Commissioner Luis A. Aguilar
Public Statement Issued by the U.S. Securities and Exchange Commission[1]
Nov. 19, 2015
Thank you and good morning. Let me start by extending a warm welcome to the panel members and other participants, including those viewing by webcast, to today’s Government-Business Forum on Small Business Capital Formation. I look forward to your discussions. I also want to thank the staff of the Division of Corporation Finance and, of course, the Division’s Office of Small Business Policy for organizing today’s Forum.
As everyone participating in today’s Forum knows well, our nation’s small businesses[2] spur innovation, produce technological change, and drive job creation across the greater economy.[3]In fact, from mid-2009—or what some pinpoint as the end of the “Great Recession”—to mid-2013, small businesses accounted for approximately 60% of net new jobs.[4] More recently, statistics compiled through the first three quarters of 2014 show that our nation’s 28 million small business owners have been responsible for an even greater share of overall job creation, accounting for between 73% and 84% of net new jobs during that period.[5] There can be no doubt that facilitating an environment that nurtures and breeds successful startups and small companies is critical to the health of our greater economy.
The SEC’s annual Government-Business Forum on Small Business Capital Formation recognizes this fact, and once again brings participants together to discuss how regulatory regimes may impact or facilitate the growth of small and emerging companies. After all, small businesses need ready access to capital to grow and flourish.[6] To that end, small businesses continue to rely heavily on owner investment (including loans from “friends and family”) and traditional bank credit for their financing needs.[7] However, sometimes this traditional financing is not enough, or is not available, to help small companies make ends meet or expand their businesses. As a result, the Commission has used its statutory authority over the years to adopt rules to help small businesses raise money by issuing securities to both public and private investors. Indeed, as today’s agenda highlights, since the passage of the Jumpstart Our Business Startups Act (“JOBS Act”), the SEC has implemented multiple rulemakings intended to facilitate the ability of small businesses to access the capital markets and some of our efforts go beyond what the JOBS Act mandated. For example:
- Less than three weeks ago, the Commission adopted rules permitting small businesses to raise capital from investors in Crowdfunding transactions. Under these rules, qualifying Crowdfunding transactions will provide an exemption from federal registration for internet-based offerings of up to $1 million in a 12-month period;[8]
- On the same day the Commission adopted the Crowdfunding rules, the agency also proposed various amendments to the intrastate transaction safe harbor under Rule 147 and to Rule 504 of Regulation D. These proposed amendments aim to revitalize Rule 147 and Rule 504 securities offerings by increasing their efficiency and usefulness for small businesses;[9]
- Earlier this year, the Commission adopted rule amendments to Regulation A (known as “Regulation A-plus”), which permits companies to raise up to $50 million in any 12-month period without requiring registration under the Securities Act, provided certain requirements are met;[10] and
- In July 2013, the Commission adopted final rules amending Rule 506 of Regulation D, to remove the prohibition against general solicitation and advertising, provided that all purchasers are accredited investors, and also proposed additional amendments to enhance investor protections.[11]
Together, these Commission rulemakings are intended to form a tapestry of options for small businesses to obtain financing from investors in our capital markets. However, these rulemakings alone are not a panacea for the financing challenges faced by small and emerging companies. As I have mentioned on other occasions, a vibrant capital formation process requires a vibrant secondary market for the securities of smaller businesses.[12] For investors to make money, buying the securities is just the first step. They also need to be able to sell them.
The long-existing problems in the secondary market for small company securities are well known.[13] With the new and expanded exemptive regimes, they are likely to get worse as more unregistered and unlisted companies will find themselves with a larger number of shareholders than ever before. Moreover, these shareholders will need to find liquidity in the secondary markets—markets which as of now are less fair, less liquid, and less transparent than the secondary markets for listed securities.[14] Ultimately, if investors in these companies are unable to transfer their shares in an active secondary market, then small business issuers may find less appetite from investors for future offerings.
Accordingly, this is an issue that requires a solution before the capital market for smaller companies is adversely impacted and should be part of any discussion on what to do in a post-JOBS Act world. In that vein, I would like to offer some questions that I hope will be considered today, and in future discussions, concerning small business capital formation:
- I have previously suggested that reforming Rule 15c2-11—commonly referred to as the broker-dealer “piggyback” exception—would enhance the integrity of market quotations for small business securities, and thereby lend an assist to the secondary market for these securities.[15] Would such reforms be enough to address abuses in the microcap securities market sector and facilitate trading in such securities, or are other reforms also necessary?
- In addition, as I have suggested before, finding a path for smaller company securities to gain access to the Depository Trust Company’s services and for improving the regulation of transfer agents with respect to such securities could enhance the capital formation eco-system for these companies.[16] If so, how could these goals best be accomplished?
