Crowdfunding, Fiduciary Responsibilities, and Auditor Independence: Recent Developments in Securities and Exchange

Strategic Insights -

The Securities and Exchange Commission (SEC) has been grappling with finalizing rules for crowdfunding exemptions under the Jumpstart Our Business Startups Act (JOBS Act) passed in 2012. Meanwhile, state legislatures have taken the initiative to enact crowdfunding exemptions within their state securities laws, with 20 states and the District of Columbia now including such exemptions. In a recent letter, a group of state treasuries and other officers voiced concern about the lack of transparency in fees paid by public pensions invested in private equity funds, urging the SEC to require enhanced and more frequent fee disclosures. SEC Commissioner Daniel Gallagher has also expressed his concerns about the DOL's fiduciary proposal, deeming it unworkable and advocating for a collaborative approach with the SEC. Additionally, the SEC has taken enforcement action against an independent auditor for violating auditor independence requirements, emphasizing the need for thorough monitoring of auditor independence. Furthermore, the SEC has imposed an industry bar against a hedge fund manager for fraudulently inflating asset prices, highlighting the importance of transparency in fund valuations.

Key Takeaways:

  • 20 states and the District of Columbia have enacted crowdfunding exemptions within their state securities laws, accommodating entities located within their home state.
  • State crowdfunding exemptions typically cap offerings at $1 million (or up to $2 million in some cases) and require a filing with the state administrator.
  • The SEC has received a letter from a group of state treasuries and other officers expressing concern about the lack of transparency in fees paid by public pensions invested in private equity funds.
  • SEC Commissioner Daniel Gallagher has publicly criticized the DOL's fiduciary proposal, deeming it unworkable and advocating for a collaborative approach with the SEC.
  • The SEC has taken enforcement action against an independent auditor for violating auditor independence requirements, emphasizing the need for thorough monitoring of auditor independence.
  • A hedge fund manager was barred from the securities industry for at least three years and ordered to pay over $5 million in penalties and disgorgement for fraudulently inflating asset prices.

Statistics:

  • 20 states and the District of Columbia have enacted crowdfunding exemptions within their state securities laws.
  • The proposed crowdfunding exemption under the JOBS Act would allow for offerings to an unlimited number of persons within a state, provided that all offers and sales are conducted exclusively within the state.
  • The proposed exemption would cap securities offerings at $1 million (or up to $2 million in some cases) within a 12-month period.
  • $614,000 was disgorged by the independent auditor and a civil money penalty of $500,000 was imposed for violating auditor independence requirements.
  • $4.2 million was disgorged by the hedge fund manager and a civil money penalty of $1 million was imposed for fraudulently inflating asset prices.

Sources:

  • Mondaq Ltd, 2015 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com
  • Securities and Exchange Commission
  • Jumpstart Our Business Startups Act (JOBS Act)
  • Investment Advisers Act of 1940