Guest post from Jenny Kassan.
As the SEC Readies this Week to Propose Rules that Reduce Investor Protection under the JOBS Act,The Attorney Who Filed the Original SEC Petition Instigating the Legislation Questions Its Viability
The decision to allow people to invest in opportunities that are not vetted by regulators checking income or verifying net worth is a symptom of the problems inherent in the law. The JOBS Act attempts to do the impossible: balance investor protection with the desire to enable companies to raise money from strangers all over the country with minimal red tape.
My involvement with what ultimately became the JOBS Act began in 2010 as I worked with entrepreneurs, artists, and makers attempting to raise capital. My colleagues and I encounter their frustrations every day at our firm, Cutting Edge Capital, which focuses on the financing needs of small to medium sized businesses.
The commonly used securities laws make it difficult and expensive for small businesses and entrepreneurs to publicly offer investment opportunities if the investors are not wealthy ($1 million in net worth or $200,000 in annual income).
In 2010, through a nonprofit that I co-founded called the Sustainable Economies Law Center, I submitted a formal petition to the SEC. The petition made a simple request:
Allow ALL investors the opportunity to help entrepreneurs raise catalytic capital by creating an exemption from the onerous federal filing requirements as long as investors put in no more than $100 per offering.
The petition garnered media coverage and letters of support from all over the country, yet we heard nothing from the SEC. But, a White House staffer became intrigued by the idea after we presented it to the SEC’s annual Forum on Small Business Capital Formation.
Congressional hearings and a Presidential proposal for a crowdfunding exemption followed, and after some changes in the House and the Senate, the final legislation – the JOBS Act – was signed into law on April 5, 2012. The SEC was charged with formulating implementation rules, which to date have yet to be released.
So how does it feel to be the one whose petition led to the creation of the JOBS Act?
I have many concerns about the final version of the crowdfunding exemption (Title III of the JOBS Act), which is very different from our original idea. Vague provisions will make it difficult to implement, the maximum allowable investments (generally 5% of net worth or annual income) are much higher than our original proposed cap of $100, and without income or net worth verification, investors stand to lose more than they can afford.
Also, the JOBS Act prohibits companies from communicating directly with potential investors other than to tell them to look at the website of a crowdfunding intermediary. We believe this defeats an important purpose of community investing – the opportunity for company principals to communicate directly with potential investors.
Since we submitted our petition, we have focused on a much better way to do investment crowdfunding. We now use a little known tool that has existed for decades called Direct Public Offerings (DPOs) that works under existing law. Yes, existing law!
DPOs are filed with the states and are screened by state level securities regulators who have a great deal of experience at spotting fraud and overly risky propositions. That is a big advantage over the JOBS Act, which prohibits state securities regulators from getting involved.
And DPOs allow public offerings of securities to all, whether wealthy or not. Any type of security can be offered (debt, equity, or anything else) and the entrepreneur sets the terms. So, business owners can keep more money in their pockets and put more Americans back to work.
In a short time, our clients have raised several million dollars from their customers, neighbors, and fans. They are raising money from the 100% – not just the wealthy.
The fate of the JOBS Act crowdfunding exemption remains to be seen, and how it was ultimately crafted leaves much to be desired, as demonstrated by the recent reported proposal to abandon attempts to prevent people from investing more than they can afford. Fortunately, we already have a powerful way to raise significant amounts of capital from the crowd.
Direct Public Offerings make investing in Main Street possible today. Let’s put crowdfunding to use, and Americans back to work.
Jenny Kassan filed the original petition to the SEC to create a crowdfunding exemption in an effort to help small to medium-sized businesses, entrepreneurs, and startups. Through two years of active engagement, Kassan continued to advocate for what eventually became the Jumpstart Our Business Startups Act (JOBS Act) that was signed into law in 2012. Kassan is a managing partner in the Katovich & Kassan Law Group, is C.E.O. of the consulting firm Cuting Edge Capital, and co-founder of the non-profit Sustainable Economies Law Center. She has extensive experience with direct public offerings, nonprofit-for-profit joint ventures, cooperatives, and creative financing tools. She has a law degree from Yale and a masters in city planning from U.C. Berkeley.