Written By: Phil Feigin

The changes mandated to Regulation A in the JOBS Act are among the least heralded yet most promising prospects for small business capital formation. The SEC adopted sweeping changes to Regulation A on March 25, 2015 to take effect 60 days after posting, in late May or so. The “elevator speech” summary of the proposed rule is that the amount an issuer can raise using this “mini-registration” exemption will increase from $5 million to $50 million, and the shares sold will be freely tradable.

As was true of old Regulation A, the exemption cannot be used by “blank check,” extractive industries like oil & gas and mining companies, reporting companies, certain investment companies, and issuers affiliated with a “bad actor.” The rarely used “test the waters” process remains available to filers and may be used more frequently now. All Reg. A issuers are now subject to antifraud liability imposed under Section 12(a)(2) of the Securities Act of 1933. The standard for liability here is much lower than under Rule 10b-5. Seller beware.

As there is with most proposals, there are several “yeah buts.” The SEC created a two-tiered system. Under Tier 1, an issuer can raise up to $20 million. There are no minimum investor qualifications, and only reviewed, but not audited, financials are required. Sounds good. Yeah but, the offerings are subject to both SEC and state review. An issuer can opt instead to proceed under Tier 2. The states are preempted from reviewing Tier 2 deals. Yeah but, audited financials are required, sales are limited to accredited investors or non-accredited investors who invest no more than 10% of their annual income or net worth, and quarterly, annual and material event reporting is required. Sales of insider and affiliate shares are restricted under both Tiers, $6 million under Tier 1 and $15 million under Tier 2, with both limited to 30% in any trailing 12 month period.

At least one “elephant in the room” in the Reg. A+ debate was “merit review,” the “M” word. It was the M word that almost tore apart the North American Securities Administrators Association (“NASAA”) in the early ’80s, that doomed the Revised Uniform Securities Act of 1986, and that, in large part, gave rise to NSMIA in 1996. Merit review was the heart and soul of the original “blue sky” laws, the authority of state securities administrators to deny securities registration to an offering that, in the administrator’s view, was “unfair, unjust or inequitable” to, or would “tend to work a fraud” on investors. At its height in the ’70s and ’80s, about 36 states applied merit review standards to new offerings already reviewed for disclosure by the SEC.

While laudable in intention, making decisions based on those standards proved challenging to enforce and defend over the years. Various regional groups of regulators formed in an effort to develop regulatory guidelines for all to see. NASAA eventually assumed the role, and its committees of state analysts continue to hone “merit” standards for those states with the authority today. However, in NSMIA, Congress reduced the number of offerings subject to state registration review to a trickle. Reg. A deals currently are in that shallow pool of state-reviewed offerings.

The goals of merit review are among the most misunderstood in American finance, by critics and perhaps state regulators both. Detractors scoff at the idea that some state examiner in “East Dakota” can predict whether a company will be a good or bad investment, whether the investor will make or lose money. But that is not the idea. Merit standards are intended to make an investment “fair” to the investor. It is not intended to be a predictor of profitability (although one can argue it makes an offering more attractive).

Two classic (and often the most nettlesome for issuers) examples of merit guidelines relate to repayment of principal loans and “cheap stock.” Merit states place tight restrictions on issuers using investors’ money, offering proceeds, to pay off prior loans made to the company by its principals. Instead, offering proceeds must be applied to the company’s operations, to generation of revenue and, with luck, profits. Also under merit review, company insiders are required to place some or all of their promoters’ shares aka “cheap stock” (shares they received from the company for nothing or at a price much lower than the price investors will pay for the registered shares) in escrow until such time as the overall value of the company has increased in an amount proportional to that “cheap stock”/public price differential.

In an effort to persuade the SEC that the states should not be preempted for Reg. A+ offerings, NASAA adopted a central, coordinated registration regime wherein one examiner is appointed to review disclosure and another for merit issues, purportedly with the authority to speak for all states. Further, NASAA members adopted a resolution that its merit member states should waive compliance with these two major merit roadblocks. Whether the state regulators adhere to these collective pronouncements when back home is another question. Whether a position taken by an administrator carries through to that line examiner in East Dakota is another concern.

Regulation A+ has great promise. While it may not seem like such a big deal for issuers and counsel on the coasts, even the $20 million threshold is plenty for mid-American companies ready to make a public splash. There will be some cache in their being able to say the offering was submitted to and reviewed by regulators (even though there are limits on stating that fact) as opposed to private (and not so private) offerings under Rule 506.

The next ingredient necessary to make either Tier of Reg. A+ a success is for regional broker-dealers—many of them beaten to a pulp over the last few years over some very large and notoriously fraudulent private placements—to emerge and seize this market. Reg. A will be the focus for that next-step, small company market, if it happens at all.

As for NASAA, merit review and Reg. A+, I am torn. On the one hand, if state review is streamlined to involve only two state examiners, one from a disclosure state and one from a merit state, with some of the toughest merit standards waived, one might ask “what’s the point?” Isn’t the SEC’s review enough? The SEC pledges that Reg. A+ offerings will receive the same degree of review as full S-1 registration filings. On the other hand, these deals are more likely to be smaller regional offerings, and who really believes an examiner sitting in an SEC cubicle in Washington, D.C. has the perspective necessary to understand an offering to be made to investors in “East Dakota?” And even if the examiner has such perspective, is that the highest and best use of the SEC’s resources?

On balance, the SEC was wise to give the states a shot at jointly handling the Tier 1 offerings and raising the Tier 1 ceiling from the originally proposed $5 million to $20 million. This is akin to the $100 million asset split in investment adviser regulation. Let the states man the laboring oar on these more localized offerings and see what happens. Further, the SEC’s suggestion that SEC and state examiners work jointly on review is an excellent idea, as opposed to the states getting a finished SEC product to review.

Now that the SEC has given the states the opportunity to participate in the review process, the state administrators have got to take the lead with their staffs. Whether it be by weekly sit-downs with line examiners, or some other check and balance, state administrators must make sure their personal policy “seal of approval” is on every position taken by their examiners. It will only take one or two “horror stories” to ruin it for state authority across the board. “Rogue” examiners and states will not be acting solely for themselves in “East Dakota” but for every state securities authority in the country. All states must remember the three guiding, state regulatory “P” words: Principle, Politics and Preemption. And not necessarily in that order.

Reg. A is no longer merely the answer to a securities trivia question. It may become the best thing to come out of the JOBS Act. Only time will tell.

What follows is a table in which some of the more salient features of the two tiers are laid out. After that, I discuss some practical considerations that may give some perspective on what the new Regulation A will and will not mean for those awaiting its promulgation.


Both Tiers
Freely tradable securities
No blank checks or “extractive industries” (oil & gas, mining)
“Test the Waters”
’33 Act Sec. 12(a)(2) private liability


Reality Check

Before the small company issuer community uncorks the champagne, it is important to recognize some practical realities and limitations about the new Regulation A regime.

SEC Review. Both Tier 1 and Tier 2 offering statements will be reviewed by the SEC’s Division of Corporation Finance examiners, and Corp Fin is on record as stating that Reg. A offering statements are subjected to the same regulatory scrutiny as any S-1 registration filing, applying Regulations SK disclosure and SX accounting standards. Preparation of a Reg. A offering statement is going to require significant legal and accounting expense.

