GOP Wants Capital Formation Bonanza in Dodd-Frank Overhaul

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By Rob Tricchinelli

Republican lawmakers are taking an ambitious approach to further easing rules that make it easier for small businesses to raise money, even amid questions over whether current regulations effectively promote capital formation.

House Republicans want to give small startups even more leeway by expanding some of the specific avenues to raise capital in the 2012 Jumpstart Our Business Startups Act.

Their plans are laid out in a memo outlining proposed changes to the Dodd-Frank Act and other laws in a forthcoming bill, known as the Financial Choice Act, and the deregulatory aims go much further than a previous version of the legislation.

All Aspects on the Table

Republicans are taking on nearly all aspects of the JOBS Act, which was enacted five years ago this month. The law required the Securities and Exchange Commission to create or loosen several regulations dealing with small-company startup dollars.

Since then, the agency has adopted rules to ease the initial public offering process for “emerging growth companies,” broaden small-dollar crowdfunding and unregistered offerings, and allow issuers to solicit money more broadly.

The new Choice Act, slated for introduction later this month, is being shepherded by House Financial Services Committee Chairman Jeb Hensarling (R-Texas). House Majority Leader Kevin McCarthy (R-Calif.) has coordinated an “innovation initiative” with an eye toward expanding JOBS Act exemptions on capital-raising.

JOBS Act Overhaul

The JOBS Act created Regulation A Plus, which allows issuers to sell up to $50 million worth of unregistered securities. Hensarling’s bill would increase that threshold to $75 million.

Reg A Plus took effect in June 2015. Through October 2016—the most current data provided by the SEC—issuers filed for 147 offerings, seeking roughly $2.6 billion. The SEC had validated 81 of those offerings worth $1.5 billion.

The law also led to the SEC’s crowdfunding regime, which allows companies to create Kickstarter-like offerings and give crowdfunders an equity stake in the company. Those offerings began in May 2016, and through the end of that year 156 issuers created 163 offerings seeking a combined $18 million. By mid-January, 33 offerings had reported raising $10 million.

Donor-based crowdfunding like Kickstarter, however, runs into the billions annually in the U.S. Hensarling’s plan now mirrors the House’s original intent with the crowdfunding regime, which allowed for higher dollar caps, more investments from particular individuals, and fewer initial and ongoing disclosure requirements for issuers, among other differences.

When the JOBS Act was being negotiated, the crowdfunding sections were altered in the Senate to beef up investor protections and ramp up those disclosures.

Hensarling’s bill would also allow all securities issuers to “test the waters” for an IPO and submit a registration statement to the SEC confidentially. Under current rules, those provisions only apply to emerging growth companies. It would increase eligibility for investors to participate in early-stage venture funds as well.

Mixed Reactions

Steps to widen the JOBS Act’s capital formation provisions are backed by industry groups like the U.S. Chamber of Commerce, whose officials have called the law “just an initial step.”

But consumer groups and investor protection advocates are quick to criticize the law as it is written, let alone with further exemptions.

“We have had this approach for years that just says ‘there’s too much regulation, provide yet another exemption,’” Barbara Roper, director of investor protection for the Consumer Federation of America, told Bloomberg BNA in an interview.

If lawmakers and regulators were serious about improving the capital-formation process, Roper said, they would realize “we’ve created a patchwork of regulations that’s incoherent and doesn’t make sense, and we should take a comprehensive look at the system and figure out what’s working, what’s not working.”

In that vein, the Financial Industry Regulatory Authority, the self-regulatory organization that handles many aspects of broker-dealer oversight, is also reviewing its own capital formation rules. The group is soliciting industry feedback on, among other items, the effectiveness of rules governing crowdfunding portals that act as intermediaries between buyers and sellers.

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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