SEC Hearing on the JOBS Act
AT TODAY’S Securities and Exchange Commission (SEC) Government-Business Forum on Small Business Capital Formation, industry representatives and academics discussed the implementation of the Jumpstart Our Business Startups (JOBS) Act and related issues.
Chairman Mary Schapiro opened the meeting by stating that the needs of small businesses are “front and center” at the SEC, noting that the Commission is working to create a framework that will provide greater access to capital, minimize regulatory burden, and enhanced investor protections.
Commissioner Elisse Walter focused on the Commission’s proposed rule to lift the ban on general solicitation in private securities offerings and stated that the small business community supports the proposal. However, she stressed that significant safeguards must be in place to ensure that investors receive sufficient information to assess risk and avoid fraudulent offerings.
Commissioner Troy Paredes said the Commission must take concrete steps to promote small businesses and suggested taking a retrospective review of current rules in an attempt to reduce existing regulatory burdens and barriers to entry that may hinder growth.
Panel I
The first panel focused on efforts related to the implementation of the JOBS Act. Gregory Yadley from Shumaker, Lopp & Kendrick, opened the discussion by noting that many of the themes of last year’s forum on this topic were incorporated into the JOBS Act. He said the legislation has given small businesses more flexibility by allowing them to remain private while publically raising money. He added, however, that much work remains to address inconsistencies and loose ends with the rules.
Sara Hanks of CrowdCheck, discussed crowdfunding and the changes made by Title III of the JOBS Act. Title III created a new exemption from registration under both the Securities Exchange Act of 1933 and 1934, while establishing that crowdfunding portals would be regulated entities. She noted that there were no changes made to the Investment Adviser Act, Investment Company Act, stock transfer association regulation, or trading platform regulation. Hanks raised concern over who would be responsible for monitoring investor limits and how this process would be accomplished. Hanks also noted that a “bad actor” provision must be a priority and the rule must be specific on what type of information is relevant. She added that regulation of portals specifying which activities are permitted or prohibited is necessary. Finally, Hanks suggested the SEC provide guidance on issuer disclosure, liability of portals, and operating requirements for trading platforms.
Meredith Cross, Director of the SEC’s Division of Corporation Finance, agreed that the “bad actor” provision should be completed first to ensure that crowdfunding is a credible way of raising capital and to instill confidence in the system for investors.
Jean Peters of the Angel Capital Association raised concern that any new rules should consider the costs and impacts of additional regulation on angel funding. She stated that experienced angel investors add a level of “adult supervision” to the market by conducting due diligence, deal screening, and company valuation. She expressed the need for more clarity on Rule 506, specifically concerning types of accredited investors, the amount of information issuers have about purchasers, and minimum investment size.
Michael Lempres of Silicon Valley Bank commented on whether Regulation A+ and the Emerging Growth Company (EGC) designation will help boost small business’ access to capital. He noted that very few companies have used Regulation A+ in the past, but since the offer limit has been raised from $5 million to $50 million, more may chose to do so.
In addition, Lempres noted that early indications show EGCs using confidential filings and streamlined compensation disclosures, but not transitional financial and accounting provisions. EGC designation scales down the level of disclosure and governance requirements for a company, making it easier for them to go public. He added that many companies try to avoid this label as they may be perceived as less safe by investors.
Bill Beatty of the Washington State Department of Financial Institutions said the biggest concern of local regulators in regard to Rule 506 is the detection of illegitimate offers that harm investors. He suggested ways to address this problem, including requiring companies to file Form D before advertising the offer or amending the form to include disclosure of owners, issuers, and offer size. He said additional verification and identification of accredited investors should be implemented and “non-exclusive safe harbors” should be established.
With regard to crowdfunding, Beatty expressed concern with the large number of “unsophisticated investors involved in a marketplace with limited oversight.” He said more efforts should be made to determine if a self-regulatory organization (SRO) can oversee this marketplace, create better disclosure requirements, and improve investor education. Beatty added that in Regulation A+, an electronic filing system could be deployed that would allow question and answer style guides to help the inexperienced investor. This would also allow for easier disclosure of documents at the state level, he said.
