New laws that ease restrictions on raising money for small, private companies could come back to bite the securities industry.
That was the assessment of Arkansas Securities Commissioner Heath Abshure, who spoke on Thursday morning in Austin, Texas, at a conference of plaintiffs attorneys.
Top-of-mind among state securities regulators was the new crowdfunding law, said Mr. Abshure, who was speaking on a panel at the annual Public Investors Arbitration Bar Association. Broadly, crowdfunding — enshrined in the Jumpstart Our Business Startups Act — allows small, private companies to sell equity directly to investors.
A crowdfunding equity raise can have an unlimited number of investors but it can raise only $1 million.
How clients eventually hold these private, illiquid securities could turn into a big problem for broker-dealers in the near future, Mr. Abshure said.
“Broker-dealer clients will buy these shares, not from the broker-dealer but directly” from the seller, he said. “Clients will return to the broker-dealer and say, 'I want to put this in my account, and perhaps borrow against it.' ”
In addition, changes in reporting standards for such securities have the potential to keep investors in the dark, Mr. Abshure said.
“Companies will stay private, and information will be in the dark,” he said.
With an explosion of private placements and crowdfunding, companies will stay smaller longer and more people will hold these securities, Mr. Abshure said.
“Exchanges could develop with trading of companies that lack public information,” he said. That creates opportunities for insider trading based on volume, not real data, he added.
According to the panel, the North American Securities Administrators Association sees a series of new threats to investors. Those include crowdfunding and Internet offers, scam artists using self-directed IRAs to mask fraud, and Visa schemes.
Mr. Abshure is the new president of NASAA.
Persistent threats include gold and precious metals, risky oil and gas drilling programs, promissory notes, real estate investment schemes, Reg D/Rule 506 private offerings and unlicensed salesman giving liquidation recommendations, according to NASAA.