NASAA: The JOBS Act an Investor Protection Disaster Waiting to Happen
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Legislation Remains Fundamentally Flawed Product of Rush to Legislate
WASHINGTON (March 22, 2012) – Congress and the White House have sacrificed investor protection for politics and are in danger of repeating a legislative mistake that has allowed promoters of fraudulent securities offerings to steal millions of dollars from investors since 1996, the North American Securities Administrators Association (NASAA) said today.
“The JOBS Act passed today by the Senate remains the fundamentally flawed product of a rush to legislate. It ignores the united and urgent pleas of leading national consumer and investor advocates not to roll back critical investor protections,” said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance, Bureau of Securities.
“This legislation will needlessly expose Main Street investors to greater risk of fraud by creating new jobs for promoters of Internet investment scams. Unfortunately, many investors may be harmed before this mistake is corrected,” Herstein said.
Herstein’s comments followed the approval of the Senate’s amended version of the “Jumpstart Our Business Startups (JOBS) Act” (H.R. 3606), which was approved earlier this month by the House of Representatives. The amended legislation has been sent back to the House.
“Election-year politics have blinded Congress and the White House to the unintended consequences of their actions, which however well intentioned could open the floodgates to investment fraud,” Herstein said.
“NASAA appreciates the efforts of those in the Senate who attempted to strengthen investor protections in certain areas. But we are deeply troubled that this bill fails to correct the oversight gap in the House-passed legislation by needlessly preempting states from reviewing crowdfunding offerings before they are sold to investors,” Herstein said. Crowdfunding is an Internet-based fundraising technique promoted by the White House as a new tool for raising money for small and startup businesses.
“Preempting state authority is a very serious step and not something that should be undertaken lightly or without careful deliberation, including a thorough examination of all available alternatives. In its quest for deregulation, the Senate rushed to judgment.” Herstein said. “In 2004, the Bush Administration preempted numerous state consumer financial protection laws in order to facilitate greater ‘financial innovation,’ especially in mortgage lending. Most of us remember how that experiment ended, but it seems that Congress has already forgotten.”
State securities regulators do not object to the concept of crowdfunding, Herstein added, noting that NASAA has since last year been working on a model rule that would permit crowdfunding while preserving a state’s ability to prevent scam artists from exploiting Main Street investors.
“Lacking adequate funding, the SEC has neither the resources nor the time to effectively police these relatively small, localized securities offerings before they are sold to the public,” Herstein said. “As a result, crowdfunding offers are likely to receive little regulatory scrutiny until after a fraudulent sale has been committed. This is an investor protection disaster waiting to happen.”
Herstein said Congress made a similar mistake in 1996 with the passage of the National Securities Markets Improvement Act (NSMIA), which preempted state authority to review private offerings made under Securities and Exchange Commission Regulation D Rule 506 and created a regulatory “black-hole” by entrusting the SEC to police these offerings.
“Since NSMIA, the provisions of Rule 506 and other limited or private offering provisions are being used by unscrupulous promoters to evade review and fly under the regulatory radar with little scrutiny by the SEC,” Herstein said. In a 2009 report, the SEC’s Office of the Inspector General concluded the agency does not give these offerings a substantive review and “does not generally take action” when it learns that issuers have failed to comply with the requirements of the Regulation D exemptions.
State enforcement records show that these offerings are the most frequent source of enforcement cases handled by state securities regulators. In the past three years, state securities regulators have reported 580 enforcement actions involving Regulation D Rule 506 offerings, according to NASAA’s 2011 enforcement survey.
“Under current law, states can only take action after a fraudulent sale is made. That’s little comfort to an investor whose money has been stolen,” Herstein said. “The Senate missed an opportunity to avoid making the same mistake with crowdfunding. Instead of preempting states, Congress should allow the states to take a leading role in implementing an appropriate regulatory framework for crowdfunding,” Herstein said.
“Expanded access to capital markets for startups and small businesses can be beneficial if done reasonably and only if investors are confident that they are protected, that transparency in the marketplace is preserved and that investment opportunities are legitimate,” Herstein said. “States are the only regulators in a position to effectively police the small emerging crowdfunding market and protect its participants.”
Organized in 1919, the North American Securities Administrators Association (NASAA) is the oldest international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.