Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
Nov. 15, 2012
Speech by SEC Commissioner:
Thank you, Meredith, for that kind introduction. And I’d like to extend my thanks to the SEC staff who helped plan this event, particularly to Gerry LaPorte and the Office of Small Business Policy. And I would thank all of you who have come today to participate in the ongoing dialogue on small business capital formation. Of course, before I continue, I must remind you that my remarks are my own and not those of the other Commissioners, the Commission or the staff.1
Since I spoke with you last year, the Jumpstart Our Businesses Act has changed the landscape of the dialogue on helping small businesses raise capital. The Commission and its staff are working to implement the Act.
Today I’d like to speak specifically about one of the Act’s provisions — that is, the removal of the ban on general solicitation for certain private offerings. This is part of a larger question that I have wanted the Commission to consider for some time. That is, what it means to “offer” securities today. After all, the world is barely recognizable from the world of 1933. As the ways people communicate to one another change, so too must the regulations governing those communications, including in the securities market.
As you know, the Commission has proposed a rule that would end the ban on general solicitation in sales to accredited investors. We have received a number of helpful comments from a variety of differing perspectives. Many comments, including ones from the small business community, strongly support ending the ban as a step toward facilitating capital raising. Other comments have focused on potential consequences to investors of lifting the ban. I feel strongly that we must take these potential consequences seriously. I think everyone can agree that removing the ban on general solicitation, essentially allowing public “offers” in private securities transactions, is a fundamental change in the securities markets. We must be vigilant about the potential consequences, particularly unintended consequences, of a significant change like this and consider ways to mitigate potential harms to the investor while preserving the rule’s intended benefits.
People often frame this discussion as “balancing” the desire for easier capital formation against the need for investor protection. But I see this as presenting a false choice, and I hope that you do as well. A vital prerequisite to efficient capital formation is a market in which investors have confidence. If allowing general solicitation results in increased incidence of fraud or sales of securities to investors that do not have the sophistication to understand the risks and merits of a particular investment, we will have failed not only investors, but small businesses as well. In other words, regulations that protect against these risks — without placing undue burdens on businesses — will benefit all participants in the capital markets. On the other hand, we should not block this change because we are afraid that harm will result; it is the responsibility of regulators (and market participants as well) to determine how to obtain the benefit of the change while safeguarding against the downside risks to investor protection and the public interest.
Accordingly, I hope that in your sessions today you will discuss and consider various safeguards that some commenters have suggested in response to the proposed rule. In particular, please take a look at the recommendations of the Investor Advisory Committee. For example, does it make sense to place some limitations on the forms of solicitation? To reconsider our definition of accredited investor? To include in the rule specific methods that issuers can use to verify accredited investors? To condition, on a permanent or temporary basis, the availability of general solicitation on the timely filing of the Form D? I am confident that we can find some common ground between the business and investor communities on these issues.
Additionally, once the rule is effective, it will be crucial that the Commission staff carefully review the effects of permitting general solicitation. There are many aspects of the new rule that we will need to analyze — its effects on capital formation; whether the rule is accompanied by an increase in fraudulent activity, and what types of solicitations are most associated with fraudulent activity; what techniques issuers use to verify accredited investors and whether they are effective; and whether investors that enter the private offering market have sufficient financial sophistication and information available to understand the risks of their investments.
In order to engage in a meaningful study, the Commission staff will need data. Studying the private market has been a huge challenge for Commission staff in the past, particularly because of the limited nature of the current Form D informational requirements, and issuers who choose not to file their Form D’s. Although the Division of Risk, Strategy and Financial Innovation provided very helpful analysis to the Commission earlier this year based on the data we have, we need more information to give us a clear picture of this market. This might result in requesting the information we need from issuers. But for us to help protect the integrity of the private market, we must understand it as it evolves.
I hope that I have given you food for thought as you proceed today. And again, I would like to thank you for attending and helping us further our mission. And as I have said on many occasions in the past, my door is always open, and I look forward to hearing from you.
1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the staff.