Remarks of SEC Chair on Small and Emerging Companies

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent remarks before the SEC Advisory Committee on Small and Emerging Companies; the complete text is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning. Thank you very much, Sara and Steve. I want to extend a warm welcome to our new Committee members as well as those members who are returning.

This Committee has been a continuing source of valuable expertise and advice to the Commission on a variety of important issues, as reflected in the Commission’s renewal of its charter last year. Small businesses play a crucial role in our nation’s economy, and this Committee helps to ensure that the views of small business owners, investors, and other stakeholders in this community are clearly heard here at the Commission.

From your impressive bios, I am certain that the newly constituted membership will continue those contributions. Each of you brings unique insights and experiences in running, nurturing, advising, or investing in small and emerging companies. We know you have busy schedules with multiple demands on your time, and we sincerely appreciate your service.

I especially would like to thank Co-chairs Steve Graham and Sara Hanks for their willingness to lead the Committee. And I also would like to extend an internal thank you to the staff of the Division of Corporation Finance—in particular Betsy Murphy, Sebastian Gomez, and Julie Davis—for their hard work in supporting the Committee’s activities and helping to organize this meeting.

I know you have a full agenda today, which you are anxious to get to, so I will give just a very quick update on our activities in a few areas of particular importance to you, including some that were the subject of recommendations from the Committee last year.

  • JOBS Act Rulemakings. As you know, last year the Commission completed all of its major rulemakings under the JOBS Act, including Regulation A+ and Crowdfunding. Since Regulation A+ became effective in June 2015, issuers have publicly filed over sixty offering statements with the Commission. Some of these issuers and others have taken advantage of the rule that allows for non-public staff review of draft offering statements before publicly filing. The crowdfunding rules will become effective on May 16 and, in anticipation, a number of funding portals have filed with us to register to serve as intermediaries in crowdfunding transactions. There is a lot of excitement about these new avenues for capital-raising, and we are keeping a close eye on how these markets develop.
  • Proposed Changes to Rule 147 and Rule 504. In October, at the same time that we adopted Regulation Crowdfunding, the Commission proposed changes to Securities Act Rule 147 for intrastate offerings and Rule 504 of Regulation D. The proposed changes are a part of our efforts to assist smaller companies with capital formation, while maintaining investor protections.
  • Your Committee last year recommended that the Commission modernize Securities Act Rule 147 to facilitate state-based crowdfunding initiatives, and that recommendation was fully considered in developing these proposed rules. As you know, the proposal, taking account of the internet age, would modernize Rule 147 to facilitate intrastate offerings, including state-based crowdfunding offerings, which would be sold to residents of a particular state. The proposal would also update Rule 504 to permit offerings up to $5 million in a twelve-month period and would make it consistent with other provisions of Regulation D by including a bad actor disqualification provision. The public comment period on these proposals closed in January, and the staff is reviewing the comments received and developing recommendations for final rules for the Commission’s consideration.
  • Accredited Investor Study. The Accredited Investor definition is another important subject for us and for many across the small business community. I know this is an area of particular interest to you as well, and in making recommendations last year, this Committee urged that the primary goal of the Commission’s review of this definition should be to “do no harm to the private offering ecosystem,” by constricting the number of investors who qualify as “accredited.” You also recommended including within the definition those investors who meet a test of sophistication. In late December, a Staff Report was issued that analyzes various approaches for modifying the definition and provides Staff recommendations for potential updates and modifications. There is a comment file to receive the public’s feedback on the Report and the issues and recommendations contained in it, and we are encouraging all interested parties to give us feedback.
  • Simplified Disclosure for Smaller Issuers. Last year, this Committee also put forward recommendations regarding disclosure by smaller issuers, including some changes in the disclosure rules for smaller reporting companies and expanding the number of companies that qualify as “smaller reporting companies” under our existing rules that permit certain scaled disclosures. As you know, staff in the Division of Corporation Finance is advancing its Disclosure Effectiveness initiative, which includes consideration of the disclosure requirements for smaller companies. We also now have additional mandates under the FAST Act to update and simplify our disclosure requirements, so our work in this area actively continues.
  • Finders. The Committee also provided a recommendation regarding the regulation of finders and other intermediaries in small business capital formation transactions. Staff in the Division of Trading and Markets continues to review this issue.
  • Section 4(a)(1)½ exemption.” In addition, the Committee last year supported formalizing by rule or statute the so-called “Section 4(a)(1)½ exemption” to allow certain shareholders, who may not be able to rely on Rule 144, to resell their shares received in a private transaction. This issue was addressed by Congress when it passed the RAISE Act in December as part of the FAST Act. I understand you will be discussing the latest developments on this topic later today, and I look forward to hearing your thoughts in light of the changes.
  • Market Structure. We appreciate that one market structure may not fit all companies and that our market structure must promote capital formation for smaller companies while also providing robust investor protections. That is why we are conducting a pilot program that will be implemented this year to help assess the effect of tick sizes on market quality for smaller companies. While I know the Committee’s recommendation was to make some of those changes permanent, you should know how important your views were to the Commission’s decision to do the tick size pilot. We also continue to study and remain receptive to innovative industry efforts designed to facilitate secondary market liquidity for smaller companies.

I look forward to continued thoughtful and informed contributions from this Committee on all of these and other topics. The focus of your agenda is, as usual, a good one. You will first be discussing the current landscape for small and emerging companies seeking to raise capital and then reviewing what the current data shows about the extent of capital-raising by small businesses through unregistered securities offerings. As the avenues for capital-raising are changing and evolving, I think it is critical to be continuously looking at what is working, what barriers may be preventing the facilitation of capital formation and how investors are faring and being protected in these new markets. So, I will be keenly interested in today’s presentations and discussions.

Let me stop by thanking you again for your service on this important committee.

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