SEPTEMBER 13, 2012


Chairman Garrett, Chairman McHenry, Ranking Member Waters, Ranking Member Quigley, and Members of the Subcommittees, thank you for the opportunity to submit this statement for inclusion in the record of the joint hearing by the House Subcommittee on Capital Markets and Government Sponsored Enterprises of the Financial Services Committee and the House Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs of the Committee on Oversight and Government Reform on September 13, 2012 entitled “The JOBS Act: Importance of Prompt Implementation for Entrepreneurs, Capital Formation, and Job Creation.”

On behalf of the North American Securities Administrators Association, Inc. (NASAA), I appreciate the opportunity to share my views on the current status of implementation of the Jumpstart Our Business Startups Act (JOBS Act), including rulemakings under Titles II (General Solicitation and Advertising in Rules 506/144A), III (Crowdfunding) and IV (Regulation A+) of the Act.

NASAA was organized in 1919 and is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Canada, Mexico, Puerto Rico and the U.S. Virgin Islands. Ten securities administrators are appointed by Secretaries of State, five come under the jurisdiction of their states’ Attorneys General, some are appointed by their Governors and Cabinet officials, and others work for independent commissions or boards. NASAA is the voice of these securities agencies that are responsible for grass-roots investor protection and efficient capital formation.

Securities regulation is a complementary regime of both state and federal laws. The securities administrators in your states are responsible for enforcing state securities laws by pursuing cases of suspected investment fraud, conducting investigations of unlawful conduct, licensing firms and investment professionals, registering certain securities offerings, examining broker-dealers and investment advisers, and providing investor education programs and materials to your constituents.

Investor Protection and Job Creation

On September 21, 2011, I testified before the Subcommittee on Capital Markets and Government Sponsored Enterprises on legislative proposals to facilitate small business capital formation and job creation.1 NASAA’s message then, and now, is that the key to job creation is balancing the legitimate interests of investors with the legitimate goals of business owners through tailored regulation, and pursuing policies that are fair to both. In other words, successful capital formation policies must protect investors while encouraging entrepreneurs in a manner that best serves the public interest. Although the JOBS Act is now law, NASAA’s desire to see this balance implemented continues to guide our comments to the U.S. Securities and Exchange Commission (SEC) on JOBS Act rulemakings.

NASAA has had a long history of working closely with the SEC to effect greater uniformity in Federal-State securities matters, including meeting annually as required by section 19(d) of the Securities Act of 1933. To facilitate this cooperative relationship in regards to implementation of the JOBS Act, NASAA has established a four-person team to serve as its primary point of contact with the SEC. This team consists of myself, Jack Herstein, NASAA past-President and Assistant Director of the Nebraska Department of Banking and Finance; Steve Irwin, NASAA President-elect and Chairman of the NASAA Federal Legislation Committee, and Pennsylvania Securities Commissioner; and Rick Fleming, NASAA Deputy General Counsel.

State securities regulators have a direct interest in implementation of the JOBS Act. Although NASAA has argued that state securities regulators, who routinely provide assistance to small businesses as well as investors, should have been given the responsibility by Congress for developing the regulatory framework for crowdfunding and other provisions of the JOBS Act, the states are committed to working with the SEC, and the Financial Industry Regulatory Authority (FINRA),2 to develop a responsible regulatory framework for implementation of the Act.

NASAA Comments on Implementation and Rulemaking under the JOBS Act

Section 302(c) of the JOBS Act directs the SEC to consult with state securities regulators who seek consultation in connection with the rules to be adopted under Title III (i.e., Crowdfunding) of the JOBS Act. By letter dated May 10, 2012, NASAA notified the SEC of the states’ desire to consult with the SEC in the development of the crowdfunding rules, as well as the rules under Titles II and IV involving general solicitation and advertising in Rules 506 and 144A and the new “Regulation A+.”

Title II: General Solicitation and Advertising in Rules 506 and 144A

With regards to Title II, the states have a strong interest in the SEC’s rulemaking in this area as states are often primarily responsible for policing these offerings in order to deter fraud. Title II allows issuers relying on Rule 506 to conduct general solicitation and advertising. It also requires that issuers take reasonable steps to verify that “purchasers” are accredited investors, and the states are interested in ways that the verification may take place without being an undue burden on the capital raising process. The states are also concerned about the activities of advertising platforms, which the new changes allow, as well as the overall impact of increased internet offerings of privately placed securities.

