Speech by Commissioner Roisman on the U.S. Capital Markets

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on his recent remarks at The SEC Speaks in 2021. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. To open, I have to note that my remarks are my own and do not reflect the views of the Commission or my fellow Commissioners.

I. Introduction

The last 18 months have been unprecedented and while we have all had to make changes and adapt I have found that the purpose of my job has been consistent. I have been going to the office throughout the pandemic and every morning, when I walk into my office, the first thing I see is a slightly faded piece of computer paper on the wall that reads “it’s a privilege.” I printed it over a decade ago and I have carried it to every job I have had since. It has never been more true of any job than it is of the job I have now: it is truly a privilege and an honor to serve on the U.S. Securities and Exchange Commission. Today, I want to focus my remarks on one aspect of this great responsibility: preserving and expanding opportunities for businesses in our economy to raise capital and for investors to share in their success.

There is little disagreement that the U.S. capital markets remain the envy of the world. Their depth, liquidity, and transparency are unmatched. Their remarkable quality is not merely a point of pride; it fundamentally affects how our economy runs, and therefore how our people, and people all over the world, are able to live their lives. These are the markets I have the privilege of overseeing.

As is often noted, the U.S. is unusual in its pronounced reliance on debt and equity securities markets. In Europe and Asia, capital formation tends to rely primarily on bank loans and only secondarily on the sale of securities. [1] Here, the pattern is reversed, with about 80 percent of debt financing coming from the sale of securities and about 20 percent coming from bank debt. [2] Companies in the U.S. also rely more heavily on equity than elsewhere. [3] Because of their considerable depth, U.S. markets remain the lodestar for early stage companies with large ambitions.

At the SEC, our tripartite mission sets the template for how to oversee this precious resource. First, we protect investors. Investors who feel that markets are transparent and that the legal system provides recourse against wrongdoers will feel that they are taking fair risks when they invest in companies of all sizes and stages. Second, we maintain fair, orderly, and efficient markets. Companies and their investors can grow, develop, and retool when there is a robust and efficient secondary market for their securities. And third, we facilitate capital formation. That is, we must do all of this without putting a stranglehold on the proverbial gold-laying goose.

II. Capital Formation: A Look-Back

It has been said that regulation is a one-way ratchet, easy to tighten but almost never loosened. I am pleased to say that in the last several years the SEC has pushed back on this notion, systematically and thoughtfully streamlining and refining or rewriting rules that are no longer working as intended or as well as they should. Many of you watching today have been integral to this process, sending comment letters or meeting with our staff to let us know where our regulations can be improved. I want to take a minute to look back on what we have accomplished.

Our efforts in this area these last few years have taken several different approaches.

A. Expanding Opportunity

In some cases, we expanded exemptions and opportunities to include more issuers, offerings, and investors. For example, we expanded the definition of smaller reporting companies, giving more companies the option of using scaled disclosure and of having longer lead times to implement many of our disclosure-based rulemakings. [4] We also expanded the number of issuers who qualify as non-accelerated filers, allowing more companies the time and opportunity to mature before having to undertake the heavy lift of preparing for the Sarbanes-Oxley Section 404(b) attestations. We changed the rules to allow all issuers to “test the waters” before filing a registration statement, and now also allow all issuers to file with us confidentially, allowing companies to receive an initial review and feedback from the staff before making their filing public. [5] We also expanded access to the Regulation A exemption, which has been newly revitalized under the JOBS Act, allowing reporting issuers to use the exemption. [6] We also expanded the ability of companies to use equity as compensation for their workers, by raising the cap from $5 million to $10 million on securities issued under Rule 701. [7] And we opened up a new path for investors to qualify as “accredited investors,” by allowing certain license-holders within the financial services industry to qualify—a move that will increase the investment opportunities for more individual investors as well as expand the pool of potential investors for non-public companies. [8]

