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Congress Passes Law; SEC Ignores It


What if Congress passed a law but no one listened?

That seems to be what happened with the JOBS Act passed by Congress and signed by the President last year.

The "Jumpstart Our Business Startups Act" (H.R. 3606) was passed by the House of Representatives in March 2012 with an overwhelming vote of 380 to 41. The measure had previously passed the Senate with a bipartisan majority.

President Obama signed the Act a few days later calling it a "game-changer" and that the measure "represents exactly the kind of bipartisan action we should be taking in Washington to help our economy."

The Act amended the Securities Act of 1933 in several respects, including by creating a new exemption from registration to allow small business to raise funds via sales of securities directly to the public through a "crowd-fund portal". This new entity - the crowd-fund portal - was to be defined by regulations promulgated by the SEC. According to the President, "Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors -- namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in." (For a crowdfunding backgrounder, see Dara Albright's site).

Among other changes to securities laws, the Act opened the door for private companies to publicly advertise the availability of investment opportunities in their securities (a practice known as "solicitation" and previously banned under the Securities Act of 1933). Removing the ban on solicitation was intended to make it easier for private companies to locate potential "accredited investors" who would be qualified to invest in exempt offerings of their securities under Regulation D.

Knowing that it would be necessary for the SEC to promulgate regulations to implement these changes, Congress specifically obligated the SEC to adopt rules promptly. In Section 201 of the Act Congress required the SEC to "revise its rules" with respect to the ban on Regulation D solicitations "not later than 90 days after the enactment of this Act."

Also, in Section 301 of the Act, Congress required the SEC "not later than 180 days after the enactment of this Act" to issue such rules as may be necessary to carry out the amendments contained in Section 301 of the Act.

Despite these clear instructions, nearly a year after passage of the law, the SEC has failed to implement these regulations. When pushed for an explanation, SEC appointees have suggested that they disagree with the law's aims and fear that it will harm their "legacy." (WSJ; Wired).

Does it bother anyone else that the SEC believes it is entitled to pick and choose which laws it has to follow and that it does so on the basis of the perceived "legacy" that its political appointees believe they have?


The JOBS Act is no game-changer. Although the House version of the crowdfunding provisions might have enabled start-ups to raise small amounts, readily, the Senate's idea of "investor protection" was to add requirements so detailed, onerous, and expensive to implement as to render the concept useless, notwithstanding the enormous hype that crowdfunding has received. The SEC's Reg D proposal, ironically, has been criticized by both consumerists and capital-raiser advocates for being insufficiently specific to protect the interests of their respective constituencies. In any case, the JOBS Act authorizes little more than what is currently permitted under SEC staff Reg D interpretations. The SEC continues to flounder with Dodd-Frank rulemakings, which like the JOBS Act, imposes preposterously short periods for implementing impossibly complicated regulations. These laws and the regulators' response to them demonstrate mainly that Congress is incompetent to manage our capital markets.

I didn't want to get overly technical about Reg D, but what I meant is that the SEC already allows on-line portals, at which investors can look for private investments, but only after pre-qualifiying as accredited. With regard to such venues, all the JOBS Act does is allow the investor to look (but not invest), before qualifying. Certainly, the JOBS Act permits far broader solicitations than current arrangements, but I have doubts that a start-up would find it terribly fruitful to solicit investors by ads on television or in the newspaper, for example.

On the larger point, I was defending the SEC only against the charge of intentional footdragging to preserve its franchise. I believe that its staggering Congressionally imposed workload is sufficient to explain the delays, without attributing a motive. Secondarily, we aren't hurt by delays in implementing JOBS Act provisions that won't do much good anyhow.

That is not to deny that the SEC has created a great deal of trouble for itself and many subject to its jurisdiction by foisting, on its own initiative, loads of regulations that advance political correctness far more than investor protection or economic efficiency. Regarding failure to implement Congressional mandates, on the other hand, the SEC could have done everyone a huge favor, by using its authority to scale back (or better yet, ignore) Dodd-Frank conflict minerals disclosure requirements, but, instead, slavishly adhered to the letter of the legislation.

Calling upon regulators to adhere to Congressional deadlines presupposes that Congress has a clue as to what it is requiring. Because I believe, instead, that Congress is willfully incompetent, the only solution I can think of is term limits.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.