A last-minute effort by three senators to add what they call crucial investor protections to a bill designed to help small companies raise capital fails to address worries by state regulators that states will be prevented from reviewing securities offerings made over the Internet.
The result will be a problem that rivals the investor harm caused by the collapse of private placements, according to Jack Herstein, president of the North American Securities Administrators Association and assistant director of the Nebraska Department of Banking and Securities.
Under a law passed in the mid-1990s, states cannot review so-called Regulation D offerings before they're made.
“What a disastrous mess those have been,” Mr. Herstein said. “I don't believe you want to repeat history. Pre-empting the state out of securities law is a very serious matter — and it shouldn't be taken lightly.”
The issue will come to a head next week, when the Senate is scheduled to take up the Jump-start Our Business Startups Act. The measure passed the House, 390-23, and contains several bills that would loosen Securities and Exchange Commission registration requirements for fledgling companies.
One of the provisions would allow entrepreneurs to raise money online, up to $1 million in increments no bigger than $10,000, without having to register with the SEC.
The ceiling would be increased to $2 million for firms that provided audited financial statements. Under the bill, a company raising money would have to notify the SEC but would not have to register there or with any state.
Proponents of so-called crowd funding say that it would open the financing spigots for startup companies by allowing them to solicit investors over the Internet and through social media. Skeptics say that crowd funding could foster fraud.
Sens. Jack Reed, D-R.I., Carl Levin, D-Mich., and Mary Landrieu, D-La., will offer an amendment Tuesday that they assert will bolster investor protections — in part by requiring crowd-funding websites to register with the SEC.
But in a letter to Mr. Reed released Friday, NASAA said that the amendment exacerbates the problem because it cuts the states out of regulating both crowd-funding securities and the investor portals.
“In fact, our concerns over pre-emption have increased,” the NASAA letter states. “The bulk of the post-sale, anti-fraud enforcement responsibility will fall to the states, which could lead to an enforcement nightmare. States should not be prevented from conducting an effective pre-offering review by requiring those who sell these securities to disclose basic information about their company, their officers, their financial condition, etc.”
The senators say they are trying to improve a bill that once
looked as if it would die in the Senate but recently has gained strong momentum. In a March 13 letter to the Senate Banking Committee, SEC Chairman Mary Schapiro warned that the legislation should be “modified to improve investor protections.”
“The House legislation fails to strike a balance between capital formation and investor protection,” Mr. Reed said in a conference call with reporters Thursday. “You can't have one without the other.”
If investors lack proper information, “markets are less markets and more casinos,” Mr. Reed added.
It's unclear how many supporters the Democratic senators will be able to find. They need 60 to overcome a filibuster of their amendment — or 41 votes to block the House bill from a final Senate vote.
“A lot is going to depend on what happens in the next few days,” Mr. Levin said in Thursday's conference call. “This thing has been moving very quickly.”
Senate Majority Leader Harry Reid, D-Nev., decided to take up the House bill rather than a Democratic substitute — an unusual approach that reflects both parties' desire to be seen as supporting job creation during an election year. The House measure has been endorsed by the Obama administration.
“We haven't given up hope,” Mr. Herstein said. “The door might slightly be open to change some minds.”
Crowd-funding advocates also will keep up the pressure.
“The next Google, Facebook, Apple or Amazon could be funded thanks to crowd-funding legislation, and that would be a great thing for our economy,” Google stated on its public policy blog.
