As Originally Drafted, Reg A+ and Reg CF Got it Wrong: SEC Commissioner Peirce

Last week during the meeting of the SEC Small Business Capital Formation Advisory Committee (SBCFAC), members voted to support improvements to secondary trading of crowdfunded securities – more specifically, to exempt state laws when it comes to the trading of securities under Tier 2 of Reg A+.

As is the tradition, prior to the meeting, SEC Commissioners issued prepared remarks, and once again SEC Commissioner Hester Peirce provided keen insight into the online capital formation ecosystem. Commissioner Peirce stated that the topic of secondary trading in private securities is critically important but the SEC “can do more.”

Commissioner Peirce stated:

“Investor protection is a top consideration when retail investors participate in these kinds of offerings; but, as originally drafted, Reg Crowdfunding [Reg CF] and Reg A+ got the investor protection/investor choice/capital formation balance wrong. Accordingly, under Chairman Jay Clayton’s leadership, during the pandemic, certain Crowdfunding rules were adjusted temporarily, and in 2020, the SEC made permanent changes to both Reg Crowdfunding and Reg A+ as part of a broader package of reforms. While the amendments were helpful, we can do more.”

As for secondary liquidity, the pursuit of improvements “marries capital formation and investor protection,” explained Peirce – a sentiment later echoed by a panelist at the meeting.  Secondary market liquidity can simultaneously improve investor protection while helping firms grow.

Peirce then outlined several questions, aiming to provide more guidance as to what the Commission should do to improve the crowdfunding ecosystem in regards to liquidity. They are as follows:

  • What opportunities do investors, who purchased shares through a crowdfunded or Reg A+ offering, have to sell the shares they hold? How do these differ from opportunities available to investors, who purchased shares through other types of private offerings?
  • How are companies that have issued shares in a Reg Crowdfunding or Reg A+ offering affected by limited secondary market liquidity?
  • How are investors that have purchased shares in a Reg Crowdfunding or Reg A+ offering affected by limited secondary market liquidity?
  • The 2020 Small Business Forum recommended “state preemption for secondary transactions for shares issued under Regulation A and Regulation Crowdfunding.” Do you agree with that recommendation?
  • What regulatory provisions other than the lack of blue sky preemption have hindered the uptake of Reg A+ and Reg Crowdfunding?
  • Can new technology, such as blockchain, smart contracts, or better auction technology, facilitate secondary market trading? If so, are rule changes necessary to allow people to put such new technology to work for this purpose?

Important questions that should be answered.

While the Committee voted on and approved a recommendation for the Commission to improve Reg A+ secondary trading, the Committee skipped over Reg CF. Perhaps, saving the topic for another date.

Meanwhile, obstacles remain as certain interested parties will fight against greater liquidity and broader access by retail investors to private securities in general.

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