On March 22, 2012, the U.S. Senate adopted H.R. 3606, the Jumpstart Our Business Startups Act (a.k.a., the JOBS Act) by a vote of 73 to 26. Prior to its passage, the U.S. Senate adopted Amendment 1884 proposed by Senators Merkley and Brown that replaced the “Crowdfunding” exemption contained in the house-passed legislation with a narrower provision. As the Senate and the House have adopted different versions, the House will have to consider and pass the Senate amendment before a bill could become law, or convene a conference committee to reconcile the House and Senate versions of the bill. (The Senate rejected by a voice vote Amendment 1931 proposed by Senator Reed that would have changed the SEC’s shareholder counting rules from record holders to beneficial owners.)
As the bulk of the JOBS Act was approved without change, our summary of the impact of the JOBS Act on community banks remains accurate.
The amended “Crowdfunding” provision includes significant restrictions on the potential utility of the new exemption, particularly for how it may have utilized by community banks. The ultimate utility of the Crowdfunding exemption will largely be tied to the implementing regulations to be adopted by the SEC. Under the Senate’s version of the JOBS Act, the Crowdfunding exemption would be available for up to $1 million in issuances in any 12-month period, require investors to purchase no more than 5-10% of their net worth in the issuance, and require the use of either a broker or “funding portal” as that term is defined in the bill.
Significantly, the Senate’s version contains a number of required disclosures, prohibits general advertising of the terms of the offering (other than notices which direct investors to the funding portal or broker), and requires the issuer to file periodic reports with the SEC (as the SEC determines, by rule, to be appropriate). In addition, the Senate version of the Crowdfunding exemption makes existing public companies ineligible to rely on the exemption.
If the Senate’s version of the Crowdfunding provision is ultimately accepted by the House, the utility of the exemption for small, private community banks will largely depend on the scope of the implementing regulations and the costs to make use of the required funding portal or broker. Assuming the initial costs and ongoing reporting burden are minimal, private community banks may be able to utilize the Crowdfunding exemption to supplement annual capital growth with an equity investment that helps further engage the local community with the bank.