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E-MailHester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.
Today’s [March 4, 2020] proposed rules are a welcome next step in the Commission’s efforts to simplify, harmonize, and improve our exempt offering framework. This proposal, which follows last year’s harmonization concept release and proposed amendments to the accredited investor definition, reflects a healthy regulatory habit—reviewing rules in light of their implementation and our experience to see what is working, what is not, and where there are gaps. I commend the staff in the Divisions of Corporation Finance, Economic and Risk Analysis, and Investment Management, and others throughout the building for their hard work on this release. Chairman Clayton has made it a priority to remove unnecessary friction from the capital-raising process and this proposal is the latest fruit of that important initiative.
I am grateful for the comments we received in response to our concept release and look forward to further comment in response to this proposal. I hope to hear from commenters not only about the proposed reforms, but also about possible additional reforms. Some of the questions I have been asking include the following:
- Why not simply deregulate offerings? The integration framework exists because there is a market need for certainty in understanding when the Commission would determine whether multiple securities transactions are part of the same offering. While today’s proposals seek to provide greater clarity and consistency on this issue, they are still complicated enough to make even a seasoned securities lawyer run for the whiteboard. Would a simpler approach in addressing uncertainty in this area be to deregulate offers and focus our attention on the time of sale? [1] After all, an investor who merely hears an offer suffers no harm aside from the mild annoyance that might come with any request for money.
- How can we unlock the potential of crowdfunding? We are proposing some meaningful changes to Regulation Crowdfunding, but these changes alone may not be enough to enable the crowdfunding exemption to live up to its true promise. Crowdfunding may not reach its potential without reforms aimed at further streamlining regulatory burdens. [2]
- Should we create a new micro-offering exemption? A new micro-offering exemption could be a life-changing way for entrepreneurs to raise small amounts of capital from the people who know them best. As one concept release commenter explained, micro-offerings could facilitate “broader access to capital for emerging and small businesses that need alternative financing options and are currently underserved by the traditional banking system.” [3]
- Should we extend preemption to certain secondary trading? The SEC has preempted state securities registration requirements for primary offerings under Tier 2 of Regulation A and under Regulation Crowdfunding, yet secondary trading remains subject to state law. Would both of these exemptions be more useful if we also preempted state securities registration requirements with respect to secondary trading of securities offered under these exemptions?
- Should we rethink constraints on venture capital funds? To retain their exemption from registration, venture capital funds must operate with certain constraints. These limitations make it difficult for venture capital funds to sustain their support of their portfolio companies as those companies grow. Should we afford venture capital funds greater flexibility to make follow-on investments in their portfolio companies?
- Can we better support state efforts to facilitate local capital formation? Intra-state offerings, exempt from SEC registration if conducted in compliance with either Rule 147A or Rule 147, offer some hope of addressing geographic disparities in capital formation. Given the mobility of our population, should we allow such offerings to include part-time residents or others with a nexus to a state in order to expand the utility of such an exemption?
- Should we holistically streamline the offering framework? Even as I ask the above questions, an overarching question lingers: by crafting new exemptions and refining old ones, would we be adding to the complexity of an already overly elaborate offering framework? Should we instead, to the extent our statutory authority allows it, start anew and create a simpler framework to provide a clear path for issuers trying to raise capital at different stages of their lifecycle? [4]
The answers to all these questions require consideration of investor protection. Investor protection is not unidimensional. Investors need to be able to trust the integrity of the marketplace, so antifraud protections are essential. Investor protection also encompasses writing rules that foster effective disclosure. Effective disclosure does not mean disclosure that pleases lawyers whose minds have been shaped by years of reading regulations. Rather, our rules should be designed to encourage issuers to communicate when, where, and how investors prefer. Investor protection also means allowing investors of all income levels to participate in a wide range of offerings that allows them to build balanced and diversified portfolios. The proposal today demonstrates a recognition of some of these often-overlooked tenets of investor protection.
I am pleased to support today’s proposal and look forward to continued work on the complementary objectives of facilitating capital formation and protecting investors.
Endnotes
1This question is not new: Linda Quinn, then Director of the Division of Corporation Finance, asked it 25 years ago. See Linda C. Quinn, Reforming the Securities Act of 1933: A Conceptual Framework, 10 Insights 25, 27 (Jan. 1996), available at https://www.sec.gov/info/smallbus/acsec/reformingsa33.pdf (asking “Do we need to continue to register offers?”). See also Letter from Sara Hanks, CEO, CrowdCheck, Inc., to File No. S7-08-19 (Oct. 30, 2019), https://www.sec.gov/comments/s7-08-19/s70819-6368811-196431.pdf.(go back)
2For a discussion of a different crowdfunding regime, see Letter from Andrew Schwartz, Professor, Colorado Law, to File No. S7-08-19 (Sept. 24, 2019), https://www.sec.gov/comments/s7-08-19/s70819-6193349-192506.pdf.(go back)
3Letter from Daniel B. Ravicher, Director, Startup Practicum, University of Miami School of Law, to File No. S7-08-19, at 2 (Sept. 24, 2019), https://www.sec.gov/comments/s7-08-19/s70819-6193336-192499.pdf.(go back)
4See, e.g., Letter from David Burton, Senior Fellow, Institute for Economic Freedom, The Heritage Foundation, to File No. S7-08-19 (Sept. 24, 2019), https://www.sec.gov/comments/s7-08-19/s70819-6193328-192495.pdf and Letter from Andrew Vollmer, Senior Affiliated Scholar, Mercatus Center, George Mason University, to File No. S7-08-19 (Sept. 24, 2019), https://www.sec.gov/comments/s7-08-19/s70819-6190606-192468.pdf.(go back)
