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Prepared Remarks Before the Small Business Capital Formation Advisory Committee

Sept. 27, 2021

Thank you, Carla [Garrett]. It’s good to be with this Committee again. I’d like to thank the members for their time and willingness to represent the interests of America’s small businesses. As is customary, I’d like to note I’m not speaking on behalf of the Commission or the SEC staff.

I look forward to your readouts from today’s discussion on late-stage, private rounds of financing, as well as the pathways to our public markets.

Last time we gathered, I spoke about my father, Sam Gensler, a small business owner who never had more than a few dozen employees. He didn’t tap the capital markets like many small business owners today.

As a society, the U.S. is blessed with the largest, most sophisticated, and most innovative capital markets in the world. Our companies, including small businesses, rely on our capital markets more than companies in other countries do.

Consider this: The U.S. capital markets represent 38 percent of the globe’s capital markets.[1] This exceeds even our impact on the world’s gross domestic product, where we hold a 24 percent share.[2]

Furthermore, corporate bonds, a $10 trillion market,[3] is about the same size of commercial bank lending in this country.[4]

Broadly speaking, as small businesses grow, they often migrate from borrowing in bank markets to borrowing in capital markets. Having that breadth and depth in our markets facilitates capital formation. That’s why we want to make them as efficient as possible.

In that context, I’d like to touch on one topic this Committee will discuss today: special purpose acquisition companies (SPACs).
 

This year, there has been an unprecedented surge in SPACs, which provide an alternative to traditional initial public offerings (IPOs). As technology and markets evolve to challenge existing business models, it is important to think about how we protect investors and facilitate capital formation.

With SPACs, there are a lot of costs in between the companies and their investors. I think enhanced disclosures and other provisions can increase competition in this market.

SPACs are shell companies that raise cash from the public through what I call “blank-check IPOs.” They generally have two years to find and merge with a target company.

SPAC sponsors generally receive 20 percent of shares of ownership up front — but only if they actually do a deal later. The first-stage investors can redeem when they find the target, leaving the non-redeeming and later investors to bear the brunt of that dilution.

Once they find a target company, SPACs often raise more capital through transactions known as private investments in public equity (PIPEs). These deals give new investors — mostly big institutions — an opportunity to put money into the target IPO.

These PIPE investors often can buy shares at a discount to what the share price will be after the target IPO, or receive other benefits or payments that are not available to ordinary investors.

The result? PIPE investors often get a better deal than retail investors, whose investment may be further diluted.

There are lots of costs that this structure is bearing — whether sponsor fees, dilution from the PIPE investors, and fees for investment banks or financial advisers. These costs are borne by companies trying to access markets and by regular investors. It may be that those fees are coming out of the retail public’s investment dollars.

I think for small businesses considering going public via SPACs, it is important to consider these costs as well, and whether it is the best approach for the target company.

I’ve asked staff for recommendations about how we might update our rules so that investors are better informed about the fees, costs, and conflicts that may exist with SPACs.

I do think, however, that it is worth considering what we have learned from SPACs and direct listings, and whether there are any changes that might be appropriate for traditional IPOs.

I look forward to hearing from the public — including from this Committee — on these topics.

Thank you.

 

[1] See Securities Industry and Financial Markets Association, “2021 SIFMA Capital Markets Fact Book,” available at https://www.sifma.org/wp-content/uploads/2021/07/CM-Fact-Book-2021-SIFMA.pdf.

[3] Statistics from Securities Industry and Financial Markets Association: https://www.sifma.org/resources/archive/research/statistics/

[4] See Federal Reserve, “Assets and Liabilities of Commercial Banks in the United States,” available at https://www.federalreserve.gov/releases/h8/current/default.htm.

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