[Congressional Record (Bound Edition), Volume 158 (2012), Part 4]
[Senate]
[Pages 4599-4601]
[From the U.S. Government Publishing Office, www.gpo.gov]




                                JOBS ACT

  Mr. TOOMEY. Mr. President, I rise today to speak on H.R. 3606, the 
Jumpstart Our Business Startups, or JOBS, Act, which the Senate passed 
on Thursday, March 22, 2012, by a vote of 73 to 26. I am particularly 
pleased that H.R. 3606 included language from S. 1824, the Private 
Company Flexibility and Growth Act, which I introduced on November 8, 
2011, with Senator Carper. We authored this important measure to update 
the shareholder threshold after which entities must register their 
securities with the Securities and Exchange Commission. This and other 
provisions contained in H.R. 3606 will provide companies and small 
banks with the flexibility to grow, which will in turn lead to economic 
growth and job creation.
  As the Commission amends its rules implementing title V of H.R. 3606, 
it is important that it be mindful of Congress's intent that the rules 
provide clear guidance to issuers on how to comply with the new 
provisions. For instance, section 503 of the JOBS Act requires that the 
SEC adopt safe harbor provisions that issuers can follow when 
determining whether holders of their securities received the securities 
pursuant to an employee compensation plan in transactions that were 
exempt from the registration requirements of section 5 of the 
Securities Act of 1933.
  The issues that we would expect the Commission to address when 
adopting the safe harbor provisions include the steps issuers can take 
to obtain comfort that securities are held by persons who received the 
securities pursuant to an employee compensation plan and whether the 
issuance of those securities were exempt from Securities Act 
registration. To provide issuers appropriate comfort under the rules, 
the Commission could adopt a safe harbor provision that allows issuers, 
absent actual knowledge of information to the contrary, to rely on 
information it has about a person at the time the securities are 
issued. The Commission could also adopt a safe harbor provision that 
allows issuers to consider an issuance of securities exempt from the 
Securities Act if it has a reasonable belief that the exemption existed 
at the time the securities were issued.
  The definition of an ``employee compensation plan'' should be 
interpreted broadly. For purposes of determining whether a person is an 
employee who need not be counted when an issuer is calculating the 
number of holders of record under section 12(g)(1)(A) of the Securities 
Exchange Act of 1934, the term ``employee'' would include persons who 
are current or former employees of the issuer. We would also include 
but not limit this exemption to other persons such as surviving spouses 
or family members who inherit equity securities from the employee and 
who need not be included in the calculation of the number of holders of 
record. ``Employee compensation plans'' would include but is not 
limited to a written compensatory benefit plan or written contract as 
defined in SEC rule 701 under the Securities Act of 1933.
  In revising rule 506 and rule 144A to remove the prohibitions on 
general solicitation or general advertising, the Commission should 
consider practice in the market for rule 144A securities and ensure 
that offerings and sales of rule 144A securities can proceed on the 
same basis as they do currently, including from a state blue sky 
perspective, regardless of whether there is general solicitation or 
general advertising.
  The Commission should also consider adopting similar safe harbor 
provisions for how issuers can determine whether their investors are 
accredited for purposes of revised Exchange Act section 12(g)(1)(A) and 
whether securities are held by persons who purchase such securities in 
crowdfunding transactions described under new Securities Act section 
4(6), in accordance with new Exchange Act section 12(g)(5)(B). We 
believe these additional safe harbor protections would provide 
important guidance for issuers and should be strongly considered by the 
SEC.
  Mr. BROWN of Massachusetts. Mr. President, I wish to rise to speak 
about jobs and the Massachusetts innovation economy.
  In July 2010, the Kauffman Foundation noted that ``startups aren't 
everything when it comes to job growth. They're the only thing.'' In 
fact, the Kauffman Foundation found that ``without startups, there 
would be no net job growth in the U.S. economy.'' In Massachusetts, 
where we have the second largest venture capital market in the country, 
venture capital helps drive our innovation technology. Massachusetts 
public companies that were once venture-backed start-ups account for 
775,151 jobs and $190 billion in revenue in the United States.
  However, in the current economic climate, institutional investors are 
wary of investing in ideas that carry significant entrepreneurial and 
technological risk. With a high risk of failure and often a lack of 
collateral, small start-up companies cannot qualify for traditional 
commercial loans. Alternative capital markets are therefore critical to 
these engines of future economic prosperity. To give entrepreneurs and 
start-ups the access to capital they need to get their businesses off 
the ground, I introduced the Democratizing Access to Capital Act--S. 
1791--to legalize crowdfunding on November 2, 2011. Crowdfunding will 
create a new alternative market for capital formation by allowing every 
American--regardless of income or wealth--to invest in a start-up or a 
great idea. And according to an economic model by Regional Economic 
Models, Inc.--REMI, crowdfunding has the potential to increase the 
number of start-ups by 10

