What Stance will SEC take with JOBS Act?
by Eric Camm
Last week my colleague Peter Smith penned a great piece on the new JOBS act (the “Act”) and the potential that the new Crowdfunding frontier presents (both good and bad) with this foray into new regulatory territory. As Peter correctly points out, there are both positives (access to funding for early stage or “emerging growth companies” that would otherwise have a very difficult time acquiring financing) and negatives (potential for securities fraud) to the Act that must be examined, as well as some unknown in terms of how exactly the regulations will shake out.
In response, “Crowdfundinglaw” provided an interesting rebuttal, examining the analogy that Peter used for Crowdfunding as the Wild West (offering the “Final Frontier” as alternative). Both posts are very good reads and well worth your time.
For my part, when looking at the potential pros and cons of the Act, I am extremely interested to see what regulations the SEC promulgates as oversight. Part of the Act includes a directive to the SEC to come up with some regulations to govern the Act, so I believe that any analysis regarding the Act at this stage has to include the caveat that much has yet to be determined when it comes to the impact that the Act will have on emerging enterprises.
The SEC, for its part, has not made much secret of the fact that they aren’t thrilled with the Act. Now, charged with creating the regulations to govern the Act, it has two choices, overkill or underwhelm.
1. Over-Regulate the Act.
The SEC could promulgate extremely burdensome disclosure and/or reporting requirements for companies seeking to take advantage of the Act. This would aid in the reduction of potential fraudsters, but would also likely have a chilling effect on the usefulness of the Act for emerging companies who likely won’t have the resources to comply with stringent requirements. While I’m sure the SEC does not want this to happen, it has to be acknowledged that the agency has not had some of its best years recently, as scandals (such as the Madoff ponzi scheme) have slipped through regulatory cracks and caused great harm to the economy. Many hearings following the Madoff affair begged the question, “Where was the SEC on this?”
Both the post written by Peter Smith and the response from Crowdfundinglaw address the issues of potential fraud under the Act, so I won’t delve into that any further. My point here being when looking at what the SEC may do in terms of regulating the Act, I certainly believe that one of the factors that the SEC is going to look at is how to avoid another round of congressional hearings wherein the Agency is skewered for its lack of oversight. The size and scope of the Act (ie the limitations on the amount of money that can be raised through crowdfunding) mean that we will not likely see any large-scale frauds being perpetrated, but nonetheless – the climate at the SEC could very well be one of erring on the side of caution when drafting oversight regulation for the Act.
2. Take the Bare-Bones Approach
In the alternative, the SEC could simply throw its hands up and set forth very minimal guidance. Given that the SEC is on record as not being in favor of the Act, it is entirely possible that they will do very little in terms of oversight when it comes to regulating Crowdfunding for emerging growth companies. The intent of Congress and the President is clear – to open up new avenues for emerging growth companies to obtain investment capital. Accordingly, the SEC may swallow its tongue on this one and see how things play out. While some have voiced concerns about the perpetration of Securities Fraud if the Act is not closely monitored, others have argued that such fraud is unlikely given the smaller scope of offerings under the Act, along with the requirements (such as audited financials) that are already required for any company seeking to participate in crowdfunding under the Act.
Overall, I think the effectiveness of the Act is a question that will be answered once the SEC sets forth its regulations. Once the regulatory framework has been established, emerging companies, along with the investors they are seeking, will have the opportunity to get comfortable with the requirements of taking investment through Crowdfunding. Further, once the SEC takes action in terms of oversight, we’ll get a better idea of whether they are waiving a caution flag, or if their approach is going to be more along the lines of letting the market dictate how crowdfunding is implemented.
 The SEC comments to the proposed legislation essentially amount to, “please don’t do this.”
 Especially in light of the fact that a whistleblower named Harry Markopolos had been writing letters to the agency stating that Madoff was a crook for years – without any action being taken whatsoever. If you are interested in this topic, google Harry Markopolos, and see what lengths Mr. Markopolos took to show the SEC that Madoff’s investments could not possibly be performing in the manner Madoff was representing, years before Madoff was discovered to be a fraud.
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