NASAA President Testifies on Venture Exchanges

North American Securities Administrators Association ("NASAA") President William Beatty testified before the Senate Subcommittee on Securities, Insurance and Investment regarding the challenges posed by venture exchanges.

Mr. Beatty questioned the additive value of venture exchanges given the current available sources of capital, which include loans from friends and family, commercial loans and crowdfunding. He urged Congress to understand and examine policy rationales for establishing venture exchanges for small and unestablished companies, and stated that "it is readily evident that establishing such exchanges could pose a risk to investors and the capital they invest in those markets."

According to Mr. Beatty, proposals to establish venture exchanges are driven largely by the desire to exempt securities traded on a venture exchange from certain regulations. Mr. Beatty explained that, although NASAA members agree that some relief may be necessary for the success of a venture exchange, the effects of such relief have raised concerns. He advocated for further analysis of venture exchanges and endorsed SEC Commissioner Stein's recent suggestion to direct the SEC to publish a Concept Release on the topic.

Mr. Beatty went on to describe a number of specific policy challenges that he believes are "inherent in" establishing venture exchanges, including the following:

• which federal authority should regulate a venture exchange;
• whether any venture exchange will be created, or will succeed, with the enactment of new legislation (he stated that a venture exchange's nonexistence "may be due to financial viability as opposed to regulation");
• baseline standards (he explained that the "key to success" is to scale listing standards to the size of the enterprise while ensuring that appropriate protections are in place to avoid fraud);
• preemption of the state review of listed securities (he stated that preemption should not attach to securities based on a listing on an exchange that lacks rigorous listing standards);
• trading volume (according to Mr. Beatty, companies that do not satisfy minimum trading volumes should be delisted from any future venture exchange);
• the reporting and transparency of the companies listed on the exchange;
• establishing a mechanism to remove companies that fall below the listing standards; and
• whether it is premature to enact legislation for the creation of a market catering specifically to Regulation A securities.

See: Mr. Beatty's Testimony. Related news: SEC Commissioner Stein Discusses How to Facilitate Capital Formation to Support Innovation (with Lofchie Comment) (March 6, 2015); SEC Holds Meeting of the Advisory Committee on Small and Emerging Companies (March 4, 2015).