[[Page 4600]]

percent, potentially creating hundreds of thousands of new jobs.
  Recognizing that crowdfunding could provide a huge new growth engine 
for the Massachusetts tech sector and the Internet, our brightest 
economic frontier, I wrote to President Obama on February 3, 2012 to 
ask for his help in urging the Senate to pass crowdfunding legislation. 
On February 27, 2012, I hosted a roundtable with Massachusetts 
entrepreneurs and small businesses at Boston City Hall. And on February 
29, 2012, I called on my colleagues to work together and pass a 
crowdfunding bill in a speech from the Senate floor.
  At the same time, entrepreneurs from the Cambridge Innovation Center 
created a petition to show Congress their support for crowdfunding. 
These entrepreneurs founded wefunder.com to rally support for 
crowdfunding. On March 5, 2012, wefunder.com and MassChallenge, a not-
for-profit organization dedicated to supporting the work of 
entrepreneurs, hosted a roundtable on crowdfunding in Boston. As of 
March 26, 2012, 3 thousand investors pledged to invest $7.5 million 
when crowdfunding becomes legal.
  On March 8, 2012, the House of Representatives passed the Jumpstart 
Our Business Startups (JOBS) Act by a vote of 390 23, which included 
crowdfunding legislation. President Obama also issued a statement in 
support of the JOBS Act. Although my focus was on legalizing 
crowdfunding, I felt that the JOBS Act bill lacked basic investor 
protection standards that would give investors some confidence and help 
the market grow. I worked with Senators Michael Bennet and Jeff Merkley 
to introduce a bipartisan compromise crowdfunding bill, the CROWDFUND 
Act--S. 2190, on March 13, 2012. On March 22, 2012, the Senate passed 
the CROWDFUND Act as an amendment to the JOBS Act, which was approved 
by a vote of 73-26.
  The CROWDFUND Act sets the framework for developing a new market in 
which entrepreneurs can raise capital and ordinary investors can invest 
in new ideas. To create a new marketplace for investment, the CROWDFUND 
Act creates investor protections that are designed to balance 
entrepreneurs' ease of access to capital with the need for 
transparency.
  In prescribing requirements for issuers, the CROWDFUND Act addresses 
the importance of providing investors accurate information. While 
financial disclosures are necessary for investors to make wise 
investment decisions, the importance of disclosure should be balanced 
with individuals' right to privacy. The SEC should therefore, under its 
rulemaking authority provided in Section 4A(b), clarify that 
entrepreneurs will not be asked to disclose individual personal tax 
returns. In addition, while the bill clearly states that issuers should 
be liable for material misrepresentations or omissions, issuers should 
not be held liable for misstatements or omissions that were made by 
mistake. The standard of liability for issuers as described in Section 
4A(c) should be ``due diligence.'' In other words, issuers must do 
their ``due diligence'' to make sure that the information that they are 
providing to potential investors is accurate. This is a widely accepted 
liability standard.
  Although issuers may not advertise the specific terms of an offering, 
the CROWDFUND Act ensures that issuers are allowed to generally 
advertise their offerings through email and social media channels, as 
long as the intermediary website remains the location for all 
offerings. Potential investors should be given enough information about 
offerings to spark their interest. To discourage fraudulent operators, 
provide proper investor education and ``crowdvetting'' of opportunities 
by impartial third parties, issuers should not be allowed to encourage 
investment outside of the intermediary. In addition to facilitating 
communication between issuers and investors, intermediaries should 
allow fellow investors to endorse or provide feedback about issuers and 
offerings, provided that these investors are not employees of the 
intermediary. Investors' credentials should be included with their 
comments to aid the collective wisdom of the crowd.
  Regulated intermediaries are necessary for investor protection; 
however, intermediaries should not be over-regulated. Specifically, 
none of the requirements placed on intermediaries should prevent an 
intermediary or funding portal from removing or preventing the public 
display of an offering that it deems not credible. To guarantee the 
quality of offerings, intermediaries should be able to employ a 
Kickstarter-like process, in which the staff of an intermediary 
determines which issuers are invited to present their offerings to site 
visitors. Intermediaries should also be allowed to inform its users 
about offerings that may interest them, provided that this is not 
explicitly or implicitly recommending the offering to an investor. 
Although intermediaries must only provide offering proceeds to issuers 
once the issuers' target offering amount is reached, intermediaries 
should not be required to escrow proceeds.
  To streamline the offering process, it makes sense to allow 
intermediaries to place a hold on investor credit cards until an offer 
is fully subscribed. At that time, investors' credit cards should be 
charged and the proceeds immediately transferred to the issuer. 
Intermediaries should also be permitted to act as the holder of record 
for offerings that they facilitate to reduce compliance complexity for 
issuers and to increase the likelihood of subsequent funding from 
institutional investors. Providing holder of record services will 
reduce compliance complexity for issuers and place the burden of 
managing crowdfunded investors on the intermediary. Without this 
mechanism, issuer capitalization tables may become unwieldy, 
discouraging subsequent funding from institutional investors. In 
addition, intermediaries should be allowed to take an equity stake in 
offerings. This however, does not mean that intermediaries should be 
able to choose which offerings to participate in but rather it should 
be a standard process for any offering that the intermediary 
facilitates. This will incentivize an intermediary to focus on issuer 
quality over quantity, providing more vetting for investors and greater 
alignment of interests. Of course, any equity stakes by the 
intermediary must be fully and meaningfully disclosed to investors. Of 
course, any equity stakes by the intermediary must be fully and 
meaningfully disclosed to investors. The SEC should carefully monitor 
any developments in this area and adjust practices, including 
restricting the ability for intermediaries to take equity positions, 
should fraud or manipulative practices arise.
  Although the CROWDFUND Act requires intermediaries to register with 
the SEC and become members of a self-regulatory association, all rules, 
regulations and registration requirements should be developed with 
minimal burden and cost to the intermediaries. The SEC and any relevant 
self-regulatory association should bear in mind that these costs will 
ultimately be passed through to issuers--costs should not undermine the 
goals of crowdfunding to create low-burden alternative means of raising 
capital. In addition, the crowdfunding community may develop its own 
self-regulatory association to specifically oversee crowdfunding 
intermediaries.
  While preemption of State securities law is necessary for 
crowdfunding to function, State securities regulators should play a 
role in crowdfunding offerings. In addition to allowing limited State 
securities registration, State should retain its authority to take 
enforcement action with regard to any issuer or intermediary. Further, 
where state authority is not specifically preempted, the SEC will not 
presume preemption. State securities regulators are the first line of 
defense against fraud and their ability to continue to combat fraud 
should not be curtailed.
  Finally, I urge the SEC to take seriously the statutory directive to 
complete within 270 days of enactment the rulemaking necessary to make 
the law effective. Crowdfunding entrepreneurs and intermediaries are 
eagerly awaiting the rules to take full advantage of crowdfunding's 
potential to unlock

