Implementation of the JOBS Act, which President Barack Obama said would jumpstart start-ups in America, is at a near standstill.
The sticking point? Rulemakers are stymied by the lack of clarity on key issues such as crowdfunding and general solicitation and advertising of private offerings — issues that some say clash with provisions of the Sarbanes–Oxley Act and the Dodd–Frank Wall Street Reform and Consumer Protection Act.
An even greater sticking point? Dodd-Frank. The SEC, tied up with the slow pace of rulemaking with Dodd-Frank, which was passed in 2010, simply doesn’t have the resources to speedily resolve JOBS.
Of the 398 total rulemaking requirements in Dodd-Frank, 127 or 31.9 percent have been met with finalized rules, and rules have been proposed that would meet 135 or 33.9 percent more. Rules have yet to be proposed for more 139 or more than one third of the total, according to a report by Davis Polk, a New York law firm that routinely tracks progress on Dodd-Frank rulemaking.
The JOBS Act, passed in April, has been missing its rulemaking deadlines. Under the law, the SEC was required to implement within 90 days of April 5 the “provision that eliminates a ban on general solicitation and advertising of certain private securities, so long as they are sold to accredited investors.” However, Schapiro indicated early at a House hearing she did not believe the SEC could get it done in that time frame. Three months later at an SEC hearing late September, the lack of progress was more than evident. According to SEC spokesman John Nestor on August 20, the “90-day deadline did not provide a realistic time frame for the drafting of a new rule, the preparation of an accompanying economic analysis, the proper review by the commission and an opportunity for public input.” In October there still hasn’t been much progress.
The hearing highlights the frightening grip that lobbyists now have on the rulemaking process, says Mike Stocker, a securities attorney with Labaton Sucharow, a leading New York–based plaintiffs firm specializing in securities litigation.
In recent months the Investment Company Institute and the U.S. Chamber of Commerce have filed suit against the SEC challenging its regulations on registered investment companies as redundant, rules that do not satisfy the SEC’s obligation to weigh the costs or benefits of such rules.
In September, trade groups for power companies and natural gas suppliers — Edison Electric Institute, the American Gas Association and the Electric Power Supply Association — asked for more time to comply with the Dodd-Frank provisions. “We are applying for a period of a year after the final rule is issued so that we can have a comprehensive look at all the rules and regulations that apply to us,” wrote Lopa Parikh, a lobbyist for the Edison Electric Institute.
Stocker believes that lobbyists are bottling up the SEC with challenges to Dodd-Frank to make it difficult to enact. As a result, the JOBS Act is also affected because some of the provisions of the JOBS Act, such as crowdfunding and general solicitation, directly impact previous laws on the books — laws that Dodd-Frank also is addressing.
The appeal of the JOBS Act was four-fold: crowdfunding that would allow start-ups to use simple platforms such as portals to raise money; the relaxation of general solicitation rules to allow start-ups to publicly announce their offerings; the 2000 rule that allows companies as many as 2000 accredited investors before they have to register with the SEC; and an on-ramp financing program that would allow companies to go public with minimal disclosure that then would gradually be expanded.
The bill’s drafters didn’t recognize that some of the provisions of the JOBS Act might already be covered by previous bills or that some of the provisions may not stand up to litigation.
The general solicitation rule, for example, has been mandated by Congress. And groups have been clamoring for a quick approval. But those who are advancing the rule didn’t understand that it is in conflict with Rule 506 of Regulation D of the Securities Act of 1933, which permits issuers to raise capital without registering their securities offerings, says Robert Robbins, a partner in the Washington D.C. office of Pillsbury Winthrop Shaw Pittman. Rule 506 allows issuers to raise capital but only if they do so “without general solicitation and general advertising.”
On September 13 the SEC decided to seek a 30-day public comment period because the JOBS Act is asking to lift this prohibition on general solicitation as well as a similar prohibition contained in Rule 144A of the Securities Act. Lifting the ban, although involving a relatively small amount for JOBS Act issuers, would affect Rule 506, which involves much larger amounts of capital. “Rule 506 has operated well under the public radar,” notes Robbins. In fact, the SEC estimates that the capital raised under Rule 506 and other similar exemptions in 2011 exceeded $1 trillion, noted SEC chairwoman Mary Shapiro at a hearing in September.
Attempting to reconcile the JOBS Act with existing securities laws and Dodd-Frank, much of which is still to be fleshed out, may be much more bureaucratic and cumbersome than predicted. And for the start-ups, which the bill was targeted for, the results may prove to be murky.
For the financial community — from start-ups to asset managers such as hedge funds — the JOBS Act has been welcomed as a help in accessing capital markets. But the delays, especially the regulators’ insistence on expanded hearings and greater public comments, have many worried. Testifying before the House subcommittee on behalf of the National Small Business Association, attorney Jeffrey Van Winkle said that he feared the regulators are asking too much — so much as to “nullify or substantially frustrate the laudable policy goals of the Act.”
The financial community loves the JOBS Act and its emphasis on less regulation. But it wants to help scuttle Dodd-Frank because it perceives it as more regulation and more SEC.
The SEC is uncomfortable about the JOBS Act because it opens up a Pandora’s box of investor protection issues.
Ironically, the road to the JOBS Act must go through Dodd-Frank. So, as long as the financial lobbies keep holding up Dodd-Frank, they also will keep holding up the JOBS Act.
