Remarks at SEC Open Meeting
Chair Mary Jo White
Dec. 18, 2013
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on Dec. 18, 2013, under the Government in the Sunshine Act.
Today we are considering an important rulemaking mandated by the Jumpstart Our Business Startups (JOBS) Act. Title IV of the JOBS Act requires the Commission to adopt rules to create a new exemption from registration under the Securities Act for offerings of up to $50 million dollars in a 12-month period.
This new exemption is intended to build upon Regulation A, which is an existing exemption from registration for small issues of up to $5 million within a 12-month period. We often have referred to this new exemption as Regulation A+.
At its core, the mandate of Regulation A+ is to help increase the access of smaller companies to capital. This is obviously a very important objective. Our rulemaking goal is to make Regulation A+ an effective, workable path to raising capital that – very importantly – also builds in the necessary investor protections.
As it exists today, Regulation A is little used by issuers. A GAO Report last year found that various factors have contributed to this outcome, including the type of investors that businesses seek to attract, the process of filing with the Commission, state securities law compliance, and the cost-effectiveness of Regulation A relative to other exemptions. The factors identified by the GAO Report were not a surprise to either regulators or market participants.
Responding to this record, the proposal we are considering today aims to increase the use of Regulation A by establishing two tiers – Tier 1 for offerings up to $5 million and Tier 2 for offerings up to $50 million. The proposal builds on our existing regulation in several ways to put forward an effective exemption that maintains important investor protections and addresses the challenges of balancing the respective roles of federal and state law.
First, the proposed rules broadly preserve and modernize the essential, current framework of Regulation A, including existing provisions regarding issuer eligibility, offering circulars, “testing the waters,” and bad actor disqualifications. The proposal also retains the review and qualification of offering statements by the Commission and its staff. I believe that such review and qualification is a critically important investor protection.
Second, the proposed rules include additional investor protections designed to address the heightened risk to investors associated with increasing the annual offering limitation to $50 million. Tier 2 offerings would, for example, impose a limitation on the amount of securities that investors can purchase and require audited financial statements and ongoing reporting from issuers.
Third, in light of these investor protections and the need to develop a workable exemption, the proposed rules would preempt state securities laws with respect to Tier 2 offerings, but preserve state review with respect to Tier 1 offerings. The complexity, time, and cost of compliance with state securities laws for Regulation A offerings was cited by the GAO Report – and was repeatedly cited in the pre-rulemaking comments we received – as a key reason for the limited use of the exemption. To ensure that the revised exemption will be a viable path for capital-raising, a calibrated preemption of state securities laws in connection with certain Regulation A offerings currently appears necessary.
Importantly, however, the proposal explores alternative approaches to addressing the challenge of balancing the respective roles of federal and state securities laws. One recent significant development is the proposal by the North American Securities Administrators Association (NASAA) for coordinated reviews of Regulation A offerings, which, if fully implemented, could potentially reduce the costs of compliance with state securities law obligations and enhance the speed of state-level review. NASAA has taken significant steps to develop a coordinated review program, including milestones they highlighted in a letter to the Commission just last week. I will be closely watching the continued development of this program and would like to hear more about how this program could effectively resolve the challenges identified with the current approach to state securities law compliance.
The proposal we are considering today is very thoughtful and benefits from the staff’s careful analysis and work over many months, and it considers a range of approaches to developing a workable exemption that preserves investor protections. It provides a strong basis for moving forward on this important initiative. We should, however, be open to views on all of the issues raised by the proposal.
Before I turn the proceedings over to Keith Higgins, the Director of the Division of Corporation Finance, to discuss the recommendations, I would like to thank the staff for all of their efforts to develop this proposal. Specifically, I would like to thank Keith Higgins, Mauri Osheroff, Sebastian Gomez Abero, Karen Wiedemann, Zachary Fallon, Shehzad Niazi, Paul Dudek, Amy Starr, Craig Olinger, and Mark Green in the Division of Corporation Finance; Annie Small, Rich Levine, David Fredrickson and Dorothy McCuaig in the Office of the General Counsel; Craig Lewis, Scott Bauguess, Erin Smith, Vladimir Ivanov , Rachita Gullapalli, and Christopher Meeks in the Division of Economic and Risk Analysis; Brian Croteau, Jeffrey Minton, John Cook, Kevin Stout, Ellen Gazlay, and Eric West in the Office of the Chief Accountant; Andrea Orr, Josephine Tao, Carla Carriveau, and John Guidroz in the Division of Trading and Markets; and James Curtis and Christian Sandoe in the Division of Investment Management. I also would like to thank my fellow Commissioners and their counsels for their hard work on this proposal.