B. Streamlining Regulation

We also refined existing disclosures to ensure that they meet the needs of investors without adding unnecessary expense for businesses. Our biggest undertakings in this area were the sweeping Disclosure Update and Simplification rule, fondly known as “DUSTR” within the building, and the amendments we adopted pursuant to the FAST Act, which streamlined and updated many of our Regulation S-K disclosures. [9] These rulemakings are the kind of blocking and tackling that required countless hours of staff effort to comb through our often Byzantine rules, and to conduct outreach, review, and listening sessions with issuers and investors alike to tease out what was working and what could be revised. I think we made very few headlines with these rulemakings, but it is the sort of maintenance that we should undertake on a regular basis. I won’t go so far as to assume that any regulation will “spark joy” but just as a regular de-cluttering regime at home can make a space more livable, a regular de-cluttering regime of our regulations can make our markets more efficient as well. [10] Under the heading of simplification, we also tackled our alphabet soup of exemptions, working to harmonize them into a more coherent mosaic. [11] And we streamlined and updated our MD&A disclosures. [12] We also updated and revised two industry guides: Industry Guide 7 and Industry Guide 3. [13]

C. Opening Doors

In addition to adopting several final rules, we opened the door to further engagement on a number of items. The concept of the accredited investor and his or her role in small business capital formation has been a topic of ongoing discussion. From its inception in the last century, it has traditionally been understood, when applied to individuals, to require a certain level of wealth or income. It is not hard to see that this is a clumsy way of defining a class of investors who are supposed to be qualified by their financial sophistication. When we recently adopted our rule expanding the definition, we also included an invitation for the public to submit additional recommendations for ways to include more investors in this definition. [14] We also put forward a proposed exemption for so-called “finders” who may serve as matchmakers for small companies and potential investors, but who may, in so doing, run afoul of our broker-dealer rules. [15] The process of developing a workable finders exemption has been ongoing for years. Although we have not yet adopted a rule or exemption to meet this need, I hope that our proposal will help to propel the discussion toward a solution.

D. The Other Pieces of the Puzzle

While the pieces of our mission are sometimes presented as a system of trade-offs, as though we must sacrifice investor protection if we want to pursue capital formation, I believe this viewpoint is misguided. Our mission should work as a coherent whole, where appropriately tailored rules allow investors and businesses to work hand-in-hand, providing a stable framework within which to collaborate. To this end, we also pursued rulemakings to enhance disclosure in several areas, improve the efficiency and operation of securities exchanges, while using our enforcement and examination programs to improve compliance and provide redress in the case of wrongdoing by market participants. [16]

III. Covid-19: A Case Study in Capital Market Resilience

Facilitating capital access is not a luxury but essential to the well-being of our economy. For those of us in the U.S., the combination of entrepreneurial spirit and high quality securities markets means living within a nimble economy able to shift resources in response to changing needs. While these changes typically occur over time, we recently experienced a rapid shift unlike any we have experienced before.

A. Companies Retool and Adapt

In mid-March 2020, literally overnight vast swaths of the population embarked on a radically new way of life. These changes had immediate effects in the broader economy. Our country’s nimble businesses pivoted and redeployed billions of dollars in resources to meet new needs. The onset of the Covid-19 pandemic caused immense and immediate changes to the American economy. But we have seen the power of American businesses to be innovative in the face of crisis. Entire industries transformed, almost overnight, to meet new demands in new markets.

Take, for example, the growth of delivery services. Nationwide lockdowns threatened to destroy the restaurant industry. Meanwhile, drivers across the country were seeing severely lower demand as Americans stayed home. So what happened? Entire industries reallocated resources and capital, and food delivery boomed, allowing restaurants to stay open and drivers to remain employed. [17] The year 2020 saw U.S. food delivery sales more than double, increasing from roughly $23 billion to $51 billion. One source notes that 70 percent of that increase was attributable to the pandemic. [18]

Covid-19 has dramatically changed the way many of us “go to” work, or how our kids learn in school, replacing traditional offices and classrooms with video- and tele-conferencing software. The pandemic has led to an increase in touchless technology, sensors, and other AV solutions. [19] One prominent videoconferencing provider saw its annual sales rise over 300 percent and profitability increase more than 30-fold in 2020. [20] We have also seen the emergence of telehealth services. As of this past February, telehealth usage was nearly 40 times higher than before the pandemic. [21]

These are only a few of the many examples from our nation’s experience throughout the pandemic showing how our economy was able to quickly respond to dramatic changes in people’s needs and living conditions. Companies had to raise and reallocate capital on the fly in order to meet the demands of the American people during this pandemic. It’s a true testament to the resilience of our economic system that such moves were able to happen so quickly, even amidst dramatic uncertainty about the virus and rapidly changing public health circumstances.

