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Press Release

SEC Proposal on Crowdfunding Increases Investor Risk

By:
Alonza Robertson, NYSSCPA Media Relations Manager
Published Date:
Feb 12, 2014

NEW YORK – (February 12, 2014)  - The New York State Society of Certified Public Accountants (NYSSCPA) is calling on the Securities and Exchange Commission (SEC) to tighten up the regulations outlined in its proposal: Regulation Crowdfunding under the Securities Act of 1933 and the Securities Exchange Act of 1934 to implement the requirements of Title III of the Jumpstart Our Business Startups Act.

The Jumpstart Our Business Startups Act was signed by President Barack Obama in 2012 and is intended to encourage funding of small businesses in the United States by easing various securities and regulations. The bill contains provisions related tocrowdfunding, which allows companies to sell securities through open platforms, including web-based programs. The law requires the SEC to write rules and issue studies on capital formation, disclosure and registration requirements.

The SEC’s proposal would prescribe rules governing the offer and sale of securities under the new Section 4(a)(6) of the Securities Act of 1933 and would also provide a framework for the regulation of registered funding portals and brokers that issuers are required to use as intermediaries in the offer and sale of securities.

In its comment letter, drafted by the NYSSCPA’s Litigation Services Committee and released on January 21, the Society points out crowdfunding activities will bring in a different type of investor.

“We note with concern that the Securities and Exchange Commission (SEC) is considering a tradeoff between transparency and functionality especially in connection with a new and, as of yet, untested method for offering securities to a broad cross-section of potential investors,” the letter states.

“In general, the proposed regulations try to strike a balance between being pro-business for the sake of developing this new funding mechanism, and maintaining high quality of investments for the public”, said Yigal Rechtman, one of the principal drafters of the comment letter. “The focus of our response was on the section of the regulations that addressed the risk of fraud. To that end, we call on the SEC to be more specific on how it will monitor the market players without any registration, given the fraud risks that we identified”.

The Society is urging the SEC to instead take a more conservative approach when it comes to regulating these offerings and avoid creating different standards for intermediaries and issuers.

"We are not in favor using a ‘reasonable basis’ as a sufficient standard for intermediaries that will be facilitating IPOs,” said David S. Zweighaft, one of the principal drafters of the comment letter. “Because these offerings are coming out via the internet, they will be received by a greater audience of potential investors who may or may not be sufficiently versed in financial matters to make a best or safe decision.  Intermediaries will be performing a gatekeeper role in reviewing these offerings before they are disseminated to the public and therefore should be held to the ‘prudent care’ standard, which enhances the transparency and level of responsibility expected from them.”

In its comment letter, the NYSSCPA suggests that to effectively and realistically create a system in which issuers’ representations are accepted, the intermediary should be required to conduct a certain amount of monitoring of its own. The monitoring could be similar in depth and manner to The Sarbanes-Oxley Act Section 404, as interpreted by PCAOB Audit Standard No. 5.

A complete listing of the NYSSCPA’s comment letters can be found online at:www.nysscpa.org/page/society-comment-letters.

 
About the NYSSCPA
 
Founded in 1897, the NYSSCPA is the premiere professional accounting association for more than 29,000 certified public accountants residing and practicing in New York State, encompassing all areas of public practice, including in government, education, and industry. Visit our website,www.nysscpa.org, for more information.