The North American Securities Administrators Association sent a letter to House Republican and Democratic leaders urging them to put the brakes on a bundle of capital formation bills assembled largely by Republicans on the House Financial Services Committee. Many of the bills were reported out of committee during an April markup in stand-alone form, but the Expanding Access to Capital Act of 2023 (H.R. 2799) would pull many of them together into a legislative package. Many of NASAA’s objections are centered around how the package of bills would preempt state regulations.
Preemption of state laws is not the only objection NASAA raised. The group also flagged many provisions in the legislative package because they could, in its view, lessen investor protections. NASAA raised nearly all of the same objections during the run-up to the hearing and markup of the component bills and in a report detailing its views of what a capital formation agenda should look like.
Division B, Title I would create a safe harbor for private placement brokers and finders. This is an area in which some practitioners have sought Congressional clarity because historically a person who acts as a finder may run afoul of existing broker-dealer rules if they handle securities or receive transaction-based compensation. In NASAA’s view, the legislative bundle creating a new exemption would allow finders to engage in activities that were historically more heavily regulated because of the need to better protect investors.
Division B, Title IV contains the Small Entrepreneurs Empowerment and Development (SEED) Act of 2023, which would legalize micro-offerings of securities amounting to no more than $250,000. NASAA offered five main objections to the SEED Act, the last of which can be combined into one objection with two related parts:
- The SEED Act would undermine well-regulated capital markets;
- There already exist numerous modes of raising small amounts of capital;
- The SEED Act merely complicates an already complex exemption framework; and
- States need registration and notice filings in order to know who is operating within state boundaries because otherwise states may only learn of problems with a particular firm when a concerned citizen files a complaint leading to an investigation.
Lastly, NASAA voiced concern about Division B, Title IX, the Restoring the Secondary Trading Market Act. According to NASAA, the provision “would erase oversight in the secondary sales of offerings by state governments, including offerings made under Tier 2 of the SEC’s Regulation A.” The provision would amend Securities Act Section 18 to preempt state regulation of off-exchange secondary trading in securities of a company that makes certain information publicly available, including under Securities Act Rule 251(a) (documents and information regarding Tier 2 offerings) and Rule 257(b) (periodic and current reports).
NASAA did say it favors at least one provision in the capital formation package that would broaden the auditor independence standards for newly public companies. That provision, contained in Division A, Title IV, would deem an auditor independent if it met the requirements of the American Institute of Certified Public Accountants applicable to certified public accountants in the U.S.