SEC Advisory Committee on Small and Emerging Companies Meeting
Securities and Exchange Commission
Investor Advisory Committee Meeting
Wednesday, June 3, 2015
Key Topics & Takeaways
- Crowdfunding Rule Expected: SEC Chair White said she expects the Commission’s crowdfunding rules to be completed this year.
- Intrastate Crowdfunding Recommendation: The Committee adopted a recommendation to modernize Rule 147 to support states’ efforts in facilitating crowdfunding, noting that they would leave it up to the SEC staff to figure out the details of such a plan.
- Venture Exchanges: SEC’s Shillman stated that the real issue with venture exchanges is the challenge of becoming viable, in part because of the difficulty in attracting liquidity providers.
Speakers
- Mary Jo White, Chair, Securities and Exchange Commission
- Michael Piwowar, Commissioner, Securities and Exchange Commission
- Michael Pieciak, Deputy Commissioner of the Vermont Securities Division
- David Shillman, Associate Director, Division of Trading and Markets
Opening Statements
In her opening statement, Securities and Exchange Commission (SEC) Chair Mary Jo White said she was pleased to note that since the Committee’s last meeting, the Commission had adopted Regulation A+, which she said would provide an additional and effective path to raise capital that includes investor protections. She also stated that the Commission is continuing its work on rulemakings from the Dodd-Frank Act and the Jumpstart Our Business Startups (JOBS) Act, including crowdfunding rules which she expects to be completed this year.
CommitteeDiscussion of Intrastate Crowdfunding and Securities Act Rule 147
Michael Pieciak, Deputy Commissioner of the Vermont Securities Division and presenting on behalf of the North American Securities Administrators Association (NASAA), stated that intrastate crowdfunding efforts are the “crown jewel” of capital formation initiatives at the state level. He explained that 16 states have enacted legislation for crowdfunding, nine have passed such legislation and are in the rulemaking process, 12 states have legislation pending, and three are investigating such legislation.
Pieciak highlighted the three main concerns of states that have come up as repeated issues when trying to establish crowdfunding regimes: 1) the focus on residence at the time of an offer or sale under Rule 147, as it is an impediment in the internet age where mechanisms span across borders; 2) the 80 percent rule that requires 80 percent of assets, revenue, and proceeds to be derived within the state of authorization, as this figure is difficult to calculate if firms do not know where all of their customers are located; and 3) the inability for a company to incorporate in a different state than it operates in.
Pieciak said that NASAA has been engaged with the SEC to change and modernize Rule 147 and Rule 504. He noted that complaints about Rule 504 center on the total capital limit being too low and the requirement that securities be registered at a state in order to conduct general solicitation.
David Paul, founder of DJP&Co, said that some of these issues will be resolved when federal rules are finished, as they will supersede the states’ rules. Pieciak said that compliance requirements will differentiate state and federal rules, because states will take a more “hands on” approach and allow for higher capital limits.
Commissioner Piwowar said he sees the state rules as being complementary to the federal rules being worked on, adding that the federal rules are very prescriptive. He asked if there is anything else the SEC can do to facilitate regional crowdfunding. Pieciak said modernization of Rule 147 is most important.
The Committee then agreed to a recommendation to modernize Rule 147 to support states’ efforts to facilitate crowdfunding, noting that they would leave it up to the SEC staff to figure out the details of such a plan.
CommitteeDiscussion of Rules and Market Structure Matters Relevant to Venture Exchanges
David Shillman, Associate Director of the SEC’s Division of Trading and Markets, stated that he would provide an overview of the current dialogue that his division has observed on venture exchanges, as well as his thoughts on the associated rules and regulations.
Shillman indicated that the one of the common misconceptions frequently stated by market participants and commenters is that the Commission is prohibiting venture exchanges. Shillman noted that, with respect to the venture exchanges with lower listing standards, the Commission has previously approved these types of venues. He added however, that regarding venues with lower listing standards, the Commission is concerned about fraud or other manipulation and therefore typically requires such venues to provide enhanced disclosure and other measures to protect investors.
Shillman stated that the real issue with venture exchanges, is that it has been difficult for these venues to become viable, in part because it is difficult to attract liquidity providers. He noted that the Division of Trading & Markets is currently evaluating how to enhance the viability of these venues.
Shillman stated that another misconception is that there are regulations preventing venture exchanges from succeeding, for instance Regulation NMS, and therefore such venues should be exempt from those applicable regulations. Shillman stated this is not the case and provided that Regulation NMS would not apply to venture exchanges, as the securities traded on a venture exchange would not be by definition a “NMS Security”.
