I am delighted to see that today’s [March 4, 2015] meeting will discuss the secondary trading environment for the securities of small businesses. The lack of a fair, liquid, and transparent secondary market for these securities is a longstanding problem that needs an effective solution. Indeed, I’ve spoken publicly about this very issue on a number of occasions, most recently less than two weeks ago at the annual SEC Speaks conference. This topic is increasingly urgent in light of certain new, or anticipated, Commission rules required by the JOBS Act that would result in a far wider range of small business securities needing to find liquidity in the secondary markets. Specifically, proposed rules under Regulation A-plus and Crowdfunding, and final rules under Rule 506(c) of Regulation D, would permit wide distributions of securities and also allow such securities to be freely-traded by security holders immediately upon issuance, or after a one-year holding period. These registration exemptions also provide—or are expected to provide—for lesser on-going reporting requirements than is required for listed securities.
Posts Tagged ‘Capital formation’
Before I begin my remarks, I would like to acknowledge the remarkable and dedicated career of Harvey Goldschmid. Just a few weeks ago, Harvey visited me to discuss his perspectives on a number of timely securities law issues. His superb intellect was reinforced by his engaging personality and skill as a teacher.
Harvey’s intense passion for the securities laws and investor protection was an inspiration to many of us. In authoring a tribute to Harvey Goldschmid in 2006, SEC historian Joel Seligman labeled him one of the most influential Commissioners.  I couldn’t agree more.
This conference provides us with an opportunity to look backward and to look forward. As I look back over the SEC’s history, I am always impressed by the rate and degree of change.
Picture Wall Street 80 years ago—the street was filled with dozens of young men—“runners”—carrying paper back and forth between various brokers and dealers and banks and exchanges and companies that made up the securities markets. Runners were the backbone of the securities market, delivering paperwork and stock certificates at a rate of $8 per day. Maybe the telephone would ring (the desk telephone was launched in 1932) or a telegram would arrive. And investors, would look to the newspaper to decide what stocks to buy or sell.
Today I’d like to talk about capital formation—one part of the Commission’s tri-partite mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. There is much to be said about the Commission’s efforts to facilitate capital formation. But because I’m an economist, today I will focus in particular on some of the economic fundamentals that I believe can be considered when thinking about capital formation.
The importance of small businesses in America is unquestionable—they are the foundation of today’s economy and are responsible for many of the new jobs created each year in the United States. And angel investors play a vital role in the development of small businesses by nurturing them at their earliest, most vulnerable stages when they may have little more than the next great idea. For early stage entrepreneurs, angels often are the only ones willing to listen to their business pitch, provide advice, and put in that crucial infusion of capital that is needed to transform an idea into a thriving new business. Yahoo, Google, Facebook, Home Depot—these are just some of the titans of today’s corporate America that, at an earlier stage of their development, were first backed by angel investors.  Equally impressive are some of the statistics about the impact of angel investing—by one estimate, in the first half of 2013 alone, angels invested approximately $9.7 billion in over 28,000 ventures, with over 111,000 new jobs created as a result of these investments. 
I have been NASAA’s liaison since I was asked by NASAA to take on that role early in my tenure at the SEC, and it is truly a pleasure to continue our dialogue with my fifth appearance here at the 19(d) conference. This conference, as required by Section 19(d) of the Securities Act, is held jointly by the North American Securities Administrators Association (“NASAA”) and the U.S. Securities and Exchange Commission (“SEC” or “Commission”).
The annual “19(d) conference” is a great opportunity for representatives of the Commission and NASAA to share ideas and best practices on how best to carry out our shared mission of protecting investors. Cooperation between state and federal regulators is critical to investor protection and to maintaining the integrity of our financial markets, and that has never been more true than it is today.
In an article recently posted to SSRN I addressed certain issues faced by the SEC in the ongoing Title III rulemaking process under the JOBS Act of 2012, enacted into law by Congress in April 2012. The SEC issued proposed rules to implement Title III in October 23, 2013, and has yet to issue final rules.
Title III of the JOBS Act created an exemption from registration for the offer and sale of so-called “crowdfunded” securities under the Securities Act of 1933, allowing the offer and sale of securities to an unlimited number of unaccredited investors without registration with the SEC, on an Internet-based platform, through intermediaries (portals) which are either registered broker-dealers or SEC licensed “funding portals.” Title III also provided for a number of built-in investor protections, including limitations on the amount invested, a limitation on the amount an issuer may raise in a 12 month period ($1 million), detailed financial and non-financial disclosure in connection with the offering, and ongoing annual issuer disclosure. Congress left much of the details of Title III in the hands of the SEC, to be fleshed out in the rulemaking process.
For nearly 80 years, the Securities and Exchange Commission has been playing a vital role in the economic strength of our nation. Year after year, the agency has steadfastly sought to protect investors, make it possible for companies of all sizes to raise the funds needed to grow, and to ensure that our markets are operating fairly and efficiently.
That is our three-part mission.
But, while commitment to this mission has remained constant and strong over the years, the world in which we operate continuously changes, sometimes dramatically.
When the Commission’s formative statutes were drafted, no one was prepared for today’s market technology or the sheer speed at which trades are now executed. No one dreamed of the complex financial products that are traded today. And, not even science fiction writers would have bet that individuals would so soon communicate instantaneously in so many different ways.
December 18, 2013 may well mark an historic turning point in the ability of small business to effectively access capital in the private and public markets under the federal securities regulatory framework. On that day the Commissioners of the U.S. Securities and Exchange Commission met in open session and unanimously authorized the issuance of proposed rules  intended to implement Title IV of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”)—a provision widely labeled as “Regulation A+”—and whose implementation is dependent upon SEC rulemaking. Title IV, entitled “Small Company Capital Formation”, was intended by Congress to expand the use of Regulation A—a little used exemption from a full blown SEC registration of securities which has been around for more than 20 years—by increasing the dollar ceiling from $5 million to $50 million. Both the scope and breadth of the SEC’s proposed rules, and the areas in which the SEC expressly seeks public comment, appear to represent an opening salvo by the SEC in what is certain to be a fierce, long overdue battle between the Commission and state regulators, the SEC determined to reduce the burden of state regulation on capital formation—a burden falling disproportionately on small business—and state regulators seeking to preserve their autonomy to review securities offerings at the state level.
Today [Dec. 18, 2013], the Commission proposes rules to implement Title IV of the JOBS Act. As mandated by that Act, the proposed rule would allow companies to issue a class of securities that are exempted from the registration and prospectus requirements of the Securities Act, provided that certain conditions are met. This is the third major rulemaking undertaken by the Commission to comply with the JOBS Act since its adoption last year.
Enhancements to Investor Protection under Regulation A-plus
The proposed rules being considered today enhance an existing exemptive regime known as Regulation A. Under the current provisions of Regulation A, companies can raise up to $5 million per year without registration, provided that they file an offering statement with the Commission containing certain required information and furnish an offering circular to purchasers, among other conditions.
I would like to talk about capital formation and the critical role that accountants play in that process. I want to particularly focus on capital formation from the investor’s perspective. Too often, the investor perspective is lost in the discussion over capital formation. The companies, lawyers, and investment bankers that often dominate this discussion often see regulation only as an obstacle to be overcome. They focus the discussion on how to raise money quicker and more cheaply — but seem to forget that the money raised comes from the pockets of hard-working Americans. The capital raising process should not make investors more vulnerable, and attempts to raise money quicker and more cheaply should not come at the investor’s expense. I want to put the focus on investors and examine how protecting investors facilitates capital formation by enhancing confidence, promoting integrity, and fostering transparency.