On September 17, 2014, SEC Commissioner Daniel M. Gallagher delivered a speech to the Heritage Foundation in which he pleaded for the SEC and Congress to provide small business with easier access to the capital markets. In a speech entitled, Whatever Happened to Promoting Small Business Capital Formation, Commissioner Gallagher noted that small business is “regularly and systematically underrepresented in the legislative and regulatory process” in Washington because small business owners cannot afford to hire “high-priced lobbyist to influence policy.” He went on to state that, in his view, the SEC was not doing enough “to ensure that small businesses have the access to capital that they need to grow.” To the contrary, the SEC “layer[s] rule after rule until it becomes prohibitively expensive to access the public capital markets.” By way of specific example, Commissioner Gallagher pointed to the JOBS Act, which attempted to liberalize Rule 506 private offerings. In response, however, the SEC submitted a proposed rule “that seeks not only to undo some of the benefits achieved [in the JOBS Act], but also to impose new burdens on all Regulation D transactions.”
The Commissioner then proposed several specific ideas for providing easier access to the capital markets for small businesses, including the following:
- Enact a “robust set” of Regulation D exemptions that allow a company access to the capital markets while remaining private. Because 99% of Regulation D offerings are made pursuant to Rule 506 because of the blue-sky exemption, consideration should be given to expanding that exemption such that companies could efficiently rely on Rule 504 and 505 exemptions as well.
- More facilities need to be developed to improve trading among accredited investors in the secondary market.
- The Office of the Chief Accounting needs to ensure, through its supervision of the FASB and the PCAOB, that the accounting and auditing standards are “scaled or scalable” for smaller companies.
- The Division of Enforcement should “recognize that not every business failure is fraudulent.” In particular, “[e]ntrepreneurs need to have the room to take risks, which means room to fail.”
- The Division of Corporation Finance, which is currently examining disclosure effectiveness, should simplify the required disclosures, thereby reducing the volume and costs associated therewith.
- The SEC needs to create an Office of Small Business Advocate which would be the point of contact for small businesses. That Office can then advocate on the views of those underrepresented parties to the Staff of the SEC.
In concluding, Commissioner Gallagher stated that, while his agenda is ambitious, “[s]mall business capital formation is too important an issue for us to ignore.”