SEC Advisory Committee on Small and Emerging Companies
Securities and Exchange Commission
Meeting of the Advisory Committee on
Small and Emerging Companies
Wednesday, March 4, 2015
Key Topics & Takeaways
· Capital Formation: Chair White said that “secondary market liquidity is important” and “critical for small business capital formation and for those investing in these businesses” and suggested that the SEC “carefully study” the shortfalls of venture exchanges in the past and find areas of improvement
· Accredited Investor: The Committee adopted a recommendation on the accredited investor definition, as outlined in the committee’sdiscussion draft.
· State Preemption: Committee Co-Chair Graham noted that there is “clear consensus” among the committee members that “state preemption will take friction out of the system to facilitate capital formation” and said the Committee would work to draft a recommendation for state pre-emption in the context of Reg A+.
· Section 4(a)(1½): SecondMarket’s Tierney said it is time for the SEC or Congress to provide an exemption for secondary trading of shares held less than 12 months, in the context of Section 4(a)(1½).
· Streamlining ATS Registration: Gate Global Impact’s Molinari stated that the ATS registration and start-up processes need to be streamlined in order to enable the trading of unregistered securities
Participants
· The Honorable Mary Jo White, Chair, Securities and Exchange Commission
· Luis A. Aguilar, Commissioner, Securities and Exchange Commission
· David M. Gallagher, Commissioner, Securities and Exchange Commission
· Michael S. Piwowar, Commissioner, Securities and Exchange Commission
· Stephen M. Graham, Co-Chair, Advisory Committee on Small and Emerging Companies
· Advisory Committee on Small and Emerging Companies Members
Introductory Remarks by Chair White and Commissioners
Stephen M. Graham, Co-chair of the Advisory Committee on Small and Emerging Companies, called the meeting to order and said that secondary market liquidity is important because companies are remaining private longer. In his view, the meeting will cover “timely topics.”
Securities and Exchange Commission (SEC) Chair Mary Jo White briefly discussed that the Committee’s agenda covered important topics including: 1) the accredited investor definition; 2) state preemption in the context of regulation A+; 3) secondary market liquidity; and 4) secondary market trading related to venture exchanges. She explained that “secondary market liquidity is important” and “critical for small business capital formation and for those investing in these businesses.” White suggested that the SEC “carefully study” the shortfalls of venture exchanges in the past and find areas of improvement. She continued that she looked forward to the the advisory committee’s ideas on obstacles and solutions to liquidity issues and emphasized that “small business capital formation” is a shared priority. White concluded, “our job is to convert supportive words to workable actions.”
SEC Commissioner Luis A. Aguilar said the topics on the meeting’s agenda are “increasingly urgent.” He continued that registration exemptions are expected to provide for lesser ongoing reporting requirements for traditional securities and this change will allow companies to sell securities to a “wider swath of the public.” According to Aguilar, this change would mean that “less sophisticated investors may be stuck with securities they are unable to sell.” For this reason, Aguilar said that a system to improve exchanges has been suggested and is still needed, but noted that the Nasdaq OMX Group’s plans to start a venture exchange “have stalled.” He stated, “venture exchanges, both here and abroad, have suffered from low liquidity and at times, high volatility. This means investors could lose a lot of money quickly, and could have trouble selling their shares in a downturn.” However, Aguilar highlighted that factors “other than size,” such as effective standards and accountings requirements, are essential for venture exchanges to succeed.
SEC Commissioner David M. Gallagher said he is “thrilled” to see the SEC considering the issue of liquidity in secondary trading developments to increase investor participation in primary issuance. He said, “the SEC needs a proactive capital formation agenda for small business that encompasses all phases of growth.” He suggested the SEC “embrace change and depart from failed ideas and opportunities from the past to move on venture exchanges.”
SEC Commissioner Michael S. Piwowar said that lower trading costs for investors would translate into great market value, opportunity, and jobs. In his view, the Dodd-Frank Act and the regulations that have resulted from the law, “have been so costly and so politicized that small businesses must look elsewhere.” He concluded that the SEC must work to improve access to capital.
Consideration of Written Recommendations on Accredited Investor Definition
Graham moved to the motion to adopt the recommendations in the discussion draft. Next, Graham accepted two word changes from SEC staff. Graham said that “tax treatment should not be a factor in whether someone achieves accredited investor status.” The Committee voted all in favor of the changes and adopted the recommendations.