B. Too Many Businesses Left Behind

We in America are truly fortunate. Our country’s successful avoidance of the economic worst case scenario in 2020 could not have happened without robust, efficient, and responsive capital markets. We must not forget these lessons even as the early months of the pandemic fade further and further into the past. Our economy remains vulnerable to future shocks, whether from later variants of Covid-19, from other pandemics, from unanticipated national security crises, or any other unhappy surprises. Our ability to persevere through future crises relies on the dynamism of our capital markets and our unparalleled workforce and entrepreneurs.

And we cannot forget: while many firms adapted, not every business could weather the storm of the pandemic. A Federal Reserve study estimated that 2020 saw 200,000 businesses above historical norms close permanently, with closures concentrated among smaller businesses. [22] To ensure that more businesses can grow and evolve throughout the rest of this pandemic and during future economic crises, we must make sure that capital raising opportunities are even more broadly accessible. [23]

Businesses owned by underrepresented groups were also especially hard hit by the absence of strong capital markets. [24] This problem, of course, predates the Covid-19 pandemic. [25] The SEC’s Small Business Capital Formation Advisory Committee has held several discussions focused on the difficulties underrepresented founders face. [26] If we want to further aid these entrepreneurs, and help them rebound and grow in ways that meet their needs and those of their communities, we must continue to focus on facilitating capital formation.

Strengthening our capital markets will continue to be key to navigating these challenges. Obstacles to capital formation slow economic recoveries and push workers out of the workforce. The result is diminishing skills and opportunities, and thus diminished economic productivity in the long term. In other words, slowing and weaker capital markets will reverberate throughout the economy for years. [27]

IV. Looking Ahead

Whatever the future holds, it is apparent that our economy will continue to transform in unexpected ways. If we don’t proactively address these challenges, many business will face the prospect of bankruptcy or obsolescence. [28] The best way to be ready for this uncertain future is to allow the market to allocate capital as it digests information. We should not hang onto outdated models at the risk of stifling innovation when we need it most. [29]

Market regulators perform best when they respond to the needs of the market, rather than using regulation to bend the market to their own idiosyncratic vision. The work of the Commission these last several years has been necessary, if a bit overdue. There is, however, still work to be done.

One of the features of this recent spate of rulemaking of which I am most proud is that we tackled the unglamorous, and therefore often neglected, work of revisiting and revising our own rulemakings. We affirmatively did not simply move the ratchet further in the same direction, we often moved it in varying directions, as appropriate. We got the elbow grease going and picked through our rules, technical bit by technical bit, revising and pruning in a way that, I believe, will result in a stronger, more resilient, and more growth-friendly market. We may have the best securities markets in the world, but without our continued self-examination and hard work, there is no reason to believe they will stay that way.

We, as Americans, have inherited a vibrant mechanism for capital formation and innovation, built over time. My job and my privilege today as a regulator is to continue this good work, ensuring that we do not get in the way of the ingenuity and industry of entrepreneurs here and abroad who rely on our markets. This means fulfilling every part of our mission: protecting investors, maintaining fair, orderly, and efficient markets, and last but definitely not least, facilitating capital formation.

Endnotes

1See Securities Industry and Financial Markets Association, 2021 Capital Markets Fact Book, at 6, (Jul. 2021), available at www.sifma.org/wp-content/uploads/2021/07/CM-Fact-Book-2021-SIFMA.pdf.(go back)

2Id.(go back)

3Id.(go back)

4U.S. Securities and Exchange Commission, Final Rule, Smaller Reporting Company Definition, Release Nos. 33-10513; 34-83550, (Jun. 28, 2018), available at www.sec.gov/rules/final/2018/33-10513.pdf.(go back)

