Senators Say SEC Going Too Far With Startup Financing Rules
On Tuesday, Senators John Thune (R-SD) and Pat Toomey (R-PA) released a letter written to SEC Chairman Mary Jo White sharing their concerns about some proposed SEC rules for startups stemming from the JOBS Act implementation.
“The additional measures that the SEC has proposed go beyond Congress’s clear mandate in Section 201, and would impose unnecessary and burdensome requirements that will have adverse effects on small businesses and investors, and undo the progress made under Section 201,” the senators wrote. "As sponsors of this provision, we respectfully urge the Commission to ... not adopt the additional proposals in order to ensure the benefits of the JOBS Act are realized for small businesses and investors. The JOBS Act, which was signed into law by President Obama in April 2012, is intended to spur job creation and business growth by easing the regulations around the process of accepting business investments. In their letter, Senators Thune and Toomey suggest some of the new rules created by the SEC have actually made the investment process more difficult for businesses – counteracting any benefits. “The gist of what they’re getting at is the strong belief that the purpose of the JOBS Act was to free up access to capital for everyone, [and not excluding] smaller business and entrepreneurs,” says Chris Cain, a partner in Foley and Lardner’s Private Equity & Venture Capital practice.Too Many Unnecessary Rules? The JOBS act lifted an 80-year-old general solicitation ban that limited capital-hungry businesses to only seeking investments from accredited investors they knew personally or were introduced to. Accredited investors must have net worth of more than $1 million or individual income that exceeds $200,000 for at least two years. Individuals whose joint net worth with a spouse exceeds $300,000 for the last two years also qualify. Since the ban was lifted in September, entrepreneurs are now allowed to seek investments publicly, through marketing efforts, social media or advertising. Supporters of the JOBS Act, including Senators Thune and Toomey, say this will spur investment, helping businesses to expand and creating jobs in the process. But the simplification may be coming with some new complications, according to the senators. “They’re concerned about several steps taken by the SEC to counterbalance the opening of the gates,” says Cain. He says the SEC is basically trying to protect investors from themselves by setting up safeguards to make sure entrepreneurs are following all the rules. One of the proposed rules Senators Thune and Toomey mentioned in the letter requires entrepreneurs to file a Form D, informing the SEC about the private offering, in advance of any general solicitation. Cain says this would make it necessary for some businesses to file up to three Form Ds – a time-consuming and potentially costly endeavor. One of the most burdensome rules, says Cain, would require businesses to file all copies of advertising materials with the SEC no later than the day they’re going to be used. Given that many startups have interpreted the lifted ban to mean they can advertise for funding via their websites, Facebook pages or Twitter accounts, this could spell trouble for entrepreneurs.Caught Between a Rock and a Hard Place? Cain says White finds herself in a difficult situation. Without finalizing rules, the JOBS Act can’t really go into effect, but White is receiving pushback both from those who want to free up investments and those who want to make sure individual investors don’t get burned. “There’s pressure to get these things done,” says Cain, who believes White will take the senators’ letter seriously. The SEC declined to comment for this story. “It’s a struggle between a mandate from Congress to open up capital markets and making sure we don’t have naked fraud in the streets, fleecing individuals’ retirement savings,” says Cain. With that said, Cain says he does believe some of the proposed rules surrounding the JOBS Act will significantly inhibit businesses’ ability to raise funds, undoing the intention of the law. Ruth Hedges, founder of business plan and due diligence tool Funding Roadmap and one of the drafters of the original JOBS Act, agrees. “This was supposed to help encourage more accredited investors to invest in deals that interest them,” she says. But because of the processes surrounding the law, Hedges says many accredited investors will be turned off from investing in private offerings altogether. “[The SEC is] giving with one hand and taking back with the other,” says Hedges.