Registrations by Qualification. At the state level, Regulation A offerings are registrations by qualification, i.e., full registrations, akin to S-1 filings with the SEC. There is no Reg. A exemptive complement at the state level, nor did the SEC impose Reg. A on the states. At the state level, registration by qualification filers are usually required (either by state statute or rule or both) to provide audited financials. So, under Tier 1, although the SEC will not require them, the states might and might have to require them (absent waiver authority), making the Tier 1 waiver rather meaningless.

Merit Review. Generally, merit states have the power to limit sales by insiders and affiliates more strictly than the SEC’s Tier 1 limits. Even with waiver of loan repayment and cheap stock guidelines, merit states might pose problems here. Merit review can be avoided by selling shares exclusively in those states that do not apply merit standards, i.e., the “disclosure” states.


Financials. At least in middle America, offerings of more than $10 million by early stage or other lesser known private companies are likely going to have to be made by one or more broker-dealers to succeed. Will these broker-dealers be willing to take on an offering by such a company that does not have audited financials, regardless of what the regulators require?

Reporting. It is one thing to say that shares will be freely tradable, and another to say there is a market for them. Will broker-dealers be able to market the shares to investors on the basis they are freely tradable if the company does not commit to making periodic, public reporting? Will the Tier 1 reporting waiver even be relevant?

Suitability. While there may be no investor qualifications in Tier 1, and only limited qualifications in Tier 2, the SEC did not exempt broker-dealers that sell the securities from their suitability obligations. Will such offerings be “suitable” investments for non-accredited investors, even if the investors are investing less than 10% of income or net worth?

FINRA. How will FINRA’s Corporation Finance section handle these new Reg. A offerings made by their member firms on behalf of client issuers? Will FINRA apply full registration review to the offerings, or will the deals be treated as some sort of exempt offering with lesser or no standards imposed? It is highly unlikely FINRA will ease its suitability requirements on broker-dealers. Nor are the states likely to do so.

Section 12(a)(2). Under this section of the Securities Act of 1933, a “seller” of securities is liable to the “buyer” for making any untrue statement of material fact or for omitting to state a material to the buyer that makes what was said misleading. (Unlike under Rule 10b-5, there is no remedy under Section 12(a)(2) for a seller defrauded by the untrue statement or omission of a fraudulent buyer.) The only defense under 12(a)(2) is that the seller did not know, and reasonably could not have known, of the untruth or omission. The seller is strictly liable for any such material untrue or omitted fact unless the seller can establish he was not negligent in not discovering the untruth or omission. That is tough to do. Most other liability under federal securities law requires a much greater degree of seller intent to defraud or scienter than under Section 12(a)(2). This section lost a lot of its punch after Gustafson v. Alloyd, 513 U.S. 561 (1995), when the U.S. Supreme Court ruled it applied only to “public” offerings. Congress breathed new life into the provision in the JOBS Act when it made those who offer and sell under Regulation A (and the crowdfunding exemption, whenever those enabling rules are promulgated) subject to Section 12(a)(2) liability. This constitutes important and very potent new issuer and seller liability.

Crowdfunding. With the exception of the Tier 2 investor qualifications, there are no other limitations imposed in the new Reg. A on how the offerings may be offered and sold. So, an issuer can employ crowdfunding to sell its offering once it has been cleared for use by regulators. It remains to be seen if up to $50 million offerings can succeed using crowdfunding.

SEC Registration. With both the new Regulation A and Rule 506(c) (publicly offered private offering solely to accredited investors) in place, it is hard to imagine why any company not already public would register an offering of less than $50 million (unless a “blank check,” oil & gas or penny stock offering or “bad actor” disqualified) with the SEC.

Venture Exchanges. The idea of establishing an exchange to complement the tradable shares sold in Reg. A offerings as well as secondary market shares of other, lesser known companies has gained some traction of late. None exists at present save for “pink sheet” trading on the Internet. Lack of liquidity is a chronic problem in small company investing. It makes it difficult to sell the shares in the first place, and later down the road. The balancing factor is the hope the investor is getting in on the ground floor of the next Apple, Microsoft or Google. Independent analysts are unlikely to follow such small companies in any significant strength, leaving understanding the company and its future to the individual investor, with limited reliable public information on which to base an investment decision. It is entirely unclear how a centralized marketplace for these lesser known securities would be able to operate at sufficient volume to make it worthwhile. Will broker-dealers, market makers, independent analysts and serious investors pay any more attention to such securities on a venture exchange than they already pay to them on line as “pink sheet” companies? Pink sheet shares are far more often accompanied by questionable Internet hype, shorting and momentum trading than fundamental valuations. How will an exchange improve that situation? There is much to do before any such concept comes to fruition.



Written By: Phil Feigin

Has the time come to license investors?

Regulators are often called upon to draw regulatory lines. In my experience as a former regulator (some would argue I never left, though it’s been almost 16 years), when called upon to fashion a regulatory scheme, it was a lot easier to flat out prohibit something than to decide how many of something would be allowed and how many would not.

Bright line numeric standards have their advantages. They are clear for all to see, both the regulators and the regulated, but they will all but certainly be set arbitrarily. In an environment where documented justification is required for any regulatory decision, it is all but impossible to find empirical evidence to support a conclusion that 15 is legal but 16 isn’t. It is a fool’s errand to argue the rationale why 15 is lawful but 16 is not. The only response possible is “because we had to draw the line somewhere.”

The “debate” to date against altering the standards in the 1982 definition of “accredited investor” has, in my view, been lacking in discussion of principles and empirical evidence. Consumer groups and state securities regulators have supported raising the standards, if for no other reason than inflation since 1982. Industry representatives, particularly those who have gone all in on the prospects of public solicitation and crowdfunding, have advocated for keeping the numbers where they are (or doing away with them altogether) with all the independence and credibility of a brewery lobbying to lower the legal drinking age. And what of those who would be directly impacted by new and higher standards? There has been no hue and cry, no outrage, no speeches about denial of rights, no taking to the financial streets with placards demanding to be among the “privileged” with access to private placements.

The problem with the whole “raise the standards” argument is that it begs the question, “Were they correct in the first place?” I agree wholeheartedly with those who question whether a net worth of $1 million (excluding principal residence) or two years of $200,000 in annual income (or $300,000 jointly with spouse) was what the Supreme Court had in mind in ruling way back when that private offerings could only be made to “sophisticated investors.” I might be willing to buy that having a million bucks in assets or making $200,000 per might mean a guy has the wherewithal to hire a professional to review an investment opportunity, but it says nothing about his financial sophistication to judge for himself. Far too often these days, that $1 million in assets is totally 401(k) money, built up over a 30 year career, with no pension in sight. It is not just running around money, and losing $50,000 or $100,000 of it is not something an older investor can easily make up once retired or even close to it.

It doesn’t take long as a regulator dealing with victimized investors before you find yourself internally struggling against developing a cynical perspective. You begin to wonder, even if jokingly, whether we’re going about it the wrong way. Instead of registering brokers and regulating issuers, we ought to be licensing investors. Make them take a test before they can invest, and impose continuing education requirements on them to maintain their investor’s license, and presumably, their acumen.