State Preemption in the Context of Regulation A+
Michael Pieciak, Deputy Commissioner of the Vermont Securities Division, explained the North American Securities Administrators Association (NASAA) Multi-state Coordinated Review Program, which he said provides issuers with a defined timeframe for their offering applications and more certainty about the process. Pieciak said this program has been successful and that it can be adapted to the rules under Regulation A+. He also mentioned that this effort was conducted to address the dramatic decline in Regulation A filings over the years, as outlined in a studyconducted by the Government Accountability Office (GAO).
Pieciak noted that the SEC and NASAA could do a better job or coordinating their review process to make them more consistent and said doing so would provide benefits to small business issuers.
When asked if all 50 states participate in the review program, Pieciak noted that New York, Arizona, Georgia, and Florida do not. He explained that all participating states have signed a memorandum of understanding (MOU) that specifies that an offering cleared by the lead reviewing state is deemed to be cleared by all other participating states. He then explained that Washington currently operates as the administrator for the program due to its level of expertise.
D.J. Paul, founder of DJP&Co., said that state and “blue sky” requirements are the biggest cost and obstacle that has caused the decline in Reg A offerings. He said he appreciated NASAA’s efforts to create a coordinated review, but noted that it has been trying to implement such a process since the 1980s and “all attempts have failed” because it has never included all 50 states.
Paul stressed that state boundaries do not matter as much in the internet age and thus such a program would need to be established at the federal level, if it is to be effective. He said that problems could arise from states opting out of a multi-state review program as proposed.
John J. Borer III, Senior Managing Director and Head of Investment Banking at The Benchmark Company, LLC, said that potential differences with state commissioners may have an impact on the quality of the reviews and contrasted this to the SEC’s Division of Corporation Finance ,which operates under a more consistent set of standards. He added that “making things less certain goes against the intent of the legislation.”
Gallagher said the real issue with the review program is that it is a “disclosure model” rather than “merit regulation” and expressed concern with the ability of a state to pull out of the MOU.
Sara Hanks, Co-founder and CEO of CrowdCheck, said that the review process would create cash constraints because going through two processes would be more expensive.
Christine Jacobs, McKesson Corporation, said she did not see what additional investor protections would result from this two tier system.
Gallagher said it is important to remember that these markets are “the everyman” and not the “millionaire markets” and that the Commission should ensure that the market remain democratic.
Graham, said the Advisory Committee would issue a recommendation “broadly based” on the comments made by Paul but that they need more time to finalize an actual recommendation. He concluded that there is “clear consensus” among the committee members that “state preemption will take friction out of the system to facilitate capital formation.” The committee voted in support of this action.
Section 4(a)(1½) and Secondary Market Liquidity
Annemarie Tierney, Executive Vice President, Legal and Regulatory and General Counsel of SecondMarket Holdings, Inc., gave a presentationon secondary trading developments. She noted that her company provides liquidity to tender offerings and that it saw a 400 percent increase in secondary transactions on its platform from 2013 to 2014.
She explained that, in these tender offerings, the company “controls the entire process” including how often they want to provide liquidity for equity, who can buy the shares, and who can sell the shares. She noted that SecondMarket acts as a paying, depository, and information agent for their clients, which are mostly institutional investors.
Tierney said that companies who engage in these offerings are ones that may be considering an initial public offering (IPO) down the line, but does not plan to do so eminently. She said secondary trading allows employees of these firms, who are compensated with equity, to access liquidity. She noted sellers may also include former employees and angel investors.
On Section 4(a)(1½), Tierney said that the current patchwork across states is unworkable and that it is time for the SEC or Congress to provide an exemption for secondary trading of shares held less than 12 months. She noted that there is legislation being discussed in the House of Representatives that would allow for this and noted that it could be included in a “JOBS Act 2.0” package of bills. She noted the bill would create a share harbor in Section 4(a)(1½) and remove state friction from these transactions.
When asked if this needs to be taken care of legislatively, Tierney said that she would “love to see the SEC take it up” but expressed concern about the amount of time the SEC would take to act on its own.
Committee members agreed that this type of action would improve liquidity for small companies. Paul stressed, however, that the Committee should frame their ultimate recommendation to specify that these actions can be taken at the SEC and that legislation is not necessary.
