Wednesday, the Senate cloture vote on H.R. 3606, better known as the JOBS Act, passed 76-22--the package will allow companies to offer securities to non-accredited investors via crowdfunding platforms. The JOBS Act passed the House by a 390-23 vote on March 8 and in a rare showing of bipartisan agreement on the economy during an election year. The Obama administration has expressed support for the JOBS Act, which the President intends to sign into law when the legislation reaches his desk.
Immediately after affirming the vote, Senators Jeff Merkley (D-OR), Scott P. Brown (R-MA) and Jack Reed (D-RI) proposed two additional amendments: S. 1884 from Merkley and Brown; and an amendment to S. 1844, S. 1931, from Reed. The Senators say the amendments are aimed at correcting the “deeply flawed” and “imperfect” qualities of H.R. 2930, Rep. Patrick McHenry's (R-NC) Entreprenuer Access to Capital Act, the foundation for the crowdfunding section of the JOBS Act, ensuring companies are able to raise capital and create jobs while protecting investors by reducing the risk of fraud. If either of the amendments are approved, the House and the Senate will need to address their differences before it’s sent to President Obama.
The Merkley-Brown S. 1884 amendment challenges Rep. McHenry's original House bill in a number of areas:
#1 – The House bill does not require companies requesting money to make financial disclosures. Under the amendment, companies requesting less than $100,000 would need to have the CEO of the company certify the accuracy of the financials. Companies seeking to raise between $100,000 and $500,000 would require a CPA to certify the accuracy of the financials. Companies seeking to raise over $500,000 would need to make their audited financials public.
#2 – The House bill would not make companies accountable for the accuracy of “information,” financial or otherwise. The amendment would require that companies stand behind the accuracy of information, providing due diligence protection to ensure that the information being disclosed is relevant and germane. This would give investors further protection, which is essential to create the foundation of an effective marketplace.
#3 – Under the House bill there would be no industry watchdog; under a new regulatory framework, funding platforms would need to agree that they would not take a position on any investments they are offering and that information would be presented “without spin.” The amendment would require funding portals to be registered following a process that would be more streamlined than the current process required for registering dealer and brokers.
#4 – The House bill doesn’t provide scalable investment caps, just the static 10% of annual income or $10,000 cap (whichever is less). Under the S. 1884 amendment, three different caps would be introduced: a maximum of 2% of investors’ annual gross income for individuals earning up to $40,000 a year; up to 5% for investors earning up to $100,000 a year; and a cap of 10% for those earning above $100,000.
#5 – The House bill would allow businesses to collect their crowdfunded investments the day the funding period closes, thereby not providing any time to uncover fraudulent behavior. With the amendment, there would be a three-week listing to closure period, which would allow some time for the collective “wisdom of the crowd” to identify possible fraudulent activity through feedback loops.
#6 – The House bill would allow paid promotion of investment opportunities without the need for disclosure, thereby opening the opportunity for “pump-and-dump” strategies. Under the proposed amendment, anyone promoting an investment would need to disclose if they were earning fees in connection with the entity raising the capital.
In adding the second amendment, Reed said while the Merkley-Brown amendment went some way towards addressing the risks that would be introduced if the House bill were to be approved. His amendment would close some additional exposures, not addressed by the Merkley-Brown amendment, namely tightening the definition of shareholders of record in a section of the bill that allows public companies to remove themselves from oversight by the Securities and Exchange Commission if their number of shareholders falls below a certain level. He stated that this would ensure “real shareholders” who were used to following companies via public reports were not starved of important information by allowing companies to “go dark” by easing reporting requirements.