NASAA says current legislation could put investors at risk for fraud; GOP, Dems, White House all back the bill
A bill that would allow small businesses to raise capital in tiny increments over the Internet has garnered an unusual trifecta of support across the partisan divide in Washington — nearly every House Republican and Democrat voted Thursday for the measure, which the White House also has endorsed.
That means that the North American Securities Administrators Association now must turn to the Senate to try to make changes in the bill that it says are crucial to protecting retail investors from risky, speculative offerings.
The legislation, which was approved by the House, 407–17, promotes so-called online “crowd-funding.” Companies can pool up to $1 million without registering with the Securities and Exchange Commission. They can accumulate up to $2 million, if they provided audited financial statements to investors, who can contribute up to $10,000 or 10% of their annual income.
The House also overwhelmingly approved a bill that would allow small companies to solicit investors through advertisements.
It's not clear when or how the Senate will take up the crowd-funding measure. Senate Banking Committee Chairman Tim Johnson, D-S.D., is taking a cautious approach to the House bills that would reform SEC registration.
“Chairman Johnson believes it is important to strike a balance that helps ensure small businesses have adequate access to capital while at the same time providing appropriate levels of investor protection," said spokesman Sean Oblack in a statement. "He is taking a close look at the legislation and is considering a hearing on a number of bills addressing access to capital that could help spur job creation.”
Supporters of the crowd-funding bill asserted that it would boost the economy by giving entrepreneurs greater access to capital.
Average investors would have “the opportunity to have an equity stake in their favorite company … not just the high-net-worth individuals or accredited investors,” the bill's author, Rep. Patrick McHenry, R-N.C., said during the House floor debate. “We take the best of microfinance and crowd-sourcing and combine them in this bill.”
But in a letter to House leadership Thursday, just before the bill hit the House floor, NASAA said that the legislation would prevent state regulators from reviewing offerings before they're made to the public.
“If this legislation is enacted in its present form, it will prohibit states from enforcing laws designed to minimize the risks to investors,” wrote NASAA President Jack Herstein, assistant director of the Nebraska Banking Department and Finance Bureau of Securities. “As currently written, [the bill] would only allow states to address investor losses after they occur.”
The state regulators' organization now will make that case on the other side of Capitol Hill. The crowd-funding legislation is one of more than 20 measures that House leaders are prodding the Senate to pass.
“The bills approved tonight will make it easier for small businesses and start-ups to access the resources they need to expand and hire new workers, and will foster a better environment for private-sector job creation and long-term economic growth,” House Speaker John Boehner said in a statement. “I urge President Obama to call on the Democrat-controlled Senate to quickly vote on these and the rest of the House-passed jobs bills still awaiting action.”
One of those bills, a measure that also received a strong bipartisan House vote, would eliminate a 3% withholding tax on government contractors. It is slated for Senate action next week. President Barack Obama's backing increases the chances that the Senate might also take up the crowd-funding bill.
When it does, NASAA likely will try to get it amended so that state regulators can review securities offerings before they are launched on social networks. Under the bill, the business soliciting the investments must notify the SEC, which in turn notifies the states.
An amendment to the bill clarified that states would have full authority to prosecute fraud related to crowd funding. But skeptics were not satisfied with that change.
“The amendment takes a step in the right direction … but it doesn't take a step far enough in the right direction because the amendment still pre-empts states from having the pre-review of these offerings that they now have,” said Rep. Melvin Watt, D-N.C.
Relief from state registration, however, is critical to facilitating crowd funding, according to the bill's author.
“When it costs $150 to register a security in Connecticut, and all you're trying to do is raise $150 from Connecticut, you net zero,” Mr. McHenry said.
The debate between the North Carolina lawmakers highlighted the central role the state is playing on the crowd-funding bill. David Massey, deputy securities administrator in North Carolina, is the most recent former president of NASAA.
