On Wednesday, as many now know, the U.S. Securities and Exchange Commission (SEC) released its long-awaited rule proposal release under Title III of the Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama in April 2012. Title III of the JOBS Act, also known as the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure (CROWDFUND) Act, governs securities--a/k/a investment--crowdfunding. Importantly, this part of the JOBS Act allows securities crowdfunding conducted under specified parameters to proceed without registration under the Securities Act of 1933, as amended (1933 Act). As you may recall, I blogged here about the CROWDFUND Act as part of a forum on the JOBS Act shortly after its adoption. Those forum posts outline the key terms and provisions of the CROWDFUND Act and the JOBS Act as a whole.
I appreciate the opportunity given to me by my friends at The Glom to blog a bit about these rules, dubbed "Regulation Crowdfunding." I have spent the past several days digesting them, as time has permitted. No offense meant to the SEC, but I did fall asleep over the rules more than once over the past few days . . . .
My overall assessment is that the rules represent a thoughtful, conservative approach to regulation under what the U.S. Congress handed the SEC, which is (in my opinion) a poorly designed legislative product. Although some have criticized the SEC for taking so long to issue rules that (in many cases) merely repeat what Title III of the JOBS Act says, I have come to the view (reading a bit between the lines) that the SEC has thoughtfully considered what, if anything, it can do to make Title III crowdfunding accessible to investors and issuers while at the same time ensuring as best as possible (especially given the untested nature of a securities crowdfunding market) that the policies underlying our federal securities law are upheld. Signs of deliberation and reflection exist throughout the rule proposal.
For example, in addressing
- whether the amount of crowdfunded securities offered under Title III of the JOBS Act should be aggregated with the amount of securities offered under other 1933 Act registration exemptions for purposes of calculating the offering limits for issuers under Title III and
- whether crowdfunded securities offerings under Title III of the JOBS Act should be integrated with other securities offerings exempt from registration under the 1933 Act for purposes of determining compliance with the overall rules under Title III,
the SEC concludes based on the text of the JOBS Act, read in context, that neither aggregation nor integration of this kind should be applicable in Title III securities crowdfunding. In addition, the SEC offers helpful hints about how to tackle a few sticky issues at the intersection of crowdfunded offerings under Title III and other exempt offerings (e.g., the handling of certain types of concurrent offerings and the treatment of offerings by affiliates and predecessors). The SEC's conclusions seem right to me, but good arguments based on investor and market protection could be made to the contrary.
The SEC takes a similarly reasoned approach to addressing ambiguities in the investor caps provided for in Title III. After acknowledging the related public comments, the SEC divines an intent to broaden, withi--but not beyond--the constraints set out by Congress, the potential for investment in crowdfunded securities offerings. The SEC's rulemaking "fix" is simple and, again, appears to be in accord with the ostensible purpose of Title III. Interestingly, the SEC rule allows issuers, absent knowledge to the contrary, to rely on verification done by crowdfunding intermediaries on investor compliance with the cap.
The proposal release also manifests regulatory caution of other kinds. For instance, the SEC notes comments requesting an increase in the 12-month issuer aggregate offering limit from $1,000,000 (as provided in the CROWDFUND Act) to a higher amount. The SEC identifies this request (and other related queries) and declines to increase the aggregate offering limit through rulemaking. In the release, the SEC states (among other things) that Title III of the JOBS Act:
specifically provides for a maximum aggregate amount of $1 million sold in reliance on the exemption in any 12-month period. The only reference in the statute to changing that amount is the requirement that the Commission update the amount not less frequently than every five years based on the Consumer Price Index. Additionally, statements in the Congressional Record indicate that Congress believed that $1 million was a substantial amount for a small business. We do not believe that Congress intended for us to modify the maximum aggregate amount permitted to be sold under the exemption when promulgating rules to implement the statute.
While perhaps predictable, the SEC's regulatory restraint in this regard is not, apparently, merely a knee-jerk reaction borne of a desire to cabin or eliminate securities crowdfunding.
Although this post touches only on a few substantive provisions of Regulation Crowdfunding relating to issuers and investors, the rule proposal is replete with similar examples of deliberate, narrowly tailored rulemaking. The regulation of funding portals also gets and deserves significant attention in the release. Moreover, the SEC expressly seeks comments on general and specific matters highlighted throughout the release. Given the scope of the legislative exemption and the related rulemaking, there are a number of interesting discernable narratives in the 585-page release. To keep this post short, I will stop here. But if The Conglomerate will indulge me a bit more, I may post a few additional observations as time permits . . . .
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