Business Compliance Partners Offers “Crowd Funding” Exemption Update

Share Article

In response to Congress and the President’s desire to promote job-growth by stimulating capital formation targeted at small businesses, the House of Representatives voted to pass, the “Entrepreneur Access to Capital Act”. The bill proposes to exempt “crowd-funding” from federal and state securities registration and filing requirements. Historically, crowd-funding has been an online fund-raising strategy that allows people to donate small amounts of money to support a project or cause.

The House bill would allow small businesses to raise up to $2 million (by providing audited financial statements) and $1 million without the audited statements. The bill would also limit investments to $10,000 per investor or ten percent of the investor’s annual income.

The Senate introduced competing legislation, “The Democratizing Access to Capital Act”, S.1791. The Senate’s bill proposes to limit offerings to a total of $1 million and individual investments to $1,000 per person per year. The Senate version of the bill also requires that businesses use an intermediary and be incorporated and subject to state laws.

Small businesses looking for investors have begun to embrace the concept, which has drawn regulatory scrutiny because it bypasses the review process of state and federal agencies that regulate investment activities.

The North American Securities Administrators Association (NASAA) voiced strong objections to the House bill because it would preempt state laws, which they believe would weaken investor protection.

In testimony before the House Financial Services Committee, Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance Bureau of Securities stated the following:

“State securities regulators have protected Main Street investors for the past 100 years, longer than any other securities regulator. State securities regulators continue to focus on protecting retail investors more so than any other regulator. Our primary goal and mission is to act for the protection of investors, especially those who lack the expertise, experience, and resources to protect their own interests. The securities administrators in your home 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.”

Although NASAA viewed the Senate version of the bill more favorably, in their opinion it didn’t go far enough. NASAA formed a committee and submitted an initial proposal that discusses which elements such a bill should contain. They include:

  •     Limiting the amount an entity can raise to $500,000 over a twelve month period
  •     Limiting individual investments to $1,000 per year, per offering
  •     Requiring that securities issuers complete a basic filing in their home state, which can be

        disseminated to other states upon request

  •     Providing a business plan with information about how the proceeds will be used and which

        discloses general investment risks

  •     Requiring that the issuer escrows investor proceeds until the goal of at least 60 percent of

        the target investment amount has been reached

  •     Barring individuals and companies that have criminal records or have violated securities

        laws from participating

In a letter to the House Finance Committee and during testimony, NASAA representatives also championed states as the primary regulator for crowd-funding. NASAA cited familiarity with local economics and responsibility to their constituents that would be targets of the offerings. NASAA also believes that the size of the offerings would make regulating crowd-funding an ineffective use of the Securities and Exchange Commission’s (SEC) time.

“Preempting state authority is a very serious step and not something that should ever be undertaken lightly or without careful consideration, including a thorough examination of all available alternatives,” Herstein said. “In the case of crowd-funding, state securities regulators are not only capable of acting, but indeed, are acting, and Congress should allow them the opportunity to continue to protect retail investors from the risks associated with smaller, speculative investments.”

NASAA reiterated their support for eliminating regulations that are overly burdensome or restrictive so that economic growth isn’t hindered. However, NASAA conveyed the need for protections and transparency in the marketplace in order to garner investor confidence, which should lead to the desired economic growth.

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Paul Cox

Chris Kosifas
Visit website