We urged the SEC to adopt rules to guide FinTech firms and engage in formal rulemaking regarding the agency’s regulation of digital assets. Without formal rules to guide the industry, FinTech firms will be left with the choice of seeking no action letters from the SEC that their activities do not constitute the sale of securities, or they will have to risk selling securities in violation of the securities laws. The guidance provided in the Investigative Report is illustrative, but informal and we believe that if the SEC develops a regulatory model that is well suited to the industry, it will further innovations and promote job creation.
Ouisa Capital believes RegulationCF functions well for funding portals, but the limitation and requirements placed on issuers are unnecessarily restrictive. The threshold placed on issuers is too low to drive the investment desired with the bi-partisan passage of the JOBS Act. The regulatory obligations of Regulation CF such as the audit requirements and individual state approvals are costly for many entities considering crowd fund investing and can often take up a significant portion of the funds raised through a portal. We encourage FINRA to take whatever steps possible to assist in raising the fundraising threshold as it is critical that the issuer threshold be raised in order to achieve the goals of the JOBS Act. Raising the funding threshold of Regulation CF will help incentivize more companies to take part in crowdfund investing and attract more diverse and mature businesses. Crowdfund investing helps to bring more visibility to companies seeking to funds, in turn exposing them to a greater number of investors. Ouisa Capital encourages FINRA to use its position in the regulation of securities to help pursue the increase of issuer thresholds under Regulation CF. We encourage FINRA to raise with the SEC the possibility of increasing the issuer threshold on a twelve month pilot basis to evaluate whether the increase achieves the desired effect of increasing capital formation while protecting the investing public from unscrupulous issuers that could use Regulation CF for nefarious purposes. At the conclusion of the pilot program, the SEC, FINRA, and Congress can evaluated the impact of the increase in the issuer threshold.
Rule 15c2-11 has played an important part in curtailing the level of fraud in microcap securities. We believe, however, that the Rule is due for a meaningful review and amendment in light of the passage of the JOBS Act and the adoption of Regulation A+. Regulation A+ will more than likely produce an increased number of securities subject to Rule 15c2-11, and without changes to the piggyback exception, could lead to a substantial increase in the number of microcap securities manipulated by nefarious issuers and market makers. We believe that FINRA has an important voice on this issue and should encourage the SEC to engage in a review of Rule 15c2-11 in light of these developments.
Though Ouisa Capital believes the concerns addressed by Rule 3270 are important, we have found in our experience that the rule is overly inclusive to a point of becoming burdensome for Members and Associated Persons. Ouisa Capital encourages FINRA to consider tailoring Rule 3270 to help limit the variety of activities covered by the rule to those that are more likely to be a concern based on the stated goals of the rule as approved by the SEC.
Ouisa Capital believes Rule 3280 is well-tailored to the concerns identified by FINRA. The cope of the rule is effectively limited by the definition provided for “private securities transactions,” which includes those transactions that are outside the regular course or scope of an associated person’s employment.
FINRA should provide clear guidance on the application of Rule 3280 to Members that are also Registered Investment Advisers. Transactions undertaken by a registered investment adviser that is also a broker-dealer, will frequently trigger disclosure requirements under Rule 3280 to make it clear that advisory activities of a registered investment adviser fall outside the scope of Rule 3280.
Ouisa Capital believes that the formation of LabCFTC represents an important step forward in the regulation of FinTech in the United States in a manner that promotes collaboration with the industry. Given the rapid advancements in the industry in recent years and the lack of regulations that specifically address FinTech, LabCFTC is well-suited to help innovators and regulators as they work to develop new technologies in a manner that is compliant with applicable laws. We belive that LabCFTC will help foster innovation by allowing early stage FinTech companies that drive innovation and job creation to develop in an environment that does not impose unnecessary, burdensome oversight. Further it will allow the CFTC to learn about these new FinTech companies and to develop regulations that are better suited to their innovative technologies. Ouisa believes FinTech has the potential to help revolutionize financial services and views LabCFTC as an effective and thoughtful approach to regulation.
Ouisa Capital advocates for the adoption of a regulatory sandbox for financial technology firms. The US FinTech industry has experienced a rapid rate of growth over the past several years, but regulatory frameworks have not kept pace with development. The nascent FinTech industry provides the SEC with a prime opportunity to fulfill its mandate to protect investors, maintain efficient markets, and facilitate capital formation. FinTech has the potential to revolutionize the financial services industry, in particular the issuance, purchase and sale of securities, and the SEC has the ability to regulate these changes in a way that both facilitates growth and protects consumers. Ouisa Capital urges the SEC to develop a regulatory sandbox for its regulation of the issuance, purchase, and sale of securities in the FinTech industry. Like the frameworks used in Canada, Australia, Singapore, and the United Kingdom, a regulatory sandbox created by the SEC would benefit both emerging FInTech companies as well as the SEC as the regulating body. A regulatory sandbox is a construct in which firms are permitted to experiment and grow without excessive regulation so long as their operations remain within enumerated boundaries. A regulatory sandbox will allow the SEC to develop a supervisory model for these innovative forms of securities as the technology evolves. Such a system will also foster innovation by allowing early stage companies, the principal drivers behind technological advancement in FinTech, to grow without having to go through a full registration process.
