In a departure from its longstanding tradition of investor protection, the SEC, in its Regulation A proposal, flouts Congressional intent by seeking to preempt state authority and in so doing deprives unsophisticated investors of important protections they have enjoyed for years.
Typically, when a company seeks to raise capital by marketing securities to a broad audience, it must first register its offering with the SEC, a state (or states), or both to ensure that potential investors have adequate information upon which to make informed investment decisions and to ensure that the enterprise seeking the capital is not operating in an unjust or unfair manner. An offering may qualify for an exemption from registration if it limits the amount of funding sought and the types of investor to whom it is marketed.
One of these exemptions, Regulation A, has allowed unregistered public offerings of up to $5 million of securities in a 12-month period. Title IV of the Jumpstart Our Business Startups (JOBS) Act of 2012 increased to $50 million from $5 million the amount of money that can be raised through these offerings.
The JOBS Act recognized the strong investor protection role provided by state securities regulators in reviewing Regulation A offerings as part of the registration process. Yet in its proposed rule implementing Regulation A, the SEC ignored Congressional intent by eliminating a state’s ability to review these offerings before they are sold to the public. Unless reversed, the SEC’s proposed rule stands to harm investors as well as small and local businesses.
Four Reasons Why the SEC’s Reg A Proposal to Preempt
State Authority is Harmful to Investors and Small Businesses Alike
1. The Commission’s December 18 proposal disregards the important role of the states in regulating Reg A offerings.
State regulators have particular strengths that uniquely qualify them to effectively oversee Regulation A offerings. Because they are geographically close and accessible to investors, states are in a better position than the SEC to communicate with both small business issuers and investors to ensure that this exemption is not abused. Moreover, the states will be most familiar with the local economic factors that affect small business and states have a strong interest in protecting investors in these types of offerings.
2. The Commission’s arbitrary decision to prohibit the states from performing an important oversight role could have negative implications for retail investors.
Given the risky nature of such investments, a collaborative and complementary system of policing small size offerings would contribute to the success of the public marketplace and provide what is best for investors. Unfortunately, the SEC’s failure to recognize the essential role of the states in reviewing these offerings exacerbates the potential for fraud and abuse and undermines the investor confidence necessary to ensure that this market achieves its fullest potential.
3. States question the legal sufficiency of the proposal.
The Commission’s proposed reliance on the “qualified purchaser” definition as a means for achieving preemption is in direct conflict with Congress’ intention that “qualified purchasers” be experienced and “sophisticated” investors who can protect themselves in the financial markets.
The SEC’s proposed rule disregards Congressional intent as it bases sophistication on the type of investment rather than the qualification of the purchaser. During extensive debate of the JOBS Act, Congress considered and rejected calls to preempt states from review of Regulation A offerings.
4. The states have already developed a new coordinated review system that will ease regulatory burdens without sacrificing investor protection.
