Friday, November 04, 2011

NASAA Regards Crowdfunding Bill as "Structurally Flawed"

In a comment letter yesterday to House Speaker John Boehner (R-OH) and Minority Leader Nancy Pelosi (D-CA), NASAA renewed its strong opposition to provisions in the Entrepreneur Access to Capital Act (H.R. 2930) that would preempt state authority over crowdfunded securities. Although acknowledging that the concept of crowdfunding may be appealing as a way to provide small, innovative enterprises with access to capital that might not otherwise be available, NASAA observed that H.R. 2930 would only allow states to address investor losses after they occur. In NASAA's view, this will cause the public to lose confidence in this business funding method, thereby hurting efforts to make crowdfunding a viable means for raising capital. As currently written, therefore, NASAA regards the legislation as being well-intended, but structurally flawed.

NASAA observed that Section 4 of H.R. 2930 would preempt state laws requiring disclosures or reviewing exempted investment offerings before they are sold to the public. NASAA believes, however, that the authority to require such filings is critical to the ability of states to get "under the hood" of an offering to make sure that it is what it says it is. Moreover, as a matter of principle and policy, NASAA believes that states are the most appropriate regulators for offerings of this size. NASAA reminded the lawmakers that state regulators are closer, more accessible, and more in touch with the local and regional economic issues that affect both the issuer and the investor in a small business offering.

Although expressing appreciation for the efforts of Rep. Ed Perlmutter (D-CO) to produce a bipartisan amendment that would alleviate the states’ concerns with H.R. 2930's preemptive provisions, NASAA believes that the Perlmutter-McHenry amendment still falls far short of this goal. By simply clarifying that states "retain jurisdiction . . . to investigate and bring enforcement actions with respect to fraud or deceit," the amendment essentially restates the preemptive provisions as they existed in the original bill. The Perlmutter-McHenry amendment fails, therefore, to address the states' fundamental concern that H.R. 2930 will preempt of state authority to review crowdfunded securities prior to their offering.

NASAA also opposed provisions of H.R. 2930 that allow for individual and aggregate investment caps which, the organization believes, go far beyond anything contemplated by the states or traditional advocates of crowdfunding. By setting an individual investment cap of 10 percent of annual income, or $10,000, NASAA believes that H.R. 2930 will create an exemption that will expose many more American families to potentially catastrophic financial harm. Moreover, H.R. 2930 would permit businesses to solicit investments of up to $2 million, in increments of $10,000 per investment. Such a high cap on aggregate investment makes the bill inconsistent with the expressed rationale for the crowdfunding exception, NASAA believes. In the opinion of state regulators, a company that is sufficiently large to warrant the raising of $2 million in investment capital is also a company that can afford to comply with the applicable registration and filing requirements.