On May 3, the Securities and Exchange Commission announced it completed the last batch of proposals to meet its JOBS Act mandates. That same day, in an unrelated effort, the Cato institute, a conservative think tank, offered its thoughts on how the legislation is meeting capital formation goals and ways it could be improved.
The policy paper, “A Walk Through the JOBS Act of 2012: Deregulation in the Wake of Financial Crisis,” was authored by Thaya Brook Knight, associate director of financial regulation studies at the Cato Institute.
“Although the JOBS Act has taken important strides toward beneficial deregulation, more work remains to be done,” the paper concludes. “The act’s crowdfunding provision is laden with protections that are likely to make it unworkable…Other titles suffer from similarly poor implementation.”
Title I of the act creates a modified IPO process that offers companies the option of scaling up their disclosure and compliance process gradually.
The provision creates a new “emerging growth company” designation that applies to companies with less than $1 billion in annual gross revenues and provides up to five years of forbearance from certain reporting requirements leading up to, during, and immediately after the company’s IPO. Features include the ability to pitch the IPO to institutional investors before filing papers with the SEC; initiating the IPO process confidentially; and the ability to opt out of certain Sarbanes-Oxley and Dodd-Frank provisions related to accounting disclosures and executive pay disclosures.
While a one-time review by the SEC of its current disclosure regime is underway, the paper suggests repeating this process on a regular basis “to ensure that whatever disclosures the SEC requires are indeed providing value to the market.”
Other suggestions for the SEC:
Establish a process for determining whether disclosures required as part of the IPO process are valuable to the market and whether their value merits the burden of compliance.
Use this process to conduct a review of the current IPO process, with the goal of repealing requirements that are unduly burdensome.
Conduct regular reviews of existing and new requirements using these criteria, repealing requirements that are unduly burdensome.
Title II, in part, allows for the general solicitation and advertising of private offerings to accredited investors without losing the benefits of certain registration exemptions. The paper suggests eliminating the existing accredited/non-accredited investor distinction or, if that is not possible, Congress should:
Broaden the current definition of accredited investor to include individuals who can demonstrate through a brief and simple test an understanding of basic finance and investment concepts.
Create a new category that would include individuals who can demonstrate, through work experience, a professional qualification, or a university-level degree in a relevant field, knowledge of a specific industry. These individuals would be eligible to invest in companies within each individual’s area of expertise.
Permit the primary residence to be included in the calculation of accredited investors’ assets.
Title III provides for the use of equity crowdfuding and “crowdfunding portals” to facilitate investment.
The paper suggests that the SEC and/or Congress consider: creating a de minimis exemption for crowdfunding; permitting the use of special purpose vehicles (SPVs) under Regulation CF and removing the restriction on crowdfunding by investment companies.
Title IV sought to increase the number of Regulation A offerings by, among other things, raising the cap to $50 million and imposing periodic reviews to determine if the cap should be raised further.
The Cato Institute paper suggests additional changes, including: extending federal preemption to all Regulation A offerings; and providing explicit federal preemption of state Blue Sky laws for registered broker-dealers trading in securities originally issued under Regulation A.
Titles V and VI of the JOBS Act raise the thresholds for, respectively, issuers generally and for bank holding companies specifically to $10 million in assets and 2,000 total shareholders of record or 500 non-accredited shareholders of record. The effect of the change is to permit companies to remain privately held further into their lifecycles or to remain private indefinitely.
The paper suggests going further to repeal the requirement that companies must register once they have reached a certain shareholder and asset threshold.