It's fitting that during the week the NCAA Tournament's Sweet 16 will tipoff, a bill that would ease Securities and Exchange Commission registration requirements for emerging companies went into double overtime in the Senate.
But at the end of the game, a
desperate attempt at a buzzer beater by the North American Securities Administrators Association to change a provision that authorizes start-up companies to raise capital in small increments online failed.
The state regulators had been trying throughout the circuitous Senate debate this week to get the chamber to amend the crowd-funding provision to require stock issuers and crowd-funding websites to register with the states. Under the bill, known as the Jumpstart Our Business Startups Act, companies that use crowd-funding would have to notify the SEC but not have to register there or with the states.
“The JOBS Act passed today by the Senate remains the fundamentally flawed product of a rush to legislate,” NASAA President Jack Herstein, assistant director of the Nebraska Department of Banking and Finance, said in a statement. “This legislation will needlessly expose Main Street investors to greater risk of fraud by creating new jobs for promoters of Internet boiler room investment scams. Unfortunately, many investors may be harmed before this mistake is corrected.”
Proponents of the capital-formation measure say that it will open the financing spigot for entrepreneurs and catalyze job creation. Skeptics say that is undermines SEC oversight and would lead to fraud. SEC Chairman Mary Schapiro, in a March 13 letter, criticized the bill.
The measure was put on a fast track in the Senate, following its 390-23 approval in the House on March 8. The Obama administration also supports the bill. In an election year, both Democrats and Republicans wanted to be seen as champions of job creation.
On Tuesday, the Senate voted down an
amendment its sponsors said would increase investor protection, including crowd-funding restrictions.
It was a uniquely Senate loss. The amendment garnered 55 votes, five short of the number required to overcome a filibuster but enough to show that a majority of senators favored strengthening investor protection in the bill.
Senate Majority Leader Harry Reid, D-Nev., in a surprise move, decided to delay until Wednesday a vote that would end debate on the underlying House measure.
On Wednesday, the Senate voted, 76-22, to invoke cloture, or conclude debate on the bill, and move to a final vote. Before doing so, however, Mr. Reid allowed debate on two amendments.
One would revise the crowd-funding provision in the House bill. The other would lower from the House bill the number of shareholders required before emerging companies would have to register with the SEC.
“The bill is imperfect, and that is perhaps an understatement,” Mr. Reid said.
“People are out there lurking – looking for ways to cheat,” Mr. Reid added in support of the crowd-funding amendment.
Finally on Thursday, the typically convoluted Senate legislative process came to a conclusion. The crowd-funding amendment was approved, 64-35. The other amendment was withdrawn after strong financial industry opposition. The Senate approved the underlying capital-formation bill, 73-26.
Now the measure goes back to the House, where Majority Leader Eric Cantor, R-Va., indicated on Thursday that it will be approved early next week.
The crowd-funding amendment changes the House bill by requiring crowd-funding websites to register with the SEC as a broker-dealer or a funding portal. It also requires a start-up to provide more information about its finances and business plan to potential investors than the House measure does.
It limits to $2,000 or 5% of income that any individual investor can put into a start-up each year through crowd-funding. The limit rises to up to 10% of income for people earning more than $100,000. The House bill allows up to $10,000 or 10% of income to be invested through crowd-funding in any one start-up.
“The House bill, as it came to us, is a pathway to predatory scams,” Sen. Jeff Merkley, D-Ore., one of the amendment authors, said before Thursday's Senate vote.
Another author stressed that he and his colleagues were not trying to kill crowd-funding but rather improve the House version.
“This crowd-funding amendment could unleash billions of dollars of local investment,” Sen. Michael Bennet, D-Colo., said on Wednesday.
The House will agree to the crowd-funding changes next week and send the bill to Mr. Obama to be signed into law. It's game-over for NASAA.
