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Waters Floor Statement Opposing Legislation to Weaken Investor Protections for Microcap Offerings

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Washington, DC, November 9, 2017 | comments

Today, Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, gave the following floor statement in opposition to H.R. 2201, the Micro Offering Safe Harbor Act:

As Prepared for Delivery

Mr. Speaker, H.R. 2201 would create an unnecessary and potentially dangerous loophole in federal and state securities laws by allowing companies to sell unregistered securities without important safeguards that normally apply to such transactions. Specifically, the bill would allow a company to raise up to $500,000 from 35 or fewer investors, subject only to the requirement that each of these investors have a substantive pre-existing relationship with the company.

Currently, before a company can offer or sell its securities, it must either register the offering with the Securities and Exchange Commission (SEC), or qualify for at least one of several existing exemptions from registration. These exemptions provide reduced regulatory requirements for businesses conducting the offerings, but are limited to investors who have the financial sophistication to understand risks or enough assets to bear losses without the full protections of the securities laws. Additionally, unlike H.R. 2201, these existing exemptions include several critical investor protections such as notice to regulators, limitations on advertising, and restrictions on resale. For example, securities offered pursuant to Rule 506 of Regulation D are “restricted,” meaning that they cannot be resold for at least a year without registering them. Additionally, the registration exemptions available under the crowdfunding rules and Regulation A impose limitations on the amounts individuals can invest in a year, thereby placing on cap on potential losses.

H.R. 2201’s lack of basic safeguards would leave investors vulnerable to an array of investment scams. For example, a purchaser of securities offered pursuant to H.R. 2201 would be able to immediately resell the securities in secondary transactions. In the past, the failure to restrict the resale of unregistered securities has exposed secondary investors to “pump-and-dump” schemes, a form of fraud that involves hyping up cheap junk stock in order to resell it at a higher price to unwitting investors.

Additionally, investor and consumer advocates like Americans for Financial Reform, Center for American Progress, and Public Citizen, oppose H.R. 2201 because it would enable a particularly deceptive scam known as “affinity fraud.” Bad actors perpetrating affinity fraud could use H.R. 2201 to prey upon religious communities, ethnic groups, and the elderly. Just a few years ago, the SEC shut down a scheme targeting the Hispanic community in southern California. The perpetrators raised more than $800,000 by representing to close friends and family members that their investments would be used to develop a financial services firm serving the Hispanic community. The SEC found that instead of developing the purported business, the scammers “used a large part of the investors’ money to engage unsuccessfully in high risk day-trading of stocks, pay personal living, travel and entertainment expenses, or make other, unexplained expenditures with no connection to the purported start-up business activities.” H.R. 2201 would provide a road map for bad actors to similarly rip off investors.

The bill’s $500,000 cap on offerings does not eliminate the need for robust safeguards against fraud and abuse. In fact, these protections are even more important for offerings of this size given the proliferation of investment scams in the smaller offering space. The SEC has found that “fraud in the microcap stock markets is of increasing concern to regulators as such markets have proven to be fertile grounds for fraud and abuse.” While $500,000 may not seem like a lot on Wall Street, for Main Street Americans, losing even a fraction of that amount could destroy the hope of one day retiring with dignity.

Existing exemptions such as those available under the SEC’s Regulation D, Regulation A, and crowdfunding rules, provide ample opportunity for companies to raise capital while also protecting investors. H.R. 2201 would only expose hardworking Americans to a new and wholly unnecessary risk. For these reasons, I urge my colleagues to vote “NO” on H.R. 2201. I reserve the balance of my time.


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