Update 286: If at First You Do Succeed…JOBS Act 3.0 — S. 2155 Redux Writ Small?
On Monday, a package of financial regulatory measures (deregulatory in aggregate effect), cleared the House overwhelmingly and has joined the short-list of bills on the Senate’s post-recess floor time queue. JOBS 3.0 raises plenty of non-Dodd-Frank issues, but it also raises S. 2155 on a smaller scale, with something for everyone to loathe or love.
On a related note is an event next Tuesday, July 24, sponsored by Americans For Financial Reform: “Regulating Wall Street – Ten Years Later.” Sens. Sherrod Brown and Elizabeth Warren are among the featured participants. To RSVP, click here.
JOBS Act 3.0
This week, House Financial Services Chair Jeb Hensarling and Ranking Member Maxine Waters announced a bipartisan agreement on the terms of a broad regulatory rollback package. The legislation, entitled S.488, the JOBS and Investor Confidence Act of 2018 (or Jobs Act 3.0), is the most comprehensive package of changes to federal securities laws to pass the House with broad and bipartisan support since Congress approved the JOBS Act of 2012. [NB: in 2015, Congress enacted a much smaller set of tweaks to securities laws as part of broader transportation reauthorization legislation, which some have dubbed “JOBS Act 2.0”.]
S.488 is comprised of 32 previously introduced bills, the vast majority of which have cleared the House or the Financial Services Committee.
This third iteration of the JOBS Act has many of the hallmarks of the JOBS Act of 2012. It combines a number of disparate and seemingly innocuous pieces of legislation that relax or moderate various existing regulatory requirements relating to U.S. capital markets, in particular, the issuance and sale of securities.
The House passed the package on a 406-4 vote on Tuesday with bipartisan support, including from Ranking Member Maxine Waters and Chairman Jeb Hensarling. It looks like the Senate will consider the bill in the next couple of months.
Public-Private Market Paradox
The JOBS Act 3.0 package contains provisions that simultaneously seek to encourage growth in the public market, while cutting back on regulations in the private market.
The bills include:
- H.R.79: The HALOS Act permits issuers of private securities that are exempt from SEC registration requirements pursuant to SEC Rule 506(b) to also be exempt from certain restrictions on the use of general solicitation in the advertising and sale of such securities, further weakening investor protections in a segment of the market that is growing rapidly but plagued by fraud.
Private securities markets are appropriate for certain types of issuers and investors, but they are inherently problematic, given that they are characterized by significant risk — lack of liquidity, oversight and transparency. The private nature of these markets also makes it difficult for investors other than large institutional investors or venture funds to obtain information about the security, or otherwise value the security.
- H.R.5877: The Main Street Growth Act lays the statutory foundation for the establishment of one or more “venture exchanges.” The Act sets forth a process under which any national securities exchange registered with the SEC can “elect” to become a venture exchange, which is subject to different standards and rules than those that govern all other national securities exchanges in the United States.
The venture exchange provisions in S.488 build upon provisions enacted in Section 501 of S.2155 that dramatically changed the way securities can be recognized as “covered” and exempted from state review by virtue of being listed on a national securities exchange. Taken together, the two provisions will ensure that certain national exchanges in the U.S. will likely operate with significantly lower listing standards than those that currently apply to national exchanges.
- H.R.6177: The Developing and Empowering our Aspiring Leaders (DEAL) Act requires the SEC to allow venture capital funds to invest in secondary market shares of venture capital companies instead of primary offerings, complementing the “venture exchange” piece of the larger bill by basically creating an ecosystem for trading shares in private venture companies.
This Act, together with the HALOS and Main Street Growth Acts, further blurs the distinction between public and private securities markets, expanding the “quasi-public” securities market that was the major legacy of the JOBS Act of 2012, and making it more likely that retail investors will soon be solicited and sold securities that are in many respects more speculative and risky than is currently permitted under the securities laws.
- H.R.1645: The Fostering Innovation Act ostensibly aims to encourage IPO formation by doubling the time that low-revenue emerging growth companies (EGCs) are exempt from key financial reporting controls. However, the Act is predicted to affect less than 2 percent of publicly traded companies and is therefore unlikely to have a discernible effect on increasing the amount of IPOs. Crucially, the bill gives special treatment to EGCs, opening the door for other issuers to demand the same and potentially precipitating a “special treatment” race to the bottom. The long-term effect of lowering the bar for a few is that the bar gets lowered for all.
A Work in Progress
- H.R.1585: The Fair Investment Opportunities for Professional Experts Act sets in statute the definition of an “accredited investor” and codifies the current thresholds for annual income and net worth. The bill would create new qualitative pathways for individuals to become accredited and attempts to address the $1 million asset threshold that was originally set by rule in 1982 by indexing it to inflation every five years. However, even with the inflation adjustments, the bill would see retirees with no experience or sophistication in investment matters qualifying as “accredited investors” by virtue of their retirement savings, or wealth realized from an event such as an inheritance or the sale of a primary residence. This bill could be amended to rectify these important issues in the Senate, but in its current form, it is an example of the unbalanced nature of some of the bills in the JOBS 3.0 package.
Where most bills in the package relate to capital markets access, two pertain to the systemic risk pillars of stress testing and resolution planning.
- H.R.4566: The Alleviating Stress Test Burdens to Help Investors Act exempts nonbank financial institutions from DFA company-run stress-testing requirements.
- H.R.4292: The Financial Institution Living Will Improvement Act requires banks to submit resolution plans every two years instead of annually. These measures mimic what regulators may already decide with newfound discretion under S.2155.
Improvements to JOBS Act 3.0
JOBS Act 3.0 is modest compared to its predecessors, but underwent significant changes during its crafting. Therefore, in some cases, the bills that have been incorporated in the package are different than the previous iterations. The package has been welcomed by some institutions, such as the Council of Institutional Investors, for its provisions that address insider trading and multiclass share structure disclosure.
Unfortunately, the speed with which the package is and has been moving has made it difficult for those on and off the Hill to properly evaluate its benefits and risks. With so many moving parts, JOBS Act 3.0 needs time to be fleshed out and examined more thoroughly before concrete suggestions can be made. This is likely post-August recess.
S.488 now moves to the Senate. With the legislative schedule packed with nominations, appropriations bills, and the Farm bill, Senate Majority Leader McConnell announced that “Senators will continue their ongoing bipartisan discussions as we work towards a vote in the coming months.”
Other Senators have indicated the negotiations and busy schedule could push the floor debate for at least three to four weeks. Look for the package to reach the Senate floor after the summer recess, perhaps attached to a funding or appropriations bill, or as standalone legislation.