Keith Higgins, Director of the SEC’s Division of Corporation Finance, noted that the language Tierney suggested “places a lot of emphasis” on the accredited investors. He said the definition of “accredited investor” has always been intended for investors who are capable of obtaining information from a seller and that this information may not be accessible to the same extent in the secondary market. Tierney said that that vast majority of sellers will not have the legal ability to provide information to buyers and said the SEC could “layer in” some kind of disclosure requirement.
Presentation and Q&A on Secondary Market Trading Venues/Venture Exchanges
David Weild, Chairman & CEO of IssuWorks and Weild & Co., stated during his presentation that he is primarily interested in driving growth to the U.S. economy and is concerned with the collapse of small IPOs in the U.S. Weild provided that due to regulatory initiatives and other changes in the market, there is no incentives for sales, distribution, and market making in small cap stocks.
Additionally, Weild stated that there are two primary causes of this decline in small IPOs: 1) the one-size-fits-all market model, which works well for naturally liquid stocks; and 2) the associated cost to issuers to go public. Weild stated the solution to this issue is to create “venture exchanges,” which are member-owned trading venues, which would permit listings up to $2 billion. Such member-owned venture exchanges would not be conflicted with driving shareholder value and would result in additional competition in the market for small listings. Weild stated that the current listing model has stifled the economy and innovation.
Vincent Molinari, CEO & Founder of Gate Global Impact, opened his presentation by stating that the biggest threat to the U.S. is the lack of job creation. Molinari said that the secondary private equity market is growing dramatically and provided that an orderly structure for liquidity is required for unregistered securities. In order to address this, Molinari stated that there has been a paradigm shift and that the SEC must take into account how millennials are investing, particularly by utilizing social media. To support the expansion of unregistered securities, he said, the Alternative Trading System (ATS) model should be leveraged. Particularly, Molinari stated that the ATS registration and start-up processes need to be streamlined in order to enable the trading of unregistered securities.
Committee Discussion of Venture Exchanges and Secondary Market Trading Issues
Hanks said that there a tension with the venture exchange model because companies are looking to keeping trading activity closed or “not wildly out of control.” Molinari stated that the venture exchange provides an issuer solution that could have permission levels. Weild responded that companies should have a choice or range of options in the private markets and that the idea is to create liquidity and standardization.
Graham stated that the Committee has been supportive of the venture exchange model. He asked Weild how this can come to fruition. Weild responded by stating that venture exchanges could come into being with the right enablement from regulatory initiatives and legislation. He added that there has been a tradition of consortium on Wall Street with investments, for instance with the development of certain ATSs. Weild stated that it is about the incentives and that the governance of the venture exchanges has to be structured to be inclusive of small and midsize companies.
M. Christine Jacobs, Co-chair of the Advisory Committee on Small and Emerging Companies, requested clarity from Weild regarding the incentives. Weild stated that for-profit shareholder-owned publically traded companies are a concern. He stated that such exchanges are focused on increasing shareholder value, which may, in turn, hurt the eco-system of smaller companies listed on the exchange. Weild stated that the need to serve shareholders and the need to create a viable ecosystem do not coexist very well. Jacobs stated that she supports the idea to increase liquidity in the market.
Paul asked what regulatory changes are needed for broker-dealers to become ATSs. Molinari stated that the process of working with the Financial Industry Regulatory Authority (FINRA) needs to be streamlined and made more efficient and provided that such ATSs can trade multiple asset types.
Paul then asked if market participants can address these issues within the current regulatory framework. Weild responded by stating that a holistic approach may be easier to do than a piecemeal change to existing regulations.
Dan Chace, Lead Portfolio Manager for the Wasatch Micro Cap Fund, asked how to avoid adverse selection on a venture exchange. Weild stated that allowing companies of up to $2 billion in market capitalization would address this issue.
Chace asked, from an issuer’s perspective, what financial disclosure requirements would be acceptable? Weild stated that the standards could be tiered based on company size in order to allow smaller companies to initially disclose less than their larger counterparts.
