Senate Hearing Today on Crowdfunding

As I'm posting, the Senate Banking Committee is holding a hearing on the small capital formation reforms that the House acted on recently through the passing of three or four bills. The hearing is being webcast here.

Senator Scott Brown is now speaking. Capital is "the grease that keeps the gears of the American economy turning," he says. No money to be had for startup businesses from the banks, he says.

Sen. Brown is not a member of the Banking Committee, but he is there to speak about his crowdfunding bill, which he says is better than the crowdfunding bill the House just passed, because it lowers the threshold for individual investment ($10,000 in the House Bill, $1,000 in Sen. Brown's bill), and offers, he says, more consumer protections. By the way, here is a brief, earlier post on this blog highlighting differences between the two bills.

Sen. Brown invokes Twitter, Facebook and Google as good things that result from startup capital being available. "Imagine the next Steve Jobs being held back by rules from the age of the typewriter," he says.

Sen. Brown has been excused, and the Committee is now hearing from a second panel.

Jack Herstein, President, North American Securities Administrators Association, is now making the case that Congress should not enact a crowdfunding exemption that preempts up-front state regulation. "Congress should allow the states to take a leading role," he says, in establishing a crowdfunding exemption. He indicates that the states are cooperating on coming up with "a one-stop filing" exemption. "The states should be the primary regulator . . . of a crowfunding offering," he asserts.

I realize I am a suspicious of his agenda, so I may be cherry picking, but here are some addtional soundbites from Mr. Herstein:

• "Mainstreet investors should not be an easy source of capital for the most speculative business ventures."
• "Passing the hat through the internet."
• "This bill would create a massive hole in the investor protection safety net."

Professor John Coffee is testifying, I think wearing the same suit he wore at the recent SEC Forum on Small Business Capital Formation, and definitely repeating the same schtick. He again invokes the image of a Danny DeVito-like character in every American bar, hawking securities every night.

"We all like the idea of tweeting for investors," Coffee says, but the crowdfunding legislation as is should be called "The Boilerroom Legalization Act of 2012." He has a list of ways to improve the various small capital formation reforms. He thinks even the bill to repeal the general solicitation prohibition needs improving. (I do too, actually.)

A representative from Nasdaq, Edward S. Knight, is also a witness. His theme seems to be, hey, don't forget how important it is for the public markets to be robust! Is he worried that if it gets too easy for businesses to raise capital privately, fewer will go public?

Other witnesses on the agenda include Meredith Cross of the SEC. She was a participant in the above referenced SEC forum, at which crowdfunding was a big topic. It will be interesting to see if she signals whether the SEC might now regard a higher crowdfunding limit to be acceptable. Earlier this year, her boss, SEC Chair Mary Schapiro, had indicated that an offering capped at $100,000, with a $100 dollars per investor limit, was what the SEC meant by crowdfunding.

Senator Richard Shelby, the ranking member, asks Ms. Cross why no one uses Regulation A today. "We're not sure why Regulation A is not appealing to companies," Cross says.

Ms. Cross is now answering a question about limits for a crowdfunding exemption, but unfortunately, the webcast is clipping out! She just indicated whether or not the SEC is taking a position on the crowdfunding bills; I assume she said the SEC is not taking a position, but I missed a critical piece of her sentence. David, did you catch what she said?

Mr. Herstein again: "the states are working on it, and the states can do it," he says about state regulators coming up with a uniform exemption that would not impose on entrepreneurs the need to comply with different crowdfunding offering rules for potentially 50 different states. Most of the information to be required would be on an issuer's website, he says. He does not reference any draft of this proposed approach, though.

Hearing adjourned at 9:18 AM Pacific.