The JOBS Act: Quick takes on the McHenry/ Schapiro exchanges on crowdfunding

William Carleton, Contributing Editor, VCExperts

I watched about an hour of early July's Congressional hearing at which Rep. Patrick McHenry - author of the equity crowdfunding exemption widely passed by the US House but rejected and replaced by the Senate in the final JOBS Act - questioned SEC Chair Mary Schapiro about how rulemaking is coming along to implement different provisions of the JOBS Act.

Four brief observations about exchanges between McHenry and Schapiro on the topic of the equity crowdfunding exemption:

1. McHenry now realizes he was sandbagged.

McHenry feels his hugely popular equity crowdfunding bill, which had President Obama's endorsement and overwhelming bipartisan support in the House, was sandbagged when the Senate later took up the crowdfunding topic. He infers that Schapiro herself had taken initiative to encourage the Senate to upend his bill and the careful work done in the various House committees and on the House floor.

This is the first time I've heard McHenry acknowledge that his crowdfunding bill was eviscerated. And it's a marked change in his prior public posture.

At the JOBS Act signing in the White House Rose Garden in April, McHenry was center stage, proud and happy and victorious. At the time, perhaps he was focused more on how his achievement had forced the Senate to take up the equity crowdfunding concept and produce a bill, however grudgingly.

Since then, he or his staffers may have been reading what I've been blogging, about how cynical the Senate's crowdfunding equity exemption is, and what a shame it was to miss the chance for the honest experiment McHenry's original bill promised. In any case, McHenry himself is now ruing, as I think we all should, that the JOBS Act took "wisdom of the crowds" out of equity crowdfunding. More on this at point 4 below.

2. Schapiro forsees a "workable exemption."

Schapiro expressed confidence that, when rulemaking is said and done, the equity crowdfunding exemption will be a "workable exemption." She says that the statutory requirement for an intermediary - a feature of the crowdfunding provision in the final JOBS Act, but not a requirement of the McHenry bill (McHenry would have allowed equity crowdfunding through an intermediary or else directly by an issuer) - is a key factor for why it will work.

3. McHenry floats the idea of "scaled disclosure" requirements.

McHenry and Schapiro had an exchange about whether a "scaled disclosure" concept might be reflected in the equity crowdfunding rules. The idea here is, to use numbers McHenry used as examples, that the burdens required of an issuer raising $100,000 should not be as extensive as those for an issuer raising $900,000. Schapiro said the SEC is very comfortable with the concept of scaled disclosure in other contexts, and suggested that it may ask the public, as part of preliminary rulemaking, whether such a concept should be pursued for the equity crowdfunding exemption. It strikes me as an invitation for still further complexity, over and above what the statute is going to require.

4. The wisdom of the crowds.

In spite of what I said at point 1 above, McHenry does seem to continue to operate under the illusion that the crowdfunding exemption of the JOBS Act will permit the wisdom of the crowds to come to bear, if only the rulemaking process will so allow. As I've said on this blog frequently, the Senate eliminated the McHenry provision that would have required issuers to facilitate discussion with and among investors. Instead, the JOBS Act more nearly contemplates a traditional kind of centralized, top down disclosure. That said, I am starting to imagine ways that rulemaking might actually let crowd-wisdom back into the picture, so I guess I should be thankful for McHenry's "reality distortion field" on this point.

William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at