Securities Law Prof Blog

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

Tuesday, October 25, 2011

NASAA Expresses Opposition to Congressional Crowdfunding Exemption

NASAA announced the formation of a committee to examine and propose steps that state securities regulators can take to help small and new businesses raise investment capital and went on record as opposed to a "crowdfunding" bill that has been introduced in Congress that would preempt state regulation.  NASAA President Herstein said the committee is expected to report specific recommendations to NASAA’s Board by early next year regarding crowdfunding and other small business capital formation initiatives.

The announcement of the new NASAA committee comes as the House Financial Services Committee is considering measures to stimulate the economy and promote job creation. On October 26, the Committee is scheduled to vote on one proposal, the Entrepreneur Access to Capital Act, H.R. 2930. This bill would deregulate crowdfunding by removing basic federal and state registration filing requirements and would allow businesses to raise up to $5 million from an unlimited number of investors through a crowdfunded offering.

“By prohibiting state securities regulators from being notified and reviewing investment opportunities before they are offered to the public, this bill will weaken investor protection,” Herstein said of H.R. 2930. “Con artists will undoubtedly flock to crowdfunding websites, lured both by the increased dollar amount of investments and the fact that a tough cop has been taken off the beat.”

In an October 21 letter, Herstein urged the Financial Services Committee’s leadership not to take a “rash and premature action” by enacting a blanket federal preemption of the authority of the states to protect their constituents by regulating crowdfunding.

“State securities administrators share the Committee’s goal of promoting small business capital formation and job-growth, including exploring the establishment of a framework that might facilitate the harnessing of investment capital online through techniques like crowdfunding,” Herstein wrote. “At the same time, NASAA believes it is vital that any such framework be crafted carefully and deliberately, as the potential for fraud in this area is real and potentially enormous.”

“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 crowdfunding, 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.”

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