There are, of course, other aspects of the eco-system for the offering of the securities of smaller companies that warrant attention. For example, developments in the investment banking industry have resulted in fewer investment banks focused on underwriting smaller offerings.[17]Accordingly, what can be done to sufficiently incentivize investment banks to participate in these offerings, such as Regulation A-plus offerings? In essence, what are feasible and cost-efficient ways to encourage investment banks to underwrite more of these deals?[18]
Of course, in thinking through the best ways to facilitate capital formation for small businesses, the challenge is to develop processes that enable businesses to raise capital efficiently while also, importantly, providing for ways to benefit and protect investors and the markets generally.
The path to successful capital formation for small businesses must lead through an investment environment that works for both issuers and investors.
Thank you.
[1] The views expressed are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (“SEC” or “Commission”), my fellow Commissioners, or members of the Commission staff.
[2] For these purposes, small businesses are defined as those independent businesses with fewer than 500 employees. See U.S. Small Business Administration Office of Advocacy,Frequently Asked Questions (March 2014), available athttp://www.sba.gov/sites/default/files/advocacy/FAQ_March_2014_0.pdf
[3] See U.S. Small Business Administration, Strategic Plan: Fiscal Years 2014-2018, at 4,available at https://www.sba.gov/sites/default/files/aboutsbaarticle/SBA_FY2014-2018_Strategic_Plan_final_update.pdf.
[4] See U.S. Small Business Administration Office of Advocacy, Small Business Finance,Frequently Asked Questions (Feb. 2014), available athttp://www.sba.gov/sites/default/files/advocacy/FAQ_March_2014_0.pdf. (Note: these SBA statistics run from mid-2009 to mid-2013). The statistics show that small firms were responsible for 63% of net new jobs created between 1993 and mid-2013, or more than 14 million of the nearly 23 million net new jobs created during this period. See id.
[5] See U.S. Small Business Administration Office of Advocacy, Small Business Bulletin, Small Business Market Update, June 2015, available athttps://www.sba.gov/sites/default/files/Small_business_bulletin_June_2015.pdf (pointing to BLS Business Employment Dynamics statistics (73%) and U.S. Small Business Administration Office of Advocacy calculations (84%)).
[6] See U.S. Small Business Administration, Strategic Plan: Fiscal Years 2014-2018, at 5,available at https://www.sba.gov/sites/default/files/aboutsbaarticle/SBA_FY2014-2018_Strategic_Plan_final_update.pdf.
[7] See U.S. Small Business Administration Office of Advocacy, Small Business Finance,Frequently Asked Questions (Feb. 2014), available athttps://www.sba.gov/sites/default/files/2014_Finance_FAQ.pdf.
[8] See Crowdfunding, Release No. 34-76324 (Oct. 30, 2015), available athttp://www.sec.gov/rules/final/2015/33-9974.pdf.
[9] See Exemptions to Facilitate Intrastate and Regional Securities Offerings, Release No. 34-76319 (Oct. 30, 2015), available at http://www.sec.gov/rules/proposed/2015/33-9973.pdf.
[10] See Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A), Release No. 33-9741 (Mar. 25, 2015), available athttp://www.sec.gov/rules/final/2015/33-9741.pdf.
[11] See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (July 10, 2013), available athttp://www.sec.gov/rules/final/2013/33-9415.pdf. At that same time, the Commission proposed various rules to further amend Rule 506 to address concerns about the impact of general solicitation that were raised by numerous commenters. I urge the Commission to adopt some form of these rules as soon as practicable. See Amendments to Regulation D, Form D and Rule 156, SEC Release No. 33-9416 (July 10, 2013), available athttp://www.sec.gov/rules/proposed/2013/33-9416.pdf. Among other things, these amendments proposed (i) requiring the filing of a Form D in Rule 506(c) offerings before the issuer engages in general solicitation; (ii) requiring the filing of a closing amendment to Form D after the termination of any Rule 506 offering; (iii) requiring written general solicitation materials used in Rule 506(c) offerings to include certain legends and other disclosures; and (iv) requiring the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission.
[12] See, e.g., Commissioner Luis A. Aguilar, Making Capital Formation Work for Smaller Companies and Investors (Oct. 30, 2015), available athttp://www.sec.gov/news/statement/aguilar-regulation-crowdfunding-147-504.html#_ednref4; Commissioner Luis A. Aguilar, The Need for Greater Secondary Market Liquidity for Small Businesses (Mar. 4, 2015), available at http://www.sec.gov/news/statement/need-for-greater-secondary-market-liquidity-for-small-businesses.html; Commissioner Luis A. Aguilar, Setting Forth Goals for 2015: Address to Practising Law Institute’s SEC Speaks in 2015 Program (Feb. 20, 2015), available at http://www.sec.gov/news/speech/022015-spchclaa.html; Commissioner Luis A. Aguilar, The Importance of Small Business Capital Formation (Nov. 20, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543532516; Commissioner Luis A. Aguilar, Promoting Investor Protection in Small Business Capital Formation (Dec. 18, 2013),available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370542557949.
