Rick Fleming Deputy General Counsel at North American Securities Administrators Association Senate Banking Committee Hearing.pdf

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Testimony of Rick Fleming Deputy General Counsel North American Securities Administrators Association, Inc. Before the Senate Committee on Banking, Housing and Urban Affairs Securities, Insurance, and Investment Subcommittee “The JOBS Act at a Year and a Half: Assessing Progress and Unmet Opportunities” October 30, 2013 Washington, DC
   Testimony of Rick FlemingDeputy General CounselNorth American Securities Administrators Association, Inc.Before theSenate Committee on Banking, Housing and Urban AffairsSecurities, Insurance, and Investment Subcommittee“The JOBS Act at a Year and a Half: Assessing Progress and UnmetOpportunities”October 30, 2013Washington, DC  2 Introduction Good morning Chairman Tester, Ranking Member Johanns, and members of theSubcommittee. I am Rick Fleming, Deputy General Counsel for the North American SecuritiesAdministrators Association, Inc. (“NASAA”), 1 the association of state and provincial securitiesregulators. One of my roles at NASAA is to coordinate the activities of the NASAA CorporationFinance Section Committee. Prior to joining NASAA in 2011, I served as General Counsel for the Office of the Kansas Securities Commissioner. In that role, I frequently represented the statein disciplinary and enforcement cases, including criminal prosecutions and related appeals.I am honored to testify before this Subcommittee about the Jumpstart Our BusinessStartups Act, or JOBS Act, a year and a half after its enactment.Securities regulation is a complementary regime of both state and federal securities laws. NASAA has had a long history of working closely with the Securities and ExchangeCommission (SEC) to affect greater uniformity in Federal-State securities matters, includingmeeting annually as required by section 19(d) of the Securities Act of 1933. The states alsowork closely together to uncover and prosecute securities law violators.State securities regulators have protected Main Street investors for the past 100 years,longer than any other securities regulator. They are responsible for enforcing state securitieslaws by pursuing cases of suspected investment fraud, conducting investigations of unlawfulconduct, licensing firms and investment professionals, registering certain securities offerings,examining broker-dealers and investment advisers, and providing investor education programsand materials to your constituents.States are also the undisputed leaders in criminal prosecutions of securities violators. In2012 alone, state securities regulators conducted nearly 6,000 investigations, leading to nearly2,500 enforcement actions, including 339 criminal actions. Moreover, in 2012, 4,300 licenses of  brokers and investment advisers were withdrawn, denied, revoked, suspended, or conditioned due to state action, up 27 percent from the previous year.State securities regulators continue to focus on protecting retail investors, especially those wholack the expertise, experience, and resources to protect their own interests. In addition to servingas the “cops on the beat” and the first line of defense against fraud for “mom and pop” investors,state securities regulators serve as the primary regulators of most small size offerings. As such,state securities regulators regularly work with and assist small and local businesses seekinginvestment capital. 1 The oldest international organization devoted to investor protection, the North American Securities AdministratorsAssociation, Inc. (NASAA) was organized in 1919. Its membership consists of the securities administrators in the 50states, the District of Columbia, Canada, Mexico, Puerto Rico and the U.S. Virgin Islands. NASAA is the voice of securities agencies responsible for grass-roots investor protection and efficient capital formation.  3  NASAA shares Congress’ desire to improve the United States economy by, in part,spurring private investment in small business. However, we believe this goal is best achieved through restoring investor confidence, and it is our hope that the JOBS Act will be implemented with a balanced approach that reflects smarter regulation.My testimony today will provide an overview of the current status of NASAA’s work indesigning a new multi-state review process for offerings conducted under Title IV of the JOBSAct, including a one-stop, filing process for “Regulation A+”. I will also present NASAA’sviews on Title II of the JOBS Act, which lifted the long-standing ban on general solicitation, and summarize the most important of our recommendations to the SEC in association with therulemakings under this title. Finally, my testimony will consider Title III’s crowdfunding provisions and NASAA’s views of the SEC’s proposed rules. Although preempted fromregulating crowdfunding offerings, the states have been committed to working with the SEC and the Financial Industry Regulatory Authority (FINRA) to develop a responsible regulatoryframework for implementation of the Act.My testimony will conclude with a discussion of sensible efforts to improve the ability of small businesses to obtain capital, along with a brief discussion of further deregulatorylegislation in the House that is referred to as “JOBS Act 2.0.” NASAA’s view is that the JOBSAct imposed changes to the securities laws