The SEC and the Non-Cost Benefit Analysis Analysis (Part 4)
For the time being, there is no question that the SEC will have to perform an even lengthier cost benefit analysis than is typically the case. Recall that in the shareholder access rule, the staff included 80 pages of analysis. This was not enough. The irony is that while the court in Business Roundtable used its questionable analysis to strike down a rule included in Dodd-Frank, the immediate consequence at the SEC will be felt under the JOBS Act.
Take crowdfunding. The provision is replete with rulemaking requirements. For example, the law creates a Section 4A of the Securities Act and requires an intermediary (broker or funding portal) to register with the SEC. The intermediary:
- will have to provide certain disclosure to investors, including disclosures related to risks and other investor education materials, as the Commission shall, by rule, determine appropriate;
- ensure that each investor reviews investor-education information, in accordance
with standards established by the Commission, by rule;
- require investors to answer questions demonstrating an understanding of "such other matters as the Commission determines appropriate, by rule."
- must take measures designed to reduce the risk of fraud "as established by the Commission, by rule."
- ensure that investors have the right "to cancel their commitment to invest, as the Commission shall, by rule determine appropriate."
- ensure that the investors do not invest more than is permitted under the statute, in accordance with "efforts as the Commission determines appropriate, by rule."
- take steps to ensure that information from investors is kept private "as the Commission shall by rule, determine appropriate."
- meet such other requirements as the Commission may, by rule, prescribe, for the protection of investors and in the public interest.
Issuers using crowdfunding will need to provide to investors certain types of financial information. For some, they must use accounts that meet the "standards and procedures established by the Commission, by rule, for such purpose." Offerings of $500,000 must provide audited financial statements, although the Commission may "by rule" specify other amounts subject to the requirement. In addition, the Commission may "by rule" require companies to disclose information necessary "for the protection of investors and in the public interest."
Investors cannot compensate anyone for promoting the offering through communication channels provided by the intermediary "without taking such steps as the Commission shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication."
They must distribute a report to investors that includes "the results of operations and financial statements of the issuer, as the Commission shall, by rule, determine appropriate, subject to such exceptions and termination dates as the Commission may establish, by rule." The Commission may also adopt by rule any other requirements for issuers for the protection of investors and in the public interest.
The Commission must make available certain information to the states as the Commission "by rule" determines appropriate. There are restrictions on transferability of shares acquired by investors under the crowdfunding exemption, with the Commission having the authority "by rule" to establish other limitations. The provision also exempts certain issuers from using the provision. In addition to the categories listed, the Commission may "by rule or regulation" determine other exempt issuers.
The provision imposes time limits. The Commission must adopt rules "[n]ot later than 270 days after the date of enactment of the Act." The provision does not, however, require that all of the rules in the section be adopted, only those that "the Commission determines may be necessary or appropriate for the protection of investors to carry out sections 4(6) and section 4A of the Securities Act of 1933."
In other words, the crowdfunding provision cannot become operative until the SEC adopts rules. Business Roundtable will require a lengthy and far more detailed cost benefit analysis. Moreover, the SEC will likely be inundated with comments that the staff will be forced to address. Business Roundtable more or less stands for the proposition that the Agency runs a serious risk if it fails to address any comment. All of this will lengthen the rulemaking process even more.
Changes to the cost benefit analysis at the SEC will occur, the Chairman has already made that clear. But for the most vociferous critics of the SEC's process, the outcome of the reforms may entail some consequences they did not intend.