[13] See U.S. Securities and Exchange Commission Advisory Committee on Small and Emerging Companies, Recommendation Regarding Separate U.S. Equity Market for Securities of Small and Emerging Companies (Feb. 1, 2013), available athttp://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-emerg-co-ltr.pdf(stating that “[t] he Committee believes that current U.S. equity markets often fail to offer a satisfactory trading venue for the securities of small and emerging companies because they fail to provide sufficient liquidity for such securities and because the listing requirements are too onerous for such companies.”) See also Crowdfunding, Release No. 34-76324, at 352 (Oct. 30, 2015), available at http://www.sec.gov/rules/final/2015/33-9974.pdf (directing the Commission staff review the development of secondary market trading in these securities during the study it plans to undertake within three years following the effective date of Regulation Crowdfunding.)
[14] See, e.g., Commissioner Luis A. Aguilar, Making Capital Formation Work for Smaller Companies and Investors (Oct. 30, 2015), available athttp://www.sec.gov/news/statement/aguilar-regulation-crowdfunding-147-504.html#_ednref4; Commissioner Luis A. Aguilar, The Need for Greater Secondary Market Liquidity for Small Businesses (Mar. 4, 2015), available at http://www.sec.gov/news/statement/need-for-greater-secondary-market-liquidity-for-small-businesses.html; Commissioner Luis A. Aguilar, Setting Forth Goals for 2015: Address to Practising Law Institute’s SEC Speaks in 2015 Program (Feb. 20, 2015), available at http://www.sec.gov/news/speech/022015-spchclaa.html; Commissioner Luis A. Aguilar, The Importance of Small Business Capital Formation (Nov. 20, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543532516; Commissioner Luis A. Aguilar, Promoting Investor Protection in Small Business Capital Formation (Dec. 18, 2013),available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370542557949.
[15] See Commissioner Luis A. Aguilar, Making Capital Formation Work for Smaller Companies and Investors (Oct. 30, 2015), available at http://www.sec.gov/news/statement/aguilar-regulation-crowdfunding-147-504.html#_ednref4; Commissioner Luis A. Aguilar, The Need for Greater Secondary Market Liquidity for Small Businesses (Mar. 4, 2015), available athttp://www.sec.gov/news/statement/need-for-greater-secondary-market-liquidity-for-small-businesses.html.
[16] See Commissioner Luis A. Aguilar, Making Capital Formation Work for Smaller Companies and Investors (Oct. 30, 2015), available at http://www.sec.gov/news/statement/aguilar-regulation-crowdfunding-147-504.html#_ednref4; Commissioner Luis A. Aguilar, The Importance to the Capital Markets of Updating the Rules Regarding Transfer Agents (Dec. 17, 2014), available at http://www.sec.gov/news/statement/spch121714-2laa.html. See alsoCommissioners Luis A. Aguilar and Daniel M. Gallagher, Statement Regarding the Need to Modernize the Commission’s Transfer Agent Rules (June 11, 2015), available athttp://www.sec.gov/news/statement/modernize-sec-transfer-agent-rules.html.
[17] See Matt Egan, America’s stock market is shrinking, CNNMoney (July 9, 2015), available athttp://money.cnn.com/2015/07/09/investing/stock-market-shrinking/ (noting that Regulation ATS “ushered in the widespread use of electronic markets in the U.S., making trading far more efficient and cheaper for everyday investors. … [but] it also made it less profitable for the small investment banks, many of which no longer exist.”). In addition, many small investment banks are focused on providing merger and acquisition advice. See,
Ed Hammond and Daniel Schäfer, Small proves beautiful at boutique banks, Financial Times (Mar. 16, 2014), available at http://www.ft.com/intl/cms/s/0/020df240-a7bd-11e3-9c7d-00144feab7de.html#axzz3rT0itzL0 (describing a “growing band of independent investment banks taking a share of the US merger and acquisition fee pool, once the preserve of Wall Street’s largest financial institutions.”); Trading places: After decades of consolidation, Wall Street is fragmenting, The Economist (Dec. 6, 2014), available athttp://www.economist.com/news/finance-and-economics/21635485-after-decades-consolidation-wall-street-fragmenting-trading-places (describing that “[s]o-called ‘boutique’ investment banks have gained a much larger share of the lucrative business of advising on mergers and acquisitions (M&A) since the financial crisis [] and are gaining other footholds. Their flourishing has put paid to the belief that consolidation was inevitable as one institution after another was crushed or absorbed by bigger rivals.”).
[18] See Tom Zanki, Reg A+ Struggles to Find Footing In Uncertain Climate, Law360 (Nov. 3, 2015), available at http://www.law360.com/articles/720673/reg-a-struggles-to-find-footing-amid-uncertain-climate (noting that the “modest sums” permitted by Regulation A+ offerings along with “liquidity questions” limit the appeal of underwriting Regulation A+ deals for investment banks).
