Citing investor protection concerns, US Senator Elizabeth Warren (D-MA) suggested an amendment that would restrict state "blue-sky" law preemption to offerings of securities that qualify for listing on a national securities exchange or that are sold only to "qualified purchasers."
It hurts me to say it because I am such a big fan, but Senator Warren may be missing the big picture with her criticism of portions of the JOBS Act, which she reiterated recently during a hearing of the US Senate Banking, Housing, and Urban Affairs Committee.
Senator Warren made her comments during a little noticed executive session of the committee held last week to allow members to mark up five modest securities bills under consideration. She urged the committee to consider overturning the Securities and Exchange Commission's rule under Title IV of the Jumpstart Our Business Startups (JOBS) Act of 2012 that preempts state securities regulations for certain offerings under Regulation A. Prohibiting states from regulating and reviewing these offerings occurring within their borders, she says, could jeopardize consumer protections.
However, qualifying securities at the state level duplicates the SEC’s thorough review process, which is designed to safeguard investors. Preempting state regulations significantly reduces the cost and complexity of conducting public securities offerings under Tier 2 of the updated Regulation A, commonly referred to as Reg A+. Federal preemption of state laws under Reg A+ has been hailed as one of the most progressive of the many changes in securities regulation brought about by the JOBS Act, which was designed to encourage the growth of startups and emerging companies.
The SEC rule has not been without controversy. The agency's liberal interpretation of the preemption law has been challenged twice in court by state securities administrators, but the rule survived both actions.
Senator Warren would restrict state law preemption to securities that qualify for listing on a national securities exchange or that are sold only to "qualified purchasers," as defined under the Investment Company Act of 1940 -- essentially, persons who own at least $5 million in investments.
Most companies using Reg A+ are earlier-stage companies that would not meet the listing standards of a national exchange and may only attract small investors. And that would mean if Senator Warren’s amendment passes, they could be required to undergo the rigorous, time-consuming and expensive state regulatory process in order to raise capital, and that would defeat the purpose of the JOBS Act.
Senator Warren's concerns over investor protection follows a recent speech by SEC Commissioner Kara Stein in which she too expressed concerns about investor protection in the wake of the JOBS Act, in this case, regarding sales of securities through crowdfunding. Commissioner Stein specifically identified online funding portals' role as "gatekeepers" and the use of Simple Agreements for Future Equity (SAFE) securities in crowdfunding offerings as issues to watch over.
The JOBS Act represents a monumental deregulation of public securities offerings. For the first time in the history of federal securities regulation, entrepreneurs may conduct certain kinds of public offerings without registration with the SEC. We must exercise these new liberties responsibly. The JOBS Act has already spawned new forms of securities solicitations that incorporate the creativity of Madison Avenue (or its cyber equivalent). De riguer two- or three-minute videos sometimes rival Hollywood movie trailers. Congress and the SEC will monitor these new offering techniques closely in the months to come and hopefully allow the new paradigm to unwind, at least until the next Bernard Madoff or Enron catalyst causes the regulatory pendulum to reverse course.
(This article was originally published on LinkedIn here)
Mark Hiraide is a partner of Mitchell Silberberg & Knupp LLP and was an attorney with the SEC's Division of Enforcement and Division of Corporation Finance. He is the author of Thomson Reuters' Crowdfunding: Practical Guide on the SEC's Final Rules for Raising Capital and the legal treatise, Representing Start-Up Companies. In December 2016 and February 2017, he published a primer on the JOBS Act for the Los Angeles Lawyer Magazine.
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