Months ago, the Securities and Exchange Commission (SEC) kicked off a review of the exempt offering ecosystem in an attempt to improve access to capital for younger firms while continuing to ensure sufficient investor protection.
Over the years, access to capital via the public markets has stumbled. There are several reasons for this fact. First, the cost to go public has gone through the roof. The legal stipulations are stratospheric and ongoing. Once you pay to go through the process of becoming a public corporation the regulatory demands ratchet up costing hundreds of thousands or millions of dollars each year in compliance requirements. Only very large firms can shoulder this burden.
Additionally, there is an ocean of private capital available looking to jump ahead of the game and get in on a promising investment before it goes public and thus earn outsized capital gains. The list of VCs and institutions seeking early-stage investments has grown while the number of listed companies has shrunk. Meanwhile, retail investors have largely been cut out of the equation.
In brief, the market always wins.
In some respects, the bi-partisan JOBS Act of 2012 was an attempt to address this pressing problem by creating more avenues for issuers to raise capital while opening up access to a wider pool of investors.
The SEC has now had the experience of several years of reviewing data generated from the JOBS Act legislation, a law that legalized online capital formation, as well as a current inclination for more equality and diversity in access to opportunity for both investors and smaller companies as well as entrepreneurs.
The update entitled“Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets,” was first published last March. While not perfect, the proposal on the table has the potential to help both sides of the equation.
During the last few months, the SEC has been accepting comments from interested parties. Earlier in July, Crowdfund Insider shared the perspective from some of the platforms that are facilitating access to funding via online capital formation. But the list of commentators is quite long and includes several political leaders.
So what are the politicians saying?
Congressman Patrick McHenry, Ranking Member on the House Financial Services Committee and longtime Fintech advocate, voiced his support for the SEC’s efforts to simplify and improve the exempt offering ecosystem.
Noting that the existing framework has become more complex in the last several decades, Congressman McHenry said he strongly supports the proposed amendments:
“These proposed changes would help small businesses and expand investment opportunities for Main Street investors while maintaining appropriate investor protections. In my previous comment letter submitted on the Concept Release on Harmonization of Securities Offering Exemptions, I expressed particular concern with the overly burdensome requirements of RegulationCrowdfunding [Reg CF]. These requirements hinder the ability of crowdfunding to address small-business capital needs. Specifically, the proposed amendments to permit the use of certain special purpose vehicles and to increase the offering limits will expand the number and scope of investors and empower small businesses to access more capital at a time when they need it most.“
The COVID health crisis has made the proposed amendments of even greater importance, said the Congressman.
Senator Patrick Toomey, the Chairman of the Senate Banking Committee, applauded the SEC’s proposed rule changes. Senator Toomey said that expanding access to capital will help the US economy recover from the COVID-19 crisis.
Senator Toomey advocated on behalf of a mico-offering safe harbor for companies seeking up to $1 million. Simultaneously, he asked the SEC to raise Reg CF to a $10 million funding cap – above the current $5 million proposal.
“Increasing offering limits for private offerings, helping issuers communicate with investors at demo days, and improving crowdfunding will improve access to private capital without undermining investor protection,” said Senator Toomey. “Expanding access to private capital through this rulemaking will help the U.S. economy recover from the COVID-19 crisis. To transform ideas into new businesses and sustain operations, entrepreneurs and existing small businesses need private capital because public markets are often prohibitively expensive. Improving access to private capital also helps public markets over time as many new private companies evolve into public companies.”
He added that improvements to both Reg A+ and Reg D along with secondary trading rules for all exempt offerings will go a long way in improving the ecosystem.
Congresswoman Maxine Waters, the Chairwoman of the House Financial Services Committee, expressed her concern regarding the “deregulatory agenda” and attempts to expand the private markets.
“Private markets lack critical investor protection safeguards, are highly illiquid, and lack the transparency investors need to make informed investment decisions. Rife with fraud and few investor protections, the North American Securities Administrators Association has noted that private offerings are among the top sources of enforcement actions brought by state securities regulators. Moreover, the further expansion of private markets comes directly at the expense of public markets, which have been specifically designed to facilitate capital formation while ensuring that investors and other market participants receive the full protection of the securities laws and have access to the tools and information they need to make informed decisions.”
Congresswoman Waters told the SEC to focus on the “dire impacts” of COVID-19 on the economy and not to engage in “partisan and deregulatory rulemaking” that “leave our investors exposed to great risk and leave our markets weakened.”
You may read all three letters below (click to download).
More to follow.