In 2012 Congress passed the Jumpstart Our Business Startups Act Act to facilitate growth in the private sector. As the JOBS Act celebrates its 10th anniversary, some on Capitol Hill are advocating for additional iterations of the bill that would expand its scope. While these are worthwhile and valuable efforts, the Securities and Exchange Commission should first ensure that the original law is implemented in accordance with congressional intent and in a manner that more appropriately balances retail investor access and protection.
In the wake of the Great Recession, small businesses desperately needed affordable capital to get back on their feet, but many could not secure a loan from traditional sources. To address this issue, the JOBS Act provided a pathway for smaller alternative investment platforms to utilize crowdfunding and fractionalized ownership as means of offering securities to investors to raise capital in a regulated environment overseen by the SEC.
The SEC has taken an unnecessarily inflexible approach to some of the novel securities offerings made under the JOBS Act. While the agency is embarking on several new regulatory ventures, including cryptocurrency and disclosures related to environment, social and governance (ESG) issues, it has not prioritized modernization of Regulation A as it should. Doing so would meet both of Congress's objectives in enacting the JOBS Act: increasing investor access to a broader set of assets and providing SEC oversight over these novel markets.
The SEC requires that any issuer of single-asset, securitized real estate provide historical, audited financial statements for any previously rented investment property. This requirement may be sensible for large-scale commercial or multifamily real estate investments but is entirely unpracticable in the single-family housing market.
This prohibitive requirement has effectively limited access through fractionalized securities for retail investors to only newly constructed properties or properties that issuers can ensure have only been used as a primary residence as these are the only properties anyone can purchase with certainty that they've never been rented before. This reduces the supply for individuals who would buy these properties for their personal use as a primary residence and exacerbates the insufficient supply in the housing market.
With
Institutional investors, on the other hand, need not comply with these requirements since they do not offer investments to nonaccredited investors. As a result, they are able to maintain completely unrestricted access to the housing market, leaving retail investors at a comparative disadvantage to some of the largest financial institutions in the country.
The SEC has the ability to easily exempt single-family and other small residential properties from this requirement and, in the process, level the playing field to ensure retail investors share in the same financial benefits that large private equity firms and other institutional investors currently enjoy in the real estate market.
The SEC should also evenly apply regulatory oversight to all actors in the crowdfunding and fractionalized securities ecosystem. In enacting the JOBS Act, Congress intended to create markets in which retail investors could gain access to new types of assets in a safe and supervised regulatory environment.
Though the SEC has the statutory authority it needs to assert supervision over these marketplaces, it is currently not actively doing so. While some companies operating in the market have voluntarily subjected themselves to SEC oversight, others have not.
As a result, good-faith efforts have turned into a potential competitive disadvantage. Unsupervised entities are purchasing properties and issuing investment products with advantageous ease and speed in the absence of any real SEC scrutiny. This is a risky practice that increases the potential for investor harm at a time when fractional investment demand is accelerating due to volatility in the stock market. Congressional intent in this space is unambiguous: Entities that provide access to fractionalized ownership to novel assets should do so under SEC supervision.
The good news is that the JOBS Act has been an unmitigated success. For example, more than 93% of IPOs since 2013 were emerging growth companies that benefited from the IPO "onramp" the
This success notwithstanding, the SEC has not gone far enough to realize even more growth and investor access by unleashing the full potential of the law. The SEC should embrace the intent of the law by dropping a burdensome regulatory approach that hinders the 35% of Americans who currently rent from accessing the financial benefits of property ownership and asserting more oversight of the fractionalized securities ecosystem.