NASAA realizes that the JOBS Act contains a 90-day limit for the changes to Rule 506, and we appreciate the urgency of the SEC to act quickly. However, the amendments that many proponents of the changes to Rule 506 would suggest are neither simple nor straightforward, and the SEC must grapple with very complex issues in its rulemaking. For example, the SEC must establish what it means for an issuer to take reasonable steps to verify that all purchasers are accredited, and the SEC will need to provide clarity in articulating the scope of ancillary services and compensation that are permissible for unregistered platforms. The SEC should also make changes to the Form D and its filing requirements. If the Title II rules are not carefully drafted to consider the effect of general solicitation and advertising on the market, they could facilitate the undesired effect of decreasing investor confidence, subjugating the overall intent of the JOBS Act. Further, if the rules lack clarity, they will lead to litigation between state regulators and issuers, and judges will ultimately be required to provide greater clarity.

Moreover, we note that many of the rulemakings required by the Dodd-Frank Act are long overdue. We have encouraged the SEC to prioritize its investor-protection rules ahead of the exemptions in the JOBS Act, and we urge Congress not to pressure the SEC to act hastily, especially where ill-considered changes could have a devastating impact on the delicate balance between investors and industry.

As the closest regulators to the investing public, state securities regulators see first-hand the dangers investors face when legislation is not implemented in a careful and deliberate fashion. In the case of Rule 506, state regulators have seen over the last decade a dramatic increase in reliance on the exemption by unscrupulous promoters. By way of background, state securities regulators who routinely screened bad actors from raising money through private securities offerings were stripped of their authority in 1996 when Congress passed the National Securities Markets Improvement Act (NSMIA). Since then, use of the securities exemption found in Rule 506 has increased significantly as has incidences of fraud and abuse. In 2010, for example, states brought more than 250 enforcement actions for fraudulent Rule 506 offerings, and in 2011, states brought more than 400 enforcement actions. In fact, these private placement offerings have been identified by NASAA as a top trap facing investors in the last several years. Because the SEC performs only a limited review of these offerings3 and states have been preempted from conducting a regulatory review, Rule 506 has been used to take advantage of unsuspecting and unsophisticated investors.

Given the complexity of the issues involved in the changes to Rule 506, plus the enormous impact those changes will have on how these risky investments will be offered, we strongly urge the SEC to craft rules that reflect a balanced regulatory approach—providing sufficient guidance to issuers and intermediaries while protecting investors from fraud and abuse. Similarly, we have urged the SEC to follow the standard rulemaking process by publishing for comment the specific proposed rules and not adopting an interim rule. Failure of the new rule to strike the proper balance between  capital formation and investor protection will be very damaging to the investing public and, ultimately, to the legitimate issuers who need investors. We realize that the SEC could have adopted an interim rule with a subsequent comment period, but we are highly doubtful of the SEC’s ability to make any significant revisions to a temporary rule once in place, especially a temporary rule with overly broad exemptive provisions.

We also remind Congress that the SEC has an obligation to conduct a cost-benefit analysis of the rule changes. Although we do not believe that regulatory decisions based strictly upon costs and benefits necessarily yield the right results, the SEC should apply the same standards to an exemptive rulemaking that it applies to other rules that are less popular with the business community.

A proper analysis of costs and benefits would require that the SEC defer action until comments are received on proposed changes to Rule 506. In this particular rulemaking, the SEC’s evaluation of “costs” must include the losses sustained in low-quality investments that are marketable under the newly-expanded Rule 506 but would never have been sold successfully in a registered offering that required full disclosure. The costs must also include the amount investors will lose in fraudulent offerings as a result of the changes to Rule 506. For example, the Justice Department recently indicted two executives of Provident Royalties LLC in connection with a $485 million fraud against 7,700 investors in private placements. Unfortunately, the number of frauds and the amount of damages can be expected to increase when it becomes easier to solicit victims under Rule 506.

Title III: Crowdfunding

As the voice of state securities regulators, NASAA has a special interest in the rules governing crowdfunding issuers and intermediaries. State securities regulators work closely with small businesses in their capital formation efforts and want those businesses to be successful in raising money through crowdfunding or other methods so they can thrive and produce jobs. However, we are keenly aware that capital formation requires confident investors who are adequately protected. Thus, NASAA believes that crowdfunding, to be successful, requires a balanced regulatory approach that minimizes unnecessary costs and burdens on small businesses while protecting their investors from fraud and abuse. Further, given the potential for huge numbers of unsophisticated investors to participate in crowdfunded offerings and the lack of regulatory oversight of these public offerings, we believe it is imperative for the SEC and FINRA to protect investors by establishing high standards for issuers and funding portals, or intermediaries.