Shillman stated that many of the regulations and initiatives that have been put into place are meant to encourage competition, both between venues and on price. Shillman provided the recently approved Tick Size Pilot Program, notably the $0.05 quoting and trading increment, as an example. Shillman noted that the thrust to encourage competition has benefited large cap securities (e.g. via lower transaction costs), however there is a legitimate question if those benefits have accrued to small-cap securities.
Shillman indicated that another area of interested to the Division of Trading & Markets is reducing competition among venues in order to promote and aggregate liquidity in small-cap securities. Shillman suggested that by restricting or limiting where small-cap securities could trade, listing markets would be in a better position to experiment (e.g. batch auctions) and provide market-makers with a greater incentives to offer liquidity.
Stephen M. Graham, Co-Chair of the Committee and Managing Partner of Fenwick & West, asked what the real impediments are to establishing viable venture exchange, to which Shillman replied that attracting liquidity providers is the primary impediment. Shillman noted that there are trade-offs with restricting competition, for instance there could be a reduction in execution quality for investors and the risk of abuse with the rise of monopoly power.
In response to a question by Graham regarding the impact of the proliferation of trading venues, Shillman stated that proliferation limits the ability of venues to experiment and potentially offer a trading model better suited for certain securities (e.g. batch auctions). Shillman also stated that if trading is restricted to certain venues, imposing market-maker obligations will be much easier if the maker-maker has the exclusive right to trade certain stocks.
Sonia Luna, Aviva Spectrum, asked if any of the suggestions, such as batch auctions or modifying the trading increments, are “in play.” Shillman responded by stating the Tick Size Pilot Program will go into effect next year, and that the NYSE’s Midday Auction proposal was recently approved as well.
John J. Borer III, The Benchmark Company, LLC, asked where the demand for improvement in small-cap securities is originating from. Shillman stated that it is coming from “the Street,” investors, and issuers. Shillman noted that the mission of the SEC is to establish a system where the markets are fair, orderly, and high quality. Shillman further noted that small-cap securities are more prone to fraud and manipulation, and therefore, as the Commission looks at ways to make it more efficient, it should not lose sight of investor protections.
Dan Chace, Wasatch Micro Cap Fund, asked about reducing competition among venues. Shillman noted that the Division of Trading & Markets is reviewing if there is flexibility in the interval where unlisted trading privileges cannot be exercised by an exchange. However, Shillman noted that absent legislation, the Commission’s ability to restrict unlisted trading privileges for an exchange is very difficult
For more information on this meeting, please click here.
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Securities and Exchange Commission
Investor Advisory Committee Meeting
Wednesday, June 3, 2015
Key Topics & Takeaways
- Crowdfunding Rule Expected: SEC Chair White said she expects the Commission’s crowdfunding rules to be completed this year.
- Intrastate Crowdfunding Recommendation: The Committee adopted a recommendation to modernize Rule 147 to support states’ efforts in facilitating crowdfunding, noting that they would leave it up to the SEC staff to figure out the details of such a plan.
- Venture Exchanges: SEC’s Shillman stated that the real issue with venture exchanges is the challenge of becoming viable, in part because of the difficulty in attracting liquidity providers.
Speakers
- Mary Jo White, Chair, Securities and Exchange Commission
- Michael Piwowar, Commissioner, Securities and Exchange Commission
- Michael Pieciak, Deputy Commissioner of the Vermont Securities Division
- David Shillman, Associate Director, Division of Trading and Markets
Opening Statements
In her opening statement, Securities and Exchange Commission (SEC) Chair Mary Jo White said she was pleased to note that since the Committee’s last meeting, the Commission had adopted Regulation A+, which she said would provide an additional and effective path to raise capital that includes investor protections. She also stated that the Commission is continuing its work on rulemakings from the Dodd-Frank Act and the Jumpstart Our Business Startups (JOBS) Act, including crowdfunding rules which she expects to be completed this year.
CommitteeDiscussion of Intrastate Crowdfunding and Securities Act Rule 147
Michael Pieciak, Deputy Commissioner of the Vermont Securities Division and presenting on behalf of the North American Securities Administrators Association (NASAA), stated that intrastate crowdfunding efforts are the “crown jewel” of capital formation initiatives at the state level. He explained that 16 states have enacted legislation for crowdfunding, nine have passed such legislation and are in the rulemaking process, 12 states have legislation pending, and three are investigating such legislation.
Pieciak highlighted the three main concerns of states that have come up as repeated issues when trying to establish crowdfunding regimes: 1) the focus on residence at the time of an offer or sale under Rule 147, as it is an impediment in the internet age where mechanisms span across borders; 2) the 80 percent rule that requires 80 percent of assets, revenue, and proceeds to be derived within the state of authorization, as this figure is difficult to calculate if firms do not know where all of their customers are located; and 3) the inability for a company to incorporate in a different state than it operates in.
