SEC Commissioner Gallagher Wants Exchanges for Small Companies, Notes Decline in IPOs

Daniel M. GallagherIn a speech given to the FIA Futures and Options Expo in Chicago, SEC Commissioner Daniel M. Gallagher made some interesting comments regarding a “the need for a fundamental, holistic review of equity market structure. And I’d like to focus on the specific issue of how the formation of new “venture exchanges” for equities trading can encourage and facilitate the public offerings of small and emerging growth companies to the benefit of issuers, investors, and job-seekers alike.”

Gallagher questioned the status quo asking if the current structure truly facilitates the capital formation process noting the exceptionally important role exchanges and equity markets play.  He pointed out the dramatic decline in initial public offerings (IPOs) specifically for small and emerging growth companies,

“...require the Commission to question whether the current regulatory paradigm best furthers the underlying capital formation purpose of the equity markets. The fundamental goals of equity markets include facilitating the ability of companies to seek public financing while allowing investors the ability to participate in a company’s economic success from an early stage. As such, it is particularly important to note the decline in initial public offerings in recent years, particularly the IPOs of small and emerging growth companies. According to a report by the IPO Task Force[4], a group formed in the wake of a 2011 Treasury conference on access to capital, between 1991 and 1999 there were an average of 547 IPOs a year. Between 2000 and 2011, however, the average fell to 192 IPOs, with IPOs of less than $50 million declining particularly precipitously.[5]

Specifically Gallagher stated the ineffective market structures have impacted job creation,

The impact of the decline in IPOs has been significant — another study noted that “[u]p to 22 million jobs [through 2009] may have been lost because of our broken IPO market.”[6] While pinpointing the exact causes has been difficult, the independent IPO Task Force concluded, crucially, “that the cumulative effect of a sequence of regulatory actions, rather than one single event, lies at the heart of the crisis.”[7]

SECWhile the Commission’s most notable task is investor protection it is implicit that the SEC must create an environment where small businesses are able to access capital AND grow,

“Encouraging the sustainability and growth of such small but growing businesses must be a focus for the Commission. We were reminded of the importance of this focus by the enactment of the JOBS Act in 2012. The JOBS Act passed with overwhelming bipartisan support in both the House and the Senate and was quickly signed into law by the President, who had made specific mention of the law in his 2012 State of the Union address. The JOBS Act seeks to facilitate job creation primarily by removing certain barriers to capital formation in order to facilitate IPOs. Facilitating capital formation is, of course, at the heart of what the SEC is supposed to do..”

These comments come at a crucial time as the SEC is collecting comments from the public regarding aspects of the JOBS Act which while law are still awaiting final regulatory action. Criticism has started to mount regarding the approach indicated by the SEC pertaining to Title III of the JOBS Act which address the concept of equity crowdfunding.  A growing chorus of industry participants, leading legal minds and entrepreneurs are concerned excessive regulation and complexity may impede the intent of the JOBs Act which is to facilitate small businesses access to capital.

The speech in its entirety is below.

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