In a crude, indirect way, we sort of do that already, but we make the industry impose the test. Brokers and investments advisers are only allowed to recommend “suitable” investments to their clients. They are required to analyze the client’s financial sophistication, conditions and expectations before recommending investments to them. On the private placement promoter side, the “accredited investor” standards are an even cruder means of sorting those who should and should not be allowed to invest in investments deemed systemically riskier than others. Anyone who has ever fielded investor complaints wonders about the efficacy of the suitability and accredited investor standards, how they are applied, and how often they are ignored.

Assuming we are not going to develop a regulatory regime to license investors, both regulators and industry need another bright line means of identifying “accredited investors.” Whatever they come up with, it must this time be a meaningful indicator of true investment sophistication and the ability truly to withstand a total loss of investment. Advocates for the current “accredited investor standard” (or for no standard at all) have waved the banners of small business being the engine of the economy and job creation, humming God Bless America, but there are there any reliable statistics to support the premise that making it easier to offer private placements creates jobs? At the same time, detractors make the argument that easier private placements mean an increase in floundering businesses and frauds that sap capital from the real economy and cost jobs. Intuitively, both are right, but neither can truly prove it.

Here are my thoughts on revising the accredited investor standards:

  • the SEC should get rid of the income test—the accredited investor definition is the only place in federal securities law of which I am aware that includes an income test, and for good reason—ditch it;
  • keep the $1 million in assets test but 401(k) and IRA assets should be excluded unless the investment is made through or with the advice of a registered/licensed/family office investment adviser or broker-dealer,
  • even then, such an investment should be limited to no more than, say, 10% of total investment assets; and
  • people who already have at least, say, 25% of their total investment assets in brokerage accounts or alternative investments that are not held in 401(k) accounts or IRAs would be “accredited” on that basis alone.

These standards would provide for at least a modicum of investor sophistication (or at least potential liability for the people making recommendations) and protection against devastation. If 401(k) and IRA funds are eliminated from consideration, it probably wouldn’t be necessary to adjust the $1 million standard for inflation.

I do not envy the SEC’s task. No matter what they come up with, some people on one side of the line or the other will be unhappy. That’s what happens when you draw lines.

Fiduciary Duty for Broker-Dealers and Agents

Written By: Phil Feigin

Could the states impose fiduciary duty on their own?

For more years than I care to remember, consumer groups, state securities regulators and investment advisers large and small have warned of the confusion wrought on investors by the differences between the duties owed them by investment advisers and broker-dealers. IAs are fiduciaries and thus have duties of care and loyalty to their clients, while broker-dealers (absent discretionary authority) are generally not held to a fiduciary standard, subject instead to the lesser suitability standard, i.e., the requirement that they recommend only investments that are “suitable” to their customers. With the array of euphemistic titles brokerage firms bestow on their agents, calling them anything but salesmen, and the blizzard of commercials in the media in which they declare themselves to be in the investor’s corner, it is easy to make the case as to confusion.

I, for one, tend to downplay the confusion factor. I am sure many investors are at least confused as to the duties they are owed by their financial providers. At the same time, I doubt any consumer who visits a Volkswagen dealer is going to be confused by the fact they are likely to be shown Volkswagens to the exclusion of all other brands. But I digress.

The confusion argument has compelled a great deal of dialogue over the last many years, and led to the SEC’s Congressionally mandated assignment in Dodd-Frank to study and consider adopting a uniform fiduciary standard for broker-dealers and investment advisers. For me, that would be like drafting a uniform standard for real estate salesmen and attorneys, but again, I digress.

Ever since, the same consumer groups, state securities regulators and investment advisers large and small have been exhorting the SEC to adopt such a uniform standard, meaning some form of fiduciary duty. Notwithstanding Capital Gains, fiduciary duty is traditionally a matter of state law. The concept is a rarity in federal securities law. The preemption that has befallen state securities law of late often leaves the states with no choice but to urge the SEC or Congress to do something as opposed to doing it themselves.

Under the National Securities Market Improvement Act (“NSMIA”) back in 1996, the states were preempted from imposing any broker-dealer regulatory requirements that departed from federal standards:

No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this chapter….

In my view, the thrust of the provision was to prohibit state securities regulators from imposing books and records, forms and similar requirements on broker-dealers and their agents that were different than those required under federal law. My question is “would this (or some other) language also preempt a state from amending the private liability section of the state securities law to provide a private remedy for any investor whose broker-dealer or agent fails to act as a fiduciary to that investor?” I don’t believe anyone can say at this point.

How can anyone know? The only way to test the premise would be for a state to enact such a provision and wait to see if a broker-dealer successfully defended arguing the imposition of fiduciary duty is preempted in NSMIA. Scrutinizing the language, I can conjure up only two potential bases for preemption of such a state imposition of private liability for failing to act as a fiduciary under the provision. The first is under the term “financial responsibility,” although I believe that would be a reach as this phrase is meant to refer more to requiring a brokerage firm to have adequate capital, custody and the customer protection rule under the Securities Exchange Act of 1934. The second possibility would be a “penumbra” to the provision argument, i.e., it is not actually stated in the law expressly, but a court would rule preemption to be found in the “general intent” of the language.

Rather than waiting for and continually urging the SEC to suffer the laboring oar in the controversy, one or more states could propose and enact legislation that would create private civil liability on their securities brokerage licensees and registrants for failure to provide fiduciary services. This would not be a “law, rule, [or] regulation” constituting any sort of procedural snag in the licensing or registration process, as requiring separate state-required forms, reports, testing and filings might present. It would merely be grounds for private civil liability, a matter of prescribing the rights and liabilities between contractual parties.

Rather than continuing to harp on the beleaguered SEC to do something, perhaps a state itself committed to the cause could stand up for what it believes in and serve in that federalism-hallowed role as laboratory for new ideas. Let a state give such a private remedy a try. It would certainly get everyone’s attention.

About “Neither Admitting Nor Denying”

Written By: Phil Feigin

For the “uninitiated,” one of the odder aspects of securities law enforcement in the U.S., federal, state and SRO, is the consent injunctive prohibition culminating an enforcement action. Whether in the form of a court order, an administrative consent order, or an AWC (“Acceptance, Waiver and Consent”) from FINRA, among the sanctions levied against the person charged is language under which he is prohibited in the future from violating the securities law, regulations or rules that the average reasonable law school graduate would swear could not be violated in the first place. Is there some sort of regulatory “one bite” rule they didn’t teach you in law school?

Even more arcane is the fact that the stipulations entered on which the consent orders are based all but universally contain the proviso that, in agreeing to the entry of the order, the defendant/respondent neither admits nor denies that any of the allegations set forth in the matter by the regulators is true. Again, to the “novice” perusing such documents for the first time, considering that the stipulation and consent order were entered following an intensive, two year investigation including eighteen depositions, and production and review of enough documents to fill the Grand Canyon, resolving the matter without anyone admitting anything might seem somewhat—oh, I’m reaching for the word—tepid?

