SEC Chairman Schapiro Says Jumpstart Our Business Startups Act Needs Better Investor Protections

Earlier this month, Securities and Exchange Commission Chairman Mary Schapiro wrote a letter to Senate Banking Committee Chairman Tim Johnson (D-S.D.) over her concerns that modifications needed to be made to the Jumpstart Our Business Startups Act to make sure that investor protections are enhanced. The US Senate is heading toward a final vote on the Start-Up Focused JOBS Act. The Republican-introduced bundle of bills is geared toward helping along capital growth by loosening reporting requirements and securities law registration. The US House passed its version of the legislation on March 8.

Today, the Senate’s version passed by a 76-22 vote through a procedural process to end debating over the Act. However, before the final vote can be made, the senators must first vote on two amendments, including one that would toughen the limits on how much money a very small investor may place in a crowd-funding offering.

The SEC is also working on a number of capital formation initiatives. In her letter, Schapiro wrote about what she considered were problems with HR 3606, including what she considered its too broad of a definition an “emerging growth company,” which are firms with under $700 million in public float and less than $1 billion in yearly gross revenue. She believes that this very expansiveness could get rid of important investor protections in even very big companies. Schapiro also thinks that the JOBS Act would “weaken” key protections by getting rid of safeguard that were implemented after the dot-com era-related research scandals, while reversing SRO-established rules that put into place “mandatory quiet periods” for stopping banks from using conflicted research as a reward to insiders that chose a particular bank as an underwriter.

The SEC Chairman also worried that the bill would limit the autonomy of auditing and accounting standard setting, let emerging growth companies use pre-filing communications to “test the waters” without having to be responsible for this information, allow these companies to turn in their registration statements confidentially without requiring public feedback (and, as a result, lessening the SEC staff’s ability to give effective reviews,) and decrease investor protections in its crowdfunding provisions. She also said that the JOBS Act should give the SEC longer timelines to allow for rulemaking. As an example, she pointed to the 180-day deadline for promulgating the rules under the bill’s crowdfunding section. She said this wasn’t enough time and that 18 months was needed, not six.

Schapiro is not the only one with reservations about the JOBS Act. The Council of Institutional Investors wrote a letter to the US House expressing its concerns about the inadequate investor protections under the bill’s “emerging growth company “definition. Senate Majority Whip Dick Durbin (D-Ill.) also has issues with several of the bill’s provisions. He says the JOBS Act can be improved so that jobs will be created and small businesses will grow. He was particularly concerned with a provision that would temporarily exempt “emerging growth companies” from certain regulations, saying that over 90% of US companies going public would thus become exempt. He also believes shat investor exposure to fraud would become inevitable

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Senate moves forward on JOBS bill, UPI, March 21, 2012

Speech by SEC Chairman: Remarks at the Society of American Business Editors and Writers (SABEW) Annual Convention, SEC, March 15, 2012

Durbin Says House ‘JOBS Act’ Will Do Away With Investor Protections, The Hill, March 20, 2012

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As the US House Passes Package of Bills to Open Capital Market Flow to Small Businesses, the Senate Prepares Similar Legislation, Institutional Investor Securities Blog, March 13, 2012

House To Vote On GOP Legislation Related to Small Business’ Access to Capital, Institutional Investor Securities Blog, March 5, 2012

Leahy Amendment Would Provide Whistleblower Protection While Holding SEC and CFTC Accountable If They Don’t Follow Up on Tips, Stockbroker Fraud Blog, May 25, 2010