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Commerce commissioner weighs in on improvements in securities regulation

The Legislature should ensure that investors do not face unknown financial risks and costs due to lack of disclosures and other safeguards.

I will continue to strongly advocate and act for the protection of investors, especially those who lack the expertise, experience or resources to protect their own interests.
REUTERS/Kai Pfaffenbach

Investment opportunities for Minnesota investors have changed significantly in the past few years since the federal JOBS act in 2012. These investments mirror mainstream conversations found on social media. Today it is not unusual to have a friend ask for support in a new endeavor through Kickstarter or Gofundme, nor is it unusual to see posts on social media asking friends to “crowdsource” a suggestion for vacations or restaurants. Investing through crowdfunding is different today from four years ago, and so too is the state of Minnesota’s focus on securities regulation.

Mike Rothman

In the past four years, Minnesota has made significant strides since my first day on the job as Commerce Commissioner in 2011. On my first day, only three individuals were tasked to help oversee the regulation of securities in our state. Now, the department has nearly four times that number working collaboratively with our other consumer, investigative, fraud and outreach staff. The state has built an investment adviser registration program and an investment adviser examination program; we have conducted investor protection initiatives; we now have a leadership position in the North American Securities Administrators Association (NASAA) to stay on the forefront of emerging national issues; our Commerce Fraud Bureau also has helped on investigations within its jurisdiction; we have built strong relationships with the U.S. Attorney’s Office, County Attorneys and other law-enforcement agencies to prosecute our cases that Commerce investigates; and, we now have begun a legacy of success in stopping criminal behavior in the securities area in Minnesota.

In 2014 alone, the Commerce Department has investigated and worked with prosecutors on five criminal cases related to securities fraud – totaling 38 counts of felony charges. Understanding the growth in financial crimes, especially those including senior citizens and investment schemes, is a key reason behind Gov. Mark Dayton’s and the Commerce Department’s legislative proposals this year. Our Vulnerable and Older Adult Financial Abuse Protection Act aims to help combat financial abuse of Minnesota’s senior citizens or stop the fraud at an earlier stage to avoid situations like the cases mentioned above. I will continue to strongly advocate and act for the protection of investors, especially those who lack the expertise, experience or resources to protect their own interests. I also will continue to advocate for improvements to the funding for our securities program from the general fund to help further improve the department’s regulatory program.

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Three pillars of regulation

Successful state securities regulation comes down to three pillars – investor education, good industry compliance and enforcement. The Commerce Department registers securities firms and investment professionals, registers certain securities offerings, reviews financial offerings of small companies, audits sales practices, requires proper disclosures, transparency, and record-keeping, promotes investor education, and most important, enforces state securities laws and helps to ensure that sales are suitable. In addition to protecting investors, the Commerce Department facilitates small business capital formation while aiding in compliance with securities laws. The Commerce Department remains committed to facilitating responsible and efficient capital formation so that both investors and businesses may succeed and thrive in our securities markets.

As Minnesota’s securities regulator, last week the Commerce Department weighed in strongly, including in a letter to Sen. Terri Bonoff [PDF], against proposed language to bring equity crowdfunding to our state. The crowdfunding legislation [SF 138] as introduced this legislative session does not protect investors from the inherent risks of these types of investments. The Commerce Department highlighted the lack of strong consumer and investor protections in the current draft as well as the potential for unintended consequences and penalties for the very small businesses the proposal attempts to aid. These concerns include the following: 

  • Offering and investment limits. The upper limits for amounts issuers can raise – from a single investor and in a 12-month period – are too high.
  • Federal exemption conflicts. Reliance on what is known as the intrastate federal exemption as drafted places the small businesses this proposal is intended to help at significant risk of running afoul of existing SEC registration requirements.
  • Portal operators and issuers. Allowing issuer companies to serve as portal operators raises significant concerns for both investors and issuers themselves; offerings should be conducted through the use of a registered broker-dealer serving as an intermediary.
  • Bad actor disqualification. Securities offerings made in a crowdfunding situation should not be permitted if either the issuer or portal operator would have been otherwise disqualified under state or federal regulations.
  • Investor recourse. Limitations on liability and reduced regulatory requirements for portal operators and issuers are inappropriate, severely inhibiting the ability of investors and regulators to take action in situations where there has been misconduct during an offering.
  • Data privacy concerns. The bill as introduced is silent as to the responsibilities of issuers and portal operators to maintain investors’ private data and potential penalties for a breach of consumers’ personal information.
  • Automatic inflationary increases. Automatic increases in offering and investor dollar limitations should not be allowed as they increase investor risk by removing legislative and regulatory oversight.
  • Regulatory review. As introduced, he bill limits the ability of the Commerce Department to inspect the actual portal site.
  • Resale restrictions. Resale restrictions are not adequately outlined in the bill as introduced.

New opportunities, with safeguards

We are already working to try to get these concerns addressed with lawmakers and industry stakeholders. Enacted appropriately, equity crowdfunding could present new opportunities for Minnesota small and startup businesses to access community-based capital. In doing so, however, the Legislature should also ensure that investors do not face unknown financial risks and costs due to lack of disclosures and other safeguards.

As we continue to move in the right direction, bolstering our state’s securities regulation will only serve to protect our investors and maintain the health of the securities industry in Minnesota.

Mike Rothman is the commissioner of the Minnesota Department of Commerce.


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