[[Page 4601]]

capital for start-ups and small businesses. Based on my office's 
interactions with the SEC, I believe that the SEC is committed the 
success of this new market, and the rulemaking should be easily 
completed within 270 days.
  Few entrepreneurs take a new start-up to a mature company on their 
own. New ideas need the support of investors to survive and thrive. 
Investments power payrolls across our nation and every sector. It's the 
grease that keeps the gears in the American economy turning. 
Crowdfunding will allow small businesses to bypass Wall Street and go 
straight to Main Street for financing. We know that new businesses are 
the source of all of the net job creation in the United States. This 
CROWDFUND Act provides an avenue for new growth for that crucial sector 
with unlimited potential.
  Mr. BENNET. Mr. President, I wish to discuss our bipartisan efforts 
to pass a crowdfunding amendment that provides needed flexibility but 
also ensures that crowdfunding has sufficient oversight and investor 
protections. I was proud to work with Senators Merkley and Brown in 
crafting this bipartisan proposal. The Senate passed our amendment by a 
64 to 35 margin. The House of Representatives subsequently passed our 
language when it considered the JOBS legislation earlier this week.
  As the Securities and Exchange Commission works to implement this new 
law, it is my hope that it will recognize that the funding portal 
registration process is meant to be more streamlined and less 
burdensome than traditional broker-dealer registration. Given the size 
of the investments that are likely to occur in crowdfunding, the SEC 
should work to provide an appropriate level of oversight without making 
it cost-prohibitive to become a funding portal.
  Funding portals should be allowed to organize and sort information 
based on certain criteria. This will make it easier for individuals to 
find the types of companies in which they can potentially invest. This 
type of capability--commonly referred to as curation--should not 
constitute investment advice or recommendations, which the law 
otherwise prohibits.
  Similarly, funding portals should be allowed to engage in due 
diligence services. This would include providing templates and forms, 
which will enable issuers to comply with the underlying statute. In 
crafting this law, it was our intent to allow funding portals to 
provide such services.
  We also sought to provide the Securities and Exchange Commission 
sufficient flexibility to promulgate rules to ensure individuals have 
the necessary information and protections to make informed investment 
decisions. It is my hope that the Commission will exercise such 
discretion judiciously and will not create a regulatory regime that is 
too cumbersome and expensive for funding portals to operate or for 
issuers to sell their securities. In preparing the law, we sought to 
find the right balance, preserving basic investor protections while 
ensuring enough entrepreneurial flexibility to help this promising 
medium take off for the good of our economy. I am hopeful that the 
Commission will respect this balance as it moves forward to implement 
this law.
  Finally, we provided 270 days for the Commission to implement this 
new law. I hope the SEC will make every effort possible to meet this 
deadline.

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