SEC Government-Business Forum on Small Business Capital Formation Final Report: Top Request is Fix the Definition of an Accredited Investor

The 36 Annual SEC Small Government Business Forum on Small Business Capital Formation took place last November in Austin, Texas. This past week, the SEC published the final report which includes the list of recommendations as prioritized by the participants in this yearly gathering between SMEs and SEC staff.

The Forum, while conducive to providing an opportunity for the SEC to engage with small business advocates, has been criticized in the past as providing actionable material for positive policy change minus the action. Will this year’s report be any different? The clock is ticking.

In year’s past, specific areas of interest have been segmented with breakout sessions for debate and discussion as to the most pressing needs. The two breakout groups for this years exercise including:

  • Exempt Securities Offerings (including Micro-Offerings)
  • Smaller Registered and Regulation A Securities Offerings

The two separate groups produced their wishes and then recommendations were shared and voted upon. Below are the top Forum recommendations, ranked by priority:

  • The SEC should maintain existing monetary thresholds for the definition of an accredited investor but should expand it to include individuals that demonstrate sufficient sophistication.
  • The SEC should revise Reg A+ to:
    • mandate blue sky preemption for secondary trading of Regulation A Tier 2 securities;
    • allow at-the-market offerings;
    • allow all reporting companies to use Regulation A;
    • increase the maximum offering amount in any twelve month period from $50 million to $75 million for Regulation A Tier 2 offerings;
    • consider overriding advance notice requirements of state regulators in Regulation A offerings and limiting state filing fees for these offerings;
    • require any portal that is conducting Regulation A offerings to be a registered portal similar to the requirements under Regulation Crowdfunding, and adhere to disclosure requirements
  • The SEC should lead a joint effort with FINRA to provide clear guidance to participants in Regulation Crowdfunding offerings.
  • Improve Reg CF (Regulation Crowdfunding)
    • Raise the investor’s investment limit (cap) by: removing the cap for investments by accredited investors;
      raising the cap for non-accredited investors by making the limit applicable to each specific investment rather than an aggregate limit; and rationalizing the cap for entities by entity type, not income.
    • Allow portals to receive compensation on different terms than the investor (e.g., warrants to purchase on the same terms as the investors) as well as to co-invest in offerings they list.
    • Rationalize Regulation Crowdfunding requirements for debt offerings and small offerings under $250,000, for example, by:limiting the ongoing reporting obligations
  • To improve access for issuers to Regulation Crowdfunding offerings, the SEC should give consideration to the following:
    • increase the offering limit for Regulation Crowdfunding offerings to $5,000,000 within a twelve-month period;
    • promote simplification of the capitalization table by allowing the use of special purpose vehicles (SPVs) to aggregate investors with appropriate conditions (e.g., democratically-organized SPVs, SPVs organized by a registered investment advisor, etc.); and
    • allow issuers to “test the waters” prior to filing.
  • Small or intermittent finders should be exempt from the requirement to register as broker-dealers.
  • The SEC should clarify the relationship of exempt offerings in which general solicitation is not permitted—such as in Section 4(a)(2) and Rule 506(b) offerings—with Rule 506(c) offerings involving general solicitation
  • The SEC should permit an alternative trading system to file a Form 211 with FINRA and review the FINRA process to make sure that there is no undue burden on applicants and issuers
  • The definition of smaller reporting company and non-accelerated filer should be revised to include an issuer with a public float of less than $250 million or with annual revenues of less than $100 million, excluding large accelerated filers.
  • Regarding venture exchange legislation, Congress and the SEC should look to existing alternative venture exchanges serving small public companies and work within the existing framework, rather than mandate a primary trading venue
  • The SEC should mandate appropriate disclosure of short positions. Additionally, the SEC should enforce Regulation SHO and Regulation T for all IPOs.
  • Proxy advisory firms should be brought under SEC registration so that the SEC may oversee how these firms make recommendations and mitigate conflicts of interest.
  • Withdraw the “Proposed Rule: Amendments to Regulation D, Form D and Rule 156” published in the Federal Register
  • SEC should lead a joint effort with NASAA and FINRA to implement the basic principles of the American Bar Association Task Force on Private Placement Brokers.
  • The SEC should recognize that quick response (“QR”) codes suffice in lieu of a hyperlink to a prospectus or offering circular after the offering has gone effective or been qualified.
  • Study and propose a revised regulatory regime for true peer-to-peer lending platforms for small businesses and consumers, using current European regulatory and other models as reference.
  • The SEC should expand the disclosure requirements of stock promotion activity.
  • The SEC should update Section 17(b) of the Securities Act to require better transparency when companies engage promotional or investor relations firms pre- and post-offerings.
  • The SEC should amend unlisted trading privileges (“UTP”) rules to allow small and medium size public companies the option to consolidate secondary trading to one or more trading platforms.
  • The SEC should allow for flexibility in tick sizes. Among the options to consider are to make the pilot program permanent, and/or consider other alternatives to address the narrowing spreads in an effort to move away from one-size fits all decimalization.
  • To promote greater liquidity, the SEC should provide greater clarity with respect to which courts and authorized governmental entities may act to satisfy the exemption from registration for exchange transactions

So there is plenty to chew on here, and several suggestions are deep in the legal weeds, but the top recommendations largely have to do with online capital formation and improving upon the existing crowdfunding exemptions. The number one request is to address the long festering issue with the definition of an accredited investor that has eliminated most of the population from investing in promising early stage companies.

In the opening statement of the Forum by SEC Chair Jay Clayton, he mentioned the Commission was moving to fill the new position of the Advocate to head the Commission’s new Office of the Advocate for Small Business Capital Formation. This position was created under legislation that was signed into law during the Obama administration back in 2016. Yet more than a year later the position has yet to be filled.

MIA

This Advocate has been mandated to make recommendations to both Congress and the SEC on regulations impacting small business. Another responsibility of the Advocate is planning, organizing, and executing the annual Government-Business Forum on Small Business Capital Formation where, at least theoretically, actionable recommendations may be distilled. But then it is hard to report to Congress when the Advocate continues to be missing in action.

All of the Forum’s reports since 1993 are available here.

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