Cross concluded the first panel and noted that she does not have any dates established on when these rules will be released, due to the high volume of comment letters that must be reviewed.
Panel II
The second panel discussed small business capital formation issues that are not addressed by the JOBS Act. John Borer from The Benchmark Company discussed how the current market for traditional IPOs is broken due to a number of factors, including fewer sponsoring firms, execution risk and high preparation costs. Borer said the confidentially marketed IPO (CM-IPO), which is a process whereby a company completes a provide placemen that is followed by the going-public process, may become a more frequently used alternative for companies seeking to go public. He explained how CM-IPO is a “modest revision to the Form 10 self-registration path that saves significant time and meaningful expense.” Borer, however, did note a number of challenges related to the CM-IPO process, including the possibility of thin aftermarket trading if a private placement was sold only to a narrow group of investors and how the execution of upfront private placement may be difficult without broad public marketing efforts.
Robert Bartlett, Professor at the University of California, discussed post-JOBS Act implementation issues for investors and issuers. Bartlett explained how issuers are subject to “residual” broker-dealer regulations and state disclosure/registration obligations that are costly and provide unclear benefits to investors. Bartlett suggested the SEC ensure a uniform system of scaled disclosure for smaller firms, which he said may be preferable for issuers, investors, and broker-dealers that the current “haphazard system of state-based regulation.”
Ann Yvonne Walker from Wilson, Sonsini Goodrich & Rosati, discussed the JOBS Act provision that requires the SEC to review Regulation S-K to determine how the registration requirements can be updated. Walker recommended that Regulation S-K include flexible language for future modification as it applies to different classes of emerging growth companies.
In closing, Cross commented on her belief that reform of private offerings will be conducted after completion of the JOBS Act implementation as a result of the new regulatory environment.
Breakout group meetings were held after the panel discussions, but were not made available for public viewing via webcast. The groups discussed exempt securities offerings, crowdfunding, and securities regulation of smaller public companies in greater detail.
The plenary session focused on developing next steps, however such conclusions have not yet been made public.
For related materials from the event click here.
AT TODAY’S Securities and Exchange Commission (SEC) Government-Business Forum on Small Business Capital Formation, industry representatives and academics discussed the implementation of the Jumpstart Our Business Startups (JOBS) Act and related issues.
Chairman Mary Schapiro opened the meeting by stating that the needs of small businesses are “front and center” at the SEC, noting that the Commission is working to create a framework that will provide greater access to capital, minimize regulatory burden, and enhanced investor protections.
Commissioner Elisse Walter focused on the Commission’s proposed rule to lift the ban on general solicitation in private securities offerings and stated that the small business community supports the proposal. However, she stressed that significant safeguards must be in place to ensure that investors receive sufficient information to assess risk and avoid fraudulent offerings.
Commissioner Troy Paredes said the Commission must take concrete steps to promote small businesses and suggested taking a retrospective review of current rules in an attempt to reduce existing regulatory burdens and barriers to entry that may hinder growth.
Panel I
The first panel focused on efforts related to the implementation of the JOBS Act. Gregory Yadley from Shumaker, Lopp & Kendrick, opened the discussion by noting that many of the themes of last year’s forum on this topic were incorporated into the JOBS Act. He said the legislation has given small businesses more flexibility by allowing them to remain private while publically raising money. He added, however, that much work remains to address inconsistencies and loose ends with the rules.
Sara Hanks of CrowdCheck, discussed crowdfunding and the changes made by Title III of the JOBS Act. Title III created a new exemption from registration under both the Securities Exchange Act of 1933 and 1934, while establishing that crowdfunding portals would be regulated entities. She noted that there were no changes made to the Investment Adviser Act, Investment Company Act, stock transfer association regulation, or trading platform regulation. Hanks raised concern over who would be responsible for monitoring investor limits and how this process would be accomplished. Hanks also noted that a “bad actor” provision must be a priority and the rule must be specific on what type of information is relevant. She added that regulation of portals specifying which activities are permitted or prohibited is necessary. Finally, Hanks suggested the SEC provide guidance on issuer disclosure, liability of portals, and operating requirements for trading platforms.
