Tuesday, March 13, 2012

NASAA Opposes Preempting State Laws on Crowdfunding

The North American Securities Administrators Association (NASAA) has voiced strong opposition to provisions in the Jumpstart Our Business Startups Act (JOBS Act) that would preempt state laws for crowdfunding. In a comment letter yesterday to Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY), NASAA urged the Senate leaders not to discard basic investor protections by restricting the ability of state securities regulators to protect retain investors from the risks of smaller, speculative investments. NASAA warned the lawmakers that Congress may be on the verge of enacting policies that, although intended to strengthen the economy, will only make it more difficult for small business to access investment capital. NASAA’s comments came as the Senate considers companion legislation to the JOBS Act (H.R. 3606), which passed the House on March 8 by a vote of 390-23.

NASAA acknowledged the appeal of the concept of crowdfunding, an Internet-based fundraising technique that has been promoted as a means to facilitate access to capital by small, innovative businesses. NASAA believes, however, that Section 301 of the JOBS Act would expose many families to devastating financial harm by setting the cap on individual investments at 10 percent of annual income, or $10,000. Instead, NASAA suggested that the Senate consider a scaled approach that would cap most investments at a modest level, but allow wealthy, sophisticated investors to invest up to $10,000. NASAA also opposed Section 301’s aggregate investment cap of $2 million as being inconsistent with the crowdfunding exception’s expressed rationale. In NASAA’s view, companies that are sufficiently large to warrant the raising of $2 million can afford to comply with the applicable registration and filing requirements at the federal and state level.

NASAA labeled as "rash" the provisions in Section 303 that would preempt state laws requiring either disclosures or the review of exempted offerings before they are sold to the public. This authority is critical to the ability of states to get "under the hood " of these offerings for the protection of investors, NASAA wrote. Moreover, NASAA believes that the review of small securities offerings should remain primarily the responsibility of the states, both as a matter of principle and policy, given that state regulators are closer, more accessible, and more in touch with local and regional economic issues. Accordingly, NASAA urged Congress to allow the states to take a leading role in implementing an appropriate regulatory framework for crowdfunding, noting that the states are now in the midst of developing a Model Crowdfunding Exemption.

Among its other comments, NASAA also strongly opposed an amendment to Section 201 of JOBS Act that exempts from registration as a broker or dealer any trading platform that serves as an intermediary in an exempted Rule 506 offering. The significance of this amendment, NASAA stated, is that it will exempt intermediaries that facilitate the sale of crowdfunded securities from broker-dealer registration requirements. Although appreciating the complexities involved with regard to the question of how best to regulate these intermediaries, NASAA believes that a categorical exemption from registration would be both foolish and reckless. As amended, Section 201 would leave intermediaries open to conflicts of interest, including inducements to list, de-list, or promote certain offerings. Additionally, Section 201 would deny any regulator effective means to examine or discipline these sellers.

NASAA also opposed provisions in Section 201 that would repeal the SEC’s ban on the use of general solicitations in offerings conducted under Rule 506 of Regulation D. NASAA wrote that the approach contemplated by Section 201 represents a radical change that would dismantle important rules governing the offering process for securities. In NASAA’s view, Rule 506 offerings have become a haven for investment fraud since the enactment of the National Securities Markets Improvement Act of 1996 (NSMIA). As many states already allow issuers to use general advertisements to attract accredited investors, NASAA stated that it does not oppose outright the underlying goal of Section 201. NASAA believes, however, that any expansion should be accomplished by the establishment of a new exemption with provisions to protect investors and the markets.