Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, April 11, 2010

Campbell on Repealing NSMIA

Dear Senator Dodd: Don't Repeal NSMIA: It Will Hurt Small Businesses and the Economy, by Rutheford B. Campbell Jr., University of Kentucky - College of Law, was recently posted on SSRN.  Here is the abstract:

As presently proposed, Section 926 of the Restoring American Financial Stability Act of 2010 (the Act) amends the National Securities Markets Improvement Act of 1969 (NSMIA) in a manner that effectively permits states and state securities administrators once again to exercise authority over securities offerings under Rule 506 of Regulation D.

Enacting Section 926 into law will hobble the legitimate capital formation efforts of our small domestic businesses. The Section will increase significantly and unnecessarily the costs of raising capital for small domestic businesses B a vital part of our national economy B by saddling them with expensive, unnecessary, and multiple regulatory regimes. Indeed, if enacted into law, the impact of the Section will be precisely contrary to one of the principal purposes of the regulatory reform in the Act, which is to ensure the flow of capital to small domestic businesses and thus provide fuel for the recovery from our recent economic crisis.

At the same time, Section 926 will provide no meaningful protection for investors from the sharp practices that caused our recent financial crisis. Presently, investors in small business offerings under federal Rule 506 are protected by tough state and federal antifraud provisions, each carrying significant civil liabilities and criminal penalties. Rule 506 also requires all investors to be either: (a) "accredited"; or (b) sophisticated and provided with the same information that they would receive in a registered offering. In many cases, therefore, investors in Rule 506 offerings actually are accorded more protection than investors in registered offerings.

As a result, subjecting Rule 506 offerings by small businesses to fifty additional state registration regimes B which will be the impact of Section 926 B adds no meaningful protection to investors. It only raises transaction costs on small business capital formation, and does so in a disproportionate, unfair and inefficient manner.

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