Why Private Capital and Crowdfunding Markets Should be Nervous about President Biden’s Regulatory Freeze
January 25, 2021
A freeze on government regulation is generally perceived by most people as being a positive development for private enterprise. Not necessarily so, however, when the regulation being frozen is itself a reform of preexisting regulatory burdens.
Among the many Presidential Actions taken by President Biden on his first day in office was one entitled Regulatory Freeze Pending Review, in which he ordered that all final regulations that have not yet become effective (because they haven’t completed the standard process of publication in the Federal Register followed by a waiting period) be frozen pending further review. Specifically, regulations that have been sent to the Office of the Federal Register but not yet published in the Federal Register are to be immediately withdrawn for review and approval. As to regulations that have already been published in the Federal Register but have not taken effect, the heads of executive departments and agencies are instructed to consider postponing the rules’ effective dates for 60 days for the purpose of reviewing any questions of fact, law and policy (emphasis added) the rules may raise.
Among the regulatory developments potentially impacted by the regulatory freeze are the November 2020 reforms on the exempt offering framework, which include rules specifically relating to crowdfunding under Regulation CF and Regulation A. I previously blogged on these important reforms here, here, here and here, and indicated that the new rules would not be effective until 60 days after publication in the Federal Register.
As of my last blog post dated January 10, the exempt offering rules had not yet been published in the Federal Register. The rules finally did get published on January 14. Although the delay from November 2 to January 14 seemed strange inasmuch as final rules typically make their way over to the Federal Register within days following SEC adoption, to paraphrase Samuel Jackson in Pulp Fiction: “I didn’t give a lot of thought to what it meant”. Until now.
The new exempt offering rules passed by the SEC in November were intended to be common sense reforms to facilitate capital formation, increase opportunities for investors and simplify and harmonize certain aspects of the exempt offering framework while preserving or enhancing important investor protections. Seems pretty non-controversial, something everyone should be able to agree on. But not everyone agrees that the new exempt offering rules preserve investor protections.
On December 4, 2020, the Chairwoman of the House Financial Services Committee Maxine Waters, on behalf of the Democratic members of the Committee, sent a letter to then President-elect Biden highlighting several areas where his administration “should immediately reverse the actions of [his] predecessors”. Among the predecessors’ actions targeted by Cong. Waters are several taken by the SEC “that have … stripped away fundamental investor protections, including safeguards around private markets, where investors have few protections”.
Cong. Waters is not alone in her hostility to capital markets reform efforts by the SEC because of investor protection concerns. In her dissent to the SEC’s exempt offering framework amendments, Commissioner (now Acting Chair) Allison Herren Lee did not mince words, asserting that the new rules on integration, test the waters and demo days, among others, exacerbate concerns over investor protections by encouraging a surge in general solicitation and offers to non-accredited investors in the private markets without a reliable method for regulators to determine if an exemption is available. Commissioner Lee argued the best opportunities for retail investors are in the public markets where we should be encouraging investment, not in the private markets which have fewer investor safeguards.
Also at risk in the regulatory freeze are the proposed reforms of the rules that require private capital markets finders to be registered with the SEC as broker dealers. On October 7, the SEC issued proposed rules for a limited, conditional exemption from broker-dealer registration for individual finders who engage in limited activities on behalf of issuers. I blogged about that here. Investor protection hawks have argued against the finder reform proposals, including Cong. Waters in her December 4 letter to the SEC and Commissioner Lee in her dissent to the proposed finder rules which she entitled “Regulating in the Dark: What We Don’t Know About Finders Can Hurt Us”.
Technically, the Presidential Action calling for a regulatory freeze may just mean an inconvenient delay in recently promulgated capital markets reforms becoming effective. But that assumes no philosophical difference in policy. President Biden’s nominee for SEC Chair, Gary Gensler, has not yet been confirmed by the Senate and it’s anyone’s guess as to where he stands in the debate on private capital markets reform. But there’s no guessing required as to where Acting SEC Chair Allison Herren Lee stands, and accordingly the risk of reform rollback is real, which if realized will impede crowdfunding markets from achieving their full potential.