Maine Office of Securities Puts an Oar in the Water on Crowdfunding

Wednesday, May 23, 2012

Crowdfunding is an online money-raising strategy that began as a way for the public to donate small amounts of money, making it easier to raise capital for young companies. Under the federal Jumpstart Our Business Startups (JOBS) Act (HR 3606), small businesses and entrepreneurs will be able to tap into the “crowd” in search of investments to finance their business ventures.

Among other things,  the JOBS Act amends § 4 of the Securities Act of 1933 to create a new exemption for offerings of “crowdfunded” securities. This amendment effectively exempts  issuers from the requirements of §5 of the Securities Act when they offer and sell up to $1 million in securities, provided that individual investments do not exceed certain thresholds and the issuer satisfies conditions in the JOBS Act, some of which will required SEC rulemaking.

The regulators are still catching up. Congress directed the Securities and Exchange Commission  to adopt rules within 270 days to implement a new exemption to allow crowdfunding. Until the SEC adopts these rules, no one can act as an intermediary or take advantage of the crowdfunding statute. On April 23, 2012, the SEC issued the following warning:

On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.

Maine’s Office of Securities recently issued a similar advisory warning would-be investors to tread carefully when contemplating crowdfunding investment opportunities.  According to the Office of Securities, the prudent approach would be to wait until SEC rules are adopted regulating crowdfunding. The bottom-line for investors is “wait and see” when it comes to crowdfunding.

Review of Enforcement Activity by the Maine Office of Securities Under Gov. LePage Shows Little Change as Compared to Similar Activity Under the Prior Administration

Monday, May 21, 2012

With some exceptions, the Maine Office of Securities under Gov. LePage has been as active as the Office was under Gov. Baldacci, at least measured by the number of actions taken.

Enforcement-related administrative orders have remained stable in number as compared to recent years. To date, as of January 1, 2012, there have been 9 enforcement-related administrative orders. In 2011, there were 11 enforcement-related administrative orders. These orders dealt with a range of offenses, from acting as a broker-dealer or investment adviser while not properly licensed, failing to comply with prior orders of the Office of Securities, borrowing funds from clients, “unlawful, dishonest or unethical practices” and the sale of unregistered securities. In 2009, there were 9 administrative orders. There were 19 such orders in 2010. At the current pace, the Office of Securities is on track to issue a larger number of administrative enforcement orders than any of the past three years with the exception of 2010. 

To date in 2012, there have been 3 criminal and/or civil enforcement actions. In 2010 and 2011, there were 7 such enforcement actions in each year. In 2008 and 2009, the State brought three enforcement actions. These actions included claims of theft by deception, theft by misapplication and securities, fraud, diversion of money for personal use, and making false statements of material facts. By all accounts, the Office of Securities is on track with the past 2 years in this area.

Recent months have seen a sharp decline in consent agreements. Since January 1, 2011, there have been 4 consent agreements, There have been none so far in 2012. In 2010, 4 consent agreements were executed. In 2009, 3 such agreements were executed. The overwhelming majority of these consent agreements pertained to licensing issues. The Office of Securities has been more active in the past, with 15 such consent decrees in 2006 alone.

The overwhelming amount of actions deal with licensing issues. It seems this will continue to be an issue as more out-of-state investment entities perform work for Maine residents.  Overall, under the LePage administration, enforcement actions have remained fairly constant in number.

Schwab's Bid to Avoid FINRA Arbitration Rejected by Federal Court

Tuesday, May 15, 2012

A federal judge has dismissed a federal lawsuit brought by Charles Schwab, Inc. (Schwab) against the Financial Industry Regulatory Authority, Inc. (FINRA) in the United States District Court for the Northern District of California.  U.S. Magistrate Judge Elizabeth LaPorte found that federal court was not the proper forum for the dispute between Schwab and FINRA, which instead must first be adjudicated by FINRA's internal arbitration process.  The court's finding means that the industry cannot have it's cake and eat it too by aggressively enforcing the binding arbitration provision in its customer agreements while simultaneously running to federal court when it wants an injunction to stop a proceeding pending against itself.

The Schwab/FINRA dispute may still make its way to federal court since FINRA arbitration decisions can  ultimately be appealed to a federal appeals court.  A federal court, however, under this decision, cannot be the court of first instance for such a dispute.