NASAA Calls for Balanced, Sensible Policy Reforms Reflecting ‘Smarter Regulation’ That Does Not Scale Back Investor Protection as New Capital Formation Proposals Emerge
State securities regulators concerned about ‘overarching deregulatory nature’ of proposals
WASHINGTON (May 1, 2014) – The North American Securities Administrators Association (NASAA) today reminded lawmakers of the importance of balancing the needs of capital formation with investor protection when considering additional legislation to revise or repeal provisions of the Jumpstart Our Business Startups (JOBS) Act of 2012.
“State securities regulators share Congress’ desire to improve the economy by spurring private investment for small businesses. However, we believe this goal is best achieved through restoring investor confidence in the markets and market participants, and it is our hope that Congress and state securities regulators can work together to pursue balanced and sensible policy reforms that reflect smarter regulation,” NASAA President-elect and Washington Securities Administrator William Beatty said during testimony before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises.
The hearing was called to examine three draft legislative proposals focusing on areas of the JOBS Act concerning crowdfunding, Regulation A small business offerings, and the general solicitation of Regulation D private placement offerings.
“State securities regulators are broadly concerned about the overarching deregulatory nature of these proposals, the primary impact of which would be to weaken various federal securities laws and reduce state and federal oversight of small public companies,” Beatty testified.
“While we wholeheartedly share the Subcommittee’s stated goal of promoting capital formation, assisting small businesses, and spurring economic growth, we believe that many aspects of the drafts before the Subcommittee today would shift policies in the wrong direction,” Beatty said. “Over-regulation did not cause our financial markets to collapse. A weakened regulatory system has not contributed to our capital market system being viewed as the ‘gold’ standard. Investor confidence in our system is what fuels economic growth and job creation.”
Beatty focused much of his testimony on crowdfunding and the significant progress states have made to promote greater use of Regulation A offerings for small businesses – both provisions of the JOBS Act awaiting final rulemaking by the Securities and Exchange Commission.
He noted that many crowdfunding advocates that have grown frustrated with the pace of federal rulemaking and, in some cases, dissatisfied with the federal exemption itself, and are seeking state-level crowdfunding exemptions.
“The enactment of the JOBS Act unfortunately precluded the states from playing a leading role in crowdfunding,” Beatty said, noting that as a result, work on a NASAA model rule that would have enabled states to play the leading role in establishing a new marketplace for raising capital through crowdfunding was deferred.
Nevertheless, to date, seven states have passed crowdfunding laws under the intrastate offering exemption of the Securities Act of 1993, and more than a dozen other states are actively considering adopting exemptions to facilitate crowdfunding. “Such actions demonstrate decisively that, had Congress allowed the states to proceed with our efforts, there could be an emerging, vibrant, and functioning crowdfunding market operating today,” Beatty said.
Beatty testified that NASAA has strong concerns about the “Equity Crowdfunding Improvement Act of 2014,” proposed by Rep. Patrick McHenry (R-NC), to repeal the existing crowdfunding framework under Title III of the JOBS Act and replace it with a new version. Despite these concerns, Beatty said NASAA also recognizes that there may be provisions in Title III that may limit its utility for certain issuers.
“Until the final rules are implemented and issuers are able to participate in crowdfunding, however, it is impossible to evaluate the impact Title III will have on capital formation, job creation and investors’ willingness to invest through crowdfunding,” Beatty said. “We caution that a number of the changes proposed by the draft bill would decrease protections that were central provision Congress included to minimize severe investor risk, and that are vital to encouraging their participation and confidence in crowdfunding.”
Beatty said another draft under consideration by the subcommittee, “The Startup Capital Modernization Act of 2014,” would substantially weaken investor protection by preempting states from playing a role in Regulation A securities offerings. During its consideration of the JOBS Act, Congress concurred that states should serve a role in this promising area for helping small and local businesses obtain investment capital to grow and create jobs.
Over the past 18 months, in anticipation of the SEC’s implementation of Title IV of the JOBS Act, states, working through NASAA, have successfully taken unprecedented steps to modernize and streamline the state process for reviewing Regulation A offerings. “The states are ready-to-go, provided that Congress and the SEC don’t short-circuit our efforts by preempting our role,” Beatty said.
The third draft proposal under consideration at today’s hearing would direct the SEC to revise its proposed amendments to Regulation D. The JOBS Act lifted the ban on general solicitation of Regulation D Rule 506 private placement offerings. “The nature of the revisions specified by the draft proposal reveal it as an assault on the authority of the SEC to provide basic, reasonable investor protection,” Beatty said. “Specifically, the draft’s primary purpose appears to be to eviscerate the few investor protection components the SEC has either adopted or proposed adopting in connection with the JOBS Act requirement to lift the ban on general solicitation for Regulation D Rule 506 offerings.”
NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.
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