I was just as puzzled as most when I first encountered the prohibition and neither admit nor deny language back in 1979, my first year as a regulator. As it was explained to me back then, the reason for the prohibition language was to put the defendant/respondent on clear notice as to the law. Were the subject of the order to be found to violate it in the future, it would be helpful in seeking a contempt order, and assist in establishing “willfulness” for a criminal prosecution. Such an order was also a means of educating the general public that might read it as to the securities law and the way in which the agencies interpreted it in the context of specific conduct. So, no, there’s not really a “one bite” rule in securities law, even though it may sound like it.

The “neither admit nor deny” language is allowed for a number of reasons. First and foremost, such stipulations and consent orders are issued by regulators in administrative or civil forums regarding violations of statutory provisions that, in all but a few circumstances, also constitute crimes if found to be “willful.” Given that “willfulness” has been defined by one influential authority as nothing more than a “legislative hint to the administrator for discretion” as to which matters should be referred to prosecutors for criminal action, this barrier is not much of a hurdle to clear. The feeling was that a regulator could and should not make a party admit violations in the administrative or civil context that would constitute confessing to committing a crime in the criminal context.

Secondly, many of those very same administrative and civil violations give rise to private civil liability. If a party was made to admit violating the law in resolving an enforcement case, it could be viewed as confessing judgment for wronged investors. Regulators generally shy away from affecting the rights and liabilities of private parties. If for no other reason, they can be very bad at it. It is not their foremost mission to serve as a collection agency or to resolve who gets what of the money recovered. Those jobs are for private counsel, courts and receivers.

Further, were parties made to admit violations, they would either never settle the enforcement case, or the regulators would be put in the position of pleading the case down to some violation without criminal or private civil implications. Electing to resolve a major fraud case with the defendant’s admission to “record-keeping violations” and a $15 million fine would serve no interest at all.

Requiring admissions would likely grind the process down to a halt. Just as with plea bargains in criminal prosecution, there simply are not enough courts, judges and trial lawyers to bring every case to trial. There aren’t enough resources to bring even a lot more of them to trial. NASAA and other investor advocates are calling for an end to mandatory FINRA arbitration for brokerage clients. They would reverse the Supreme Court’s decision in Shearson v. McMahon that the Federal Arbitration Act preempts federal securities law voiding waiver of private rights. Can anyone really doubt that Shearson was rendered with at least some view toward the crisis of resources all those investor lawsuits would mean were they all brought to federal court?

In my view, securities regulators already have enough to do rather than fight the battles of private civil litigants and criminal prosecutors. Perhaps requiring admissions from defendants would provide some sense of moral expiation for those who advocate it, but at what cost? Will the requirement make the regulators “tougher” somehow? “We really showed them!” I suspect not. There is more than just “well, that’s the way we’ve always done it” to “neither admit nor deny.” It has been and is a way to finish Case 1 expeditiously and get on to Case 2, bringing as much suspected violative conduct to the public’s attention as soon as possible.

It is a slippery slope. If admissions are required in enforcement cases, can demands for criminal prosecution of every violation be far behind? And then how about sentences for everyone found guilty? Then we’ll really show ‘em!

Anyone who has served as a regulator negotiating an enforcement case settlement knows how defendants fight tooth and nail against agreeing to a stipulated consent order. The damage is done. They will have to report it and disclose it. They will have to try to explain it away to customers, banks and potential business partners for years to come, given the Internet. No one who reads the order takes into account that the defendants neither admitted nor denied the allegations are true. Down the road, the allegations will be treated as hard and fast facts by anyone except a court in a later proceeding, and even then, the allegations can be damning.

Retrieving damages rightly is and ought to be the domain of private civil counsel. A significant policy problem arises when private suits are precluded by legislative constraints. But that’s a subject for another day. Prohibitive injunctive orders and “neither admit nor deny” stipulations are the results of a lot of policy determinations and judgment calls. They weren’t just plucked out of thin air. They ought to be left alone.

Why All The Angst About Public Solicitation?

Written By: Phil Feigin

Without much fanfare, Mary Jo White’s reign as chairman of the Securities and Exchange Commission has begun in earnest. The first regulatory Gordian knot, of the sort that stymied Mary Schapiro’s Commission into an administration with all the innovation of Herbert Hoover’s presidency, has been untied. Ms. White’s SEC proposed new rules to govern money market funds. It well might be argued that the seeds of these consensus proposals were sown a year earlier, when Ms. Schapiro championed bold reform efforts in the face of ardent opposition.

The Commissioners’ consensus and unanimous vote on the money market fund proposals beg the questions:  how many more regulatory logjams at the SEC will be broken, and when? Will the JOBS Act initiatives be next? Will it be crowd funding (the purist in me still precludes me from treating it as one word), the populist and ill-conceived notion for bringing capital formation to the common man—a financial version of the hula hoop and pet rocks (about as useful but much more dangerous)? I doubt it.

Or will it be the change called for in the JOBS Act that the professionals are waiting for, the Congressionally mandated SEC amendments to Rule 506 to allow public solicitation to verified accredited investors? While crowd funding drew a lot of consternation from regulators and consumer protection activists, it is the prospect of public solicitation of Rule 506 deals that is of greatest concern. This is where the real fraud and harm will be centered.

Entrepreneurs and their counsel view the regulatory resistance to public solicitation as some troglodyte, Neanderthal, mindless, Flat Earther reaction to innovation and positive change. Allow me to peel some layers off the onion to explain my concerns (my law partners will never accuse me of having left my regulatory roots far behind). Perhaps these concerns are representative of those of my former colleagues in the investor protection trenches.

First and foremost, regulators only see the worst of the worst private placements. They see them in investigations and enforcement cases. Without any scientifically validated evidence to support the conclusion, any enforcement guy will tell you there is an uncanny correlation between private placements that are being publicly solicited illegally and those rife with abuse and fraud. QED—show them an unregistered deal being publicly solicited and you show them a fraud. That connection has been hard-wired into the enforcement DNA for more than 100 years.

Second, anyone can make a private placement offering. Anyone can pull down a PPM from the Net and edit it to fit their deal. They do not need the resources necessary to register an offering, to deal with the lawyers, accountants and broker-dealers and the regulators. All they need is a computer and an Internet connection. As a result, in addition to fraudsters, shaky private placement offerings can also be made by starry-eyed entrepreneurs who have no hope of succeeding in anything except perhaps convincing some other unsophisticated people they can turn their dream into profitable reality. Whether to a bungling amateur or a slick con man, lost life savings can be just as harmful to unsuspecting victim investors. Enforcement personnel have to deal with all too many errant dreamers who publicly solicit too.

Setting those very real, experience-based factors aside, the real core issue is that the long-standing limitation imposed on private placement issuers allowing them to solicit only those persons with whom they have a pre-existing business or personal relationship carries with it a sense of issuer maturity, of seasoning. Only those issuers who have developed a loyal following of persons over years, people who know them, whose trust they have earned, and are willing and able to support their capital needs based on their history of success and accomplishment, are those issuers who ought to be raising money through private placements. That’s the way it’s supposed to work.

