFIRA) will hold a symposium in Washington, DC on July 13, 2012 to bring together lawmakers, regulators, and crowdfunding advocates. As the leading advocacy group for the crowdfunding industry, CFIRA invites these key constituents to come together and discuss the rules that will govern equity crowdfunding under the JOBS Act.
An analysis and summary of the hearing also has been prepared by Sarah Henks, co-founder of Crowdcheck.biz and Leadership Team member of CFIRA, which can be viewed here. Below is the video of the hearing made available by C-SPAN.