Commissioner Crenshaw’s remarks on January 30, 2023 once again touched on Regulation D and the private markets. It is understandable that given that companies in the United States have become increasingly reliant on private capital to fuel their growth a regulator would seek to focus on the private markets. The “how did we get here” part of the remarks conveniently omits a discussion of the public markets. Is compelling private companies once they reach a certain revenue threshold or once a class of their equity securities are held by a certain number of holders that are not accredited investors to become reporting companies really the answer, especially without doing more to make being an SEC-reporting company or a smaller SEC-reporting company attractive? In our prior post discussing the Report of the Office of Small Business, we commented on the SEC’s own findings regarding the limited liquidity associated with the securities of most smaller public companies, attributable, at least in part, to the lack of research coverage. That same report also provided data regarding the costs of being public for smaller public companies and mid-cap companies. There have been fundamental market structure changes that have contributed to private companies choosing to remain private. There are also fundamental market structure changes that cause public companies, even when they have a shelf registration statement readily available, to choose to rely on private placements to raise additional capital or to rely on unannounced or confidentially marketed offerings resembling private placements to raise additional capital. The Securities and Exchange Commission has not done anything to address these changes.
The statutory private placement exemption, and the safe harbor, should remain available for sophisticated investors. These investors can fend for themselves and request the type of information that they need to make their investment decisions—all of this has been at the heart of the exemption and the case law for decades. These principles were not premised on, and the exemption was not conditioned on, the size of the issuer seeking the capital. Form D was not intended to be a disclosure document. It is not used to market and sell securities in private placements, nor is it relied upon by market participants as a source of information about private companies. It is unclear why there is something inherently “bad” or suspect about a large private company or why a private company should be assumed to have governance practices that are inherently more concerning from a public policy perspective than those of some public companies. The remarks cite to three private companies as an example of problems with the private markets that should be our call to action to redraw the lines between private and public.
Seems like we’re missing something–where’s the call to action for regulators to make the public markets more attractive for small and mid-cap companies if we are going to compel reporting and disclosure prematurely? And won’t companies just rely on the Section 4(a)(2) statutory private placement exemption to continue to sell securities in exempt offerings to qualified institutional buyers and institutional accredited investors who conduct thorough diligence and request and receive detailed disclosure and financial information from the private companies in which they invest—quite likely. And valuations will continue to adjust based on market cycles and demand as always.
See the full text of the Commissioner’s remarks.