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Remarks at Meeting of the Small Business Capital Formation Advisory Committee

Nov. 12, 2019

Thank you Carla [Garrett], members of the Small Business Capital Formation Advisory Committee, Martha [Miller], and the staff in the Office of the Advocate for Small Business Capital Formation.[1] It is nice to join you again for today’s meeting.

I am pleased that you will devote today’s meeting to a discussion of the concept release on harmonization of securities offering exemptions. [2] Taking a critical look at our offering exemptions is important for investors and issuers alike.

First, I believe that our private markets are not providing opportunities to our Main Street investors to the same extent, including quality, they provide our institutional investors. Our markets are far different today than they were 35 or more years ago. Then, our private capital markets were a minor component of our economy for both companies and investors. Today, in terms of the amount of capital raised, investment opportunities, returns and other key metrics, our private capital markets often are seen as more attractive for companies and professional investors than our public markets.

However, our overly complex and rigid approach to private offering regulation was built on a patchwork basis for the markets of at least 35 years ago. This approach focuses on direct access and is rooted in investor protection concerns that, to be sure, must be respected and furthered. However, I believe it is overly reliant on our wealth-based definition of “accredited investor,” and it effectively prohibits or significantly restricts all but our wealthiest Main Street investors from investing directly or indirectly in our private markets. Worse, because the costs of providing access to Main Street investors on an individual by individual basis, including those who qualify as “accredited investors” are high, those seeking to raise capital in the private markets generally may turn to Main Street investors only if institutional investors are not sufficiently interested. Said another way, there may be significant selection bias that adversely affects Main Street investors.

For these and other reasons, I believe it is our obligation to explore whether we can reduce cost and complexity, increase opportunity for our Main Street investors in this important market, including through professionally managed funds. To be more specific, I am thinking about funds where Main Street investors are able to invest in the private market on terms similar to those available to institutional investors and on a diversified basis. Importantly, and contrary to what some have suggested about our efforts, we must ensure appropriate investor protections for our long-term Main Street investors in any action we take. Here, I note that our public capital markets protect our Main Street investors in many ways, including that our long-term Main Street investors get essentially the same terms as long-term institutional investors. We should think about replicating that in our private markets.

Second, small and medium-sized companies are increasingly relying on our private capital markets to raise capital. We have found that these markets all too often do not function well for companies that are seeking to grow beyond the start-up stage, particularly those that do not have established relationships with professional investors. We should explore whether regulatory changes can be made to facilitate capital formation in this critical component of our economy.

Thank you for your focus on this important topic.

[1] My thoughts are my own and do not necessarily reflect the views of my fellow Commissioners or the SEC staff.

[2] Concept Release on Harmonization of Securities Offering Exemptions, 84 FR 30460 (June 26, 2019).

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