On the other side of the coin are the entrepreneurs, particularly those less established entrepreneurs, who believe to the last fiber of their being that they will succeed in raising the capital they need if only given the chance to publicly solicit. Nature of the beast. They believe that, given the opportunity to share their ideas with others, these strangers will be convinced of the prospects as well, and will support the entrepreneur’s efforts. Sure, the entrepreneurs are willing to make disclosures about their ideas, just as long as they don’t have to pay lawyers to put together a private placement memorandum no one reads anyway. But a prohibition on reaching out to people who might want to share in the dream is downright un-American. But for the prohibition, their dream could become reality and all involved would benefit. [1]

I have long supported Internet-based matching services where potential issuers can post their ideas for vetted angels to peruse undisturbed at their leisure. Those who wish to pursue investing may contact the issuer directly. That should not constitute “public solicitation” for Rule 506 purposes and the website hosts should not be classified as broker-dealers when they take an equity stake in the funded companies. The JOBS Act pretty much mandated implementation of both ideas, and those changes are long overdue.

That said, very few deals at any level are sold on the basis of disclosure information sitting on some website waiting to be perused. There is an old adage that securities are not bought, they are sold. That means brokers, salesmen, guys on the phone pitching, and pitching hard. It is here I predict the private placement enforcement cases of the future will lie:  unregistered brokers and agents and their fraudulent solicitations.

As a general rule, issuers make lousy securities salesmen. It is the track record of the seasoned, successful issuers that attracts their loyal following to their next deal. Any sales effort is minimal. If those issuers had to expand their market to solicit new, unknown prospective investors, their chances of failure to raise capital would soar.

Issuers don’t want to sell their securities, they just want the money. It is natural that they have in the past and will in the future turn to those who are in the business of selling. The JOBS Act did virtually nothing to amend the Securities Exchange Act of 1934 or Rule 3a4-1 in this regard. Those who engage in the business of selling securities are and will continue to be brokers.

The SEC has been uncharacteristically active of late in pursuing unregistered broker cases. Further, and ironically, the opportunities that will be presented by the ability of issuers to publicly solicit for accredited investors coincides with the advent of the most extreme restrictions in decades on registered broker-dealers getting involved with private placements.

In the wake of several recent, highly visible, national private placement frauds, many broker-dealers that were willing to market private placements that (perhaps unwittingly) marketed the fraudulent securities went out of business. Those that continued to market other private placement issues have been faced with intensive regulatory examinations and skepticism. More recently, FINRA has imposed its Rule 5123, requiring much more of broker-dealers that elect to market private placement securities. With the ranks of those firms willing to market private placements thinned by attrition, these new factors are not likely to help replenish the ranks and attract member firms to the private placement market in the future.

That leaves us with the rogues. Private placement issuers that turn to public solicitation in the absence of a ready market for their securities will find out quickly that merely posting the opportunities on websites, or advertising in newspapers, or even via spots during Star Trek or infomercials between late night movies will not attract the investors they need. That is when some will turn to the “placement agents,” “finders” and the like who, through their own websites and other ads, purport to have access to eager accredited investors for private placement issuers. There are far too many of these illicit operations and operators out there today. Their numbers will only increase once the new Rule 506 public solicitation rules are effective.

There is no bright line test to separate those few legitimate, true finders from the far more common illicit, unregistered brokers. It will take a massive diversion of resources for federal and state securities regulators even to make a dent in the hoard of illegal operations and operators who are bound to spring up. Fraudulent private placement issuers will use their own pitchmen. Unsuspecting issuers will retain unregistered firms, and hire unlicensed people to sell their offerings in even greater proportions than they do today. Enforcement efforts will have to be far more “after the fact” than the tripwire that mere public solicitation is today.

Advocates of limited regulation have used the requirement that the SEC conduct a cost-benefit analysis prior to promulgating rules to great advantage in testing and defeating SEC proposals of late (would that legislation enacted by Congress was subject to the same analytic gauntlet.) Contrary to the belief of some entrepreneurs and their market advocates that, but for the ban on public solicitation, they could find investors for their private placement offerings, I fear the lifting of the ban will precipitate far more illicit conduct and investor losses to fraud than any legitimate investing, let alone job creation. Professional investors are not likely to be located by means of ads, cold calls and websites. And make no mistake—there will be a flood of such solicitations. True investors find their investments through networking, through trusted channels of people with whom they have dealt for years. The fraud that will trace its roots to now allowed public solicitation of purported Rule 506 deals will far outweigh any benefit derived from allowing it. The extent of the fraud will boil down to how long public solicitation is allowed before everyone comes to their senses.

[1] However, I note that, in my 34+ years of securities regulation and practice, not once has an investor called and complained to me that they could not find an investment to invest in.


Written By: Phil Feigin

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi was born 131 years ago this coming March, and died penniless in a Rio de Janeiro charity hospital two months shy of his 67th birthday, just two months before I was born, in 1949. While he did not invent the sort of scheme he pulled off in Boston back in 1920, the brazen and spectacular nature and scope of his fraud warranted naming rights.

By now, most are familiar with the classic Ponzi scheme pattern. A promoter raises capital from investors for an enterprise, promising high returns paid in short order, perhaps weekly, monthly or quarterly. The promoter actually pays initial investors the promised returns. Recognizing that the unbelievable has come true, i.e., the operation is returning 20% a month (or whatever), these first investors decide to reinvest their initial returns and let them and future returns roll over for a compounding effect. The hook is now sunk.

These early investors tell all their friends and provide testimonials. Some of them have swallowed the bait so hard, they may even start selling the investments to family, friends and anyone else who will listen. And then there’s the Internet and social media.

The cash rolls in. A few months or years later, investors ask to withdraw some or all their funds. They get excuses, but no money. In reality, there never were any profit- or even revenue-generating operations; all the scammer did was raise money and keep the imaginary balloon inflated. Those first returns were just of some of the investors’ own money. Most of the proceeds have now been drained away by the scammer, less occasional payouts to the “squeakiest wheels.” You know the rest:  disconnected telephones, regulators, newspaper stories, subpoenas, interviews, denial, fury, fear, court documents, accountants, receivers, grief, greed, the occasional financial literacy editorial, clawbacks, those who weren’t bilked asking how those who were could have been so stupid, betrayal, desperation, anger, loss of trust and faith, excuses, recriminations, prosecutors, more court, retribution, contrition, sentencing, perhaps a legislative committee hearing or two, blame all around, and finally, nothing but  hollow questions of how it all happened and what might have been. A complete waste, except for boosting the revenue of casinos, drug dealers, mansion and exotic car sellers and leasers, jewelry stores, fashion retailers, art dealers, hotels, airlines and fancy restaurants.

In the Post-Madoff Era (“PME”), barely a week goes by without word of a new Ponzi scheme being uncovered and shut down somewhere. As I see it, three factors have contributed to this apparent bull market in Ponzi schemes. First, we’ve had five years of recession and bad economic times. A lot of people lost a lot of money in investments and real estate, a lot of retirees are suffering, markets have been volatile, and traditionally safe returns have been microscopic. The allure of higher returns in the “safe” strategies only a promoter not burdened with the truth can promise has for some been too much to resist.

Second, in good times, investors don’t need to withdraw principal from good, growing investments. In bad times, or after bad news in the media, they flee to cash. In some ways, that explains the longevity of Madoff’s scam. It wasn’t until after the Lehman Brothers/Reserve Primary Fund debacle that people who had invested in “hedge funds” started asking to liquidate their holdings by the thousands. The volatile markets and continuing problems here and abroad, as well as Ponzi scheme revelations themselves, precipitated unprecedented and unanticipated investor requests for liquidation of alternative investments. The scammer’s inability to meet broad scale requests for cash meant the beginning of the end.