Ouisa Capital encourages the SEC to engage in a meaningful discussion of how to regulate FinTech companies that are issuing digital assets that may be deemed securities and the platforms and broker dealers that favilitate the issuance and trading of those digital assets. We believe digital assets in several contexts are securities and that existing laws provide a mechanism for regulation of the issuance and trading of digital assets. However, we encourage the SEC to publish a concept release on the regulation of the issuance and trading of digital assets to provide suitable guidance to the industry followed by the adoption of a new regulation on the same.
We commend FINRA for soliciting comments from the industry on the impact of DLT. The present regulatory model already imposes a significant number of rules and requirements on registered entities that engage in various forms of securities transactions. Many such market participants are already using DLT in their business and are doing so in conformance with the current securities laws and regulations. However, there are platforms that are not registered with the SEC or FINRA. We believe further guidance from FINRA and the SEC about the types of activities and transactions involving digital assets that are subject to regulation and registration is the first step to help promote industry awareness of the existing regulatory landscape and which activities lead to the requirement to register.
Ouisa Capital believes the investing public will be better served if FINRA and the SEC provide guidance to firms using DLT to help them better understand when transactions effected through a platform require the participants to register as a broker, an exchange, or an alternative tradition system. Having securities transactions effected through regulated entities increases transparency, provides stronger investor protection and affords regulatory bodies a clear path to enforce existing laws and regulations.
GATE believes Rule 15c2-11 has played an important part in curtailing the level of fraud in microcap securities. However, the Rule is due for a meaningful review and amendments in light of the passage of the JOBS Act. The expanded use of Regulation A will more than likely produce an increase in the number of securities that are subject to the Rule. This increase without a change to the piggyback exception could lead to a substantial increase in the number of microcap securities manipulated by nefarious issuers and market makers. GATE encourages the SEC to review and revise Rule 15c2-11 to address this risk.
While the Jumpstart Our Business Startups Act of 2012 (“the JOBS Act”) represents a meaningful step to improve the capital formation process, Regulation ATS has grown increasingly ill-suited to the new model for capital formation that could rely on the internet to facilitate the sale of unregistered securities. GATE believes the time has come for the SEC to resume the work it commenced in 1998 and consider how best to regulate the sales of unregistered securities through an ATS. While there are a number of regulatory mechanisms to address the sale of unregistered securities, those mechanisms are ill-suited to the use of an ATS or the new platforms that are designed to democratize the capital formation process. While Regulation ATS has played an important role in preserving the integrity of the financial markets and has helped to promote transparency and efficiency in the trading of registered securities, the present regulatory model does not properly address the unique characteristics of new platforms that are designed to democratize the capital formation process. The value of the sale of unregistered securities in an orderly manner that serves to protect the investing public is a cornerstone of the U.S. capital formation process. While the amendments to Rule 506 and Rule 144A permit the use of general solicitation in the offering of unregistered securities, the changes do not address the issue that Regulation ATS failed to properly address in 1998 – how the regulation should apply to the sale of unregistered securities.
GATE encourages the SEC to review and revise Regulation ATS and the rules and regulations under the Securities ACT that address the regulation of marketplaces that focus on the sale of unregistered securities. Such regulations will enable the SEC and FINRA to use currently available surveillance tools in a manner that will enhance market transparency and liquidity, and that will promote investor protection. We encourage the SEC to address these issues as promptly as possible in order to spur the capital formation process and growth of small private companies.
GATE believes the trading of unregistered securities is accomplished most effectively through a broker dealer, an ATS or an exchange registered with the SEC because such transactions provide the books and records and an audit trail that can be used for surveillance purposes. In the absence of such information, an infinite allocation of resources to the SEC, will be unable to properly monitor such trading. The proposed reform of Regulation D as part of Representative David Schweikert’s Private Company Flexibility and Growth Act, would be a welcome change in the capital formation process that would promote economic expansion and job creation.
We have a rare opportunity to exact policies that will further the goals of the investors and small and private company entrepreneurs, while assisting our battered economy and our unemployed works. Taken together, these policies will have a powerful and positive economic effect that will become apparent very quickly. These changes are the best and most effective actions that could be taken right now to invigorate the economy.
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