Pieciak said that NASAA has been engaged with the SEC to change and modernize Rule 147 and Rule 504. He noted that complaints about Rule 504 center on the total capital limit being too low and the requirement that securities be registered at a state in order to conduct general solicitation.
David Paul, founder of DJP&Co, said that some of these issues will be resolved when federal rules are finished, as they will supersede the states’ rules. Pieciak said that compliance requirements will differentiate state and federal rules, because states will take a more “hands on” approach and allow for higher capital limits.
Commissioner Piwowar said he sees the state rules as being complementary to the federal rules being worked on, adding that the federal rules are very prescriptive. He asked if there is anything else the SEC can do to facilitate regional crowdfunding. Pieciak said modernization of Rule 147 is most important.
The Committee then agreed to a recommendation to modernize Rule 147 to support states’ efforts to facilitate crowdfunding, noting that they would leave it up to the SEC staff to figure out the details of such a plan.
CommitteeDiscussion of Rules and Market Structure Matters Relevant to Venture Exchanges
David Shillman, Associate Director of the SEC’s Division of Trading and Markets, stated that he would provide an overview of the current dialogue that his division has observed on venture exchanges, as well as his thoughts on the associated rules and regulations.
Shillman indicated that the one of the common misconceptions frequently stated by market participants and commenters is that the Commission is prohibiting venture exchanges. Shillman noted that, with respect to the venture exchanges with lower listing standards, the Commission has previously approved these types of venues. He added however, that regarding venues with lower listing standards, the Commission is concerned about fraud or other manipulation and therefore typically requires such venues to provide enhanced disclosure and other measures to protect investors.
Shillman stated that the real issue with venture exchanges, is that it has been difficult for these venues to become viable, in part because it is difficult to attract liquidity providers. He noted that the Division of Trading & Markets is currently evaluating how to enhance the viability of these venues.
Shillman stated that another misconception is that there are regulations preventing venture exchanges from succeeding, for instance Regulation NMS, and therefore such venues should be exempt from those applicable regulations. Shillman stated this is not the case and provided that Regulation NMS would not apply to venture exchanges, as the securities traded on a venture exchange would not be by definition a “NMS Security”.
Shillman stated that many of the regulations and initiatives that have been put into place are meant to encourage competition, both between venues and on price. Shillman provided the recently approved Tick Size Pilot Program, notably the $0.05 quoting and trading increment, as an example. Shillman noted that the thrust to encourage competition has benefited large cap securities (e.g. via lower transaction costs), however there is a legitimate question if those benefits have accrued to small-cap securities.
Shillman indicated that another area of interested to the Division of Trading & Markets is reducing competition among venues in order to promote and aggregate liquidity in small-cap securities. Shillman suggested that by restricting or limiting where small-cap securities could trade, listing markets would be in a better position to experiment (e.g. batch auctions) and provide market-makers with a greater incentives to offer liquidity.
Stephen M. Graham, Co-Chair of the Committee and Managing Partner of Fenwick & West, asked what the real impediments are to establishing viable venture exchange, to which Shillman replied that attracting liquidity providers is the primary impediment. Shillman noted that there are trade-offs with restricting competition, for instance there could be a reduction in execution quality for investors and the risk of abuse with the rise of monopoly power.
In response to a question by Graham regarding the impact of the proliferation of trading venues, Shillman stated that proliferation limits the ability of venues to experiment and potentially offer a trading model better suited for certain securities (e.g. batch auctions). Shillman also stated that if trading is restricted to certain venues, imposing market-maker obligations will be much easier if the maker-maker has the exclusive right to trade certain stocks.
Sonia Luna, Aviva Spectrum, asked if any of the suggestions, such as batch auctions or modifying the trading increments, are “in play.” Shillman responded by stating the Tick Size Pilot Program will go into effect next year, and that the NYSE’s Midday Auction proposal was recently approved as well.
John J. Borer III, The Benchmark Company, LLC, asked where the demand for improvement in small-cap securities is originating from. Shillman stated that it is coming from “the Street,” investors, and issuers. Shillman noted that the mission of the SEC is to establish a system where the markets are fair, orderly, and high quality. Shillman further noted that small-cap securities are more prone to fraud and manipulation, and therefore, as the Commission looks at ways to make it more efficient, it should not lose sight of investor protections.
Dan Chace, Wasatch Micro Cap Fund, asked about reducing competition among venues. Shillman noted that the Division of Trading & Markets is reviewing if there is flexibility in the interval where unlisted trading privileges cannot be exercised by an exchange. However, Shillman noted that absent legislation, the Commission’s ability to restrict unlisted trading privileges for an exchange is very difficult
For more information on this meeting, please click here.