Third, it is my completely unverified opinion, supported by nothing more than my 34 years of dealing with and observing the SEC Enforcement Division staff, that, before the onset of the PME, Enforcement personnel viewed work on Ponzi schemes as somewhat beneath them. That was not the path to greatness within the Division. Working insider trading cases, major company accounting fraud, mutual fund finagling, Foreign Corrupt Practices Act violations, wire house deception—now, you’re talking. Not everyone in Enforcement is there to cash in with a Wall Street or D.C. law firm partnership after 10 or 15 years toiling away at the Commission, but that prospect is hard not to at least consider. It is only natural to aspire to advancement within the Division as well. Before the PME, work on Ponzi schemes simply was not pursued with much vigor.

Once the Madoff and Stanford revelations started pounding the SEC’s midsection, it seems Ponzi schemes became Public Enemy Number One at Enforcement (and at the state level as well). I’m guessing a memo went out to all SEC Enforcement staffers across the country to review any complaints received in the last three years for potential Ponzi schemes and prioritize them. Reports were requested and generated regarding any current investigation or litigation. Headquarters made it a point to emphasize every enforcement action taken against anything even resembling a Ponzi scheme.

It is my unofficial observer’s sense that the PME saw the creation of a new term:  frauds were now described as “Ponzi-like schemes.” What in heaven does that mean? Does the Ponzi family have a copyright on the term, and SEC officials hoped the qualifier would avoid having to pay the royalties? “Operating a Ponzi scheme” is not an express violation or crime that I know of. You don’t get any more points if you prove it was a “Ponzi scheme” as opposed to some other form of fraud. It is merely a colorful and convenient way to describe how a lot of investment frauds operate.

I don’t think we will ever know if there have been more Ponzi schemes in the PME, or if it is simply a fact that more are being detected, investigated and publicized. In spite of the best intentions and efforts of financial regulators everywhere, the number of people willing to fall prey to Ponzi schemes seems endless and infinite. This demand inexorably leads to more and more scammers, who, in my experience, universally believe they are smarter than the morons before them who got caught.

The purported deterrent effects of heightened enforcement efforts and ever increasing prison sentences are myths. These scammers don’t think that way. As proof beyond my own personal experience in dealing with them, I offer the following as empirical evidence. If the scammers feared being caught, wouldn’t they take the money and run? Pull a “Body Heat”? Raise lots of money and then disappear to an unnamed Caribbean island and wile away the rest of their lives under an assumed name, tanning and sipping umbrella drinks by the pool? But, remarkably, few do. Perhaps their hanging around can be explained in part by their greed for ever more money and the lifestyle riches brings in South Beach, Beverly Hills or SoHo, but there’s got to come a point, no?

Well, Happy Birthday Charlie! Your soiled name lives on, and will for the foreseeable future. Would that it and the scams it describes wither and disappear into the ashes of history.

Sometimes The Regulated Obey More While The Regulators Could Care Less

Written By: Phil Feigin

After spending 20 years in state securities regulation and enforcement, I would have supported a law making the sale of a security a felony. In 20 years, no citizen had ever called me to report they had made money investing. Everyone lost. In call after call, letter after letter, one investor after another complained of investment deception, fraud and abuse, at the hands of a brokerage industry that was nothing more than a band of corrupt swindlers. Losses incurred in private placements—especially Reg. D, Rule 506 deals—showed they were the work of the devil. From my perspective, the lawyers who represented these guys were all crooked aiders and abettors. Abject cynicism and universal suspicion borne of all this were hard siren songs to resist.

Helping me temper those extremes and gain some balance was my experience as a state regulators’ liaison to the State Regulation Committee of the Business Law Section of the ABA for several years. Attending ABA meetings and otherwise interacting with committee members gave me a broader perspective on regulation and the professions we were charged with overseeing. The state securities law practitioners who participated on the State Reg. Committee were from some of the most highly respected and sophisticated firms, dealing (for the most part) with legitimate and worthy clients. Not quite the “clientele” I dealt with back home.

The experience opened my otherwise myopic eyes to the possibility that, every once in a while, it was the regulators who were screwing up and not the regulated. I dare say that my participation and that of the state colleagues who attended meetings with me opened some private sector eyes as well to problems confronting state regulation. It is unfortunate that, generally speaking, NASAA (the North American Securities Administrators Association), state administrators and others have not attended the State Reg. meetings in recent years. In my view, both the state regulators and the Bar and the public we serve would benefit greatly from the interaction.

State regulators may not realize the extent to which the legitimate private sector goes to comply with laws and rules, even some laws and rules that the regulators themselves might not view with much priority. I find it ironic that the industry is often much more worried about complying with some regulations than are the regulators themselves. I’ll cite three examples.

Form D.  Before enactment of the National Securities Markets Improvement Act (“NSMIA”) in 1996, I think most regulators made sure the filing fee check that came with Form D cleared, and then threw the forms in some dark room, never to be seen, let alone referenced, again. More attention to the Form has been paid since 1996, but at least in most states, not all that much more. Yet many an associate and paralegal have sweated bullets trying to get the darn things filed correctly and on time. Maybe I’m speaking out of school, but with the exception of a few states, Form D remains more of a pain to states and the SEC than of any significant regulatory benefit. The Recession may have changed that a bit from a state revenue perspective, and it will change even more substantively after the JOBS Act Rule 506 changes kick in, but generally speaking, I think the Bar takes compliance with Form D filing requirements a lot more seriously than most state regulators and the SEC take them. For the regulators, it has been more of a pain than it’s worth.

The Model State Commodity Code.  I have written on this subject elsewhere so I will not belabor the point. Suffice to say that the 19 states with the Code in one form or another have all but forgotten it exists, while precious metals companies around the globe struggle still to comply with its outdated restrictions. This is another case where the private sector spends much more time and energy complying with regulations than do the regulators enforcing them.

Brokerage Registration and Licensing Requirements.  Show me a Merrill Lynch or UBS broker who is detected doing business with clients in a state where he/she is not registered or licensed, and BLAM, the regulators will come down on him, his supervisors and his firm like a ton of bricks, with demands of refund of commissions, perhaps adoption of enhanced supervision, a consent order, and maybe even a fine to boot. However, show me an unlicensed “finder” who makes a living brokering private placements and hedge funds on commission or locating merger/acquisition partners and helping to negotiate the deal for a “success” fee, and, absent fraud, the regulators are nowhere to be found, even if the brokers advertise. Meanwhile, issuer counsel tears his/her hair out trying to convince otherwise lawful issuer clients that these unlicensed people are far more than “Paul Anka” finders, are acting in clear violation of the law, and, in many states, it is also illegal for the issuers to hire them.

Several committees of the ABA have been working to get the SEC and the states to adopt a system of “merger broker” and “private placement broker” regulation for years, but without much success. I think the lack of action from the regulators is due, at least in part, to:

(1)     many other and higher regulatory priorities;

(2)     a general lack of complaints of fraud; and

(3)     the realization that if the regulators adopt such a new regulatory regime, they will be forced to come down hard on those who fail to comply thereafter, which circles back to Point 2 and an unwillingness to devote scarce enforcement resources to pure licensing/registration cases.

