Capital Formation Proposals Must Not Weaken Investor Protection

Download: Testimony

WASHINGTON (September 21, 2011) – In testimony before the House Subcommittee on Capital Markets and Government Sponsored Enterprises, the North American Securities Administrators Association (NASAA) today outlined the unintended consequences investors could face from legislative efforts to loosen regulations on how new and small businesses raise money.

“State securities regulators are acutely aware of the difficult economic environment and its effects on job growth. No state securities regulator seeks to inhibit economic recovery through regulation that is overly burdensome or restrictive,” said Heath Abshure, Arkansas Securities Commissioner, chair of NASAA’s Corporation Finance Section, and an observer member of the Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies.

Abshure’s testimony came during a hearing focused on three legislative proposals to promote small business capital formation and job creation: the Small Company Capital Formation Act of 2011 (H.R. 1070), the Entrepreneur Access to Capital Act (H.R. 2930) and the Access to Capital for Job Creators Act (H.R. 2940).

“While Congress’ desire to facilitate access to capital for new and small businesses is warranted, it must be sure to do so in a careful and deliberate fashion. Investors must be assured that they are protected to the fullest extent possible,” Abshure testified. “The methods of facilitating small capital formation must reasonably balance the needs of businesses with the needs of investors. To do so, Congress must ensure that the methods are available only to those entities that need it, rather than all that profit from using it.”

As an example of unintended legislative consequences, Abshure recounted the harmful impact investors have faced since 1996 when Congress preempted states from reviewing certain private placement offerings before they were sold to the public. Although properly used by many legitimate issuers, a registration exemption in SEC Regulation D Rule 506 has become an attractive option for individuals who would otherwise be prohibited from engaging in the securities business.

“Today, the exemption is being misused to steal millions of dollars from investors through false and misleading representations in offerings that provide the appearance of legitimacy without any meaningful scrutiny of regulators,” Abshure said.

He urged the panel to balance the need for investor protection with the need to help small businesses raise money. “By ignoring smart regulation and the crucial role of state securities regulators, Congress could enact policies intended to strengthen the economy that have precisely the opposite effect,” he said. “The challenge for Congress today is to find policies that achieve the right balance between the competing objectives of promoting investment in real and valid business opportunities and protecting citizens from inappropriate risk and fraudulent schemes.”

Abshure’s testimony is available on the NASAA website here.

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.

For more information:
Bob Webster, Director of Communications
202-737-0900

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