Gregory C. Yadley, Shumaker, Loop & Kendrick LLP, asked David Shillman, Associate Director, SEC Division of Trading and Markets, to provide an overview of the ATS registration process. Shillman stated that Regulation ATS requires registration as a broker-dealer. Shillman stated that there is nothing in Regulation ATS which would preclude an ATS from trading unregistered securities. Shillman stated that from a regulatory perspective, there is an open question if there should be regulatory steps taken to encourage trading on certain venues. For instance, Shillman noted one issue that the SEC has been considering is the extent of flexibility under the Exchange Act to allow trading to be concentrated on one or a few specific venues.
John J. Borer III, Committee Member, Advisory Committee on Small and Emerging Companies, asked Weild what happened to NASDAQ’s BX initiative to create a venture exchange. Weild stated that it was his understanding that NASDAQ could not get exemptions to Regulation NMS and that it would not likely be profitable under the regulatory framework at the time.
Gallagher stated NASDAQ had built a venture exchange previously. He noted that the NASDAQ BX failure proves that impediments to such trading venues need to be removed, as the private market is not currently in a place to create a solution without the help of the SEC.
Charles Baltic, Director and Co-Head of Healthcare at Needham & Company, stated that there has been a large increase in money flowing from active management to passive management. He asked, how venture exchanges would address the general shift towards exchange traded products (“ETPs”). Molinari stated that more information and knowledge is needed in the market to reeducate the public on the importance and benefits of being an investor.
Piwowar asked Weild for thoughts on allowing issuers to hire market makers in order to trade their stocks. Weild stated that this model in London has demonstrated that it can increase liquidity in those securities. Weild indicated that while he would prefer the market itself support the market makers, he would be okay with issuers paying them as well.
Shannon L. Greene, Director of The Tandy Leather Factory, stated that she is from a small cap company and noted that many companies, including her own, would no longer like to be publically traded. She referenced that the rising costs are squeezing smaller companies. Greene stated that the Committee should be cognizant that with every company beginning the IPO process, there are many on the back-end who no longer see the benefit.
Next Steps
Graham said that the Committee would table the discussion of venture exchanges for the next meeting, to be held on June 3, saying he thinks the idea “is a good one” and that the committee should keep the discussion going.
He noted the Committee will “put together” the accredited investor definition, draft a recommendation for Reg A+, and draft a recommendation on Section 4(a)(1½).
For more information on this event, please click here.
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Securities and Exchange Commission
Meeting of the Advisory Committee on
Small and Emerging Companies
Wednesday, March 4, 2015
Key Topics & Takeaways
· Capital Formation: Chair White said that “secondary market liquidity is important” and “critical for small business capital formation and for those investing in these businesses” and suggested that the SEC “carefully study” the shortfalls of venture exchanges in the past and find areas of improvement
· Accredited Investor: The Committee adopted a recommendation on the accredited investor definition, as outlined in the committee’sdiscussion draft.
· State Preemption: Committee Co-Chair Graham noted that there is “clear consensus” among the committee members that “state preemption will take friction out of the system to facilitate capital formation” and said the Committee would work to draft a recommendation for state pre-emption in the context of Reg A+.
· Section 4(a)(1½): SecondMarket’s Tierney said it is time for the SEC or Congress to provide an exemption for secondary trading of shares held less than 12 months, in the context of Section 4(a)(1½).
· Streamlining ATS Registration: Gate Global Impact’s Molinari stated that the ATS registration and start-up processes need to be streamlined in order to enable the trading of unregistered securities
Participants
· The Honorable Mary Jo White, Chair, Securities and Exchange Commission
· Luis A. Aguilar, Commissioner, Securities and Exchange Commission
· David M. Gallagher, Commissioner, Securities and Exchange Commission
· Michael S. Piwowar, Commissioner, Securities and Exchange Commission
· Stephen M. Graham, Co-Chair, Advisory Committee on Small and Emerging Companies
· Advisory Committee on Small and Emerging Companies Members
Introductory Remarks by Chair White and Commissioners
Stephen M. Graham, Co-chair of the Advisory Committee on Small and Emerging Companies, called the meeting to order and said that secondary market liquidity is important because companies are remaining private longer. In his view, the meeting will cover “timely topics.”