Now comes the JOBS Act and crowdfunding, or more accurately, the prospects of securities crowdfunding and funding portal regulation that will be part of the rules once promulgated. Investment crowdfunding hopefuls all over the country are chomping at the bit to get started, clamoring to be the first with the most. However, for better or worse, JOBS Act-style crowdfunding is currently, entirely and undeniably illegal, as is serving as a portal.

Here I am advising clients, people who want to be legitimate players in the crowdfunding marketplace, to hold their water until the rules are finalized and effective and they are in full compliance with them. The SEC and state regulators both have warned those who want to crowdfund against gun-jumping because crowdfunding isn’t legal yet. Even so, the number of Internet sites whose sponsors appear to be serving as funding portals facilitating crowdfunding of offerings NOW, as we speak, brings to mind those early kinetoscopes of the Cimarron Strip land rush. These sites and companies appear to be openly ignoring the law and the warnings, yet there’s nary an injunctive action or cease and desist order anywhere to be found. Again, most in this embryonic market sector are dutifully obeying the law and biding their time, even though it seems the regulators could care less, seemingly occupied elsewhere.

Unregistered private placement and merger brokers have proliferated to such an extent that they have all but achieved an air of legitimacy through regulatory neglect. The regulators need only peruse the Yellow Pages or Yahoo to find a career’s worth of unlicensed miscreants. Now, it’s happening all over again with investment crowdfunding. It’s getting harder and harder to convince clients it is the wrong way to go.

Looking Back: July 1982, Part Three: The States Come to Denver

Written By: Phil Feigin

In the last two segments, I discussed the beginning of NASAA’s modern era, and in particular, its Enforcement Committee and my first dealing with group. I turn now to what brought me to Denver for the first time, opening new doors I could not have anticipated.

As memory serves, we in Wisconsin and several other jurisdictions were investigating a rather significant and sophisticated national tax shelter scam called “Gold for Tax Dollars” run by a guy named Gerald Rodgers. I was frustrated by the case, because it cried out for a coordinated national effort yet the SEC was not particularly interested in exotic scams (sound familiar?) and individual state efforts were ineffective when crucial records were strewn across the country. I prepared a long letter to Rick Tucker urging him to revisit the idea of joint state investigations with travel, room and board to be funded by NASAA. Unbeknownst to me, Royce Griffin had also petitioned Tucker for help in dealing with his big problem, the penny stock industry in Denver. Colorado had adopted (in my view) the weakest state securities law in the country in 1981, for one thing, stripping the Commissioner of the authority to require licensing of, or regulate, brokerage firms and reps that were registered with the NASD. In Royce’s view, penny stock brokerage firms and their reps in Denver were doing business in states where they weren’t licensed, and committing securities fraud to boot.

It was April or so of 1982. We were at the annual spring meeting at the Hyatt Regency in Washington, D.C. The Enforcement Committee was meeting in one of the lower level conference rooms, and I remember that Ed Greene, then of the SEC, was giving a presentation on the new Regulation D that the SEC was in the process of adopting.

I was pulled out of the meeting by forensic accountant Nancy Jones of the Arkansas staff. My letter and Royce’s entreaty to Tucker had prevailed. Nancy had been recruited by Tucker and Royce to put together what would be NASAA’s first “special project.” She sought my help, along with that of several other enforcement types. We would put together a team of examiners from states where selected/suspected Denver penny stock firms were registered/licensed, thus giving them inspection authority, and these examiners would gather evidence the firms and reps were conducting business in states where they were not licensed. The evidence gathered would then be distributed it to the offended states. To be honest, at the time, I really didn’t know what a “penny stock” was. I had to ask one of my Wisconsin mentors, Ron Burtch, when I got back to Madison.

Back then, it was pretty unusual for state securities agencies to conduct onsite examinations of the headquarters of firms licensed/registered in their states but located elsewhere, particularly out west. It was one thing for a Boston-based Massachusetts examiner to inspect a Providence-based, Rhode Island firm just down the road; it was quite another matter for a Boise-based Idaho examiner to check out a Salt Lake City firm. They simply didn’t have the budget, even though they had unquestioned authority, to do so.

NASAA funding made it possible, particularly if an issue of regional or national concern presented itself. That was the case with Denver’s penny stock firms. The team of 16 or so staffers, including me, flew into Denver the first week of July 1982. (Among team members was Ralph Lambiase, at the time, an examiner from Connecticut, who would later become the state’s long time administrator and a NASAA President, and Lee Polson from Texas, who would become NASAA’s General Counsel a few years later.)

We had arranged for our own rented copying machines to be delivered to each firm that Tuesday morning. Back then, some firms would complain about examiners using their xerox machines, and insisted on having their own people make copies of requested documents. That of course allowed the firms to identify which documents were of interest. Bringing in our own machines obviated that problem.

As I recall, the team conducted exams of about 12 firms. Virtually all of them would go out of business over the next few years. Some I recall were Blinder, Robinson & Co., N. Donald & Co., E.J. Pittock & Co., Vantage Securities, Wall Street West, First Financial, Rocky Mountain Securities & Investments, Hanifen Imhoff (probably shouldn’t have been on our list), S.W. Devanney & Co. and R.B. Marich. The team left for a week and then returned for a second week of exams later that July.

Collectively, the exams collected evidence that the firms and their reps had hundreds of accounts in dozens of states where they and their reps were neither registered nor exempt from the requirement. For some reason, the Vantage numbers stick in my mind. Per NASD records, they were only authorized to do business in Colorado, but our team examiners found they had something like 693 accounts in 39 other states. (Paul Hurtado, who ran Vantage, was murdered years later here in Denver. I don’t think the crime was ever solved.)

Even more glaring than the 693 accounts in states where Vantage wasn’t licensed was the fact that team examiners noted the NASD Denver District office had inspected Vantage twice in the last few years, and had noted the fact in their reports. Even so, the NASD had not done anything on its own to make Vantage correct the problem, and had not notified any of the state securities agencies in the offended jurisdictions. When we brought that to the attention of Georgia securities director H. Wayne Howell, now NASAA’s President, sparks flew. I wish I had copies and recordings of the communications between Wayne and Gordon Macklin, the head of the NASD back then. This issue and other similar bones of contention helped forge the attitudes of a generation of state securities regulators toward the NASD and SROs in general. Things got a bit better in later years, but my sense is the distrust is pretty hard-wired and genetically imprinted in state securities regulators.

A wave of enforcement actions followed in the wake of the distribution of the evidence the team gathered in the two weeks of examinations. I think the count was about 110 cease and desist orders and the like. As I recall, Wisconsin was the first state to enter into a consent order with Blinder. A dozen or so other states took action against Blinder based on the project evidence as well, a statistic that was later cited by a federal judge in granting injunctive relief against the contentious firm in a hard fought SEC action. Colorado had been the jurisdiction to examine S.W. Devanney & Co., and they took Colorado to court in an attempt to preclude the Division from distributing the evidence of violative conduct to other jurisdictions. Eventually, Devanney would lose the case,* and ironically, strengthen the Commissioner’s powers under the Colorado act in doing so.