Internet-based offerings through crowdfunding cannot be done efficiently unless the rules are uniform from state to state. NASAA has previously asserted that Congress could have chosen to use federal preemption only in the case of states that failed to adopt a NASAA model rule, thus allowing states to adopt uniform rules. Congress chose, however, to preempt the states from regulating crowdfunding issuers thus retaining only the states’ antifraud, post-sale enforcement authority. Although Section 305 of the JOBS Act preserves the authority of a crowdfunding intermediary’s home state to conduct examinations of resident intermediaries, state rules cannot exceed the federal
requirements, thus putting state governments in the position of enforcing federal laws from which they may not deviate.

With respect to Title III of the JOBS Act, NASAA has submitted preliminary comments to the SEC urging it to adopt specific disclosure requirements for crowdfunding issuers.4 We also made recommendations for the types of investor education materials that intermediaries should be required to use. For example, we have encouraged that investor education materials include information about the risks inherent in small and start-up companies, or companies that may be seasonal in nature or impacted by the overall economy. In fact, NASAA has provided to the SEC a sample one-page document that discloses the general risks of crowdfunding in plain English. At a minimum, we suggest that investors be required to “click through” these materials and correctly answer a series of specific questions controlled by the SEC.

Finally, we have given the SEC specific suggestions related to financial statements, background checks, escrow requirements and several other issues. Although the JOBS Act does not clearly delineate the SEC’s and FINRA’s rulemaking authority, NASAA has also offered several proposals to FINRA assuming that the SEC will grant FINRA relatively broad authority to establish rules for crowdfunding intermediaries. NASAA supports efforts to establish a rational regulatory framework for crowdfunding as long as it represents a reasonable balance between the needs of small business issuers and the protection of the investors who will fund those businesses. We look forward to working with the SEC, FINRA, or any other appropriate organization, on making recommendations for these rulemakings as the process moves forward.

Title IV: Regulation A+

Title IV of the JOBS Act requires the SEC to adopt a rule to provide an exemption for certain offerings up to $50 million. Because of its similarity to the current exemption under Regulation A, which is capped at only $5 million, this new exemption is commonly referred to as Regulation A+. These offerings, which are exempt from SEC registration under the new Section 3(b)(2) of the Securities Act of 1933, will be subject to review by the states.

The existing Regulation A was designed before the advent of the internet for small companies raising a limited amount of capital, so the offerings tended to be localized. It remains to be seen whether the new Regulation A+ will be used with any greater frequency than the old Regulation A, especially considering the new alternative of crowdfunding and the expanded Rule 506. To the extent that Regulation A+ is used, however, the increase in the cap from $5 million to $50 million will mean that the offerings are more broadly disbursed.

NASAA plans to develop and propose to its members for adoption a uniform system of review that will strike a careful balance between the interests of capital

formation and investor protection. NASAA has begun discussions with interested groups, such as the American Bar Association, to determine how Regulation A+ can achieve the most reasonable balance necessary in order to achieve its full potential. This includes the development of an electronic filing system that could accommodate multistate Regulation A+ offerings. NASAA recognizes that it is critically important for the federal and state requirements – especially the required disclosure document – to be in sync. Issuers and investors will be served best if the SEC exemption and the NASAA model rule are closely aligned. NASAA has asked the SEC to work closely with it in the development of this new exemption so that the federal framework will coordinate effectively with the state-level filing and review process for these offerings.


There is no question that small business capital is vital to our economy. However, implementation of legislation designed to foster the flow of capital to small businesses must be done responsibly and carefully. States, as the primary regulator of small business offerings, have a direct interest in the SEC’s rulemaking and implementation of the JOBS Act. We look forward to working diligently, and in a timely manner, with the SEC to recommend rulemakings that maintain appropriate investor protections while encouraging the growth of capital formation. Thank you, Chairman Garrett and Chairman McHenry, for the opportunity to submit this written statement.


1 Testimony on “Legislative Proposals to Facilitate Small Business Capital Formation and Job Creation” by A. Heath Abshure: Hearing before the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Committee on Financial Services (Sept. 21, 2011), available at Many of the proposals that were the focus of the hearing were subsequently enacted as part of the JOBS Act.

2 NASAA is working FINRA on rules governing crowdfunding intermediaries. 

3 Each year, more than 20,000 private offerings are filed with the SEC. According to the SEC’s Office of the Inspector General (OIG), in 2008 issuers sought to raise more than an estimated $609 billion from investors through Regulation D, Rule 506 offerings. The same report concluded that the agency does not give these offerings a substantive review. The SEC’s own internal watchdog found that the agency’s Division of Corporation Finance “does not generally take action” when it learns that issuers have failed to comply with the requirements of the Regulation D exemptions. 

4  See

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