On October 23, the Heritage Foundation hosted Rutherford Campbell Jr., a professor at the University of Kentucky College of Law. Campbell discussed the Jumpstart Our Business Startups Act (JOBS Act). The JOBS Act reduced regulation for entrepreneurs who wanted to start or grow their businesses and permitted crowdfunding. Campbell talked about the law, mentioning problems that he saw with it and proposing ideas for how they could be fixed.
Title 3 of the JOBS Act “…allows issuers, large or small, using rule 506, to make broad solicitations for investors” but “…only accredited people could invest…”. Campbell thinks that this part of the law is good but takes issue with another part of Title 3; that is, the part that involves crowdfunding. He does not think crowdfunding as an idea is bad but that aspects of this law that go along with it are bad. He said: “Crowdfunding really foundered or has foundered so far in my opinion for two reasons. One is the limitation on any sort of selling activities other than the posting… You cannot split a single offering half crowdfunding and half (or whatever percentage) 506.”
“The other reason in my view that crowdfunding foundered or is foundering is the disclosure requirements… periodic reporting requirements of the kind that you get under the 34 Act… can go on for quite a time depending upon the situation.” A problem with the last point about the periodic reporting requirements is that transaction costs will go up. For Title 4 of the JOBS Act “…The idea was always to have smaller offerings with less disclosure and filing requirements than a full-blown registration in that situation.”
Offerings under Title 4 are divided into Tier 1 and Tier 2, with Tier 2 containing larger amounts of money than Tier 1. Tier 2 offerings require more disclosure than Tier 1 offerings, although Tier 2 preempts state registration authority while Tier 1 does not. Problems Campbell has with Title 4 are “…the failure of the Commission to preempt state authority over Tier 1 offerings” and the fact that “…there are ex-ante financial disclosures and narrative disclosures that are really way too much, especially for small offerings…”
Campbell believes that the problems with Title 3 are generally fixable. He said that the Securities and Exchange Commission(SEC) “…could drop in a 2-way safe harbor provision, they could come back and they ought to absolutely eliminate the ex-post periodic reporting requirements from this” and “I think they ought to work with Congress; I mean, I think that’s what an administrative agency ought to do in this situation.” He thinks that the SEC can fix the problems of Title 4 as well: “They seriously need to scale this, and I think they need to scale it to the $1 million level, have a reg. A+ regime for $1 million or less, and scale at the $5 million another bit more disclosure at the $5 million and then over that.”
In conclusion, Campbell said: “I am a big JOBS Act fan, in that I think it offers-properly implemented–I think it offers three good paths to external capital. I think crowdfunding will never be what we hoped it would be on the front end you can’t sell securities that way) but you can open that up and I think crowdfunding could become something like a shelf registration for small companies…but you’ve got to let people do these offerings at the same time.”