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Statement at Open Meeting on Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets

Nov. 2, 2020

Thank you, Mr. Chairman, and thank you to Bill, John, and S.P for the overview of the recommendation.  Conversation at the Commission’s conference on interconnectedness last month turned in a direction that helps to explain why what we are doing today is so important.  Specifically highlighted was the need for the creation of “engines of capital accumulation.”[1]  These engines enable one generation to pass down wealth to the next and enable communities to grow and prosper.  Small businesses are engines of capital accumulation.  Unfortunately, many small businesses that could be successful struggle to find the capital they need to create wealth.  We have to do a better job getting capital to those businesses, and that is what today’s amendments are all about.

The recommendation we are considering comes out of a years-long effort to ensure that the exempt offering framework, which governs the private capital markets, works for a wide range of small- and medium-sized businesses.  We are adopting targeted improvements to a regulatory scheme that unnecessarily hinders capital formation and unduly restricts investors’ opportunities to participate in economic growth.  Thank you to Chairman Clayton for making these changes a priority on the regulatory agenda and to the dedicated staff in the Divisions of Corporation Finance, Economic and Risk Analysis, and Investment Management, and the Office of General Counsel for your hard work on this release and your continuing attention to small business capital formation.  A special thank you to Director Bill Hinman for your steadfast leadership of the Division of Corporation Finance.  You have accomplished a great deal during your time here, and we are grateful for your service to the Commission.

Companies do not face a one-time, binary choice between raising capital in the public markets or raising it in the private markets.  Rather, one market may be more appropriate than the other depending on the stage of a company’s development or the circumstances it faces.  For many companies, the upfront costs of going public and the ongoing costs of being a public company are beyond their available resources.  These companies rely on a variety of exemptions to fulfill their capital raising needs as they grow and scale to the point that they can seriously consider becoming a public company.

Today’s amendments, by refining our rules governing the private markets, help to build a pipeline of companies that will one day go public.  Among other changes, we are increasing the maximum permitted offering amounts for certain exemptions.  By raising the offering limit under Tier 2 of Regulation A from $50 million to $75 million and the Regulation Crowdfunding offering limit from $1.07 million to $5 million, we seek to reduce the costs relative to the amount raised under these exemptions.  Doing so should make the exemptions more efficient capital raising options for small- and medium-sized businesses.  By increasing the Rule 504 offering limit from $5 million to $10 million, we seek to encourage more issuers to use this under-utilized exemption, to conduct regional multistate offerings, and to make use of state coordinated review programs.  As one commenter noted, this change could “increase access to capital by allowing issuers from communities and regions that do not have direct access to private equity and venture capital to more easily raise money from friends, supporters and local investors.”[2]

In response to the continuing pandemic and the strain that it is placing on small businesses, we are extending for an additional eighteen months the temporary relief with respect to the financial statement review requirements in Regulation Crowdfunding.  We have received positive feedback on this provision of the temporary relief first granted in May,[3] and I am pleased that it will continue to facilitate crowdfunding during a time when small businesses are looking for ways to survive the pandemic.

This release makes a number of other important changes.  It tackles integration, a notoriously difficult legal doctrine that introduces uncertainty into the capital raising process and can severely limit options for issuers when executing their financing strategies.  Today’s modernization and streamlining of this analysis into a single rule with a clear principle, guidance on how to apply that principle, and four safe harbors is a welcome improvement.  There is room, however, for further streamlining.  For example, there appears to be a concern that issuers will conduct serial Rule 506(b) offerings to sell to more than 35 non-accredited investors over a short period of time.  Rather than relying on the anti-evasion language in new Rule 152 that would clearly prohibit such a scheme to evade the registration requirements, we are also amending Rule 506(b) to limit the number of non-accredited investors to no more than 35 within a 90 calendar day period.  This additional complexity is unwarranted, particularly given that most 506(b) offerings do not include non-accredited investors because of the heightened disclosure requirements.

