House Committee Votes To Undermine Investor Safeguards

The Honorable Jeb Hensarling
Chairman
Financial Services Committee
U.S. House of Representatives
Washington, D.C. 20515

The Honorable Maxine Waters
Ranking Member
Financial Services Committee
U.S. House of Representatives
Washington, D.C. 20515

Dear Chairman Hensarling, Ranking Member Waters, and Members of the Committee:

This week the House Committee is scheduled to mark up a series of bills that double down on the belief that you can promote healthy, sustainable capital formation by weakening protections for the providers of capital. The House Committee continues to promote this approach despite a total lack of evidence that it is effective in increasing the amount of capital raised, as opposed to simply shifting capital raising into progressively less well-regulated areas of the markets. Among the ten capital markets bills being marked up this week, all but two would significantly weaken regulatory oversight, reduce transparency, and generally undermine the regulatory framework that helped make America’s financial markets the deepest, most vibrant markets in the world.

We are therefore writing on behalf of CFA and Americans for Financial Reform to urge you to oppose the following eight bills scheduled for mark-up:

  • H.R. 4850, the “Micro Offering Improvement Act”
  • H.R. 4852, the “Private Placement Improvement Act”
  • H.R. 4854, the “Supporting America’s Innovators Act”
  • H.R. 4855, the “Fix Crowdfunding Act”
  • H.R. 5311, the “Corporate Governance Reform and Transparency Act”
  • H.R. 5421, the “National Securities Exchange Regulatory Parity Act”
  • H.R. 5424, the “Investment Advisers Modernization Act”
  • H.R. 5429, the “SEC Regulatory Accountability Act”

Vote NO on H.R. 4850, the “Micro Offering Improvement Act”

This legislation would create a yet another unnecessary and unwarranted exemption from the Securities Act of 1933 to enable the sale of micro-cap offerings (those involving sales of securities valued at $500,000 or less in a single year) without appropriate regulatory protections. While the legislation would limit the total number of investors in such offerings, it includes no requirement that those investors have the financial sophistication to understand the potential risks of the offering or the financial wherewithal to withstand any losses. Instead, it requires only that they have a “pre-existing relationship” with an officer, director or major shareholder of the issuer, a condition that provides no meaningful protections. The bill:

  • doesn’t require issuers to notify regulators of the offering,
  • doesn’t require them to provide even the minimal disclosures required under Reg D,
  • doesn’t impose any limits on the amount individuals can invest, and
  • doesn’t include any restrictions on secondary sales.

While the amendment in a nature of a substitute does make some improvements to the original legislation – by actually limiting it to micro offerings, for example, and adding a bad actor provision – these changes are completely inadequate to address the legislation’s fundamental short-comings. In particular, since the bill preempts state authority over what are likely to be predominantly local offerings, there is unlikely to be any regulatory oversight exerted to enforce the bad actor provision or to otherwise prevent fraudulent and abusive practices. Certainly, the SEC doesn’t have the resources to provide that oversight for offerings of this type. Because this legislation would very quickly and predictably become an avenue enabling questionable offerings to avoid regulatory scrutiny and countless retail investors to suffer devastating losses, we urge you to vote no on this legislation.

Vote NO on H.R. 4852, the “Private Placement Improvement Act of 2016”

When Congress removed the ban on general solicitation in private offerings under Rule 506 of Regulation D, it both increased the risk of fraud in a market already plagued by misconduct and eliminated the primary red flag regulators had relied on to identify possibly fraudulent offerings. Acting in accordance with recommendations from investor advocates and state securities regulators, as well as the unanimous recommendation of the SEC’s Investor Advisory Committee, the Commission has proposed a modest set of reforms designed to both improve compliance with existing rules and provide regulators with better information about this large, important and often opaque market. For example, the proposed rules would: require Form D, which includes basic information about the offering, to be filed in advance of any general solicitation; would require an additional filing at the termination of the offering containing information on the total amount of capital raised; and would stiffen the penalties for failing to file Form D. These filings are necessary both to provide regulators with basic information on the market and to alert them to potentially problematic offerings. In addition, the proposed rules would ensure that private funds, which are now free to advertise, follow guidelines designed to ensure their advertisements are not misleading. This legislation would prevent the SEC from finalizing those rule proposals even where it finds the actions are necessary to protect investors, to promote market integrity, and encourage capital formation. Because it would prevent the SEC from taking appropriate actions to provide needed oversight of the Reg D market, perpetuate widespread non-compliance with the existing filing requirements, and undermine informed policymaking, we urge you to vote no on this legislation.

Vote NO on H.R. 4854, the “Supporting America’s Innovators Act”

This legislation would increase fivefold, from 100 to 500, the number of investors a venture capital fund can have while still qualifying for the exemption from the registration requirements under the Investment Company Act of 1940. This has the potential to significantly expand the number of funds that qualify for the exemption from the registration requirements, simultaneously freeing them from the obligation to comply with other substantive requirements designed to protect investors and promote effective regulatory oversight. Although sales of these unregistered funds would generally be limited to accredited investors, the definition of accredited investor fails to ensure that investors in these funds have the financial sophistication to understand potential risks, market power sufficient to demand access to information, or even the financial wherewithal to withstand potential losses. Because this legislation would expand the exemption for venture capital funds without imposing any additional protections for investors, we urge you to vote no on this legislation.

Vote NO on H.R. 4855, the “Fix Crowdfunding Act”

Roughly a month after federal crowdfunding rules took effect, this Committee is being asked to vote on legislation to “fix” crowdfunding. Moreover, several of the proposed “fixes” would greatly increase the risks to crowdfunding investors by: increasing the amount they could invest in these highly speculative, early-stage start-up companies; reducing liability and thus the incentive funding portals have to ensure issuer compliance with the law; and inappropriately opening the door for issuers to use nonbinding solicitations of interest under the crowdfunding rules to attract investors for other types of offerings where such solicitations are not permitted. The provision to allow single purpose funds to invest in crowdfunding may offer potential benefits to investors, but only if appropriate safeguards are put in place – safeguards that are not included in this legislation. Ironically, it would only achieve any benefits by directly repudiating the principle on which crowdfunding is based, reliance on the “wisdom of the crowd.” Rather than trying prematurely to apply a patchwork of fixes to a fundamentally flawed idea, and making things worse in the process, Congress and the Commission should take time to study how the crowdfunding market evolves in order to determine what changes are needed to address any concerns that may arise. We therefore urge you to vote no

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