Tuesday, June 21, 2011

NASAA Opposes Efforts to Strip Protections from Regulation A Offerings

The North American Securities Administrators Association (NASAA) has expressed concern that provisions of the proposed Small Company Capital Formation Act (H.R. 1070) would strip exempt offerings conducted under federal Regulation A of all investor protections, thereby resulting in the broad marketing and sale of riskiest and most speculative securities to the least sophisticated investors. Writing on June 15 to the leadership of the House Financial Services Committee and the Capital Markets Subcommittee, NASAA supported the bill's premise of reducing burdensome regulation on small business. NASAA believes, however, that the current disclosure requirements and investor protections contained in the registration and exemption provisions of the federal securities laws are not unnecessarily burdensome. Rather, NASAA argued, these provisions are absolutely necessary for fair and efficient capital formation, given the speculative nature of the businesses that would benefit from the changes proposed by H.R. 1070.

NASAA noted that Regulation A under the Securities Act of 1933 currently blends elements of a registered offering and an exempt offering, essentially permitting issuers to conduct a mini-public offering on a private offering scale. Although Regulation A offerings do not have all of the investor protections of a typical registered offering, NASAA noted, these offerings do benefit from the investor protections contemplated by Section 3(b) of the Securities Act because of the small dollar amount involved. In NASAA's view, the changes proposed by H.R. 1070 would strip Regulation A offerings of all investor protections by opening up a quasi-public market without the market integrity and protections for investors that currently exist in both the public offering and exempt offering setting.

NASAA also expressed concern that an amendment to H.R. 1070 introduced by Rep. David Schweikert (R-AZ) would limit the authority of the states to regulate Regulation A offerings that are sold through broker-dealers. The Schweikert amendment ostensibly seeks to clarify that any securities exempted under Section 3(b) of the Securities Act that are offered by any means other than through a broker or dealer will not be federal covered securities within the meaning of Section 18(b) of the Securities Act or exempt from state regulation under Section 18(a). NASAA fears that, by stating that non-broker-sold offerings will not be covered securities, the amendment leaves open, by implication, the argument that broker-sold Regulation A offerings could be construed to be federal covered securities. Accordingly, NASAA strongly urged the Committee to remove or clarify this language to avoid any unintended limitations on the states’ ability to protect investors.

Expressing NASAA's support for SEC Chair Mary Schapiro's plan to establish an Advisory Committee on Small and Emerging Companies, the state regulators suggested that NASAA's Model Accredited Investor Exemption (MAIE) could serve as an option for the Advisory Committee to consider as it develops ideas on reducing the regulatory burdens on small business capital formation. Adopted by the NASAA membership in 1997, and subsequently adopted by 32 states, the MAIE provides small businesses with the ability to conduct a general solicitation while also containing a number of investor protection provisions that reflect the speculative nature of the offerings, such as limiting sales to accredited investors.

NASAA observed that small businesses are extremely speculative and typically have untested technologies, limited resources, and no operational history. As a result, NASAA believes that any efforts to lessen the capital raising requirements of these companies must maintain appropriate, necessary investor protections. As currently drafted, however, H.R. 1070 focuses entirely on the desire of the small business issuer and ignores the need for reasonable investor protections contained in existing law, NASAA wrote. Accordingly, NASAA offered the MAIE, or a provision containing similar protections, as a reasonable middle ground that should be considered before final action is taken on H.R. 1070.