Senate Banking on Small Capital Formation
Senate Banking Committee
Subcommittee on Securities, Insurance, and Investment
“Capital Formation and Reducing Small Business Burdens”
Tuesday, March 24, 2015
Key Topics & Takeaways
- Improving Access to Capital for Emerging Growth Companies Act: The panel generally supported the bill. Quaadman said the legislation would build upon the JOBS Act by facilitating follow-on offerings made by EGC’s and increase the likelihood of a successful IPO launch.
- SBIC Advisors Relief Act: There was mixed support amongst the panel. Spell said the legislation would reduce duplicative regulatory requirements with the SEC and SBA. Stanley voiced opposition, citing concerns that the legislation would weaken state investor protection oversight of SBIC funds.
- Encouraging Employee Ownership Act: The panel generally supported the bill. Partigan said the legislation was a balanced approach to raising the outdated threshold for enhanced disclosures in SEC Rule 701 from $5 million to $10 million. He raised concerns about confidential information contained in the enhanced disclosures getting outside a privately held company.
Speaker
- Thomas Quaadman, Vice President of the Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
- William Spell, President of Spell Capital Partners
- Dr. Marcus Stanley, Policy Director of Americans for Financial Reform
- John C. Partigan, Partner and Securities Practice Group Leader of Nixon Peabody
Opening Statements
In his opening statement, Chairman Mike Crapo (R-Idaho) noted that the Securities and Exchange Commission (SEC) has a “long list of to-do items” and Congress could help in prioritizing the list through oversight and legislation. Specifically, he referenced the completion of Regulation A rules from the Jumpstart Our Business Startups (JOBS) Act, modernizing disclosure requirements, and improving access to capital for small companies. He said that in the previous hearing the committee explored whether venture exchanges would help emerging growth companies to gain accesses to capital and the steps should be taken.
In his opening statement, Ranking Member Mark Warner (D-Va.) suggested that holding this hearing may have spurred the SEC into action, noting the SEC is set to vote on moving forward with Regulation A+ on March 25. He highlighted that the Committee would discuss two bills related to derivatives regulation, expressing strong interest in the Committee taking a deeper look at derivatives regulation at a future date. He concluded by indicated interest in finding ways to cut down some of the bureaucracy to allow companies to more quickly grow and raise capital.
Testimony
In his testimony, Thomas Quaadman, U.S. Chamber of Commerce, emphasized that companies need the tools and ability to grow from small to large. He noted that the public company model is no longer appealing to many young entrepreneurs and drew attention to a tremendous number of public company outflows. Quaadman said the SEC could modernize existing regulations to achieve many of the same goals included in the bills being discussed but in the past has not done so unless forced to by Congress.
In his testimony, William Spell, Spell Capital Partners, noted that some of the regulatory burdens faced by small business investment companies (SBICs), such as duplicative costs and time burdens of registering with the SEC and complying with the Small Business Administration (“SBA”) regulations in the SBIC program, have diminished the time and funds that can be allocated to a SBIC’s core mission. He advocated that the duplicative or redundant regulatory oversight impedes small business investment funds from being profitable and directing time, energy, and capital to helping small businesses grow. Spell concluded by voicing support for a bipartisan bill entitled H.R. 432, the SBIC Advisor Relief Act.
In his testimony, Dr. Marcus Stanley, Americans for Financial Reform (AFR), stated that AFR does not believe the SEC’s capital formation mandate fundamentally conflicts with its mission of investor protection. Stanley said AFR supports legislation from last Congress eliminating swap data indemnification requirements, H.R. 742, stating that progress in derivatives reporting has been slow and citing indemnification requirements in Dodd-Frank as one factor involved. He advocated that the replacement of indemnification requirements with a simpler confidentiality agreement would be beneficial in the sharing of derivatives data between different jurisdictions and entities.
Stanley voiced opposition to H.R. 2274, legislation exempting merger and acquisition brokers from broker-dealer registration, citing concerns that bad actors might seek to take advantage of the registration exemptions and no effective provision to prevent transfer to a shell company. He said AFR opposed H.R. 5471, legislation that would have expanded exemptions from Dodd-Frank derivatives clearing requirements for financial affiliates of commercial entities. Stanley concluded with opposition legislation to expand exemptions from advisor registration for SBIC funds.
