When Congress in a rare bipartisan stampede rushed to pass the JOBS Act earlier this year, it enacted modest reforms to make it easier for startup businesses to raise capital. But it also saddled the U.S. Securities and Exchange Commission with more rulemaking work at a time when the agency is already overwhelmed.
That was the consensus of panelists today at the American Bar Association's Administrative Law and Regulatory Practice Fall Conference in Washington. "The JOBS Act has some good things, some less than laudatory," said former SEC Chairman Harvey Pitt. "We can't pick the winners and losers yet, except the commission is a clear loser."
The Jumpstart Our Business Startups Act, which was signed into law by President Obama in April, was intended to facilitate initial public offerings, relaxing certain standards for accounting and disclosures, as well as making it easier for companies to remain private longer and allowing them to advertise private offerings. Also, the act created a new exemption for "crowdfunding" – raising small amounts of money via websites like Kickstart.
The SEC is already struggling to write 95 rules required by the Dodd-Frank Act, but has only managed to finalize 30 of them to date. The JOBS Act on top of Dodd-Frank creates a "a new dogma. Too much to succeed," said Pitt, now head of consulting firm Kalorama Partners. "Congress has saddled the SEC with a variety of burdens and the SEC is having a hard time, understandably, trying to comply with that."
Lona Nallengara, the deputy director of legal and regulatory policy at the SEC's Division of Corporation Finance, agreed. The legislation, which was cobbled together from five separate bills, "moved like a locomotive – and not Amtrack. A bullet train," he said. "With all the parts of the JOBS Act, there are some unintended consequences. I’m not sure anyone had the time to go through it and make sure it all lined up properly."
For the SEC, this means "questions about the scope of the mandate," he said, and whether ancillary issues should be taken up as part of the rulemakings.
While some aspects of the law did not require rules, such the provision increasing the number of shareholders from 500 to 2,000 that a company can have before it must go public, others are proving complex.
Crowdfunding , for example, is "an exemption we haven’t worked with before in a market we haven't worked with before," Nallengara said.
Pitt flagged crowdfunding, which panelists said could be vulnerable to fraud, as a particular problem. "This is what's going to happen," he said. Within a few years, "We'll see some sort of scandal rise and of course everyone will blame the SEC – 'Why didn’t you do something to prevent this?'" he said. "The commission is facing tremendous pressure to produce an abnormal amount of rulemakings," each one requiring extensive cost-benefit analysis in order to survive potential court challenges. "The piecemeal passage of legislation, even with good things in it, has the prospect of undermining the system."