While SEC Chair presented a state of SEC type presentation, Commissioner Aguilar has jumped in and put some more meat on the bones. Speaking at the annual Practicing Law Institute gathering, Aguilar set forth his perceived goals for the SEC for 2015.
While touching base on Dodd-Frank noting the SEC has finalized 56 out of 95 separate rules (Dodd-Frank became law in 2010), Aguilar bullets out his opinion on remaining aspects of the JOBS Act stating he would like to see the Commission “continue its progress”. Specifically Aguilar states “the Commission should adopt final rules to Regulation A-plus and Crowdfunding [retail], and, importantly, amend Regulation D to mitigate the risks posed to investors involved in general solicitations”.
The Commissioner chimes in on the fact that “smaller businesses [is] the engine that powers the U.S. economy”. But qualifies this statement that smaller businesses tend to be risky:
“investments in small or emerging businesses also carry heightened investment risks, including higher risks of small business failures, lower liquidity of issued securities, and, unfortunately, a higher incidence of outright fraud.”
- First, we need to consider the nature and experience of the investor who will be putting their dollars at work in any particular offering. For example, we need to ask whether any particular offerings should be limited to investors who are able to fend for themselves, such as with private placements publicly offered to so-called “accredited investors” under Regulation D.
- Second, once we have identified the nature and experience of the investor, we need to consider the type of information that is necessary to permit the targeted investors to make informed investment decisions.
- Third, we need to consider the overall regulatory environment, such as the role of state securities regulators, in protecting investors and promoting capital formation for smaller offerings. We should recognize that the states have long been at the forefront of combating securities fraud in smaller offerings, and should therefore carefully consider the extent to which state securities regulators will be involved—or not involved—in enhancing the SEC’s limited resources in overseeing the market for smaller offerings.
- Fourth, and something often overlooked, we need to consider the secondary trading environment that will exist, or not exist, as more and more companies distribute their shares to a wider group of investors—many of whom are expected to be less financially sophisticated. For example, several provisions of the JOBS Act, such as those under Regulation A-plus, Rule 506(c) of Regulation D, or Crowdfunding, permit wide distributions and also allow securities to be freely traded by security holders immediately upon issuance, or after a one-year holding period.
While little insight is given into the timing of any regulatory pronouncement perhaps we can read between the lines as to the trenches that surround the internal debate. The balancing act of investor protection and efficient markets is a fascinating polemic. The concern consistently remains with the role of the government in protecting citizens from themselves. I will posit that most investors have more confidence in their own decision making process as opposed to those of an elected (or appointed) official.
NASAA, a special interest group that represents state securities administrators, has been lobbying vociferously the Hill and 100 F Street to keep as much control as possible within their dominion. Aguilar alludes to this above. Their concern of losing “blue sky review” regarding Regulation A+ is frequently described as misdirected: they will always have the power and authority of anti-fraud laws.
Secondary markets is an evolving dynamic. Companies, such as OTC Markets, are already positioning operations to fill the void. Illiquid assets increases risk and investors must be willing to acknowledge and shoulder this fact. An efficient secondary trading vehicle could be beneficial to both issuer and investor.
Today great wealth is created in early stage companies. These companies are also more prone to loss. Creating a more open, and transparent, marketplace for greater investor opportunity should be embraced as an important policy objective. Risk is intrinsic to any investment and potentially higher returns correspond to higher risk. What every investor should be reminding policy leaders is the fact that a market void of risk is no market at all.
The speech is embedded below in its entirety.
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