State Securities Regulators to Explore Steps to Help Small and New Businesses Raise Investment Capital

Download: NASAA Letter to House Financial Services Committee Leadership

WASHINGTON (October 24, 2011) – The North American Securities Administrators Association (NASAA) today announced the formation of a committee to examine and propose steps that state securities regulators can take to help small and new businesses raise investment capital.

The Small Business Capital Formation Committee, which meets this week, is chaired by Arkansas Securities Commissioner A. Heath Abshure, who also serves as chair of NASAA’s Corporation Finance Section, said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance Bureau of Securities.

“The committee’s first priority will be to examine various initiatives to facilitate capital formation, including a possible model rule that state securities regulators may adopt to responsibly encourage small business capital formation through crowdfunding,” Herstein said.

Crowdfunding is an online fund-raising strategy that began as a way for the public to donate small amounts of money to help advance a project or cause. The concept also is being used increasingly by small businesses and start-ups looking for investors. Herstein said the committee is expected to report specific recommendations to NASAA’s Board by early next year regarding crowdfunding and other small business capital formation initiatives.

The announcement of the new NASAA committee comes as the House Financial Services Committee is considering measures to stimulate the economy and promote job creation. On October 26, the Committee is scheduled to vote on one proposal, the Entrepreneur Access to Capital Act, H.R. 2930. This bill would deregulate crowdfunding by removing basic federal and state registration filing requirements and would allow businesses to raise up to $5 million from an unlimited number of investors through a crowdfunded offering.

“By prohibiting state securities regulators from being notified and reviewing investment opportunities before they are offered to the public, this bill will weaken investor protection,” Herstein said of H.R. 2930. “Con artists will undoubtedly flock to crowdfunding websites, lured both by the increased dollar amount of investments and the fact that a tough cop has been taken off the beat.”

In an October 21 letter, Herstein urged the Financial Services Committee’s leadership not to take a “rash and premature action” by enacting a blanket federal preemption of the authority of the states to protect their constituents by regulating crowdfunding.

“State securities administrators share the Committee’s goal of promoting small business capital formation and job-growth, including exploring the establishment of a framework that might facilitate the harnessing of investment capital online through techniques like crowdfunding,” Herstein wrote. “At the same time, NASAA believes it is vital that any such framework be crafted carefully and deliberately, as the potential for fraud in this area is real and potentially enormous.”

“Preempting state authority is a very serious step and not something that should ever be undertaken lightly or without careful consideration, including a thorough examination of all available alternatives,” Herstein said. “In the case of crowdfunding, state securities regulators are not only capable of acting, but indeed, are acting, and Congress should allow them the opportunity to continue to protect retail investors from the risks associated with smaller, speculative investments.”

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

Current Headlines, Newsroom