Herstein worried that easing of rules governing web-based raising of capital will lead to fraud
State regulators are shooting back at a House bill that would exempt small, private securities offerings sold over the Internet from securities registration requirements.
These online offerings, sold through a process known as crowd funding, have gained attention as policymakers focus on problems small businesses are having in obtaining capital.
The bill, HR 2930, sponsored by Rep. Patrick McHenry, R, N.C., would exempt crowd-funding offerings from registration if the deals were limited to $5 million in size, and no more than $10,000 per investor.
But the bill would open the door to fraudsters, said Jack Herstein, assistant director with the Nebraska Department of Banking & Finance, and president of the North American Securities Administrators Association Inc. Under the bill, neither the states nor the Securities and Exchange Commission would have to be notified of a filing, he said.
The National Securities Markets Improvement Act of 1996 removed state registration requirements for securities but let states require notice filings from private issuers. It also kept state regulators' anti-fraud powers intact.
Most private placements are sold under an exemption known as Regulation D. "At least with a Reg D offering, we know someone is out raising money and they're limited to 35 nonaccredited investors," Mr. Herstein said.
Under Mr. McHenry's bill, most investors would probably be nonaccredited, he said.
"If I'm a crook, I'd be licking my chops over this," Mr. Herstein added.
In response to the bill, NASAA last week formed a special Small Business Capital Formation Committee to look into crowd-funding offerings.
The House Financial Services Committee is taking up the McHenry bill Wednesday. It is expected to add a requirement that sellers of a crowd-funding deal file a notice with the SEC and that the SEC make the notice available to the states.
A spokesman for Mr. McHenry declined comment.