Securities and Exchange Commission (SEC) Chair Mary Jo White briefly discussed that the Committee’s agenda covered important topics including: 1) the accredited investor definition; 2) state preemption in the context of regulation A+; 3) secondary market liquidity; and 4) secondary market trading related to venture exchanges. She explained that “secondary market liquidity is important” and “critical for small business capital formation and for those investing in these businesses.” White suggested that the SEC “carefully study” the shortfalls of venture exchanges in the past and find areas of improvement. She continued that she looked forward to the the advisory committee’s ideas on obstacles and solutions to liquidity issues and emphasized that “small business capital formation” is a shared priority. White concluded, “our job is to convert supportive words to workable actions.”
SEC Commissioner Luis A. Aguilar said the topics on the meeting’s agenda are “increasingly urgent.” He continued that registration exemptions are expected to provide for lesser ongoing reporting requirements for traditional securities and this change will allow companies to sell securities to a “wider swath of the public.” According to Aguilar, this change would mean that “less sophisticated investors may be stuck with securities they are unable to sell.” For this reason, Aguilar said that a system to improve exchanges has been suggested and is still needed, but noted that the Nasdaq OMX Group’s plans to start a venture exchange “have stalled.” He stated, “venture exchanges, both here and abroad, have suffered from low liquidity and at times, high volatility. This means investors could lose a lot of money quickly, and could have trouble selling their shares in a downturn.” However, Aguilar highlighted that factors “other than size,” such as effective standards and accountings requirements, are essential for venture exchanges to succeed.
SEC Commissioner David M. Gallagher said he is “thrilled” to see the SEC considering the issue of liquidity in secondary trading developments to increase investor participation in primary issuance. He said, “the SEC needs a proactive capital formation agenda for small business that encompasses all phases of growth.” He suggested the SEC “embrace change and depart from failed ideas and opportunities from the past to move on venture exchanges.”
SEC Commissioner Michael S. Piwowar said that lower trading costs for investors would translate into great market value, opportunity, and jobs. In his view, the Dodd-Frank Act and the regulations that have resulted from the law, “have been so costly and so politicized that small businesses must look elsewhere.” He concluded that the SEC must work to improve access to capital.
Consideration of Written Recommendations on Accredited Investor Definition
Graham moved to the motion to adopt the recommendations in the discussion draft. Next, Graham accepted two word changes from SEC staff. Graham said that “tax treatment should not be a factor in whether someone achieves accredited investor status.” The Committee voted all in favor of the changes and adopted the recommendations.
State Preemption in the Context of Regulation A+
Michael Pieciak, Deputy Commissioner of the Vermont Securities Division, explained the North American Securities Administrators Association (NASAA) Multi-state Coordinated Review Program, which he said provides issuers with a defined timeframe for their offering applications and more certainty about the process. Pieciak said this program has been successful and that it can be adapted to the rules under Regulation A+. He also mentioned that this effort was conducted to address the dramatic decline in Regulation A filings over the years, as outlined in a studyconducted by the Government Accountability Office (GAO).
Pieciak noted that the SEC and NASAA could do a better job or coordinating their review process to make them more consistent and said doing so would provide benefits to small business issuers.
When asked if all 50 states participate in the review program, Pieciak noted that New York, Arizona, Georgia, and Florida do not. He explained that all participating states have signed a memorandum of understanding (MOU) that specifies that an offering cleared by the lead reviewing state is deemed to be cleared by all other participating states. He then explained that Washington currently operates as the administrator for the program due to its level of expertise.
D.J. Paul, founder of DJP&Co., said that state and “blue sky” requirements are the biggest cost and obstacle that has caused the decline in Reg A offerings. He said he appreciated NASAA’s efforts to create a coordinated review, but noted that it has been trying to implement such a process since the 1980s and “all attempts have failed” because it has never included all 50 states.
Paul stressed that state boundaries do not matter as much in the internet age and thus such a program would need to be established at the federal level, if it is to be effective. He said that problems could arise from states opting out of a multi-state review program as proposed.
John J. Borer III, Senior Managing Director and Head of Investment Banking at The Benchmark Company, LLC, said that potential differences with state commissioners may have an impact on the quality of the reviews and contrasted this to the SEC’s Division of Corporation Finance ,which operates under a more consistent set of standards. He added that “making things less certain goes against the intent of the legislation.”
Gallagher said the real issue with the review program is that it is a “disclosure model” rather than “merit regulation” and expressed concern with the ability of a state to pull out of the MOU.
Sara Hanks, Co-founder and CEO of CrowdCheck, said that the review process would create cash constraints because going through two processes would be more expensive.
