Commissioner Michael Piwowar, who was Acting Chair of the Securities and Exchange Commission (SEC) until the successful appointment of Jay Clayton, visited with David Burton of the Heritage Foundation earlier this week providing a unique glimpse into the world of the SEC.
Burton, who is a Senior Fellow in Economic Policy focusing on entrepreneurship, securities law and more, told Crowdfund Insider after the presentation by Piwowar he was encouraged by the exchange (note that Piwowar was speaking on his own accord and not on behalf of the SEC);
“Commissioner Piwowar’s remarks were cause for optimism,” said Burton. “The SEC appears poised to take steps to improve the regulatory environment for entrepreneurs, to democratize access to high return investments and to enable Fintech innovation. I am glad to see that the SEC is thinking seriously about how it can remove regulatory impediments to financial innovation, entrepreneurial capital formation and economic growth”
So what did Commissioner Piwowar say?
Regarding the newly appointed Chair of the Commission, Jay Clayton, Piwowar explained;
“It is awesome working with our new Chairman Jay Clayton,” stated Piwowar.”Think back to before the election and we had a Chair who thought about enforcement first and the Dodd-Frank death march second. We have a new Chairman who has come in, chosen by the President, to have an agenda that remembers we have a threefold mission which is not only to protect investors and maintain fair and orderly markets but to also promote capital formation.”
Piwowar said that one of the things the Commission would like to do is to create a capital formation agenda. There is much the SEC can do without legislation. There are even things that can be done at the staff level, without a Commission vote.
Asked about the definition of an Accredited Investor (a rule that blocks most individuals from participating in private securities offerings) versus a sophistication qualification and whether the SEC is open to updating this outdated rule?
“I for one have a question even to the premise of having an Accredited versus non-Accredited Investors definition,” said Piwowar.
The rationale is that somehow the SEC is protecting investors. What they are, in fact doing, is protecting investors from risky yet higher return investments. Piwowar said that main street investors are not sharing in the returns being captured by Silicon Valley types.
“The average investor is being prohibited from investing in these securities,” stated Piwowar.
Are they too risky perhaps?
“As a former finance professor what we teach is the benefit of portfolio diversification and a lot of these securities would provide diversification for investors in their existing portfolios… this is something I have been pressing the attorneys at the SEC to think about. The SEC is mostly a lawyer driven agency and for historical reasons we have been thinking about risks of an individual security offer … I have been trying to get people to think more broadly. Look, it is not just the risk of that security in isolation but it is risk with a portfolio a [consumer] already has.”
Piwowar questioned having these “artificial” distinctions that disenfranchises the majority of the investing population.
This differential between Accredited and non-Accredited investors has been exacerbated by the fact that promising young companies are staying private for as long as possible. So what can we do to make it more likely that a company goes public? As the number of IPOs have tanked…
“I still think there are things we can do,” stated Piwowar. “Look at the JOBS Act.”
Piwowar said that under the Emerging Growth Companies provision, there were about 80 biotech companies that went public the very first year. Little changes can have a huge impact. Piwowar said the SEC Staff is very interested in being more collaborative with people interested in boosting capital formation. The change in tone at the top is helping to push this along.
An Avalanche of Information
Burton pointed to cumbersome disclosure requirements that add little value for an investor nor the firm. Think of the conflict minerals disclosure, a regulatory act that did more damage than good. Scaled disclosure and outright exemptions for smaller companies could help ease the crushing regulatory burden on the economy.
Disclosure documents have become so immense they now obfuscate instead of inform. Information should be accessible but not overwhelming. A 10-K today is not the same thing from years ago. Piwowar shared an experience of reviewing the document for when Wal-Mart went public. It was 28 pages long. And one of those pages was blank.
Should smaller companies be granted a Blue Sky exemption and not have to seek approval of each state securities regulator? Piwowar said this is something the SEC is working on with state securities regulators.
Speaking about Title III, Reg CF crowdfunding, Burton called this exemption a disappointment. According to Burton, Title III has just about every regulatory burden you can imagine.
“I agree with you that not only has it been a disappointment but it is also not a surprise. In fact, when it came time for us to finalize the rulemaking I actually dissented and voted no. As you mentioned, there are a lot of things that are prescriptive for the funding portals and the limitations on how much could be raised. A lot of that is statutory unfortunately. When the JOBS Act was working its way through Congress the House passed a sensible crowdfunding [Reg CF] provision for the JOBS Act which basically left a lot of flexibility for the SEC to set the regulatory regime and adjust as necessary. When the JOBS Act went over to the Senate Harry Reid decided to skip it through Committee and let it go to the floor directory and allowed only one amendment and that was the Crowdfunding amendment. The Merkley-Brown amendment was substituted in … which is highly prescriptive and does not give us very much flexibility at all in terms of allowing for a framework that works. That was proven challenging. The reason I dissented was not only because it was prescriptive but then the majority of the Commission at that time decided to make it even more difficult.”
Piwowar said the Commission could go back and try to change some of these provisions but he believes Congress should move first. Piwowar mentioned specifically the Financial Choice Act (currently navigating Congress) which includes capital formation provisions.
Piwowar also mentioned that state based crowdfunding frameworks are a viable option to the federal exemption under Reg CF.
Commenting on Reg A+, an exemption that appears to be picking up speed, Piwowar was more optimistic for an exemption that was previously a “dead letter.”
Asked about emerging Fintech innovations and the ICO market, Piwowar pointed first to the challenging regulatory environment and the many different federal agencies a startup must address. Piwowar said the SEC has a task force dedicated to Fintech disruption. As for ICOs, it is something they are looking at.
“I personally see Fintech as transformational,” stated Piwowar. “… there are a number things that can be done to transform the capital formation process. We need to make sure we are not behind the curve,” added Piwowar, noting that Fintech is a global phenomena. “We need to make certain our regulatory environment is not stifling innovation.”
Piwowar said the US has the best capital markets in the world, but the rest of the world is catching up.
“We need to get the cost to match the benefits,” explained Piwowar. “We need to make certain we remain as competitive as possible.”