April 5, 2016 marked the four year anniversary of the enactment of the Jumpstart Our Business Startups (JOBS) Act. While the statute is still relatively young, we have already begun to see the positive impacts that its provisions have had on startups’ ability to raise capital. It has made going public easier and created new pathways for startups to raise money through Regulation A+ and general solicitation under Regulation D. And with regulation crowdfunding set to finally go live in May, we are hopeful that a vibrant non-accredited investor crowdfunding market will emerge in the near future.
As the provisions of the JOBS Act become more widely used, policymakers should evaluate the impact of the Act and remain open to modifications and improvements to the existing framework that could further enhance capital formation options for entrepreneurs and startups.
This morning, the House Financial Services Committee held a hearing to examine the impacts of the JOBS Act and evaluate four bills aimed at improving the capital access landscape for innovators across the country. Engine submitted a statement for the record commending the Committee on its thoughtful approach to capital access issues and voicing our support for the four bills discussed at today’s hearing. Each bill includes commonsense, meaningful reforms that will go a long way towards facilitating capital formation for startups:
The Supporting America’s Innovators Act of 2016 (H.R.4854), introduced by Congressman Patrick McHenry (R-NC), would remedy what is known as the “99 Investor Problem.” Entrepreneur and VC Brad Feld did a great job explaining this problem here, but to summarize: current securities law caps the number of investors who can act as a coordinated group to invest in a company, allowing only 99 investors per LLC. As online fundraising and general solicitation have taken off (thanks to the JOBS Act), grouping investors into what are known as investment LLCs, or “syndicates,” has become useful for mitigating investor risk, diversifying investor portfolios, and simplifying the fundraising process for startups. The arbitrary 99 investor cap, which has been in place since 1940, does nothing more than exclude sophisticated investors from funding the startups they want to and limit the amount of capital flowing to startups. H.R.4854 would raise the cap to 500, ensuring that accredited investors are not excluded from offerings and that startups don’t have to leave money on the table.
*Update: H.R.4854 passed the House of Representatives on 7/5/2016
The Fix Crowdfunding Act (H.R.4855), also introduced by Congressman Patrick McHenry (R-NC), would make a number of improvements to the current Title III regulation crowdfunding framework that Engine has championed in the past. Specifically, the bill incorporates reforms that we advocated our white paper, “Financing the New Innovation Economy: Making Investment Crowdfunding Work Better for Startups and Investors,” including: increasing the annual raise limit on issuers from $1 million to $5 million, allowing for innovative special purpose vehicles (SPVs) to participate in this new non-accredited framework, giving portals more flexibility to vet offerings on their site, and allowing issuers to “test the waters” before initiating complex and costly offerings. We remain hopeful that these changes will help investment crowdfunding realize its full potential.
*Update: H.R.4855 passed the House of Representatives on 7/5/2016. However the bill was amended and a number of changes were made. For a rundown, check out this great piece in CrowdfundInsider.
The Micro Offering Safe Harbor Act (H.R.4850), introduced by Congressman Tom Emmer (R-MN), would create three new safe harbor exemptions for non-public offerings. In plain English, this bill is meant to remove some of the ambiguities in the legal rules defining private and public offerings that can lead to regulatory problems for startups. Basically, in their earliest stages, lots of young startups rely on small, private fundraising rounds (often from family and friends) to raise early-stage, seed capital. But existing laws don’t do a good job of differentiating between “private offerings” and “public offerings.” So, startups sometimes accidentally run afoul of the law when they do a private raise that unintentionally has some characteristics of a public offering. H.R.4850 aims to fix this problem by clarifying what qualifies as a non-public offering (with three safe harbor exemptions) and lowering the regulatory burdens on startups pursuing these non-public offerings.
*Update: H.R.4850 passed the House of Representatives on 9/8/2016
The Private Placement Improvement Act of 2016 (H.R.4852), introduced by Congressman Scott Garrett (R-NJ), would clarify Congressional intent under the JOBS Act around Rule 506 of Regulation D. When the JOBS Act was passed, it included a provision allowing for startups to publicly solicit funds from accredited investors (also known as general solicitation). But when the Securities and Exchange Commission (SEC) approved the regulations for this new means of raising capital, they also proposed a number of additional burdens on Regulation D issuers that were arguably not consistent with the original intent of the JOBS Act. H.R.4852 would explicitly eliminate a number of these requirements, removing regulatory uncertainty and ensuring that startups do not face outsized burdens in raising funds through general solicitation, either now or in the future.
*Update: H.R.4850 passed the House of Representatives on 9/8/2016
These four bills represent opportunities for lawmakers to act to make it easier for promising startups to raise capital. We are pleased to see the House Financial Services Committee discussing the merits of these bills, and we hope that the House will act to pass these reforms in the near future.
