Securities regulators warn of an “investor protection disaster”, as they say new legislation to enable “crowdfunding” in the U.S. will, in fact, enable scam artists.
The North American Securities Administrators Association said that by passing the Jumpstart Our Business Startups Act, known as the JOBS Act, on Thursday, “Congress and the White House have sacrificed investor protection.”
“The JOBS bill the President signed today is based on faulty premises and will seriously hurt all investors by either eliminating or reducing transparency and investor protections. It will make securities law enforcement much more difficult,” said Jack Herstein, NASAA president and assistant director of the Nebraska Department of Banking and Finance, Bureau of Securities.
“Investors need to prepare themselves to be bombarded with all manner of offerings and sales pitches. Congress has just released every huckster, scam artist, and small business owner and salesman onto the internet,” he added.
NASAA is particularly concerned about portions of the bill that require the U.S. Securities and Exchange Commission to establish a registration exemption for so-called “crowdfunding”, which allows firms to raise small amounts of money from a large number of investors. NASAA says that issuers that use the crowdfunding exemption will be required to disclose a minimal amount of information to the SEC, and state securities regulators will be prevented from reviewing or registering securities sold under the exemption in their states.
The state securities regulators say they do not object to the concept of crowdfunding. Their objection is with the provision that prevents them from having a role in regulating these offerings, leaving it entirely to the SEC.
“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.”
“The notion of crowdfunding as originally conceived is a relatively innocuous way to promote creativity,” said Steve Irwin, chairman of NASAA’s Committee on Federal Legislation and Pennsylvania Commissioner of Securities. “But the crowdfunding exemption enacted in the JOBS Act is rife with risk, not only for the investors who think they are getting on the ground floor of the next Google or Facebook, but for the countless targets of unscrupulous con artists playing on the unsophisticated, gullible, and vulnerable.”
“By preempting states, the JOBS Act takes the handcuffs away from state regulators and puts them on us,” Irwin added. “Although intended to stimulate the economy, if recent history is any guide the JOBS Act may once again show how hasty and unreasonable deregulation often leads to disastrous results.”
NASAA also expressed skepticism about the legislation’s ability to create new jobs and stimulate the economy, questioning its underlying assumption that burdensome regulations are inhibiting investment in small business and stifling job growth.