Securities Reform Bills in Congress

The U.S. Senate is currently debating the Jump-Start Our Business Start-ups Act (JOBS Act), which recently passed the House by a nearly 375-vote margin. The aim of the bill is to make access to public capital markets easier for smaller businesses. However, opponents of the Act claim it will have the effect of stripping away important securities regulation protections, requiring only the largest companies to have to comply with the stringent registration and filing requirements of the SEC. For starters, the JOBS Act defines a small business — referred to in the bill as an “emerging growth company” — as one with annual revenues below $1 billion. Companies that fall under the definition of an “emerging growth company” have relaxed standards on the information they must provide in their prospectus to potential shareholders, and is also exempted from the executive compensation rules under Sarbanes-Oxley and Dodd-Frank. The bill also raises the limit on shareholders in a private company from 500 to 2,000. Furthermore, the bill also allows for the blurring of roles between investment bankers underwriting an offering whose job it is to sell the securities, and the securities analysts whose job it is to provide impartial advice and analysis to investors.

More targeted towards startups and early stage ventures is legislation also being debated in the Senate to approve crowdfunding. I recently attended a panel forum with Congressman Patrick McHenry and Senator Scott Brown, two of the primary proponents of crowdfunding in Congress and who have sponsored bills to authorize it. Congressman McHenry’s bill, which also recently passed the House by a nearly 400-vote margin, is perhaps the most liberal of the crowdfunding bills in Congress — it authorizes offerings of up to $1 million, which do not count against the the limits in other securities registration exemptions; individuals are allowed (depending on their personal financial situation) to invest up to $10,000 a year in crowdfunding offerings. Most importantly, the McHenry bill allows true general advertising and solicitation, in that companies can likely offer their securities through social networks like Twitter and Facebook.

On the Senate side, Senator Brown recently merged his bill with another crowdfunding bill sponsored in the Senate by Senator Jeff Merkley. The new combined Brown/Merkley bill is much stricter than the McHenry bill that passed the House — it too allows up to $1 million in crowdfunding offerings, but counts it against other securities registration exemption limits, and also limited individual investors from only investing up to $2,000 a year in crowdfunding offerings. Companies are also required to use some sort of intermediary (including perhaps an online crowdfunding portal) to sell the securities. The bill also creates a cause of action against any director, partner, executive officer, controller, or other top management official in a company for materially false or misleading statements. Finally, the bill directs the SEC to establish a new regulatory scheme for crowdfunding offerings.

Although the Brown/Merkley bill looks likely to ultimately pass the Senate, it is still unclear at this point what shape the bill will take when the House and Senate versions are merged in conference committee.

Further reading: “In Latest Jobs Bill, a Billion-Dollar Is Now Small”