Securities Attorney T. Hale Boggs: SEC Uncomfortable with JOBS Act

manatt-logoCorporate Attorney T. Hale Boggs, a partner at well respected law firm Manatt, founded their Palo Alto office in 1998.  He also helped establish the San Francisco office.  He has had the unique opportunity to work with a very diverse clientele in the Silicon Valley / Bay area ecosystem of startups and investors.  His practice focuses mainly on securities law, venture capital transactions and public and private securities offerings.

Crowdfund Insider recently had an interesting and candid discussion with Hale regarding the SEC’s release of proposed regulations surrounding Title III of the JOBs Act – the portion of the law which addresses popular crowdfunding.

T. Hale Boggs:  I have worked as a securities attorney for a long time and I have interacted with the SEC for a long time and everything about this process from the beginning … until now – way behind schedule – indicates a significant degree of discomfort at the agency with this entire scheme.  I do not think that is a surprise to anyone who has followed the SEC and what it is about.  Clearly, there is a sort of feel good motivation about the jobs act and making opportunities available to a broader audience  but when you get down to the implementation reality  – as a regulatory agency  – I just understand their discomfort . They are concerned about the possibility and almost inevitable likelihood of some kind of fraudulent issuance affecting people that cannot afford to lose a lot of money.

 In terms of trying to put shackles around  how the crowdfunding process is actually going to work.  You know the limitations on investing based on income.  It almost sounds patrician.  We all know the limitations on investing based on income.  It almost sounds patrician.  

This is exactly what all this is about, namely, trying to put shackles around  how the crowdfunding process is actually going to work.  

I applaud the effort.  I like the idea of any new asset class which creates opportunity and I am personally a big fan of it.  But I see the way this process has unfolded and my sense is that the way it will continue to unfold will be difficult in terms of really enabling the significant amount of capital to be invested through this process.  Maybe I am just overly skeptical.  

T. Hale BoggsCFI:  Returning to the patrician comment, it appears it has been decided you can put a dollar amount on intellect.  Is there a disconnect there in tying the size of a bank account to ability to invest?

T. Hale Boggs:  Yes I agree.  A finance professor at a major university would probably not be able to invest significant funds.  I see a disconnect in a lot of ways but I am not surprised by it.  The position the commission is in … You had what happened in 2008 and 2009 and all of the finger pointing ..

CFI:  They (SEC) have been burned…

T. Hale Boggs:  So what else would they be?  They  were burned and then on the heels of that comes this legislation which requires them to do something which is contrary to their entire mindset for 40 or 50 years.  So it is a tough one.  I think they are doing this dragging and kicking against it – only because it is mandated by the law.

CFI:  But Mary Jo White has good corporate experience necessary in making these types of decisions.  Previously it appeared that it was not going to move forward because of the leadership.  It seems she feels it is better to get the rules out there now instead of waiting any longer plus many states are moving forward independent of the Federal law. 

Mary Jo White Chair SECT. Hale Boggs:  Yes I agree with that.  Until now there has not been any incentive on the part of any person in the position to advance the cause because they do not want to be tarred with it reputationally.  I think with the current situation that is correct because it is so overdue.   The cry in the industry is the law that was passed so long ago – what’s being done about it?   So the time has finally come for change but it is not going to be an easy process to get to the finish line.   I think it is going to continue to be baby-steps and you may end up with something at the end that, as I speculated earlier, really isn’t going to facilitate or accommodate a lot of funds being invested through this process.

CFI:  Are you involved in Crowdfunding in anyway? Or are you just an advocate because you see the opportunity?

T. Hale Boggs:  Most of my practice involves venture capital.  And most of it involves working on the investor side.    I do a fair amount of work with start-up companies as well.  I wear a couple of hats. I am very familiar with the startup eco-system and as I said earlier  – any new asset class that enables participation and creates competition amongst the asset classes –  is a good thing for our economy.  Many of the venture capitalists that I work with feel the same way.  Venture Capitalists do not feel that they have an exclusive to invest in these companies and that horse has left the barn already with these angel groups.  It is already developing.   I spend most of my time working with early to mid stage company investments.

CFI:  Don’t most VCs see this as an opportunity?  With crowd based affirmation? You have seen VCs invest in rewards based success stories because of the opportunity.

T. Hale Boggs:  I think you are right.  I have one client in particular, who you would know,  who is a big advocate, a big fan. Especially VCs which have played in the early stage.  Generally speaking I think they (VCs) are in favor of access to capital by smart entrepreneurial people and they can’t do it all for lots of reasons.  It allows for companies to be tested without their money being put at risk.  I think that is a good thing.  More generally it just creates momentum for the entire early stage company ecosystem.  That is something they like.

CFI:  Do you follow what is going on in the UK?

T. Hale Boggs:  I have had a couple of clients which have considered UK affiliations or subsidiaries but it is not an area which I have spent a lot of time.

CFI:  Was the SEC release a positive?

T. Hale Boggs:  I think it is a positive that something was released.  They had to come out with something.  At least it is now out there.  It will obviously encourage comments.  Yes it will get mired down in process – there is no doubt about that.  I think it is to be determined as to whether the ultimate final results will truly facilitate crowdfunding as a significant new entrant as an option as to how to fund companies.  I hope so.  But I do worry that some of these restrictions are going to make a challenge.

CFI:  Have you read the over 500 page document?

T. Hale Boggs:  No I have not had a chance to yet.  But the added costs associated with the proposed regulations reduces the IRR the investor may get because the expense is ultimately the investors expense.  Part of the money they are raising will have to go towards paying those costs which reduces the return to the investor which is contrary to the whole idea.

CFI:  Do you think it is the mindset of the SEC that they need to save investors from themselves?

T. Hale Boggs:  I think there is some of that. There is a sense of the need to protect widows and orphans.  And those are ill equipped to fend for themselves in terms of financial decision making and also there is the prospect of fraud.  As I said earlier it is inevitable there will be fraudsters out there.  There will be a big crowdfunded company that turns out to be lining the pockets for some guy and it will be a big black eye.  It is going to happen.  The SEC is properly concerned about that.  The problem is, like a lot of things, the extent of regulations probably goes beyond what’s necessary to address that.

SECCFI:  Do you think the SEC is trying to protect themselves?  When something happens politicians will point the finger of blame at them and they really cannot shoot back. 

T. Hale Boggs:  I think that is a huge part of it.  It is much the same in the banking industry and the regulation of banks.  Any kind of regulator which is charged with keeping tabs on how financial players interact with the public – I think their natural inclination is to be conservative at this point.  And it is sort of ironic that this law came about after that course of events (the financial crises etc.) You would have thought this would have came out in 2006 when things were going well.  It probably would have gone through much more easily in 2006.  Now it has become a sort of response to the crises.

CFI:  Do you represent any crowdfunding portals?  

T. Hale Boggs:  I do not.  I did some work for a company which decided to pivot and is doing something else now.   I am a supporter of crowdfunding but I am pessimistic about it ultimately succeeding, as it should, largely because of the nature of regulation.   I hate to be doom and gloom, but it just seems that is where we are.






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