that were neither simple nor straightforward, and which required the SEC to grapple with very complex issues in its rulemaking. We would encourage Congress to observe and evaluate the full impact of the JOBS Act before proposingfurther legislation purportedly designed to spur economic growth. Title IV: Regulation A+   When a company wants to raise capital by selling securities, the company must firstregister those securities with the government unless the securities are sold in a way that qualifiesfor an exemption from the registration process. Title IV of the JOBS Act requires the SEC toadopt a rule to provide an exemption for certain offerings up to $50 million.Because of its similarity to the current exemption under Regulation A, which is capped atonly $5 million, this new exemption is commonly referred to as Regulation A+. These offeringswill be exempt from SEC registration under the new Section 3(b)(2) of the Securities Act of 1933, but they will be subject to registration at the state level unless the securities are listed on anational securities exchange or sold to a qualified purchaser as defined by the SEC.Given the inherently risky nature of these offerings, and the primacy of the states’ role in policing small size offerings, NASAA believes state oversight is critically important for investor  protection and responsible capital formation. However, we also recognize that in some instancesthis process can be costly and particularly burdensome upon small companies.When a company applies for registration of securities at the state level, the company mustensure that the terms of the offering and the content of the disclosure document satisfy the legalrequirements that apply to that particular type of offering. These legal requirements are found in  4 state law but are usually derived from NASAA Statements of Policy that are approved by amajority of the NASAA members. A typical equity offering would be subject to a general set of rules, including things like limitations on underwriting expenses and a requirement to specify theanticipated use of proceeds. 2 More specialized securities, such as church bonds, oil and gasinterests, and real estate investment trusts (REITs), are subject to specific rules for those types of offerings. All states conduct a “disclosure” review to ensure that all material risks are disclosed to investors, and some states conduct a further “merit” review of the offering to prevent offeringsthat are inherently unfair to investors. If an application for registration does not satisfy all of thelegal standards applicable to that type of offering, the state securities regulator will issue adeficiency letter and communicate with the company until the deficiencies are resolved.On behalf of NASAA President and Ohio Securities Commissioner Andrea Seidt, I wantto assure this subcommittee that one of NASAA’s priorities is the creation of an efficient filingand review process for multi-state securities offerings, including but not limited to, RegulationA+. In fact, in her inaugural speech to NASAA’s membership earlier this month, PresidentSeidt outlined her goal for this type of system as follows:The corporation finance world needs the equivalent of aCRD/IARD system for multi-state offerings. My vision is for thereto be a one-stop, automated filing system for every type of corporation finance offering filed in multiple states. A system thathas NASAA guidelines, forms, and core state requirementsembedded in its design, a system in which all regulatory and industry users can track the filing status of an offering in all statesin real time. 3  For now, NASAA is focused particularly on Regulation A+ and is actively engaged in thedesign of a new multi-state review process for those offerings. As currently contemplated, onestate would be designated the lead “disclosure” state and another would be designated the lead “merit” state, and those two states would coordinate the multi-state review of the offering tominimize the possibility of duplicative or inconsistent comments from multiple states. Of course, this means that the states would have to agree to a set of uniform standards that would apply to the particular type of offering. We are also working on a multi-state electronic filing platform that will allow one-stop filing with automatic distribution to all states, and we intend to build out that system to accommodate Regulation A+ filings.In designing the system and developing a uniform set of standards, NASAA hasconsulted with a task force of the American Bar Association (ABA) to determine whether existing standards could be applied in the context of offerings under Regulation A+. The task force expressed concern about certain existing NASAA guidelines that are difficult for start-upsto satisfy, including the required amount of promoters’ equity investment and the limitation onusing investor funds to repay loans from officers of the company. In response to these concerns, 2 For a full list of NASAA Statements of Policy, see http://www.nasaa.org/regulatory-activity/statements-of-policy/. 3 Andrea L. Seidt, President, North American Securities Administrators Association, Inc., 2013 Presidential Speech, NASAA 96 th Annual Conference, Salt Lake City, Utah (Oct. 8, 2013), available athttp://www.nasaa.org/26900/2013-presidential-address-andrea-seidt-ohio-securities-commissioner/.
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