Earlier this week, the North American Securities Administrators Association (NASAA) issued a comment letter criticizing the Expanding Access to Capital Act (HR 2799).
This legislation was introduced into Congress last year but has yet to move forward with a Committee vote. Sponsored by the Chairman of the House Financial Services Committee, Congressman Patrick McHenry, the bill aims to improve access to financing for smaller firms and entrepreneurs while improving access to opportunities for smaller investors.
NASAA is the entity that represents state securities regulators as well as regulators in Canada and Mexico. Historically focused on investor protection, NASAA has been a consistent critic of investment crowdfunding as well as improvements to the capital formation process. The legislation is multifaceted with many different Acts largely culled from stand alone legislation. NASAA disagrees with the entire bill with the exception of a single Act.
In the letter, addressed to both Democrats and Republicans in the House, NASAA said it “strongly” opposes multiple titles in the legislation. The sections it strongly opposes include:
- Title I (the Unlocking Capital for Small Businesses Act of 2023),
- Title IV (the Small Entrepreneurs’ Empowerment and Development (“SEED”) Act of 2023),
- Title VII (the Improving Crowdfunding Opportunities Act), and
- Title VIII (the Restoring the Secondary Trading Market Act)
In brief, the above titles address the following issues:
- The Unlocking Capital for Small Businesses Act creates a safe harbor for private placement brokers and finders. Finders are individuals who can connect smaller companies in need of funding to potential investors. This is especially helpful for underserved communities that do not have a country club-type network.
- The Small Entrepreneurs Empowerment and Development Act creates a “micro-offering exemption.” This exemption allows a securities offering of $250,000 or less with some caveat’s for issuers.
- The Improving Crowdfunding Opportunities Act limits liability for funding portals with an exemption from state regulation. Funding portals, a type of broker-lite that can enable issuers to sell securities under Reg CF, would not be considered issuers unless they make an untrue statement or engage in fraud.
- The Restoring the Secondary Trading Market Act aims to make it easier for private securities issuers to trade securities off-exchange.
- NASAA stated that it opposes all of the other titles in the legislation except Division A, Title III (SEC and PCAOB Auditor Requirements for Newly Public Companies).
The sections of the bill that it simply opposes, but not strongly it seems, include:
- Remove Aberrations in the market cap test for target company financial statements
- Helping startups to grow
- Expand the protection for research reports to cover all securities of all issuers
- Exclude qualified institutional buyers (QIBs) from record holder count for mandatory registration
- Expand WKSI [well-known seasoned issuer] eligibility
- Smaller reporting company, accelerated filer, and large accelerated filer thresholds
- Small business investor capital access
- Improving capital allocation for newcomers
- Small entrepreneur’s empowerment and development
- Regulation A+ improvement (increase cap to $150 million)
- Developing and empowering our aspiring leaders
- Gig Workers’ equity compensation
- Investment opportunity expansion
- Risk Disclosure and investor attestation
- Accredited investors include individuals receiving advice from certain professionals
If you are interested in the details of the legislation, you may access it here (HR 2799) in its current form as amended.
This blanket opposition to supporting smaller businesses and entrepreneurs may be due in part to state securities regulators’ fear of relevance or diminished authority. NASAA has a history of pushing back against federal authority when it is deemed to limit state power in regard to securities. A fairly recent example is Reg A+, as updated by the JOBS Act of 2012. NASAA members sued the SEC to halt the improvements to the exemption, which was used by no one before Congress updated the exemption. While state regulators perform important anti-fraud enforcement at the state level, the letter comes across as tone-deaf to the needs of entrepreneurs and small business owners as well as the desires of smaller investors. A turf battle with Congress, trumping the needs of their constituents, perhaps.
Rebecca Kacaba, the CEO and co-founder of DealMaker – a broker-dealer providing investment crowdfunding services, shared her thoughts on the letter, lambasting NASAA. Kacaba said:
“NASAA’s opposition to HR 2799 and the Improving Crowdfunding Opportunities Act is concerning. The act serves to expand investment opportunities for everyday Americans. NASAA’s focus appears to be on state rules, rather than the identification of inadequate investor protections for Americans. As the SEC has noted, large investors have a limited focus on smaller companies, but HR 2799 provides [an improved] pathway for smaller investors to finance these businesses. This, in turn, drives job creation and economic opportunity. We continue to support the democratization of access to capital.”
While it is not immediately clear if the legislation has a viable path to make it out of the House and Senate, NASAA may be acting pre-emptively as the current leadership of the House Financial Services Committee has been more supportive of smaller firms, entrepreneurs, and smaller investors.
The NASAA Letter commenting on HR 2799 is available here.
