Sherwood Neiss, founder of Crowdfund Capital Advisors (CCA), has submitted a statement to the Securities and Exchange Commission’s Small Business Capital Formation Advisory Committee (SBCFAC) advocating for improvements to secondary markets for crowdfunded securities. At the same time, Neiss has sent a letter to the House Committee on Financial Services, sharing a statement supporting secondary transactions.
Recently, the House Financial Services Committee advanced legislation, the Restoring the Secondary Trading Market Act (HR 7127h), that would exempt off-exchange secondary trading from state regulation. The bill would impact Regulation A and Regulation CF.
In the future, as these exemptions may be used for digital securities, it could also help address tokenized securities trading.
The SBCFAC has scheduled a meeting for later this month to discuss secondary markets in private securities, alongside a discussion on Finders.
According to the agenda, the SBCFAC describes the panel:
“As the IPO and M&A markets have shifted, the private secondary market has grown to fill liquidity needs and meet investor demand. Continuation funds are becoming more prevalent, and the rise of special purpose vehicles allows LPs, VCs, and other strategic investors to find exits and rebalance their portfolios through the private markets. Additionally, startups are using private tender offers to attract/retain talent. Committee members will hear from experts and industry participants in this space to better understand the data, deal flow drivers, trends, opportunities, and challenges that stem from the growth and normalization of private secondary transactions.”
While providing improved liquidity for investors, thus enabling an exit other than a merger, acquisition, or initial public offering event is good for everyone, some observers spread fear, uncertainty, and doubt in an attempt to block a common-sense approach to secondary transactions.
A prime example is the North American Securities Administrators Association (NASAA), the lobbying group representing state financial regulators.
In a recent letter, NASAA declared that changes to secondary market rules would not address “Issues such as share transfer inefficiencies and issuer rights of first refusal persist independent of state regulation. Further preemption of state authority, without addressing these underlying issues, is unlikely to meaningfully improve secondary market activity.”
Neiss counters this claim, explaining that “less than 1% of Regulation Crowdfunding (Reg CF) issuers have achieved meaningful secondary liquidity.”
“Yet the retail investors who took the earliest risk—often at the lowest valuations—remain trapped. They cannot sell into these higher valuations. They cannot realize the gains they created on paper. The infrastructure does not exist. This is not a story of failure. It is a story of success that retail investors cannot access. NASAA’s claim that “existing exemptions already provide multiple pathways” may apply to raising capital. It does not apply to exiting investments. The pathways do not function.”
Neiss adds that NASAA’s objections “miss the point” as legislation and rule changes should seek infrastructure that addresses the full lifecycle of the security, from sale to exit.
“The solution is to build the disclosure infrastructure that gives buyers and sellers the information they need to transact.”
Some observers see NASAA’s attempt to block change in private securities transactions as more representative of fear of diminishing relevance. Regulators typically do not like to see empires dismantled and authority reduced.
At the same time, state regulators do important work, primarily through anti-fraud actions, which they will continue to exercise regardless of any change.
Neiss schools NASAA by stating “liquidity is investor protection,” and the organization’s attempt to package pre-emption as a threat to investor protection is false: “The opposite is true.”
“When investors are locked into illiquid positions solely because regulatory fragmentation makes lawful trading impossible, the cost is borne by families—not institutions. They cannot rebalance portfolios. They cannot respond to life events. They cannot realize gains or cut losses. The current system does not protect these investors. It traps them. Federal preemption with standardized disclosure is not deregulation. It is [the] infrastructure that makes investor protection functional rather than theoretical.”
The current leadership at the SEC is pro-business, pro-small-investor, and should be supportive of improved liquidity. The legislation advancing in the House with broad Republican support indicates change may arrive at some point later this year. Yet special interest groups will always rise to create moats that protect their interests and not necessarily those of investors.
The SBCFAC meeting will take place on February 24th and will be livestreamed on the SEC website.
