Though time has seemingly stood still on JOBS Act rulemaking at the SEC nearly one thousand days after its passage, the world continues to complete a full rotation every 24 hours – and it seems that the rest of the world is passing the U.S. by, at least when it comes to the vitality of U.S. capital markets.
We were reminded of this most recently in remarks (embedded below) delivered by SEC Commissioner Daniel M. Gallagher on January 13, 2015, entitled “Can the U.S. Be an International Financial Center?” The title for the speech was cause alone for concern – indeed a wakeup call of sorts. After all, isn’t the U.S. already the international financial center? And who could possibly compete with the U.S. in this arena?
The speech itself began with yet another question which framed the issue at hand:
“I have a resolution for policymakers in Washington. Every day in 2015, we should ask ourselves, “Are the U.S. capital markets competitive?” That is, where do our capital markets stand vis-à-vis both established and emerging global markets? Sadly, I believe the answer is that – without timely and intense introspection and reaction – the United States is at risk of losing its status as the world’s capital markets leader. Maybe not in the next year, or ten, but the trend is unmistakable.”
In support of his concerns he cited to two studies, one by the U.S. Chamber of Commerce conducted in 2007 and two reports issued around the same time by the Committee on Capital Markets Regulation, an independent and non-partisan research organization led by Harvard Law School Professor Hal Scott. According to Commissioner Gallagher, the U.S. is losing its competitiveness not only in well established markets, such as London, but also emerging markets in Asia and the Middle East, citing the UAE, Qatar and Turkey, to name but a few. Yes, some of those same markets which the White House has targeted in its ongoing Global Entrepreneurial Initiative which I recently wrote about – focused on building entrepreneurship in Muslim controlled countries.
And what is at the root of Commissioner Gallagher’s concern over the competitiveness of U.S. capital markets?: Government overregulation coupled with the absence of “creativity” of Washington policymakers in defining and facilitating new avenues for capital formation, especially for small business:
“rather than thinking creatively about ways to promote capital formation, legislators and regulators are layering on law after law, regulation after regulation – strangling entrepreneurs, their enterprises, and of course their employees and customers. We are not even resting on our laurels—we are actively throwing those laurels on a bonfire.”
And as Commissioner Gallagher pointed out, the cost of overregulation falls not only on existing businesses but also on “ . . . those that never form in the first place because of regulation – because they don’t have a voice.” Typically it is the smaller businesses which bear the disproportionate brunt of these regulations.
So what can the Commission do today? Gallagher’s priorities were clear:
“. . . we can and should finalize our JOBS Act Regulation A amendments ASAP – maybe we should call it Reg A-SAP. And, we cannot ignore secondary trading of Regulation A and other small company shares. This is why I have been a vocal proponent of so-called venture exchanges.”
Though it was heartening to have attention called to the pending Regulation A+ SEC rulemaking by an SEC commissioner, his words seemed to reflect a different tone than he echoed in a speech on November 20, 2014, addressing the SEC Government-Small Business Forum, where he said that he “hopes and expects” to see final rules “in the very near future.”
And absent from Commissioner Gallagher’s speech was any reference to JOBS Act crowdfunding rules. Perhaps this was the wrong crowd. Or perhaps this was simply viewed as a lost cause. After all, the UK and other countries are way out in front on equity crowdfunding, and there is not even of a hint of final JOBS Act rules in the offing any time soon.
Though it remains unclear when we will see final JOBS Act rules for either crowdfunding or Regulation A+, there is some solace for those who share Commissioner Gallagher’s concern. First, SME’s are fortunate to have a Commissioner who speaks out publicly on the importance of small business issues under the umbrella of the SEC. And perhaps foremost, if the SEC is not up to Commissioner Gallagher’s standards, he will have a more receptive ear in the Republican-controlled Congress in 2015.
And in an article penned by JOBS Act crowdfunding pioneer Sherwood Neiss on January 17, entitled “SEC to Small Business – We’re Just Not Into You,” three years after the JOBS Act was signed into law by President Obama, he summed up his frustration, joining a growing chorus of thought leaders who are seemingly fed up with the SEC’s attitude towards small business:
If you haven’t read ”He’s Just Not That Into You”, it can be summed up in a sentence: “If he isn’t calling you, asking you out, sleeping with you, or otherwise treating you like he really cares, he’s just not that into you.” This of course means you should move on. This pretty much summarizes the stance the Securities and Exchange Commission (SEC) seems to have taken with Small Business.
In doing so he shared many of my observations which have graced the pages of Crowdfund Insider over the past year – citing not only to inaction by the SEC in the face of Congressional JOBS Act rulemaking mandates – but also to a broader historical record of benign neglect of small business by the SEC. However, instead of advocating for an Office of Small Business Advocate in the SEC with enhanced powers, including reporting to Congress, as argued by Commissioner Gallagher and me over the past year, his solution is to create a new federal agency to address the needs of small business capital formation.
Even the Commonwealth of Massachusetts seems to share the impatience of many with the glacial pace of the SEC’s crowdfunding rulemaking. Only two days after Commissioner Gallagher’s speech, the Massachusetts Secretary of State joined a growing number of states when it announced its new intrastate crowdfunding exemption – effective immediately. All of this was contained in six pages, without any directive from the state legislature and without a lengthy rulemaking period. And though some may quibble with the details, the exemption itself is to be applauded for its simplicity – and appears, as far as state law is concerned, to present a workable framework for crowdfunding. The only fly in the ointment – two recent SEC Staff pronouncements in 2014 opining that general solicitation on the internet is not allowed under state crowdfunding laws – seemingly in conflict with all of the prior Staff positions going back decades as well as a noted academic scholar, Professor Rutheford B. Campbell.
Though it is questionable whether, or how quickly, any of this will move the JOBS Act final rulemaking needle at the SEC, many in Congress are taking notice and will take matters into their own hands by time the Cherry Blossoms begin to flower this year in Washington, D.C. – three years after the passage of the JOBS Act.
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Samuel S. Guzik, a Senior Contributor to Crowdfund Insider, is a corporate and securities attorney and business advisor with the law firm of Guzik & Associates, with more than 30 years of experience in private practice. A nationally recognized authority on the JOBS Act, including Regulation D private placements, investment crowdfunding and Regulation A+, he is and an advisor to legislators, researchers and private businesses, including crowdfunding issuers, service providers and platforms, on matters relating to the JOBS Act. As an advocate for small and medium sized business he has engaged with major stakeholders in the ongoing post-JOBS Act reform, including legislators, industry advocates and federal and state securities regulators. In 2014, some of his speaking engagements have included leading a Crowdfunding Roundtable in Washington, DC sponsored by the U.S. Small Business Administration Office of Advocacy, a panelist at the MIT Sloan School of Business 2014 Crowdfunding Roundtable, and a panelist at a national bar association event which included private practitioners, investor advocates and officials of NASAA. His articles on JOBS Act issues, including two published in the Harvard Law School Forum on Corporate Governance and Financial Regulation, have also served as a basis for post-JOBS Act proposed legislation. Recently he was cited by SEC Commissioner Daniel M. Gallagher in a public address for his advocacy on SEC regulatory reform for small business. He is admitted to practice before the SEC and in New York and California. Guzik has represented a number of public and privately held businesses, from startup to exit, concentrating in financing startups and emerging growth companies. He also frequent blogger on securities and corporate law issues at The Corporate Securities Lawyer Blog.