"SMALL BUSINESS MAKES A LARGE CONTRIBUTION” REMARKS BY ARTHUR LEVITT, CHAIRMAN U.S. SECURITIES AND EXCHANGE COMMISSION SMALL BUSINESS TOWN MEETING FT. LAUDERDALE, FLORIDA NOVEMBER 6, 1996 U.S. SECURITIES AND EXCHANGE COMMISSION 450 Fifth Street, N.W. Washington, D.C. 20549 Check against delivery REMARKS BY CHAIRMAN ARTHUR LEVITT UNITED STATES SECURITIES AND EXCHANGE COMMISSION SMALL BUSINESS TOWN MEETING FT. LAUDERDALE, FLORIDA -- NOVEMBER 6, 1996 Good afternoon. It’s a special pleasure to be here today. For as long as I can remember, I’ve cared about the issues you face every day. Indeed, my sentiments, history, and passions are those of small business. In the course of my life, I worked for a community newspaper, helped establish a cattle company, started two weekly newspapers, and founded a small brokerage firm that became a large one. I've savored success and experienced failure. I've been sued by overzealous lawyers, and plagued by irrational government regulations. I've sweated through many payrolls, and worked many long nights. I've also engaged in the desperate search for capital. I know the fear of having to mortgage your future, and your family's future, to keep your business afloat and not give up on your dream. I know the risks -- and fortunately, I also know the rewards. Today, as Chairman of the Securities and Exchange Commission, I still preach the gospel of small business to anyone who will listen. According to an article not long ago in Inc., "Most of the 20 million new jobs created during the past 15 years came not from established giants, . . . [but] from the `independent entrepreneurial sector.'" That is one of the most impressive and important statistics I've ever heard. You can see why I believe so deeply in the role of the entrepreneur in America -- and why I was proud to organize and Chair the first White House Conference on Small Business in 1980. We wanted to bring legions of entrepreneurs to the seat of government. Our goal was not to impress small business with the power of Washington -- it was to impress Washington with the power of small business. And of course in the years since then, you’ve succeeded in impressing Washington, which today is much more in tune with the needs of small business. As testament to your importance, a continuing parade of our nation's top officials visit forums like this to show their concern. I'm not a top official -- in fact, compared to most federal agencies, the SEC almost qualifies as a small business. But despite our relatively small size, we've been working very hard to try to meet your needs. The 1980 White House Conference directed the SEC to host an annual forum on capital formation specifically for small business. This Forum is practically unique. It is the only national forum for small business that meets annually. It is a place where small businesses can voice their concerns, especially about government regulations that might be having an unintended, or inhibiting effect on small entrepreneurs. It is a place where ideas can be raised, about how capital can be raised. This was a real innovation on the part of our government, which has been known to issue regulations with little regard for the costs of compliance. Those days are over. As President Clinton said during last year’s White House Conference, "The system that's set up now is very convenient for the government. Now it's the government's turn to be convenient for business owners and taxpayers." Our SEC Forums try to reduce costs for you, through cooperation among small business, federal and state agencies, and regulatory bodies to achieve less burdensome regulation. These meetings have been held in Seattle, Atlanta, Phoenix, and Providence, Rhode Island, as well as in Washington, D.C. -- the location of this year’s Forum, which was held on September 26th and 27th. We vary the Forum's location, to make it easier for people in different parts of the country to attend, as well as to give us a better idea of the problems small businesses face throughout the United States. Over the past 15 years, participants in our forums have offered many ideas for improving our regulatory scheme. These recommendations consistently reflect timely, real-life experiences; but no matter how good they are, they amount to little unless the government acts in response. I'm happy to be able to tell you that many recommendations have led to SEC action. Let me give a few examples: * As a result of a Forum recommendation, we now exempt the employee compensation arrangements of small companies from registration with the SEC; * Companies can now raise up to one million dollars a year in seed capital, with no federal requirements beyond the obvious rule that you can't defraud people; * Small businesses can now raise up to five million dollars in a year through exempt public sales of securities using unaudited financial statements -- this reduces the costs of filing substantially; * We also have what we call a "test the waters" provision for these exempt offerings up to five million dollars, which allows a company to determine whether there is public interest in its securities, before it goes through the substantial time and expense needed to prepare documents for an offering; * We have worked to facilitate the growth of company bulletin board-based stock trading mechanisms, which help small companies provide a more liquid market for shareholders; * And most recently, we assisted the Small Business Administration in the launching of the Angel Capital Electronic Network. “ACE-Net,” as it’s known, is a new Internet network that links small businesses with investors looking for opportunities. In addition to these forums, we’re also undertaking a series of town meetings -- of which this is the fifth -- to make sure smaller businesses throughout the country are aware of the many opportunities to raise capital in our securities markets. I’d like to talk with you this afternoon about some recent initiatives to ease capital formation and simplify SEC regulation. After that I’d like to hear from you as I open the floor to questions, problems, successes, or complaints about the capital markets. Capital Formation In 1939, SEC Chairman William O. Douglas wrote that it should be possible someday to consolidate the reporting requirements imposed by the various securities laws. In trying to explain why, even 50 years later, that day had