On Thursday, November 20th, the 2014 SEC Government-Business Forum on Small Business Capital Formation met at the SEC headquarters in Washington, D.C. The forum was attended by SEC Chairwoman Mary Jo White, Commissioner Gallagher, SEC staff (the “Staff”) and featured presentations by lawyers, an Arkansas state securities regulator, and the SEC’s Senior Financial Economist, among others. Stanley Keller, a partner at Edwards Wildman Palmer led the panel, “Secondary Market Liquidity for Securities of Small Businesses.” He stressed the importance of liquidity in promoting capital formation, permitting the redeployment of capital, providing benefits to employees and giving companies more time grow. Mr. Keller noted that while the emergence of secondary market trading platforms has led to increased liquidity, there are concerns about investor protections and the adequacy of information provided by such platforms, which affects both investors and the transparency of the trading markets. Michael Zuppone, a partner at Paul Hastings, discussed the need to create specialized exchanges hospitable to smaller companies that would permit reduced reporting requirements and have lower fees than those of national exchanges. He stated that the need for such exchanges is likely only to increase upon the implementation of Regulation A+ and the increase in smaller company IPOs that he believes is likely to follow. Mr. Zuppone further proposed that the Staff should allow companies that are currently listed on national exchanges to be able to “migrate” to Regulation A+ reporting requirements. The Staff was receptive Mr. Zuppone’s proposal, with Stephen Luparello, the Director of the Division of Trading and Markets, agreeing that “one size does not fit all—especially in equity.”
The second panel featured a discussion of the standards for an “Accredited Investor,” under Regulation D. Chairwoman Mary Jo White explained that the SEC’s goal is to “assess whether we are properly identifying the population of investors who should be able to purchase securities in a securities offering without the protection afforded by the registration requirements of the Securities Act.” Commissioner Gallagher stated that he’s “baffled by continued insistence from some quarters that we need to significantly revise” the Accredited Investor definition, and that he felt the Dodd-Frank Act’s removal in 2010 of the equity value of one’s primary residence for the purposes of the net worth test “was already a significant change to the accredited investor definition.”. He asked, “Why should we spend limited Commission resources protecting the wealthiest 2%-3% of investors in this country? This obsession with protecting millionaires — potentially at the cost of hindering the wildly successful and critically important private markets — strains logic and reason. Millionaires can fend for themselves.” Panelists considered adding qualitative provisions to allow investor to qualify based on their “financial sophistication” and/or educational requirements, and not just their net worth. Panelists believed that this alternative could potentially expand the pool of investors that would qualify as “Accredited Investors” and promote capital formation. However, Jean Peters of the Angel Capital Association said she does not believe the definition should be changed “as far as financial thresholds” and only agreed with adding a sophistication element in addition to current financial threshold requirements.
An archive version of the webcast of the forum is expected to be available shortly on the SEC’s website.
The program and slide presentations from the forum can be accessed here.
Opening remarks from Chair Mary Jo White can be accessed here.