I am pleased that we are providing greater certainty to issuers on how to participate in “demo days” without conflicting with the prohibition on general solicitation.  These events allow startups to connect with angel investors in a setting that is open to a wider audience, often including students and entrepreneurs.  I would have favored loosening restrictions on the information permitted to be conveyed at these events and the individuals permitted to participate online, which frankly is the only way anyone is participating these days.  How would attendees at these events be hurt by simply hearing details about an offering in which they cannot invest?

We are adopting a commonsense measure that will permit an issuer to rely on a prior verification of accredited investor status at the time of a subsequent sale, so long as the investor represents in writing that she is still an accredited investor and the issuer is not aware of information to the contrary.  I would have supported making this change without a five-year time limit on the ability of issuers to rely on a prior verification.

I view today’s work on harmonizing, simplifying, and improving the exemptive framework to be a positive step, but we have more work to do to ensure that small- and medium-sized businesses all across the country can raise capital in a way that works for them, supports economic growth, and is consistent with investor protection.  A micro-offering tier of Regulation Crowdfunding for offerings up to $250,000, with simplified and reduced disclosure obligations, would make crowdfunding a viable option for the type of businesses that most need capital to survive the pandemic.  While we are adopting rules to permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers, we likely will need to do more to make them a useful tool for investors, issuers, and crowdfunding platforms.

We also need to give further consideration to preempting state securities laws with respect to “test-the-waters” offers made under new Rule 241and secondary sales of Regulation Crowdfunding securities and Regulation A Tier 2 securities when their issuers are current in their reporting obligations.  My concern that absent preemption, our exemptions cannot achieve their potential was expressed in many comment letters and in a recommendation of the 2020 Small Business Forum.[4]  One commenter explained that “secondary sales face a complex web of disparate state securities regulations, leaving investors and companies searching for the most appropriate state in which to conduct such sales.”[5]  State securities regulators play an important role in regulating our markets, but regulatory resources are limited and need to be allocated wisely.

Finally, we need to keep our ear to the ground so that we can hear from our Small Business Capital Formation Advisory Committee, our Investor Advisory Committee, and market participants more generally about what is working and what is not.  As 2020 has taught us, circumstances can change in fast and unexpected ways.  We have to be ready to react.  We also need to be prepared to respond to technological change.  As one example, during the time of COVID, we have seen increased use of QR codes to communicate information such as menus at restaurants.  We should allow issuers to use this technology in communicating with investors.

As small businesses continue to recover and adapt to our new COVID-19 reality, we must be willing to make the changes necessary to facilitate their resilience through improved access to the capital markets.  I look forward to continued dialogue on these issues.  Thank you to the staff for answering my questions, including during multiple weekend phone calls.  I have no further questions.


[1] See SEC Roundtable on Interconnectedness and Risk in U.S. Credit Markets (Oct. 14, 2020) at approximately 2:00 (Gary Cohn stating: “We’ve got those that have access to the capital markets and those that don’t and there is sort of nothing in the middle right now. Those that have access to the capital markets have access to massive liquidity and can grow their businesses…. And there is everyone else who is just fighting to stay alive.”) and 2:07 (Glenn Hutchins stating: “We know from work in microfinancing around the world that you can set up very successful practices in communities that are much poorer than we have in our own country and really create engines of capital accumulation.”), available at

[2] Letter from the Federal Regulation of Securities Committee, the Private Equity and Venture Capital Committee, and the Commercial Finance Committee of the Business Law Section of the American Bar Association (July 27, 2020), available at

[3] See Temporary Amendments to Regulation Crowdfunding, Release No. 33-10781 (May 4, 2020) [85 FR 27116 (May 7, 2020)].  See also Temporary Amendments to Regulation Crowdfunding; Extension, Release No. 33-10829 (Aug. 28, 2020) [85 FR 54483 (Sept. 2, 2020)].

[4] Report on the 39th Annual Small Business Forum (Jun. 18, 2020) at 22, available at

[5] Letter from the Biotechnology Innovation Organization (Jul, 21, 2020), available at

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