In testimony today before the Senate Banking Committee, NASAA President Jack Herstein expressed NASAA's firm belief that the states should be the primary regulator of small business capital formation, including offerings of crowdfunded securities. Herstein's remarks came as the Committee considered several pieces of legislation designed to spur job creation by removing perceived regulatory roadblocks to small business investment in the economy.
With regard specifically to the regulation of crowdfunded securities, Herstein said that the states have a more direct interest in these offerings, based on the small size of the offerings, the small size of the issuers, and the relatively small investment amounts. The states are in a better position to communicate with both the issuer and the investor, are most familiar with the local economic factors that affect small business, and have a strong interest in protecting the investors in these types of offerings. Further, regulating offerings of this size would not be an effective use of the SEC's limited resources, Herstein said.
NASAA opposes the regulatory framework proposed in the Entrepreneur Access to Capital Act (H.R. 2930), Herstein said, because the legislation would establish an exemption for crowdfunded securities that is far too broad. In its current form, the bill would preempt the application of state registration laws to these securities, thus leaving a massive hole in the investor protection safety net. Post-sale anti-fraud remedies provide little comfort to an investor who has lost a significant sum of money that is unrecoverable, Herstein said. Additionally, the thresholds for individual investment and aggregate offerings set by H.R. 2930 are far higher than those sought by most advocates of crowdfunding. As a result, NASAA believes that small investors would be exposed to the danger of considerable losses in highly risky investments.
NASAA regards the Democratizing Access to Capital Act (S. 1791) as a significant improvement over H.R. 2930, Herstein said, because the Senate bill limits individual investments to $1,000 per person, with an aggregate offering cap of $1 million. Moreover, S. 1791 requires an entity that raises capital through crowdfunding to be incorporated under, and subject to, state law. The Senate bill also requires the issuer to use a "crowdfunding intermediary."
If regulatory authority is preserved for the states, Herstein said that NASAA will pursue the development of a model exemption for crowdfunding that uses many of the components of S. 1791. Herstein informed the lawmakers that NASAA has completed an initial draft of a model exemption that includes the following seven elements:
- Aggregate offering amounts are limited to $500,000 over a 12-month period;
- Individual investments are limited to $1,000 per year, per offering;
- Issuers use "one-stop filing" in the state of the issuer's principal place of business, information from which the home state will share with other states, upon request;
- Issuers have the choice whether to use an intermediary or not;
- Issuers must make basic information available to investors on their websites, including their business plans and use of proceeds;
- Issuers will be required to escrow investor proceeds until they reach at least 60 percent of the target investment amount; and
- Individuals and companies that have criminal records or have violated securities laws will be precluded from using the exemption.