Why House Bills on June 22 Would Weaken Investor Protection: NASAA's Concerns

As my colleague, Massachusetts Secretary of the Commonwealth William Galvin (left), wrote in his comment letter to the committee, the language of Section 6 states that Regulation A offerings that are not sold through a broker-dealer shall not be “covered securities” under Section 18 of the Securities Act of 1933. “By implication,” Galvin wrote, “under Section 6, Regulation A offerings that are sold through a broker-dealer would be considered covered securities, and state review would therefore be preempted.”

In order to avoid any unintended limitations on the states’ ability to protect investors, NASAA has strongly urged the Committee to remove or clarify this language.

While we appreciate Congressional efforts to reduce burdensome regulation on small business, NASAA continues to believe that these efforts will not be effective if they eliminate necessary disclosure requirements or otherwise limit the states’ ability to protect investors.

While filing a registration statement and “going public” involves some expenses, much of this cost results from requirements that are necessary to ensure adequate disclosure of material information and provide sufficient investor protection. This system of disclosure ensures investor faith in the integrity of the public markets.

Currently, Regulation A blends certain elements of a registered offering and an exempt offering. It is, to some degree, a mini-public offering on a private-offering scale. It does not have all of the investor protection provisions of a typical registered offering. But as currently utilized, Regulation A does retain the investor protections contemplated by Section 3(b) of the Securities Act because of the small amount involved.

Raising the dollar limit for Regulation A exemption from $5 million to $50 million would result in the broad marketing and sale of the riskiest, most speculative securities to the least sophisticated investors.

The changes proposed by H.R. 1070 would afford small, untested companies all of the benefits of a public offering, but would strip the Regulation A exempt offerings of all investor protections. As currently drafted, this bill focuses entirely on the desires of the small business issuer and ignores the need for reasonable investor protections that are currently contained in existing law.

While NASAA understands the desire to facilitate job creation, we respectfully point out that creating exemptions from important investor protection statutes may not be the best option.