In his testimony, John Partigan, Nixon Peabody, gave support for S. 576, the Encouraging Employee Ownership Act and how the bill updates SEC Rule 701 Rule 701. He reviewed SEC Rule 701, citing that the rule was amended by the SEC in 1999 to create a two-tiered disclosure regime. Partigan advocated that the enhanced disclosures under Rule 701 are burdensome and problematic. He noted the legislation would adjust the threshold under Rule 701 form $5 million to $10 million to account for inflation from when the rule was amended.
Question and Answer
Crapo asked Spell to respond to Stanley’s concern that the SBIC Advisor Relief Act does not adequately protect against the potential for investor abuse in private equity markets. Spell responded that he was not aware of any abuses in the private equity industry. He added that Small Business Administration (SBA) regulation of SBICs is “stringent and thorough” and the SBA has the authority to shut down fund managers that do anything inappropriate or illegal.
Sen. Joe Donnelly (D-Ind.) asked Spell if he could speak about the success of the SBIC program since it was created and how he sees it benefitting small businesses. Spell responded that the program plays a critical role in providing capital to small and medium-size businesses that sometimes cannot obtain capital from traditional sources.
Donnelly asked Spell what he saw as the most important benefit and risk of the SBIC Advisor Relief Act. Spell responded that the removal of duplicative reporting requirements would be a key benefit and there would be no additional risks introduced.
Expanding Exemptions from Derivatives Clearing Requirements
Warner asked Quaadman if there should be any limitations on clearing exemptions for non-financial institutions. Quaadman responded that the Chamber of Commerce’s position is that hedging or a derivative used for financial speculation should go through clearing.
Donnelly asked Stanley to expand upon his opposition to H.R. 5471. Stanley responded that his fundamental concern was that the legislation would permit financial entities potentially owned by a parent company that is a bank or systematically important financial institution (SIFI) to access the clearing exemption based off the claim that they were mitigating risk for a commercial entity.
Encouraging Employee Ownership Act
Warner asked Partigan how many small private companies or employees would be able to participate if the threshold for SEC Rule 701 was raised from $5 million to $10 million. Partigan responded that under the proposed limit you could have twice the number of employees participating in stock grant programs as well as stock purchase programs for companies that share company stock with employees.
Sen. Tim Scott (R-S.C.) asked Partigan to comment on the feasibility of having employees sign a confidentiality agreement to prevent the publication of sensitive information of the employer instead of raising the Rule 701 threshold. Partigan responded with concerns that even if employees have signed a confidentiality agreement, audited financial statements may find its way into a competitor’s hand that otherwise would not be available.
Improving Access to Capital for Emerging Growth Companies Act
Warner asked if the panel had concerns that if a company passed through the $1 billion in gross revenue threshold during the IPO process that the company could still be an emerging growth company and not disrupt the IPO process. No concerns were raised on the panel.
Warner asked Quaadman about his strong support for the six day change between the public filing and the start of the road show. Quaadman responded that it was a helpful way to make the JOBS Act more efficient and facilitate second stage financing.
Scott asked Quaadman if he could elaborate on disclosure overload and why scaling disclosures may make it more useful to retail investors. Quaadman responded that the proxy statement in its current form is about 100 pages and scaling disclosures so that they are readable and understandable is extremely important. He further said that there is a systematic problem that the more disclosures we make, the less they are understandable.
Crapo asked Stanley to discuss his concerns with the threshold and the need for bad actor language in the merger and acquisition bill. Stanley responded that a company with $250 million in revenue is a large company, and when combined with a lack of shell company provisions, could yield significant private equity business and some complex broker deals that would fall under the registration exemption in the bill. He voice further concerns about the lack of oversight and bad actor provisions. Quaadman responded that he believed the $250 million threshold was reasonable and that bad actor language should be included in the bill.