5U.S. Securities and Exchange Commission, Final Rule, Solicitation of Interest Prior to a Registered Public Offering, Release No. 33-10699 (Sept. 26, 2019), available at www.sec.gov/rules/final/2019/33-10699.pdf; and U.S. Securities and Exchange Commission, Announcement, Draft Registration Statement Processing Procedures Expanded, (Jun. 29, 2017) available at www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded.(go back)

6U.S. Securities and Exchange Commission, Final Rule, Conditional Small Issues Exemption under the Securities Act of 1933 (Regulation A), Release No. 33-10591, (Sept. 19, 2018), available at www.sec.gov/rules/final/2018/33-10591.pdf.(go back)

7U.S. Securities and Exchange Commission, Final Rule, Exempt Offerings Pursuant to Compensatory Arrangements, Release No. 33-10520, (Jul. 18, 2018), available at www.sec.gov/rules/final/2018/33-10520.pdf.(go back)

8U.S. Securities and Exchange Commission, Final Rule, Accredited Investor Defintion, Release Nos. 33-10824; 34-89669 (Aug. 26, 2020), available at www.sec.gov/rules/final/2020/33-10824.pdf.(go back)

9U.S. Securities and Exchange Commission, Final Rule, Disclosure Update and Simplification, Release No. 33-10532; 34-83875, IC-33203 (Aug. 17, 2018), available at www.sec.gov/rules/final/2018/33-10532.pdf; U.S. Securities and Exchange Commission, Final Rule, FAST Act Modernization and Simplification of Regulation S-K, Release No. 33-10618; 34-85381; IA-5206; IC-33426 (Mar. 20, 2019) available at www.sec.gov/rules/final/2019/33-10618.pdf.(go back)

10See Marie Kondo, The Life-Changing Magic of Tidying Up, Ten Speed Press (Oct. 14, 2014).(go back)

11U.S. Securities and Exchange Commission, Final Rule, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Release Nos. 33-10884; 34-90300; IC-34082; (Nov. 2, 2020), available at www.sec.gov/rules/final/2020/33-10884.pdf.(go back)

12U.S. Securities and Exchange Commission, Final Rule, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Release No. 33-10890; 34-90459; IC-34100 (Nov. 19, 2020), available at www.sec.gov/rules/final/2020/33-10890.pdf.(go back)

13U.S. Securities and Exchange Commission, Final Rule, Modernization of Property Disclosures for Mining Registrants, Release Nos. 33-10570; 34-84509; (Oct. 31, 2018), available at www.sec.gov/rules/final/2018/33-10570.pdf; and U.S. Securities and Exchange Commission, Final Rule, Update of Statistical Disclosures for Bank and Savings and Loan Registrants, Release No. 33-10835; 34-89835; (Sept. 11, 2020), available at www.sec.gov/rules/final/2020/33-10835.pdf.(go back)

14U.S. Securities and Exchange Commission, Final Rule, Accredited Investor Defintion, Release Nos. 33-10824; 34-89669 (Aug. 26, 2020), available at www.sec.gov/rules/final/2020/33-10824.pdf.(go back)

15U.S. Securities and Exchange Commission, Proposed Exemptive Order and Request for Comment, Notice of Proposed Exemptive Order Granting Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Finders, (Oct. 7, 2020), available at www.sec.gov/rules/exorders/2020/34-90112.pdf.(go back)

16See U.S. Securities and Exchange Commission, Selected Accomplishments May 2017 – December 2020, (Dec. 23, 2020), available at www.sec.gov/selected-sec-accomplishments-may-2017-2020.(go back)

17MarketWatch: Sumagaysay, Levi. “The Pandemic Has More than Doubled Food-Delivery Apps’ Business. Now What?” MarketWatch, 25 Nov. 2020, available at www.marketwatch.com/story/the-pandemic-has-more-than-doubled-americans-use-of-food-delivery-apps-but-that-doesnt-mean-the-companies-are-making-money-11606340169.(go back)

18Oblander, Elliot Shin and McCarthy, Daniel, How has COVID-19 Impacted Customer Relationship Dynamics at Restaurant Food Delivery Businesses? (April 26, 2021), available at papers.ssrn.com/sol3/papers.cfm?abstract_id=3836262; see also Forman, Laura. “For Food Delivery, Covid-19 Was a Sugar High.” The Wall Street Journal, (Apr. 30, 2021,) available at www.wsj.com/articles/for-food-delivery-covid-19-was-a-sugar-high-11619780401.(go back)

