After a full year’s delay, the Securities and Exchange Commission recently lifted a ban on general solicitations for certain private securities offerings. Yet in doing so, the commission proposed a set of rules -- effective in late September -- that threaten to institutionalize the very ban that was supposed to be eliminated. And it reinforced an unfair regulatory bias against less wealthy investors that has persisted for far too long.
In March 2012, Congress passed the Jumpstart Our Business Startups Act, or the JOBS Act. As originally intended, Title II of the law sought to widen the pool from which small businesses could privately raise capital by allowing them to publicly advertise their securities offerings. The logical assumption was that the greater the number of people who were aware of such an opportunity, the more accredited investors who were likely to be in that group.
What the law didn’t do was amend who was qualified to invest in these offerings. That’s a crucial point: No one who was disqualified from participating before the JOBS Act was now allowed to play. It took the SEC 15 months -- 12 more than statutorily provided for -- to simply allow more people to know that something exists.
And as it did so, it proposed a new set of compliance rules that are so onerous they effectively keep the advertising ban in place. The commission would first require enhanced due diligence on an investor’s accredited status. Second, it would require a filing 15 days in advance of using the exemption with a follow-up filing within 30 days of completion. Third, it would need additional disclosures that include expanded information on the issuer and the offered securities, the types of investors in the offering, the use of proceeds, the types of general solicitation employed, and the methods used to verify the accredited status of investors. Finally, issuers would be required to submit copies of all written general-solicitation material to the SEC.
All so more people can see an advertisement and be made aware of an exempted securities offering. How many companies are likely to submit to such requirements? And what will happen when the SEC turns to rules that would actually allow unaccredited investors to access some of these new opportunities, including through crowdfunding?
The world of capital markets consists of the haves and have-nots. Those who are deemed accredited -- investors with a certain level of accumulated assets or annual income -- are allowed to invest in opportunities deemed too risky for the general public by virtue of their level of registration, disclosure, transparency and so on. Those deemed unaccredited can’t participate.
What is it about a paycheck or a bank statement that makes someone a “qualified” investor? Where is the opportunity for growth and bettering one’s financial station when protection and risk mitigation trump free markets and free choice?
We’ve grown so afraid of loss that we’ve allowed society to become bifurcated to a fault. Those who talk about the gap between rich and poor are often the same people who aggressively promote this financial split under the guise of consumer and investor protection.
Why is it acceptable for the “unsophisticated” to invest in mutual funds and exchange-traded funds, typically through an unhealthy reliance on the advice of faceless financial professionals, but not in a local business they believe in and support?
What makes this country great are the risks we’re all willing to take to improve our lives and help our families. From the pilgrims braving the New World in pursuit of religious liberty to the Founding Fathers fighting for freedom from tyranny to the men and women working hard every day to ease our daily burdens through technology, Americans have always believed in risk and reward. As a society, we encourage business creation, continuing education, career retraining and bungee jumping -- in other words, we support risk-taking in moderation and in keeping with individual tolerance.
So what is it about an investment that makes government regulators so nervous? Why do we question the competency and qualification of not only the issuer but also the potential investor? Do we lose our internal filters when what we’re buying is the potential for return and not merely a product? Is it right to prohibit people from making a dollar for fear that they may lose one instead?
The SEC still has time to prove my fears unfounded. General solicitation still has the chance to be done right. And crowdfunding was meant to be the great democratizer of financing. We worked hard on the JOBS Act to ensure that everyone, rich or poor, has the chance to participate.
I sincerely hope the SEC doesn’t make the burdens so restrictive that the unaccredited never have the chance to change their “status.” I also hope the SEC doesn’t starve companies of much-needed capital that they can’t access any other way.
We are a nation of risk-takers. No one has the right to take that from us.
(David Schweikert, a Republican, represents Arizona’s Sixth Congressional District.)
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