For more information on this hearing, please click here.
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Senate Banking Committee
Subcommittee on Securities, Insurance, and Investment
“Capital Formation and Reducing Small Business Burdens”
Tuesday, March 24, 2015
Key Topics & Takeaways
- Improving Access to Capital for Emerging Growth Companies Act: The panel generally supported the bill. Quaadman said the legislation would build upon the JOBS Act by facilitating follow-on offerings made by EGC’s and increase the likelihood of a successful IPO launch.
- SBIC Advisors Relief Act: There was mixed support amongst the panel. Spell said the legislation would reduce duplicative regulatory requirements with the SEC and SBA. Stanley voiced opposition, citing concerns that the legislation would weaken state investor protection oversight of SBIC funds.
- Encouraging Employee Ownership Act: The panel generally supported the bill. Partigan said the legislation was a balanced approach to raising the outdated threshold for enhanced disclosures in SEC Rule 701 from $5 million to $10 million. He raised concerns about confidential information contained in the enhanced disclosures getting outside a privately held company.
Speaker
- Thomas Quaadman, Vice President of the Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
- William Spell, President of Spell Capital Partners
- Dr. Marcus Stanley, Policy Director of Americans for Financial Reform
- John C. Partigan, Partner and Securities Practice Group Leader of Nixon Peabody
Opening Statements
In his opening statement, Chairman Mike Crapo (R-Idaho) noted that the Securities and Exchange Commission (SEC) has a “long list of to-do items” and Congress could help in prioritizing the list through oversight and legislation. Specifically, he referenced the completion of Regulation A rules from the Jumpstart Our Business Startups (JOBS) Act, modernizing disclosure requirements, and improving access to capital for small companies. He said that in the previous hearing the committee explored whether venture exchanges would help emerging growth companies to gain accesses to capital and the steps should be taken.
In his opening statement, Ranking Member Mark Warner (D-Va.) suggested that holding this hearing may have spurred the SEC into action, noting the SEC is set to vote on moving forward with Regulation A+ on March 25. He highlighted that the Committee would discuss two bills related to derivatives regulation, expressing strong interest in the Committee taking a deeper look at derivatives regulation at a future date. He concluded by indicated interest in finding ways to cut down some of the bureaucracy to allow companies to more quickly grow and raise capital.
Testimony
In his testimony, Thomas Quaadman, U.S. Chamber of Commerce, emphasized that companies need the tools and ability to grow from small to large. He noted that the public company model is no longer appealing to many young entrepreneurs and drew attention to a tremendous number of public company outflows. Quaadman said the SEC could modernize existing regulations to achieve many of the same goals included in the bills being discussed but in the past has not done so unless forced to by Congress.
In his testimony, William Spell, Spell Capital Partners, noted that some of the regulatory burdens faced by small business investment companies (SBICs), such as duplicative costs and time burdens of registering with the SEC and complying with the Small Business Administration (“SBA”) regulations in the SBIC program, have diminished the time and funds that can be allocated to a SBIC’s core mission. He advocated that the duplicative or redundant regulatory oversight impedes small business investment funds from being profitable and directing time, energy, and capital to helping small businesses grow. Spell concluded by voicing support for a bipartisan bill entitled H.R. 432, the SBIC Advisor Relief Act.
In his testimony, Dr. Marcus Stanley, Americans for Financial Reform (AFR), stated that AFR does not believe the SEC’s capital formation mandate fundamentally conflicts with its mission of investor protection. Stanley said AFR supports legislation from last Congress eliminating swap data indemnification requirements, H.R. 742, stating that progress in derivatives reporting has been slow and citing indemnification requirements in Dodd-Frank as one factor involved. He advocated that the replacement of indemnification requirements with a simpler confidentiality agreement would be beneficial in the sharing of derivatives data between different jurisdictions and entities.
Stanley voiced opposition to H.R. 2274, legislation exempting merger and acquisition brokers from broker-dealer registration, citing concerns that bad actors might seek to take advantage of the registration exemptions and no effective provision to prevent transfer to a shell company. He said AFR opposed H.R. 5471, legislation that would have expanded exemptions from Dodd-Frank derivatives clearing requirements for financial affiliates of commercial entities. Stanley concluded with opposition legislation to expand exemptions from advisor registration for SBIC funds.