not yet arrived, a distinguished professor at Harvard wrote that “the mills of God grind slowly.” While I am personally reluctant to lay the entire blame on God, it’s true that no one ever followed through fully on this very good idea. Rather than point fingers, we have worked to jump-start the process, by creating an Advisory Committee on Capital Formation and Regulatory Processes. Led by SEC Commissioner Steve Wallman, the Committee brought together some of the most respected names in the field of securities regulation, to weigh the efficiency and costs of regulation against its benefits in public offerings. I'll illustrate the scope of the Committee's work by sharing one simple, but fascinating question they examined: Should the SEC consider registering companies, as opposed to multiple offerings of securities? If you know the SEC, you'll know that that idea is nothing short of revolutionary. The advisory committee presented its report in July, recommending changes that it believes would increase investor protection while reducing regulatory burdens. The full Commission is now studying it. We’ve also been working with the states to ease capital formation. The state of California, for example, made certain offerings of securities to California residents exempt from state registration requirements. This exemption is unique -- it allows a general advertisement that contains specific information, as long as sales of securities are limited to certain qualified purchasers. As sometimes happens, the state exemption did not work well with existing Federal exemptions. Last May I announced that the SEC had adopted a corresponding Federal exemption for offerings of up to $5 million that qualify for the California exemption. This can be viewed as an experiment; I'm advised that no other state has a comparable exemption, but should they adopt one, I'm prepared to consider a companion federal exemption. As many of you know, the Commission also raised the threshold, from $5 million to $10 million in assets, before a company is required to report to us under the federal securities laws. These exemptions make sense. But sometimes it’s not enough to exempt people from rules -- sometimes you have to change the rules themselves. We haven’t been shy about doing that. Simplification We're re-examining our regulatory requirements to find ways we can improve things for the thousands of companies that go to market each year -- saving money for them and their shareholders, and helping to preserve the international competitiveness of our businesses and pre-eminence of our markets. Recently, for example, the Commission developed plans to consolidate its small business disclosure function at SEC headquarters. This move will allow the Commission to make better use of its sharply limited resources, permitting us to reallocate 38 staff positions to our investment adviser examination program. At the same time, we’re taking four steps to maintain our special commitment to small business: * we have created a new headquarters unit that specializes in small company filings and the needs of small businesses; * we have appointed a special Small Business Ombudsman, Bill Toomey, to answer your questions and act as your advocate at SEC headquarters; * we’re assigning regional liaisons for small firms, so there’s still always an SEC staff member nearby to direct your inquiries; and * we’ve put a special package of SEC information for small businesses on-line at our World Wide Web site. I encourage you to visit our site -- www.sec.gov. In addition to the small business offering, it contains investor alerts, litigation releases, and access to our huge EDGAR database of corporate information, which is an incredible research tool for businesses of every size. The Commission has also established a special electronic mailbox on the site. We’re hoping that you’ll use it to send us your best ideas about electronic prospectuses and other ways to take advantage of new technology. We’re working in many other ways to improve and simplify our regulatory structure. In August 1995, I created the Task Force on Disclosure Simplification to review all the forms and disclosure requirements we impose on public companies. We were fortunate enough to have Philip Howard, an outspoken advocate of regulatory common sense, serve as outside advisor. The Task Force issued its report in March; although I won’t burden you by describing every one of its recommendations, I will tell you that if all of its recommendations were implemented, they would eliminate or modify fully a quarter of the rules and half of the forms and schedules related to corporate finance. The Task Force recommended several regulatory changes to help small businesses raise capital, such as permitting companies to raise up to $5 million every six months rather than every year under Regulation A, and exempting local offerings from federal registration, including even those that may cross state lines. The Commission has taken the Task Force report to heart and has already eliminated 44 rules and 4 forms; more will disappear next year. * * * I’ve discussed many things this afternoon -- perhaps too many. I hope I’ve given you a sense of how the SEC is working to meet your needs today. This is a Commission that believes in entrepreneurs and in the miracles they can and do perform. When people focus too narrowly on the Fortune 500, I tell them there's another group that's just as important -- the "Small Business 21.5 Million." When people try to gauge the health of the American economy, I tell them to look not only at the Dow-Jones Industrial Average, but also at the earnings of American sole proprietors and partners -- which grew 8 percent in 1995, to $449.2 billion dollars. And when a corporate CEO starts to get too self-important, I remind him that during the last recession, it was not the captains of industry, but the footsoldiers, who generated more than 2 million new jobs -- large firms lost about 4 million. I believe in big business. I know how important it is to the future of our nation. But I also know that the American economy is the strongest in the world because it stands on two legs, not one. I thank you for your contribution, and look forward to continuing to work with you to find ways to lower the cost of capital for you, the entrepreneurs on whom so much of our nation’s economic future depends. # # #