This week Congress took another whack at extending the JOBS Act. The House Financial Services Committee approved legislation that would reduce the number of days emerging growth companies must have draft registration statements on file with the SEC from 21 to just 15. The bill also offers a one-year grace period for companies that have inconveniently outgrown their emerging growth status during the filing period. In addition, the bill would instruct the SEC, as part of its JOBS Act duties, to write new rules for Form S-1 statements that would allow an issuer to omit financial disclosure information for historical periods that would otherwise be required by Regulation S-X. Unusually, the bill made it out of committee on a unanimous bi-partisan vote.
The SEC has been busy recently on another aspect of the JOBS Act. Last December, in response to its mandate under the Act, it proposed to modify Regulation A, a longstanding exemption from Securities Act registration. Regulation A currently permits unregistered public offerings of up to $5 million of securities in a 12-month period. The regulation hasn’t seen much use in recent years and has been criticized for increasing the costs and complexity of compliance, rendering it a less practical exemption than others available under the Securities Act. When Congress passed the JOBS Act, it required the SEC to modify Regulation A to make it easier for small companies to raise capital. In response, the SEC proposed a two-tier offering regime. Tier 1 would consist of offerings already covered by Regulation A — namely securities offerings of up to $5 million in a 12-month period. Tier 2 would consist of securities offerings of up to $50 million. Rounding out the proposed changes was a provision to preempt Tier 2 offerings from state securities law requirements.
The Commission has received an unusually large number of comments on the proposal, many of them supporting the notion that the previous $5 million cap was simply too low to be useful for small businesses or community banks alike. Along with the commendations are numerous proposals to strengthen investor protections and lower the risks that unregistered filings can pose.
Unsurprisingly, there is strong push-back from state regulators who take issue with the rule’s preemption of state securities registration authority. The Arkansas Securities Commissioner pronounced himself "surprised and offended" and disagreed that the SEC has the authority to preempt state law through rule-making, "especially in the face of clear Congressional direction to not preempt the states." The Assistant Director of the Nebraska Department of Banking and Finance wrote of his "surprise and dismay regarding the Commission’s decision to propose preempting the authority of states."
It’s no surprise that there should be such diversity of opinion about the proposed rule. The whole JOBS Act, Regulation A, crowd-funding landscape is a new and bewildering one for many observers, and one fraught with as much peril as it is filled with promise. Skeptics of the new regime abound. On March 26, Financial Advisor Magazine went to town on the JOBS Act using the Kickstarter campaign for Oculus's crowdsourced 2012 fund-raiser as a jumping off point. This new deregulatory environment, FA says, isn’t a fraud; fraud involves something where there is a violation of the law. Rather, it’s a scam; a scam is when people are legally duped out of their money.
It will be up to the SEC to comb through the comments it has received and refine its proposed rule to offer more promise than peril.