U.S. small-business growth is being stunted by regulators’ delay in issuing rules to permit so-called crowdfunding and other means of raising capital, company owners and an academic told lawmakers today.
The House Small Business Committee is holding a hearing in Washington to examine the Securities and Exchange Commission’s work to implement the Jumpstart Our Business Startups Act, enacted last year with the goal of spurring job creation. The SEC has missed deadlines for writing rules including ones that would let hedge funds advertise for investors and allow startups to raise money over the Internet.
The hearing underscores frustration among lawmakers and business owners over the lack of progress on the rules, which had bipartisan support in Congress and were endorsed by President Barack Obama. SEC Chairman Mary Jo White, who took the agency’s helm yesterday, has said she will prioritize completion of the rules.
“The longer we wait for action by the regulators, the more our engines of economic growth will continue to simply tread water,” Representative David Schweikert, an Arizona Republican, said in a statement prepared for the hearing. “Or worst yet, starve for lack of opportunity.”
SEC officials didn’t disclose when they will issue the new rules, according to their prepared testimony. They said the agency has released guidance to help companies use portions of the law that don’t require rulemaking.
“The commission and staff are moving forward on the various rulemakings,” Lona Nallengara, the SEC’s acting director of corporation finance, said in a statement. “We look forward to completing the remaining provisions as soon as practicable.”
The JOBS Act generally limits equity crowdfunding investments to the greater of $2,000 per person or five percent of one’s annual income or net worth. People with more than $100,000 in annual income can invest as much as 10 percent of their income or net worth.
The SEC is considering allowing people to self-certify to a brokerage or crowdfunding portal how much they can invest, Nallengara told the committee. That would reduce the amount of paperwork that investors have to provide before participating in a crowdfunding campaign.
“That is something we are certainly considering and that is what the commission will consider as well,” Nallengara said.
James J. Angel, a professor of finance at Georgetown University in Washington, said the SEC has complicated the process of allowing crowdfunding. The agency should adopt interim rules and monitor how they affect capital formation and investor protection, he said in prepared remarks.
“The commission has shown a pattern of antipathy toward the idea of crowdfunding from the beginning and is in great danger of killing the idea through regulatory delay and over-regulation,” Angel said.
Jean Peters, a board member of the Angel Capital Association, said the SEC should clarify how hedge funds and other private-investment vehicles can safely use advertising to raise money. The SEC’s draft rule, issued in August, said advertising would be permitted as long as a company takes reasonable steps to verify an investor is accredited, or has a net worth exceeding $1 million and annual income greater than $200,000.
“This is problematic because the SEC has not provided clarity on what are ‘reasonable steps,’” Peters said in prepared remarks. “Many legal experts have advised their clients through alerts not to invest in advertised offerings if there is no safe harbor.”