Regulation A+ would not have happened without non-partisan persistence from those lobbying Barney Frank’s office during the months leading up to the decision, Arizona Congressman David Schweikert said.
Schweikert was one of the authors of the bill containing Title IV of the JOBS Act, aka Regulation A+. Schweikert recently appeared on a webinar hosted by Dara Albright which focused on how Regulation A+ was created and what the future holds for alt-fi in America.
What eventually became the JOBS Act started out as a series of very small and simple pieces of legislation which were run through Congress one at a time before being bundled to move them through, Schweikert said. He recalled a group of like-minded souls constantly going to Barney Frank’s office with little non-partisan ideas.
“Once we convinced him it wasn’t a right-wing plot they were great to work with,” he said.
The Regulation A+ and its expected boon for business is directly attributable to Dodd-Frank, Schweikert said.
“There’s a revolution that is here in capital raise and in some ways it was created because of Dodd-Frank.”
Schweikert also likes peer-to-peer lending because it has so far correctly anticipated the future. He recently spoke at a banking conference in front of many traditional bankers and warned them if they do not find some way to act as aggregators they will become travel agents of early 1990’s.
Changing the qualified investor definition was an important aspect of the legislation because of its potential for reducing income disparity, Schweikert said.
“If I came to you and said you are the wrong gender or from the wrong country you’d be outraged,” he said. “In this country when we say you don’t have enough money you functionally have created a type of financial apartheid and an access to opportunity differential.”
“Then you here about income disparity but we allow rules that create that.”
Those looking to progressive tax systems should look somewhere else, Schweikert advised, citing a recent United Nations paper which said that countries with progressive tax structures still have income differential problems because of the opportunity gap.
That gap can at least partially be closed by our use of information technology. Information is a much better regulator than people sitting in an office building, he said.
Higher cap may come
Schweikert is among those who would have liked to see a higher cap on Title II, saying a $70 to $75 million cap would have allowed them to help some “sweet spots” in the economy. He feels higher caps will eventually be allowed.
While Title IV will be reviewed every two years, don’t expect rapid wholesale changes should the markets clearly need them. Not based on Schweikert’s experience to get Title IV this far. Because of level of support initially needed on the JOBS Act, they now have to take a piecemeal approach to refining it, he said.
As for Title III, “It may not be dead but we’re moving on,” Schweikert said.
What we may see in lieu of the SEC finishing rules is an aggregation process between states, who are creating their own crowdfunding legislation “in a cascade” across the country, Schweikert said.
He asked the SEC commissioner a month ago if she would step in between states that would recognize each other’s crowdfunding platforms.
“I believe her answer was the SEC would stay out of that,” Schweikert said.
In listening to Schweikert, it is clear he spends time thinking about the future, and it is clear that future includes crowdfunding.
“Ten years ago people were approaching us about community banks now its crowdfunding platforms,” Schweikert said.
“Whether it be an ethnic or geographical product crowdfunding may end up becoming this broad based first capital raise behind an idea.”
“If you do it on a robust enough platform you can actually set up an ecosystem that uses some of these new access to capital mechanics to really spark the next wave of entrepreneurship”
That wave could crash if special interest groups get their way.
“(There’s) frustration because you have a success in congress which is hard to come by,” Schweikert said. “It disappears in this regulatory maze because there … are sort of these control freaks out there. If you look at their letters all of (them) are created from the same organization which just has created multiple titles, union-funded which actually seem to be terrified of a wave of entrepreneurship and I don’t understand it.”
‘Heading towards crisis’
“We are heading toward a crisis in this country where we are having millions and millions of our brothers and sisters heading toward retirement who happen to have no savings and no investment. We can’t have a country that is growing at two percent or less of GDP and covers the social entitlement promises it’s made.”
“You’d think collectively whether you are on the right or the left you’d be doing everything you can to spur the next wave of capital formation and economic growth that would expand the economy.”
Schweikert illustrated this point by telling a story about a friend of his who is an electrical engineer. Some of the engineer’s friends started a business in a field the engineer had strong knowledge in. He believed in the technology and its chances for success and wanted to invest.
His income level wasn’t enough for him to invest, even though he knew the market and the technology.
“How do I use not just your bank account and your income but also your risk tolerance and knowledge?” Schweikert asked.
Schweikert said the North American Securities Administrators Association threatened legal action over the preemption of blue sky laws but he eventually expects them to switch focus toward locking down their regulatory place in the food chain.
“As information becomes more available the state based regulatory environment is, I don’t want to say absurd, but how many of you when you are looking at an investment the first thing you look at is what state is it based in in because ‘I want to know their regulatory set?'” he asked.
Schweikert said the states need to demonstrate they can safely work with other states to help the money move through the country. If not we will see more and more of a push coming from Washington that there cannot be 51 different regulatory sets.
“The world is different today,” Schweikert said. “My access to information is dramatically different today than it was in the 1930’s. You have to wake up and move to this century.”
Schweikert said the SEC has the authority to update qualified investor rules, but they will talk about it in order to slow it down at the congressional level.
“Regulators are always fearful that some of their dominance will be taken away from them,” Schweikert said. “If they would be willing to step up and do it, bless them.”
“Because this is going to be some real brain damage trying to drive this through the legislative process.”