On February 17, just as new rules to further facilitate intrastate and regional crowdfunding offerings are beginning to take effect, the Securities and Exchange Commission and the North American Securities Administrators Association (NASAA), the organization of state securities administrators, signed a Memorandum of Understanding intended to facilitate the sharing of information between federal and state regulators. The goal of the MOU is to ensure that the new regulations serve their intended purpose of facilitating access to capital for small businesses, while allowing the regulators to better monitor their activities and thereby protect investors from fraud. The agreement is significant in that it represents a joint effort by federal and state securities regulators to expand small-business investment opportunities while still protecting investors through collaboration among the regulators.
The new crowdfunding rules give emerging companies greater flexibility in conducting intrastate offerings through websites and social media, without registering them with the SEC, and include other provisions that can facilitate development of regional offering exemptions from SEC registration. However, such efforts always raise the risk that some will see them as an opportunity to engage in fraud and other illegal practices. The MOU is intended to enable the regulators to share information in a manner that improves the ability of emerging companies to raise capital efficiently while preventing fraudulent activities from harming the investors seeking to support them.
It’s abundantly clear that many quarters favor facilitating access to capital for entrepreneurs that are not able to avail themselves of more traditional means; however this increases the risk that unscrupulous characters will use these new methods to engage in fraud and other illegal practices. Balancing control of the costs of raising capital, which can make it simply too expensive for small, emerging companies to find investors, with the need to protect investors from being defrauded, is a difficult task that calls for effective but efficient methods of regulating. By working closely together, the SEC and NASAA hope to avoid unnecessary and duplicative regulations that can make it impossible for entrepreneurs and those looking to support them to achieve their goals, without adversely impacting the protections to which all investors are entitled.
This spirit of cooperation is a positive sign that the sometimes overwhelmingly complex mosaic of federal and state securities regulation can be harmonized in a manner that serves the various participants in our capital markets. While it sometimes seems that the overlap and redundancy that results from the best intentions of federal and state regulators to protect investors and the integrity of the markets makes things overly complicated, the unending creativity and cleverness of those who would seek to exploit the markets for illicit gain makes such things necessary. However, the kind of partnership between federal and state regulators embodied in the MOU makes it clear that by working together, the regulators can reduce unnecessary and duplicative regulations and thereby make the markets more efficient, and safer, for everyone.