The North American Securities Administrators Association (NASAA), an organization comprised of the 50 state securities regulators, believes that the crowd funding provisions of the so-called JOBS Act are just another “Regulation D-like rip-off,” according to InvestmentNews (“Crowd funding draws scorn from NASAA,” by Mark Schoff Jr.). Regulation D provides a registration exemption for certain investments that are privately offered ? i.e., not offered by means of a general solicitation to the public at large.
Under the JOBS Act, start-ups with no track record can raise up to $1 million online annually, via a public offering, without having to register with the SEC. In addition, the Act allows so-called emerging growth companies with less than $1 billion in revenue to make public offerings with no SEC registration.
Between 2007 and 2010, securities law violations related to private (Reg D) offerings resulted in 580 state enforcement actions, and were the leading regulatory problem in 2010. Part of the reason for this is the fact that state regulators are preempted from imposing a regulatory review requirement on private (Reg D) investments before they are offered to investors. State regulators will likewise be preempted from regulating crowd funding investments. Regulation will be left up to the U. S. Securities and Exchange Commission.
But that could be a problem given lack of funding, inadequate resources and other problems at the SEC. “Based on the [Securities and Exchange Commission’s] previous track record and their limited resources, this is a mandate the agency is not in a position to fulfill and hence an investor protection disaster waiting to happen,” Jack Herstein, president of NASAA, wrote in a letter to Senators last month.
Other state regulators agree (as do some investment advisers, who cite the inherent risks of investing in unproven businesses and weak regulatory oversight). “I think it’s absolutely another Reg D,” Heath Abshure, Arkansas’ securities commissioner, was quoted as saying, adding: “What this bill potentially does is take the worst parts of Reg D, make them worse and apply them to crowd funding.”
SEC Chairman Mary Schapiro also expressed concerns about the JOBS Act, according to the article.
Unlike private (Reg D) offerings, a broker-dealer need not be involved in crowd-funding transactions, which means that there will be no reasonable-basis suitability analysis to protect investors.
“Investors are going to be bombarded with offers to invest. “There’s going to be so much noise in this marketplace that legitimate companies are not going to be heard,” Mr. Abshure was quoted as saying.
Allan Katz, president of Comprehensive Wealth Management Group LLC, reportedly described the JOBS Act as “a train wreck waiting to happen,” and further noted that investors “have a hard time seeing through the clutter, deciding what’s legitimate and what’s not. You’re not going to be able to ascertain all the risks when you’re hearing the pie-in-the-sky upside without a downside.”
One crowd-funding consultant anticipates billions of dollars in crowd funding offerings in the next 18 months, after the SEC writes the implementing regulations.
Startups reportedly will be able to get a “seal of approval” before they are placed on crowd funding portals if they submit to a background check by a due-diligence company such as the newly formed CrowdCheck Inc.
But how thorough and accurate will such due diligence be, and will all material risks and causes for concern about an investment be communicated to investors? A “seal of approval” could in itself be misleading and lull investors into a false sense of security.
Bottom line ? Investors should exercise extreme caution before investing in crowd funding ventures.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.