Gutting Investor Protections Will Jeopardize Legitimate Business

May 1, 2014

Gutting Investor Protections Will Jeopardize Legitimate Business

Statement of Bartlett Naylor, Financial Policy Advocate, Public Citizen

Note: At 9:30 a.m. today, the Subcommittee on Capital Markets and Government Sponsored Enterprises, part of the U.S. House of Representatives’ Committee on Financial Services, will conduct a second hearing on “Legislative Proposals to Enhance Capital Formation for Small and Emerging Growth Companies” and will consider three legislative measures.

By promoting reckless bills, this hearing serves to pressure regulators at the Securities and Exchange Commission (SEC) to eliminate some of the minimal investor protections proposed as part of the agency’s implementation of the Jumpstart Our Business Startups (JOBS) Act. That law authorized a number of potentially dangerous vehicles such as online solicitations and public advertisements for deals suitable only for high-income investors.

The bills under review at the hearing would:

  • Pre-empt state-based regulatory oversight of small firms selling stock, an invitation to possible rip-offs;

  • Raise from $1 million to $3 million the amount firms could sell through online “crowdfunding” and allow individuals to invest more than is safe, potentially endangering their financial well-being; and

  • Eliminate penalties for smaller firms that fail to notify the SEC they are selling securities, or that fail to take even minimal steps to ensure investors are qualified to engage.

The SEC had the temerity to adopt a few, albeit tepid, safeguards in proposed rules for the JOBS Act, prompting immediate criticism from the committee’s Republican leaders.

These measures join a grab bag of bills the committee reviewed in a hearing last month that are apparently headed to a committee vote next week. Combined, they strip requirements for independent audits, expose employees to dubiously valued company stock and allow insiders to dump stock shortly after a public offering.

America’s capital markets depend on an investment community with faith that businesses are held to reasonable standards when selling securities. Violation of that faith will only drive up the cost of capital for legitimate enterprises as investors become burned by scams and demand higher returns from unproven companies. We hope Congress can see through these bills as irresponsible and counterproductive.

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