Saturday, October 08, 2011

NASAA Defends States' Review of Crowdfunded Securities

NASAA President Jack E. Herstein has expressed strong concerns regarding legislation recently introduced in the U.S. House of Representatives that would preempt state investor protection laws. In a comment letter to leaders of the House Financial Services Committee and the Capital Markets and Government-Sponsored Enterprises Subcommittee, Herstein stated that the Entrepreneur Access to Capital Act (H.R. 2930) and the Access to Capital Job Creators Act (H.R. 2940) would, if enacted, undermine important investor protections and prevent state securities regulators from enforcing meaningful parts of state investor protection laws.

Specifically, Herstein opposed provisions of H.R. 2930 that would preempt the states' authority to review offerings of so-called "crowdfunded" securities. As introduced, the bill would exempt from federal registration securities offerings of less than $5 million, where the maximum individual investor contribution is the lesser of 10 percent of an investor's annual income or $10,000 per investor. Herstein noted, however, that Section 4 of H.R. 2930 would also expressly preempt state law with respect to these offerings by classifying the securities as "covered securities."

Herstein believes that it is crucial that the states retain full authority to review securities offerings in this area, given the significant fraud in this segment of the market. Moreover, the protections provided by state review are even more essential because companies offering exempt securities under H.R. 2930 will not issue ongoing reports like true public reporting companies. "State regulators have been vigilant in their efforts to protect retail investors from the risks associated with smaller, speculative investments," Herstein wrote. "Further, as crowdfunding centers on community investment, the oversight should be vested in the regulator with the most direct interest in protecting that community."

Herstein also strongly opposed provisions of H.R. 2940 that would expand the registration exemption under Rule 506 of Regulation D by requiring the U.S. Securities and Exchange Commission to remove the long-standing prohibition against the general solicitation of these offerings. "Such an action would exacerbate the regulatory black-hole created in 1996, when Congress passed the National Securities Markets Improvement Act (NSMIA) and stripped the states of their authority to fully regulate in this area," Herstein commented. Herstein observed that, since the enactment of NSMIA, Rule 506 offerings have received virtually no regulatory scrutiny. "Given state experience with these offerings and the significant fraud and investor losses associated with them, NASAA opposes H.R. 2940," Herstein wrote.