NASAA has developed a streamlined multi-state review protocols for Regulation A offerings to ease regulatory compliance costs on small companies seeking to raise capital. With the new program, Regulation A filings will be made in one place and distributed electronically to all states. Lead examiners will be appointed as the primary point of contact for a filer and each state will be given 10 business days for review. The lead examiners alone will interact with the issuer to resolve any deficiencies. Each participating jurisdiction agrees to clear the application upon clearance by the lead examiner. On January 30, the NASAA Board of Directors approved the Proposed Coordinated Review Program for membership vote. The program was approved March 7. Coordinated Review Overview | Illustrated Guide to NASAA’s Coordinated Review Program | NASAA Coordinated Review Program Protocol
Comments, Testimony & Other Resources
- Comment Letter: Nine Members of the U.S. Senate (Markey, Merkeley, Levin, Harkin, Warren, Hirono, Murphy, Boxer, Franken) (August 1, 2014)
- Comment Letter: 20 Members of Congress, including House Financial Services Committee Ranking Member Maxine Waters (D-CA) and House Financial Services Capital Markets Subcommittee Ranking Member Carolyn Maloney (D-NY) (June 3, 2014)
- Comment Letter: Chad Johnson, Bureau Chief, Investor Protection Bureau, New York State Attorney General’s Office, (May 7, 2014)
- Speech: NASAA President Andrea Seidt, NASAA Public Policy Conference (April 8, 2014)
- Speech: SEC Commissioner Kara Stein, NASAA Public Policy Conference (April 8, 2014)
- Speech: SEC Commissioner Luis Aguilar, NASAA/SEC19(d) Conference (April 8, 2014)
- News Release: NASAA Renews Call on SEC to Revise Regulation A Rule Proposal (April 8, 2014)
- Comment Letter: NASAA Comment Letter to SEC Regarding Regulation A Rulemaking (March 24, 2014)
- Comment Letter: William M. Beatty, Securities Administrator, Washington Department of Financial Institutions (March 24, 2104)
- Comment Letter: Andrew M. Hartnett, Missouri Commissioner of Securities (March 24, 2104)
- Comment Letter: Irving L. Faught, Administrator, Oklahoma Department of Securities (March 24, 2014)
- Comment Letter: William F. Galvin, Secretary, Commonwealth of Massachusetts (March 24, 2014)
- Comment Letter: William A. Jacobson, Clinical Professor of Law, Cornell Law School, and Director, Cornell Securities Law Clinic, Ithaca, New York (March 24, 2014)
- Comment Letter: Kurt N. Schacht, CFA, Managing Director, Standards and Financial Market Integrity, and Linda L. Rittenhouse, Director, Capital Markets, CFA Institute (March 24, 2014)
- Comment Letter: Barbara Roper, Director of Investor Protection, Consumer Federation of America (March 24, 2014)
- Comment Letter: John Morgan, Securities Commissioner, Texas State Securities Board (March 21, 2014)
- News Release: NASAA Members Approve Streamlined Multi-State Coordinated Review Program (March 11, 2014)
- Comment Letter: Puerto Rico Office of the Commissioner of Financial Institutions (March 5, 2014)
- Comment Letter: National Association of Secretaries of State (March 4, 2014)
- Comment Letter: Gregory Fryer, Attorney, Verrill Dana, Portland, Maine (February 28, 2014)
- Comment Letter: Janet M. Tavakoli, President, Tavakoli Structured Finance, Inc., Chicago, Illinois (February 24, 2014)
- Comment Letter: A. Heath Abshure, Past NASAA President and Arkansas Securities Commissioner (February 20, 2014)
- NASAA Leadership Letter to SEC Objecting to State Preemption of Reg A Offerings (February 19, 2014)
- Comment Letter: Jack Herstein, former NASAA President and Assistant Director of the Nebraska Department of Banking & Finance (February 10, 2014)
- Comment Letter: Mike Liles, Jr., Attorney, Karr Tuttle Campbell, Seattle, Washington (January 17, 2014)
- Comment Letter: Massachusetts Secretary of the Commonwealth William Galvin (December 18, 2013)
- NASAA Statement on SEC Reg A Proposal(December 18, 2013)
- NASAA Comment Letter to SEC Regarding Regulation A (December 13, 2013)
- NASAA Testimony: The JOBS Act at a Year and a Half: Assessing Progress and Unmet Opportunities (October 30, 2013)
- NASAA Outlines Plan for Streamlined State Review of JOBS Act-related Multi-State Offerings (October 30, 2013)
In the News
- SEC’s Stein Backs States’ Push to Police Smaller Stock Deals, Reuters (April 7, 2014)
- State regulators hire outside lawyer for dispute with SEC, Reuters (March 27, 2014)
- Reg A-Plus Would Preempt Blue Sky Laws, To Joy of Small Companies, Chagrin of States, Bloomberg BNA (February 11, 2013)
Dead firms live on as zombie stocks: New SEC regulations may unleash more pump-and-dump scams, Crain’s New York Business (February 10, 2014)
- A Campaign for Smarter Regulation, Think Advisor (November 18, 2014)