SEC Hosts 30th Annual Forum on Small Business Capital Formation

The SEC last week held the 30th annual government-business forum on small business capital formation. Panelists discussed capital formation issues for private companies, initial public offerings and securities regulation involving smaller public companies. Meredith Cross, the director of the Division of Corporation Finance, noted that a number of small company issues are already under consideration by the staff. SEC Chair Mary Schapiro emphasized the importance of small businesses, but also that of balancing the instinct to ease the rules governing capital access with the SEC’s obligation to protect investors and the markets.

All five commissioners spoke during the forum. The newest commissioner, Daniel Gallagher, agreed that the SEC faces important questions about how to balance the sometimes competing priorities of investor protection and capital formation.

Gallagher said it is widely believed that the Sarbanes-Oxley and the Dodd-Frank Acts made the U.S. markets less attractive for smaller and growth stage companies to go public. Some of the costs, such as those associated with the auditor attestation requirements of Sarbanes-Oxley Act Section 404, are so significant and so readily traced to the particular regulation, that they trigger efforts to bring regulatory relief.

Other requirements are more incremental, according to Gallagher, but the accumulation of these requirements can result in a significant burden. He cited, for example, the ever-expanding, federally mandated corporate governance requirements, some of which provide little useful information to investors, in his view.

Gallagher said that as the SEC implements the Dodd-Frank requirements, the commissioners must take care not to chase IPO candidates into private or offshore capital raising transactions, but to look for opportunities to minimize the burdens of being public. He said the SEC should use its general exemptive authority under the 1934 Act where appropriate to exempt smaller issuers.

Gallagher said one bright spot in the Dodd-Frank Act is that Congress exempted smaller issuers from compliance with the auditor attestation requirements contained in Section 404(b). In his view, the benefits of the rule to investors were not worth the compliance costs. He is also pleased that both Congress and the SEC are considering ways to make private capital markets more robust in their consideration of easing the limitation on general solicitations in the private placement exemptions, increasing the offering size limitations under Regulation A, creating an exemption from 1933 Act registration for crowdfunding transactions, and raising the 500 shareholder threshold for registration under the 1934 Act. These proposals are a step in the right direction, he said.

Gallagher is also pleased that the SEC is considering a process for conducting retrospective reviews of its existing rules. He hopes these considerations will result in improvements to the securities laws.

Commissioner Troy Paredes said the SEC should refine the regulatory regime to give issuers more flexibility to raise capital privately and should consider regulatory changes that address concerns that the regulatory regime dissuades companies from going public and listing on U.S. exchanges. He is encouraged by a number of bills in Congress that would promote capital formation.

Paredes cited a set of recommendations made by an IPO task force that was submitted to the Treasury Department. The group’s recommendations deserve careful consideration, in his view.

Commissioner Luis Aguilar said it is important to remember that capital formation is more than just capital raising. The funds must be invested in productive assets. Fair disclosure rules level the playing field and help investors make informed decisions. Market safeguards that promote reliable disclosure create the confidence that investors need to invest in securities, he said.