NASAA: The JOBS Act Fails Investors and Entrepreneurs
Bipartisan Legislation is Flawed Product of Rush to Legislate
WASHINGTON (April 5, 2012) – Congress and the White House have sacrificed investor protection, the North American Securities Administrators Association (NASAA) said today.
“The JOBS bill the President signed today is based on faulty premises and will seriously hurt all investors by either eliminating or reducing transparency and investor protections. It will make securities law enforcement much more difficult,” said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance, Bureau of Securities. “Investors need to prepare themselves to be bombarded with all manner of offerings and sales pitches. Congress has just released every huckster, scam artist, and small business owner and salesman onto the internet,” Herstein added.
Herstein’s comments followed the signing by the President of the “Jumpstart Our Business Startups (JOBS) Act” (H.R. 3606), which was approved last month by the House of Representatives and Senate. The White House played a key role in developing the legislation and urged its expedited passage by Congress, despite warnings voiced by securities regulators, law professors, economists, investor protection advocates, and others.
“Election-year politics have blinded Congress and the White House to the unintended consequences of their actions, which, however well intentioned could open the floodgates to investment fraud,” Herstein said.
NASAA also expressed skepticism about the legislation’s ability to create new jobs and stimulate the economy, questioning its underlying assumption that burdensome regulations are inhibiting investment in small business and stifling job growth.
“Rather than creating a transparent marketplace where investors receive trustworthy information that facilitates investment, the JOBS Act reduces the amount of reliable information available to investors. By allowing general advertising of nonregistered offerings with little or no regulatory oversight, the JOBS Act facilitates a noisy and confused market that will diminish rather than rebuild investor confidence,” said Heath Abshure, NASAA Vice-President and Arkansas Securities Commissioner. “At a time when a reasonable regulatory presence is necessary to rehabilitate the markets, the JOBS Act reduces the regulatory presence by preempting the states from acting to protect their citizens.”
JOBS Act’s Crowdfunding Exemption Prevents States from Policing a New and Risky Market
NASAA’s sharpest criticism was aimed at portions of the bill that require the SEC to establish a registration exemption for “crowdfunding.” Issuers who use the crowdfunding exemption will be required to disclose a minimal amount of information to the SEC, but the bill includes a provision, strongly opposed by NASAA, that will preempt state securities regulators from reviewing or registering securities sold under the “crowdfunding” exemption in their states.
State securities regulators do not object to the concept of crowdfunding; in fact, NASAA had since last year been working on a model rule that would permit crowdfunding while preserving a state’s ability to prevent scam artists from exploiting Main Street investors. Because the JOBS Act preempts the states from regulating crowdfunding, the SEC will be solely responsible for policing the new market and deterring fraud.
“Lacking adequate funding, the SEC has neither the resources nor the time to effectively police these relatively small, localized securities offerings before they are sold to the public,” Herstein said. “As a result, crowdfunding offers are likely to receive little regulatory scrutiny until after a fraudulent sale has been committed. This is an investor protection disaster waiting to happen.”
Herstein said Congress made a similar mistake in 1996 with the passage of the National Securities Markets Improvement Act (NSMIA), which preempted state authority to review private offerings made under Securities and Exchange Commission Regulation D Rule 506 and created a regulatory “black-hole” by entrusting the SEC to police these offerings.
“Since NSMIA, the provisions of Rule 506 and other limited or private offering provisions are being used by unscrupulous promoters to evade review and fly under the regulatory radar with little scrutiny by the SEC,” Herstein said. In a 2009 report, the SEC’s Office of the Inspector General concluded the agency does not give these offerings a substantive review and “does not generally take action” when it learns that issuers have failed to comply with the requirements of the Regulation D exemptions.
State enforcement records show that Regulation D Rule 506 offerings are the most frequent source of enforcement cases handled by state regulators. In the past three years, state securities regulators have reported 580 enforcement actions involving these offerings, according to NASAA’s 2011 enforcement survey.
“The notion of crowdfunding as originally conceived is a relatively innocuous way to promote creativity,” said Steve Irwin, Chairman of NASAA’s Committee on Federal Legislation and Pennsylvania Commissioner of Securities. “But the crowdfunding exemption enacted in the JOBS Act is rife with risk, not only for the investors who think they are getting on the ground floor of the next Google or Facebook, but for the countless targets of unscrupulous con artists playing on the unsophisticated, gullible, and vulnerable.”
“By preempting states, the JOBS Act takes the handcuffs away from state regulators and puts them on us,” Irwin added. “Although intended to stimulate the economy, if recent history is any guide the JOBS Act may once again show how hasty and unreasonable deregulation often leads to disastrous results.”
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