The North American Securities Administrators Association (NASAA) is calling on Congress to require and fund a comprehensive study, led by the SEC, on the factors behind the dramatic shift in recent years from public to private markets. The study, which NASAA believes should include a review of offerings under Reg. A, Reg. D, and Reg. Crowdfunding, is one of a dozen recommendations that NASAA has issued to Congress in a new report.
The report, which NASAA calls its recommendations for reinvigorating the capital markets, is premised on the association’s concern that public offerings of securities are no longer the dominant form of capital formation in the U.S. Reversing the shift toward private markets will necessarily require a reconsideration of various exemptions from registration, especially Rule 506 and the definition of an accredited investor, NASAA believes, as well restoring a meaningful threshold in Section 12(g) to push large companies into the public markets.
JOBS Act opposition. As a starting point, NASAA is calling on lawmakers to pursue policies that enhance efficiency, transparency, and a level playing field, rather than those that pull companies and investors away from the public markets. In that regard, NASAA criticized the ineffectiveness of the original JOBS Act, passed in 2012, and urged Congress not to adopt its 2022 progeny, JOBS Act 4.0, as currently proposed.
NASAA noted that the 2012 JOBS Act was intended to incentive more companies to enter the public markets by, among other things, creating an IPO on-ramp, reducing the disclosure burden for emerging growth companies, and allowing capital raising through crowdfunding. It did not work, and neither will JOBS Act 4.0, NASAA said.
According to NASAA, JOBS Act 4.0 contains provisions that would try to attract more companies to go public by extending EGC status to 10 years, among other things, while making it easier for companies to raise capital through exempt offerings and stay private longer. The mix of public market incentives in the form of weakened regulatory requirements and private market expansions will have the same result as the 2012 JOBS Act—the expansion of private markets while public markets suffer, NASAA warned.
Instead, NASAA supports the Promoting Opportunities for Non-Traditional Capital Formation Act, which would expand the functions of the SEC’s Office of the Advocate for Small Business Capital Formation and require meetings with state securities regulators at least annually.
SEC study. The report also discusses the lack of information that impedes the ability of policymakers to pursue data-driven reforms. NASAA would like Congress to require a study on public and private markets led by the SEC’s Division of Economic and Risk Analysis.
NASAA said the study should examine the costs and benefits associated with the shift from public to private markets and, in particular, review the performance of offerings conducted under Reg. A, Reg. D, and Reg. Crowdfunding, as well as the effect of recent changes to the SEC’s definition of an accredited investor. NASAA is convinced that the study would illustrate the need for bolder action, including passage of S. 4587, the Private Markets Transparency and Accountability Act.
Accredited investor definition. NASAA believes the definition of an accredited investor is a critical component for protecting investors and restoring the balance between public and private markets. Accordingly, it recommends that Congress work to reverse the deleterious impact of decades of inflation on the existing net worth and income standards by raising the current income and net worth thresholds for natural persons and index those thresholds to inflation.
NASAA also suggests that just as a person’s primary residence does not count towards the $1 million net asset threshold required for accredited investor status, Congress should add an exclusion for the value of any defined benefit or defined contribution tax-deferred retirement accounts, as well as the value of agricultural land and machinery held for production.
Other recommendations. The report also contains these other suggestions for Congress that NASAA believes will help the capital markets:
NASAA noted that the 2012 JOBS Act was intended to incentive more companies to enter the public markets by, among other things, creating an IPO on-ramp, reducing the disclosure burden for emerging growth companies, and allowing capital raising through crowdfunding. It did not work, and neither will JOBS Act 4.0, NASAA said.
According to NASAA, JOBS Act 4.0 contains provisions that would try to attract more companies to go public by extending EGC status to 10 years, among other things, while making it easier for companies to raise capital through exempt offerings and stay private longer. The mix of public market incentives in the form of weakened regulatory requirements and private market expansions will have the same result as the 2012 JOBS Act—the expansion of private markets while public markets suffer, NASAA warned.
Instead, NASAA supports the Promoting Opportunities for Non-Traditional Capital Formation Act, which would expand the functions of the SEC’s Office of the Advocate for Small Business Capital Formation and require meetings with state securities regulators at least annually.
SEC study. The report also discusses the lack of information that impedes the ability of policymakers to pursue data-driven reforms. NASAA would like Congress to require a study on public and private markets led by the SEC’s Division of Economic and Risk Analysis.
NASAA said the study should examine the costs and benefits associated with the shift from public to private markets and, in particular, review the performance of offerings conducted under Reg. A, Reg. D, and Reg. Crowdfunding, as well as the effect of recent changes to the SEC’s definition of an accredited investor. NASAA is convinced that the study would illustrate the need for bolder action, including passage of S. 4587, the Private Markets Transparency and Accountability Act.
Accredited investor definition. NASAA believes the definition of an accredited investor is a critical component for protecting investors and restoring the balance between public and private markets. Accordingly, it recommends that Congress work to reverse the deleterious impact of decades of inflation on the existing net worth and income standards by raising the current income and net worth thresholds for natural persons and index those thresholds to inflation.
NASAA also suggests that just as a person’s primary residence does not count towards the $1 million net asset threshold required for accredited investor status, Congress should add an exclusion for the value of any defined benefit or defined contribution tax-deferred retirement accounts, as well as the value of agricultural land and machinery held for production.
Other recommendations. The report also contains these other suggestions for Congress that NASAA believes will help the capital markets:
- Congress should update and enhance the SEC’s civil penalties statute by increasing the statutory limits on civil monetary penalties, directly linking the size of these penalties to the scope of harm and associated investor losses, and substantially raising the financial stakes for repeat securities law violators.
- Congress should require the federal financial regulators to establish a bad actors database and allow state and local governments to participate in it.
- Congress should resist calls to shift oversight away from the SEC, and should consider giving state securities regulators a seat at the table in any digital asset working groups or other multi-agency efforts.
- Congress should modernize the Financial Literacy Education Commission.
- Congress should examine the resources that are devoted to investor education and pursue policies designed to bolster those efforts, including providing more resources to the SEC.
- Congress should preserve the choice and authority of the states to register and regulate finders.
- Congress should preserve the choice and authority of the states to register and regulate small offerings, especially ones under $500,000.
- Congress should resist efforts to eliminate the choice and authority of states to require notices to the states of certain securities transactions that are included in bills such as the Facilitating Main Street Offerings Act and the Improving Crowdfunding Opportunities Act.