Christine Jacobs, McKesson Corporation, said she did not see what additional investor protections would result from this two tier system.
Gallagher said it is important to remember that these markets are “the everyman” and not the “millionaire markets” and that the Commission should ensure that the market remain democratic.
Graham, said the Advisory Committee would issue a recommendation “broadly based” on the comments made by Paul but that they need more time to finalize an actual recommendation. He concluded that there is “clear consensus” among the committee members that “state preemption will take friction out of the system to facilitate capital formation.” The committee voted in support of this action.
Section 4(a)(1½) and Secondary Market Liquidity
Annemarie Tierney, Executive Vice President, Legal and Regulatory and General Counsel of SecondMarket Holdings, Inc., gave a presentationon secondary trading developments. She noted that her company provides liquidity to tender offerings and that it saw a 400 percent increase in secondary transactions on its platform from 2013 to 2014.
She explained that, in these tender offerings, the company “controls the entire process” including how often they want to provide liquidity for equity, who can buy the shares, and who can sell the shares. She noted that SecondMarket acts as a paying, depository, and information agent for their clients, which are mostly institutional investors.
Tierney said that companies who engage in these offerings are ones that may be considering an initial public offering (IPO) down the line, but does not plan to do so eminently. She said secondary trading allows employees of these firms, who are compensated with equity, to access liquidity. She noted sellers may also include former employees and angel investors.
On Section 4(a)(1½), Tierney said that the current patchwork across states is unworkable and that it is time for the SEC or Congress to provide an exemption for secondary trading of shares held less than 12 months. She noted that there is legislation being discussed in the House of Representatives that would allow for this and noted that it could be included in a “JOBS Act 2.0” package of bills. She noted the bill would create a share harbor in Section 4(a)(1½) and remove state friction from these transactions.
When asked if this needs to be taken care of legislatively, Tierney said that she would “love to see the SEC take it up” but expressed concern about the amount of time the SEC would take to act on its own.
Committee members agreed that this type of action would improve liquidity for small companies. Paul stressed, however, that the Committee should frame their ultimate recommendation to specify that these actions can be taken at the SEC and that legislation is not necessary.
Keith Higgins, Director of the SEC’s Division of Corporation Finance, noted that the language Tierney suggested “places a lot of emphasis” on the accredited investors. He said the definition of “accredited investor” has always been intended for investors who are capable of obtaining information from a seller and that this information may not be accessible to the same extent in the secondary market. Tierney said that that vast majority of sellers will not have the legal ability to provide information to buyers and said the SEC could “layer in” some kind of disclosure requirement.
Presentation and Q&A on Secondary Market Trading Venues/Venture Exchanges
David Weild, Chairman & CEO of IssuWorks and Weild & Co., stated during his presentation that he is primarily interested in driving growth to the U.S. economy and is concerned with the collapse of small IPOs in the U.S. Weild provided that due to regulatory initiatives and other changes in the market, there is no incentives for sales, distribution, and market making in small cap stocks.
Additionally, Weild stated that there are two primary causes of this decline in small IPOs: 1) the one-size-fits-all market model, which works well for naturally liquid stocks; and 2) the associated cost to issuers to go public. Weild stated the solution to this issue is to create “venture exchanges,” which are member-owned trading venues, which would permit listings up to $2 billion. Such member-owned venture exchanges would not be conflicted with driving shareholder value and would result in additional competition in the market for small listings. Weild stated that the current listing model has stifled the economy and innovation.
Vincent Molinari, CEO & Founder of Gate Global Impact, opened his presentation by stating that the biggest threat to the U.S. is the lack of job creation. Molinari said that the secondary private equity market is growing dramatically and provided that an orderly structure for liquidity is required for unregistered securities. In order to address this, Molinari stated that there has been a paradigm shift and that the SEC must take into account how millennials are investing, particularly by utilizing social media. To support the expansion of unregistered securities, he said, the Alternative Trading System (ATS) model should be leveraged. Particularly, Molinari stated that the ATS registration and start-up processes need to be streamlined in order to enable the trading of unregistered securities.
Committee Discussion of Venture Exchanges and Secondary Market Trading Issues
Hanks said that there a tension with the venture exchange model because companies are looking to keeping trading activity closed or “not wildly out of control.” Molinari stated that the venture exchange provides an issuer solution that could have permission levels. Weild responded that companies should have a choice or range of options in the private markets and that the idea is to create liquidity and standardization.
