Senate should stand firm on JOBS Act

With the passage of the Jumpstart Our Business Startups Act (HR 3606), dubbed the “JOBS Act,” by the House of Representatives on March 8, 2012, momentum for reform of the legal regime governing capital formation in the United States is building. President Obama expressed his support for this regulatory reform, emphasizing that HR 3606 “will help startups and small businesses succeed and create jobs, which is fundamental to having an economy built to last.”  It is now up to the Senate to take up this momentum and pass comparable reform legislation.

But even in the face of this bi-partisan support, a vocal naysayer – seemingly stuck back in time re-fighting lost legislative battles - is interceding in an effort to derail this momentum. Policy makers should see this effort for what it is, a naked power grab by state securities regulators, who through their lobbying group, the North American Securities Administrators Association (NASAA), have publicly opposed important elements of the JOBS Act reforms. Under pressure from NASAA, an important provision of the House bill aimed at modernizing Regulation A (a lighter touch regulatory regime governing small company public offerings) was stripped from the original bill. The stripped out provision would have permitted small growth companies to access a nationwide pool of capital through offerings intermediated by SEC regulated broker-dealers without the need to clear the offering separately with all 50 state securities regulators, a significant compliance burden that is unwarranted given the extensive review of such offerings by the SEC.  In his testimony before the Senate Banking Committee, Professor John C. Coates IV observed that the “[Regulation A reform] is not particularly threatening (to capital costs or investor protection) because without blanket preemption of state blue-sky laws, it is unlikely to be used.”

NASAA succeeded in rendering unusable a well-crafted reform intended to foster small growth company capital formation and has now turned its sights on other important provisions of the JOBS Act, all in the name of rooting out fraud.  NASAA’s lobbying position is a true red herring given that state regulators retained their jurisdiction to enforce state anti-fraud laws even after the enactment of the National Securities Markets Improvement Act of 1996, a deregulatory measure that laid the foundation for enterprises to access a nationwide private capital market without the need to clear their private offerings with bureaucrats in 50 states.  The argument that state regulators should regulate capital formation as a means of rooting out fraud failed resonate with the Congress in 1996 and should so resonate now with the Senate as it takes up its version of the reform legislation. The Senate should re-insert the provision that preempts the application of state securities laws to Regulation A offerings intermediated by broker-dealers and it should stand firm against NASAA’s lobbying effort to revise the legislation to allow state securities regulators to have a hand in regulating crowdfunding or remove from it the repeal SEC’s ban on general solicitation in connection with Regulation D private offerings, each of which would dramatically expand the opportunities for companies to reach investors.

The Obama administration has stated that it “looks forward to continuing to work with the House and the Senate to craft legislation that facilitates capital formation and job growth for small businesses and provides appropriate investor protections,” laudable goals that will not be advanced in the slightest way by the power grab that NASAA is pursuing on behalf of state securities regulators.

Zuppone is chair of Paul Hastings Securities & Capital Markets.

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