What Legislative Role Do States Play When it Comes to Disruptive Technologies?
In this segment, Vincent Russo, Partner, Robbins Ross Alloy Belinfante Littlefield LLC explains how states serve as laboratories of democracy in helping Congress shape their policies regarding new disruptive technologies. Vince underscores the integral role that state crowdfunding laws had in helping shape federal crowdfunding laws.
Dara Albright: I love that term “laboratories of democracy.” And I think that we're starting to see that happening, too, where the states are going out there and testing out legislation that the feds are able to actually step in and say, okay, that worked in that state. And then maybe we could try that on a grander level—similar to what happened with the Invest Georgia exemption and the crowdfunding legislation. Maybe you could talk a little bit about the Invest Georgia exemption and your role in drafting that.
Vincent Russo: Back in 2010, now governor Brian Kemp, then Secretary of State, was the Commissioner of Securities in the state of Georgia. As his general counsel at this time, we were looking at ways we could help foster capital formation in the state of Georgia for small businesses and allow residents an opportunity to invest locally. Around that time, Congress was also looking at crowdfunding and trying to figure out how to wrap their heads around it and create what ultimately became the Jobs Act. And it was just a piece of the Jobs Act. In 2011, we looked at the federal interest state offering exemption and took that and applied it to our own regulations.
We didn't even have to pass legislation because the Secretary of State had the authority under Georgia law to exempt securities that were purely intrastate (an offering—it can be public or private—that is by a Georgia company to Georgia residents). We started out doing that and it was created, the regulations took maybe 60 days total from beginning to end. We allowed issuers in the state of Georgia, Georgia businesses to issue securities up to $1 million that unaccredited investors could invest in alongside with accredited investors. And we did put some structure around it so that if there was going to be an issue where maybe there was a bad actor who was taking grandma and grandpa's money, they wouldn't be able to take all of it.
We did put a $10,000 limit on how much an unaccredited investor could invest per offering. But what we saw was that companies in Georgia and elsewhere who were trying to raise money at the time who had loans, interest rates were fairly high back in 2011. Those companies were trying to raise capital and started looking to this as a way to do it. All we required at the state level is a notice filing. We didn't want a 100-page offering document to be filed. We were trying to get red tape out of the way for businesses to be able to use their money on their business and grow. We had companies from out of state end up moving to Georgia.
I believe the most recent statistic I saw is that there have been 73 companies to date that have relied on the Invest Georgia exemption. I understand that's it's more than any other state. There were many other state regulators who viewed it as a good thing. Some had their concerns. I can say that today I think there's more than 40 states that have something similar to what we did. We didn't find that there was this abundance of fraud that came out because of this exemption. We found that legitimate companies were really trying to figure out ways to raise money in a cost-effective way. It’s been a good thing for the state. They're obviously small offerings, but it's helped a lot of small businesses.
DA: That is incredible, 60 days, even when you compare that to how long it took not only to actually pass the Jobs Act, but to implement the crowdfunding rules. We’re talking 60 days compared to years.
VR: You’re right. I think crowdfunding regulation wasn't implemented until 2016.
DA: IGE has really helped set new precedents, even on a federal level, because federal legislators were able to see what was happening on a state level and they were able to see what was and what wasn’t working on a state level so that they could amend the federal legislation, which it wasn't working quite as well as they wanted it to. So there were even later iterations of the Jobs Act being introduced that look a little bit more like IGE than the original crowdfunding bill and the original Jobs Act.
VR: I think it's a mentality around the regulation. It's a balance of how much regulation needs to be in place to protect the people. Overregulation we all know stymies business and there are so many good businesses out there that would love to do an offering, our full-blend public offering. But the costs to do that would put them out of business before they even get started. You have to have regulations in a way that still provide the necessary protections while allowing the business piece to work.
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