19Lane, Rob. “AV in Changing Times.” AV Magazine, 28 Aug. 2020, available at www.avinteractive.com/features/technology/av-changing-times-27-08-2020/.(go back)

20“Zoom Sees More Growth after ‘Unprecedented’ 2020.” BBC News, 1 Mar. 2021, available at www.bbc.com/news/business-56247489.(go back)

21Bestsennyy, Oleg, et al. “Telehealth: A Quarter-Trillion-Dollar Post-Covid-19 Reality?” McKinsey & Company, 22 July 2021, available at www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/telehealth-a-quarter-trillion-dollar-post-covid-19-reality.(go back)

22Crane, Leland D., Ryan A. Decker, Aaron Flaaen, Adrian Hamins-Puertolas, and Christopher Kurz (2021). “Business Exit During the COVID-19 Pandemic: NonTraditional Measures in Historical Context,” Finance and Economics Discussion Series 2020-089r1. Washington: Board of Governors of the Federal Reserve System, available at doi.org/10.17016/FEDS.2020.089r1; see also Simon, Ruth. “Covid-19’s Toll on U.S. Business? 200,000 Extra Closures in Pandemic’s First Year.” The Wall Street Journal, 16 Apr. 2021, available at www.wsj.com/articles/covid-19s-toll-on-u-s-business-200-000-extra-closures-in-pandemics-first-year-11618580619.(go back)

23Dua, André, et al. “Which Small Businesses Are Most Vulnerable to COVID-19–and When.” McKinsey & Company, 25 June 2020, (“[Governments should consider] promoting structural reforms that encourage financial institutions to provide longer-term access to capital and create incentives for small businesses to upgrade their facilities and digitize”), available at www.mckinsey.com/featured-insights/americas/which-small-businesses-are-most-vulnerable-to-covid-19-and-when.(go back)

24“Coronavirus Pandemic Hits Minority-Owned Small Businesses Disproportionately Hard, New Poll Shows.” U.S. Chamber of Commerce, 4 Aug. 2020, available at www.uschamber.com/press-release/coronavirus-pandemic-hits-minority-owned-small-businesses-disproportionately-hard-new.(go back)

25Azevedo, Mary Ann. “Untapped Opportunity: Minority Founders Still Being Overlooked.” Crunchbase News, 4 June 2020, (“[A]ccess to capital presents an even greater challenge when it comes to people of color, women, and individuals of limited wealth”), available at news.crunchbase.com/news/untapped-opportunity-minority-founders-still-being-overlooked/. See also see also Hwang, Victor. “Breaking down Barriers to Capital Access.” Ewing Marion Kauffman Foundation, (23 May 2019), available at www.kauffman.org/currents/breaking-down-barriers-to-capital-access/.(go back)

26U.S. Securities and Exchange Commission, Press Release, “Increasing Opportunities for Underrepresented Founders and Investors on the Agenda for the SEC Small Business Capital Formation Advisory Committee Meeting on April 30,” (Apr. 26, 2021), available at www.sec.gov/news/press-release/2021-73; U.S. Securities and Exchange Commission, Press Release, “Small Business Capital Formation Advisory Committee Aug. 4 Meeting to Focus on How Capital Markets Are Serving Underrepresented Founders,” (Jul. 29, 2020), available at https://www.sec.gov/news/press-release/2020-166.(go back)

27Carlsson-Szlezak, Philipp, et al. “Understanding the Economic Shock of Coronavirus.” Harvard Business Review, (Feb. 1, 2021), available at hbr.org/2020/03/understanding-the-economic-shock-of-coronavirus.(go back)

28Spellacy, Michael, et al. Capital Markets Help with the Pandemic. Accenture, (Jan. 21, 2021), available at www.accenture.com/us-en/insights/capital-markets/capital-markets-helping-with-pandemic.(go back)

29See id. (“It’s clear that innovation is a precondition not just for profitability but for survival.”)(go back)

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