Meredith Cross, Director of the SEC’s Division of Corporation Finance, agreed that the “bad actor” provision should be completed first to ensure that crowdfunding is a credible way of raising capital and to instill confidence in the system for investors.
Jean Peters of the Angel Capital Association raised concern that any new rules should consider the costs and impacts of additional regulation on angel funding. She stated that experienced angel investors add a level of “adult supervision” to the market by conducting due diligence, deal screening, and company valuation. She expressed the need for more clarity on Rule 506, specifically concerning types of accredited investors, the amount of information issuers have about purchasers, and minimum investment size.
Michael Lempres of Silicon Valley Bank commented on whether Regulation A+ and the Emerging Growth Company (EGC) designation will help boost small business’ access to capital. He noted that very few companies have used Regulation A+ in the past, but since the offer limit has been raised from $5 million to $50 million, more may chose to do so.
In addition, Lempres noted that early indications show EGCs using confidential filings and streamlined compensation disclosures, but not transitional financial and accounting provisions. EGC designation scales down the level of disclosure and governance requirements for a company, making it easier for them to go public. He added that many companies try to avoid this label as they may be perceived as less safe by investors.
Bill Beatty of the Washington State Department of Financial Institutions said the biggest concern of local regulators in regard to Rule 506 is the detection of illegitimate offers that harm investors. He suggested ways to address this problem, including requiring companies to file Form D before advertising the offer or amending the form to include disclosure of owners, issuers, and offer size. He said additional verification and identification of accredited investors should be implemented and “non-exclusive safe harbors” should be established.
With regard to crowdfunding, Beatty expressed concern with the large number of “unsophisticated investors involved in a marketplace with limited oversight.” He said more efforts should be made to determine if a self-regulatory organization (SRO) can oversee this marketplace, create better disclosure requirements, and improve investor education. Beatty added that in Regulation A+, an electronic filing system could be deployed that would allow question and answer style guides to help the inexperienced investor. This would also allow for easier disclosure of documents at the state level, he said.
Cross concluded the first panel and noted that she does not have any dates established on when these rules will be released, due to the high volume of comment letters that must be reviewed.
Panel II
The second panel discussed small business capital formation issues that are not addressed by the JOBS Act. John Borer from The Benchmark Company discussed how the current market for traditional IPOs is broken due to a number of factors, including fewer sponsoring firms, execution risk and high preparation costs. Borer said the confidentially marketed IPO (CM-IPO), which is a process whereby a company completes a provide placemen that is followed by the going-public process, may become a more frequently used alternative for companies seeking to go public. He explained how CM-IPO is a “modest revision to the Form 10 self-registration path that saves significant time and meaningful expense.” Borer, however, did note a number of challenges related to the CM-IPO process, including the possibility of thin aftermarket trading if a private placement was sold only to a narrow group of investors and how the execution of upfront private placement may be difficult without broad public marketing efforts.
Robert Bartlett, Professor at the University of California, discussed post-JOBS Act implementation issues for investors and issuers. Bartlett explained how issuers are subject to “residual” broker-dealer regulations and state disclosure/registration obligations that are costly and provide unclear benefits to investors. Bartlett suggested the SEC ensure a uniform system of scaled disclosure for smaller firms, which he said may be preferable for issuers, investors, and broker-dealers that the current “haphazard system of state-based regulation.”
Ann Yvonne Walker from Wilson, Sonsini Goodrich & Rosati, discussed the JOBS Act provision that requires the SEC to review Regulation S-K to determine how the registration requirements can be updated. Walker recommended that Regulation S-K include flexible language for future modification as it applies to different classes of emerging growth companies.
In closing, Cross commented on her belief that reform of private offerings will be conducted after completion of the JOBS Act implementation as a result of the new regulatory environment.
Breakout group meetings were held after the panel discussions, but were not made available for public viewing via webcast. The groups discussed exempt securities offerings, crowdfunding, and securities regulation of smaller public companies in greater detail.
The plenary session focused on developing next steps, however such conclusions have not yet been made public.
For related materials from the event click here.