Graham stated that the Committee has been supportive of the venture exchange model. He asked Weild how this can come to fruition. Weild responded by stating that venture exchanges could come into being with the right enablement from regulatory initiatives and legislation. He added that there has been a tradition of consortium on Wall Street with investments, for instance with the development of certain ATSs. Weild stated that it is about the incentives and that the governance of the venture exchanges has to be structured to be inclusive of small and midsize companies.
M. Christine Jacobs, Co-chair of the Advisory Committee on Small and Emerging Companies, requested clarity from Weild regarding the incentives. Weild stated that for-profit shareholder-owned publically traded companies are a concern. He stated that such exchanges are focused on increasing shareholder value, which may, in turn, hurt the eco-system of smaller companies listed on the exchange. Weild stated that the need to serve shareholders and the need to create a viable ecosystem do not coexist very well. Jacobs stated that she supports the idea to increase liquidity in the market.
Paul asked what regulatory changes are needed for broker-dealers to become ATSs. Molinari stated that the process of working with the Financial Industry Regulatory Authority (FINRA) needs to be streamlined and made more efficient and provided that such ATSs can trade multiple asset types.
Paul then asked if market participants can address these issues within the current regulatory framework. Weild responded by stating that a holistic approach may be easier to do than a piecemeal change to existing regulations.
Dan Chace, Lead Portfolio Manager for the Wasatch Micro Cap Fund, asked how to avoid adverse selection on a venture exchange. Weild stated that allowing companies of up to $2 billion in market capitalization would address this issue.
Chace asked, from an issuer’s perspective, what financial disclosure requirements would be acceptable? Weild stated that the standards could be tiered based on company size in order to allow smaller companies to initially disclose less than their larger counterparts.
Gregory C. Yadley, Shumaker, Loop & Kendrick LLP, asked David Shillman, Associate Director, SEC Division of Trading and Markets, to provide an overview of the ATS registration process. Shillman stated that Regulation ATS requires registration as a broker-dealer. Shillman stated that there is nothing in Regulation ATS which would preclude an ATS from trading unregistered securities. Shillman stated that from a regulatory perspective, there is an open question if there should be regulatory steps taken to encourage trading on certain venues. For instance, Shillman noted one issue that the SEC has been considering is the extent of flexibility under the Exchange Act to allow trading to be concentrated on one or a few specific venues.
John J. Borer III, Committee Member, Advisory Committee on Small and Emerging Companies, asked Weild what happened to NASDAQ’s BX initiative to create a venture exchange. Weild stated that it was his understanding that NASDAQ could not get exemptions to Regulation NMS and that it would not likely be profitable under the regulatory framework at the time.
Gallagher stated NASDAQ had built a venture exchange previously. He noted that the NASDAQ BX failure proves that impediments to such trading venues need to be removed, as the private market is not currently in a place to create a solution without the help of the SEC.
Charles Baltic, Director and Co-Head of Healthcare at Needham & Company, stated that there has been a large increase in money flowing from active management to passive management. He asked, how venture exchanges would address the general shift towards exchange traded products (“ETPs”). Molinari stated that more information and knowledge is needed in the market to reeducate the public on the importance and benefits of being an investor.
Piwowar asked Weild for thoughts on allowing issuers to hire market makers in order to trade their stocks. Weild stated that this model in London has demonstrated that it can increase liquidity in those securities. Weild indicated that while he would prefer the market itself support the market makers, he would be okay with issuers paying them as well.
Shannon L. Greene, Director of The Tandy Leather Factory, stated that she is from a small cap company and noted that many companies, including her own, would no longer like to be publically traded. She referenced that the rising costs are squeezing smaller companies. Greene stated that the Committee should be cognizant that with every company beginning the IPO process, there are many on the back-end who no longer see the benefit.
Next Steps
Graham said that the Committee would table the discussion of venture exchanges for the next meeting, to be held on June 3, saying he thinks the idea “is a good one” and that the committee should keep the discussion going.
He noted the Committee will “put together” the accredited investor definition, draft a recommendation for Reg A+, and draft a recommendation on Section 4(a)(1½).
For more information on this event, please click here.