During my two weeks in Denver, I spent most of the time in “headquarters,” the Colorado Securities Division office, and got to interact with Royce Griffin. It was not long afterwards that he offered me the job of Assistant Commissioner. I was ready for a change, and took on the challenge, moving to Colorado in November 1982.

I had no idea what lay ahead for me. My state regulatory career gave me the opportunity to testify in Congress on many occasions, I would represent Colorado and NASAA traveling to almost every state and Canadian province, Cambridge and Oxford Universities, London, Tokyo, Paris, São Paulo and Montevideo. I would be named to a federal advisory committee, work on the drafting of two Uniform Securities Acts, the Model State Commodity Code, a bunch of federal legislation, and NASAA model statutes, rules and policies. I would go on to be named and serve as Colorado’s Commissioner for ten years, chair NASAA committees and sections, serve on NASAA’s Board, as its President and later, Executive Director, speak at more conferences than I can remember, work on national cases against Salomon Brothers and Lloyd’s of London, and forge friendships for the ages. It all traces back to Nancy Jones plucking me out of that Enforcement meeting about Regulation D that Spring day in 1982.

State awareness of the penny stock problem was certainly raised by the Denver effort. Soon, the NASD would, grudgingly, begin advising states of firm problems with state registration they uncovered in their exams. National publications started covering firms like Blinder, with the famous Forbes story entitled, “Blind ‘em and Rob ‘em.” While I have always held that New York, New Jersey and Florida had far more of a penny stock problem than Denver, at least by number of firms, they had lots of legitimate firms as well. With the predominance of Denver’s penny firms in this market, they stood out like a sore thumb.

Over the next decade or so, the combination of bad publicity, NASD efforts (particularly those of Frank Birgfeld and his staff here in Denver), the SEC’s dogged pursuits, U.S. Attorney actions, Colorado efforts, national, Colorado and Utah legislation and combined enforcement efforts and private litigation combined to end the bulk of penny stock abuses in Denver. I like to think what became known as the “Denver Project” was the beginning of the end for the worst of the Denver penny stock market. It also laid the groundwork for the dozens, if not hundreds, of “special projects” that NASAA has funded in the cause of investor protection.

* Griffin v. Devanney, 775 P.2d 555 (Colo. 1989)

Looking Back: July 1982 Part Two: Origins of NASAA’s Enforcement Committee

Written by: Phil Feigin

One of the side effects of the system was the creation of Series 63, the Uniform State Agent Securities Law Examination (“USASLE”). The states were required to drop their own exams in favor of the national exam, to the great relief of firms and reps across the country. Most states weren’t all that keen on keeping their own exams up to date and administering them anyway, so it was of benefit to them as well as the industry. Series 63 was to be administered by the NASD along with all the other NASD exams at its testing centers, at the NASD’s expense. That was another saving for the states. Finally, and perhaps most importantly, Series 63 was to be drafted and owned by NASAA. For the first time in its existence, NASAA would have an independent, and significant, funding source producing revenue and a budget far exceeding the experience of the past dependent on member jurisdiction dues. NASAA would only get a small fraction of the test fees, but it was still a substantial figure.

That meant that for the first time, NASAA could afford to fund staff members from NASAA member jurisdictions to attend face-to-face meetings at national conferences and otherwise during the year. This gave projects an enormous boost. Certainly, there had been meetings before, and staff members from jurisdictions with ample budgets had attended conferences in the past, but it was nothing like what the new era of Series 63 revenue provided.

I began my securities regulatory career in April 1979 as the Chief Attorney of the Enforcement Division of the Office of the Wisconsin Commissioner of Securities. The first annual conference I attended was that fall, in Little Rock, Arkansas (Anchorage had been selected site, but as it turned out, could not accommodate the meeting, so Little Rock filled in at the last minute). I attended on Wisconsin’s dime because NASAA funding had yet to kick in.

In 1979, I knew nothing of securities law, regulation or practice. Over the next three and half years, the excellent staff at the Wisconsin office had the patience to share with me their estimable and comprehensive knowledge and experience, on which I still rely every day of my practice, and for which I am forever grateful. I thrived in my new career, and being able to attend conferences and meetings, I began to participate in issues of national significance, initially, precious metals fraud.

With NASAA funding, the first winter enforcement meeting was held in January 1980, at the Big Mountain Ski Resort outside Whitefish, Montana, with R.G. “Rick” Tucker as our host. There were about 20 of us. Tom Krebs, the legendary director of the Alabama Securities Commission, was NASAA’s new president, and the Enforcement Committee chair was Wayne Howell of Georgia. There was no conference room—we sat wherever we could in the bedroom, with Krebs and Howell running the meeting from the bed. I remember discussing the idea of multistate investigations to be funded by NASAA, but worries about potentially adverse insurance ramifications quashed the idea.

We tromped along for the next few years, and enforcement types across the country got to know each other better from the face-to-face meeting opportunities. The first winter meeting in Whitefish had grown into a significant annual enforcement conference taking place in various venues. The January 1982 meeting was held again in Montana. Rick Tucker was the Chair of the Enforcement Committee for 1981-82. It was at this Montana meeting that I first met Royce Griffin. I had seen his name in the NASAA directory for prior years as a member of the Arkansas staff, but in February of 1981, he had been named Colorado Securities Commissioner. It would turn out to be an important meeting for both of us.

Looking Back: July 1982 Part One

Written by: Phil Feigin

My life and career changed dramatically and forever in July 1982. I have been encouraged to do some reflecting on times past every once in a while. I couldn’t help but think back to 30 years ago this summer. It was one of those pivotal periods in my life—which is not particularly important to anyone but me, my family and friends—but also in securities regulation and the maturation of the North American Securities Administrators Association (“NASAA”).

Let me set the stage, first on NASAA. Until the late 1970s, NASAA was an organization where the “blue sky” administrators, the bosses, met twice a year, in Washington, D.C. in the spring and a host state venue in the fall. The administrators were usually outnumbered by a large multiple by industry professionals from brokerage firms, investment companies, law firms and the like. It was a good opportunity to discuss events, issues and projects blue sky staffs had been working on back home. NASAA was funded by the dues paid by the blue sky agencies and their jurisdictions. Therefore, it was usually the bosses alone who got to attend the meetings, and only those administrators able to obtain state funding for the trips.

Investing was becoming a middle class/consumer fact of life to an ever increasing degree, inflation was rampant, and brokers across the country were reaching out to investors everywhere, not just where the brokers had their offices. That meant that both firms and agents had to fill out forms, take qualification examinations and meet other requirements of each state jurisdiction where they sought investors, on top of what they had to do for the SEC and the NASD. That was becoming an unholy mess.

The late 1970s and early 80s saw an unusual spasm of uniformity and cooperation that must be marveled at and commended. The SEC, the states and NASAA, and the NASD worked together to come up with uniform forms, entry requirements and tests, and a computerized system for administering all of it. The most recognizable feature of the new system was the Central Registration Depository, or CRD. There were bumps in the road to be sure, and it wasn’t perfect, but the CRD and coordinated registration/licensing process for firms and reps remains a model and paragon for every multistate/federal regulatory registration/licensing structure.