Friday, March 13, 2015

NASAA Questions Value, Viability of Venture Exchanges

[This story previously appeared in Securities Regulation Daily.]

By John M. Jascob, J.D.

NASAA has asked Congress to examine more closely the policy rationale behind any legislation that would establish “venture exchanges” for small and unestablished companies. In a written statement this week to the Senate Subcommittee on Securities, Insurance, and Investment, NASAA President William Beatty questioned the need for opaque and volatile venture exchanges, given the many existing ways that new and growing businesses can access investment capital.

Viability. Beatty questioned whether the enactment of new legislation would even result in the creation, let alone the success, of any venture exchanges. He noted that over the past 80 years, more than 20 regional stock exchanges have either have gone out of business or have been forced to merge with other exchanges to remain viable. The fact that a “venture exchange” does not already exist may be due to financial viability as opposed to regulation, Beatty said.

Low listing standards. NASAA also fears that facilitating the creation of exchanges with low listing standards may facilitate fraud at the expense of retail investors. The key to success, NASAA believes, will be to scale listing standards to the size of the enterprise while mainitaining adequate investor protections. The protections would include, at a minimum, a baseline standard that requires investor qualifications for participation.

Beatty emphasized that foreign venture exchanges are not unregulated marketplaces. These exchanges explicitly acknowledge that regulation is the key to success for both the exchange and the companies that trade on them. In NASAA's view, any “venture exchange” legislation should be based on a study of those markets and their successes and failures.

Preemption of state review. NASAA opposes the preemption of state review of offerings of securities listed on an exchange lacking rigorous listing standards. Beatty urged the lawmakers to maintain the regulatory balance struck by the National Securities Markets Improvement Act of 1996 and not extend exempt, “covered security” status to less stringent exchanges. Where an exchange does not qualify for “covered security” status, manual exemptions and other exemptions are available in a majority of states to facilitate secondary trading while providing for important investor protections, Beatty stated.

Regional diversity. Beatty also observed that prior regional exchanges often became focused on a particular industry or region, thereby magnifying economic downturns in those markets or regions. One way to avoid this risk in any future legislation, NASAA believes, would be to prohibit venture exchanges from denying a listing based on a company’s business location within the United States or based on the company’s industry of operations. This would help to create a diversity of listings that would better ensure the success of those exchanges, Beatty said.