In his testimony, John Partigan, Nixon Peabody, gave support for S. 576, the Encouraging Employee Ownership Act and how the bill updates SEC Rule 701 Rule 701. He reviewed SEC Rule 701, citing that the rule was amended by the SEC in 1999 to create a two-tiered disclosure regime. Partigan advocated that the enhanced disclosures under Rule 701 are burdensome and problematic. He noted the legislation would adjust the threshold under Rule 701 form $5 million to $10 million to account for inflation from when the rule was amended.
Question and Answer
Crapo asked Spell to respond to Stanley’s concern that the SBIC Advisor Relief Act does not adequately protect against the potential for investor abuse in private equity markets. Spell responded that he was not aware of any abuses in the private equity industry. He added that Small Business Administration (SBA) regulation of SBICs is “stringent and thorough” and the SBA has the authority to shut down fund managers that do anything inappropriate or illegal.
Sen. Joe Donnelly (D-Ind.) asked Spell if he could speak about the success of the SBIC program since it was created and how he sees it benefitting small businesses. Spell responded that the program plays a critical role in providing capital to small and medium-size businesses that sometimes cannot obtain capital from traditional sources.
Donnelly asked Spell what he saw as the most important benefit and risk of the SBIC Advisor Relief Act. Spell responded that the removal of duplicative reporting requirements would be a key benefit and there would be no additional risks introduced.
Expanding Exemptions from Derivatives Clearing Requirements
Warner asked Quaadman if there should be any limitations on clearing exemptions for non-financial institutions. Quaadman responded that the Chamber of Commerce’s position is that hedging or a derivative used for financial speculation should go through clearing.
Donnelly asked Stanley to expand upon his opposition to H.R. 5471. Stanley responded that his fundamental concern was that the legislation would permit financial entities potentially owned by a parent company that is a bank or systematically important financial institution (SIFI) to access the clearing exemption based off the claim that they were mitigating risk for a commercial entity.
Encouraging Employee Ownership Act
Warner asked Partigan how many small private companies or employees would be able to participate if the threshold for SEC Rule 701 was raised from $5 million to $10 million. Partigan responded that under the proposed limit you could have twice the number of employees participating in stock grant programs as well as stock purchase programs for companies that share company stock with employees.
Sen. Tim Scott (R-S.C.) asked Partigan to comment on the feasibility of having employees sign a confidentiality agreement to prevent the publication of sensitive information of the employer instead of raising the Rule 701 threshold. Partigan responded with concerns that even if employees have signed a confidentiality agreement, audited financial statements may find its way into a competitor’s hand that otherwise would not be available.
Improving Access to Capital for Emerging Growth Companies Act
Warner asked if the panel had concerns that if a company passed through the $1 billion in gross revenue threshold during the IPO process that the company could still be an emerging growth company and not disrupt the IPO process. No concerns were raised on the panel.
Warner asked Quaadman about his strong support for the six day change between the public filing and the start of the road show. Quaadman responded that it was a helpful way to make the JOBS Act more efficient and facilitate second stage financing.
Scott asked Quaadman if he could elaborate on disclosure overload and why scaling disclosures may make it more useful to retail investors. Quaadman responded that the proxy statement in its current form is about 100 pages and scaling disclosures so that they are readable and understandable is extremely important. He further said that there is a systematic problem that the more disclosures we make, the less they are understandable.
Crapo asked Stanley to discuss his concerns with the threshold and the need for bad actor language in the merger and acquisition bill. Stanley responded that a company with $250 million in revenue is a large company, and when combined with a lack of shell company provisions, could yield significant private equity business and some complex broker deals that would fall under the registration exemption in the bill. He voice further concerns about the lack of oversight and bad actor provisions. Quaadman responded that he believed the $250 million threshold was reasonable and that bad actor language should be included in the bill.
For more information on this hearing, please click here.