In 2012, the Jumpstart Our Business Startups Act was signed into law. Since that time, various provisions of the legislation have taken effect, while others are still going through regulatory process before they are made official. One of the most anticipated areas of the JOBS Act has been crowdfunding for equity as well as the lift on the ban of general solicitation. The implications for both investors and entrepreneurs could potentially transform the financial markets.
Equities.com had the opportunity to speak with Congressman David Schweikert, one of the most prominent figures in implementing the JOBS Act. Schweikert (R) represents Arizona’s 6th District in the House of Representatives. He sits on the House’s Committee on Small Business, authored Title IV and V in the JOBS Act, and recently chaired the hearing on the SEC’s proposed crowdfunding rules held on Jan. 16. Schweikert is one of the nation’s leading proponents of crowdfunding and crowdfinance.
In our interview, he provided us valuable insight and offered his perspective about the JOBS Act and the future of crowdfunding.
EQ: The JOBS Act was instrumental in changing some very old, long-standing regulations that have been a part of the financial world since the Great Depression. It was a bipartisan recognition that these regulations needed to be addressed to better reflect the current economic landscape. What were some of the primary issues that inspired you to spearhead the effort for some of these changes?
Schweikert: Today, the number of publicly traded companies on our exchanges is 40 percent less than a decade ago.
We have failed to use technology to provide sunshine and access to information for both the regulators and the public and that’s a huge frustration. The use of technology wasn’t incentivized in creating new capital. I saw part of this as the very first step in this next generation of what market structure will look like.
EQ: Could you say that, in some way, this was an effort to address what capital markets in the internet age are going to look like?
Schweikert: That’s perfect. That’s a brilliant way to phrase it. Information has become egalitarian and I’m a believer that, by the end of the decade, entrepreneurs will have a substantial increase in ways to raise capital.
EQ: The Small Business Subcommittee on Investigations, Oversight and Regulations held a hearing on crowdfunding Thursday, which you chaired. Crowdfunding is one of areas of the JOBS Act that really has really generated a lot of excitement based on the potential it has for the economy and financial markets. What were some key highlights from the hearing?
Schweikert: The internet has created this democratization to access to information. Now, can it create democratization of capital?
The hearing was actually very useful because the rule set that came out in October. We’re in our last two weeks of comment period with the SEC and we were trying to formalize what the experts thought. The opportunities, and where the bottle necks are, in the SEC’s proposed rules.
We tried to do something a little different instead of the typical oversight hearing where your mission is just to beat the crap out of someone. This one, we tried to take the approach: What’s the message we need to give to the SEC to make this work?
And it was terrific because there seemed to be, both from the majority and the minority witnesses, a commonality on where the problems were in what the SEC proposed and even some approaches to solve them.
EQ: The Title III rules from the SEC are still in their comment period. Do you have any concerns about their current state that you would like to see addressed? Are there any changes you might like to see to the current iteration of these rules?
Schweikert: One of my greatest concerns is, if there is a perception of a cascade of liability to the intermediaries, do you drive the quality intermediaries away from participating in crowd funding?
The SEC needs to make their language much crisper in that regard.. If there’s a bad actor, who’s ultimately held liable and responsible for that? There also needs to be some clearing up on the cap. Make it clearer what counts in terms of your investments.
The third thing is in dealing with the SEC’s expectation of audited financials if you’re raising over $500,000. A handful of issues were articulated in the hearing that would make using equity crowdfunding as expensive, or more expensive, than other styles of capital.
And I think there were good suggestions of ways the SEC could change the way they were writing the rules to tighten it up a bit. It gets rid of the perception that this is going to be fairly costly as a way to raise money.
EQ: So you still envision intermediaries and broker/dealers as being a really important part of finance moving forward even with these changes?
Schweikert: Oh, very much so. Even some of the testimony at the hearing talked about how it could be used as one of the arrows in the quiver. Even if your intent is to raise money mostly from qualified investors, you might also use crowdfunding to not only to broaden your base, but also for proof of concept.
The beauty of crowdfunding is that it doesn’t just stand out there on its own. It may have benefits, not only of raising awareness capital, but also as proof of concept. As one of your tools even when you’re raising money in a traditional fashion.
EQ: It sounds like one of your major concerns is the potential costs of raising capital through crowdfunding?
Schweikert: Part of this is the discussion of whether it even might have an effect on costs depending on the type of business.
If you’re the type of business that is a little more complicated, leasing items, lots of in and out transactions, and lots of capital assets. If you raise over $500,000, you now have to move into audited financials. Some businesses, that’s easy because of the nature of transactions they do. But when there’s lots of churn in inventory or accounts, audited financials is much tougher to do.
Which seems a little absurd, for $500,000 in crowdfunding to require audited financials. In Reg. A it’s $5 million. The new Reg. A caps for when you have to have audited financials is a dramatically higher number, $50 million.
So we also need to ask the SEC to look at trying to help us have some regulatory consistency. So where you hit the cost of audited financials are similar or identical dollar amounts for raising money through crowdfunding, or Reg. A, or Reg. A+.
EQ: The two provisions in the JOBS act you spearheaded were title IV and V, which were designed to help small businesses and start-ups access capital by increasing the thresholds of the amount of capital they are allowed to raise as well as the number of shareholders. Title V has taken effect, and Title IV is still in process of going through the SEC. Can you discuss the challenges that small businesses and start-ups face when trying to grow, and how these provisions have and will help them?
Schweikert: We all went to business school. And we all heard that you go out to friends and family, then angel investors, then venture capital firms, and then you go public. Rules are a lot more complicated today, but that complication provides options. So now we’re trying to reflect what the market really looks like.
The great frustration that many of us involved with the JOBS Act have is the sluggishness and missed deadlines of the SEC. How many organizations a year ago wanted to use Reg A+ or use crowdfunding? And then they wait, and wait, and wait. What was the lost of economic growth due to their delay?
What I’m most optimistic about is what, at our office, we refer to as the optionality of capital. If you’re a small concern trying to grow, or in many cases even a mid-size concern, and you use the mini-IPO onramp, how do you create as many options for a capital raise as possible?
Tune in tomorrow when we publish the second portion of the interview where Congressman Schweikert digs deeper into the historical context of the JOBS Act and how the availability of information changes the nature of investing.
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