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Remarks at SEC’s Small Business Capital Formation Advisory Committee Meeting

Aug. 13, 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 for holding the second meeting of the Committee outside of Washington, DC.[1] It demonstrates a clear commitment to capital formation across the country. I thank you for your thoughtful and pragmatic exploration of how our rules, regulations, and policies impact small businesses and their investors, including smaller public companies. In that vein, a very big thank you to our host, Creighton University, for the warm welcome to Omaha, NE.

Your agenda today is packed with substantive topics that I believe can have a very positive impact on smaller companies and their investors. This morning you already heard from the staff in the Division of Corporation Finance about the SEC’s Concept Release on Harmonization of Securities Offering Exemptions.[2] The concept release is the first step in what I hope will be a much needed reform of our exemptive offering framework, which I have referred to before as an elaborate patchwork.[3] I understand that this morning was also the first step for the work of the Committee in this area and that you will continue to consider how we can harmonize and make more effective our exemptions from registration at a future meeting of the Committee. The opportunity for improvement is stark. Private capital raising is now outpacing capital raising in our public markets, yet our Main Street investors have no effective access to investments in private capital offerings. Further, the availability of private capital is geographically skewed and, as we discussed at your first meeting, significantly favors companies with valuations in excess of $50 million. I look forward to your work in this area. In the meantime, I encourage everyone, including small businesses and their investors, to send us their comments and share their suggestions for how we can improve the exemptive offering framework.

This morning you also discussed our proposed amendments to the financial reporting requirements for acquisitions and dispositions of businesses, including Rules 3-05, 3-14 and Article 11 of Regulation S-X.[4] I am pleased you are tackling this topic, especially since I realize that it is not an easy one. So let me be clear about what I hope we can achieve with these amendments. First and foremost, we need to ensure that investors receive the financial information they need to understand the potential effects of significant acquisitions or dispositions. Second, I believe we can deliver for investors while eliminating unnecessary costs and burdens imposed by the current rules that, in my experience, can and do frustrate attractive acquisitions and dispositions, including those involving small businesses. The proposed rules reflect the expertise of the staff in the Division of Corporation Finance gained through years of experience working with these rules. I commend them for their work.

The last topic on your agenda today is also a direct result of the efforts of the Corporation Finance staff. Bill [Hinman], you and your staff have been busy. In May, the SEC proposed amendments to more appropriately tailor the accelerated and large accelerated filer definitions.[5] Under the proposed amendments, smaller reporting companies with less than $100 million in revenues would not be required to obtain an attestation of their internal control over financial reporting (ICFR) from an independent outside auditor. Importantly, the proposed amendments would not change key investor protections from the Sarbanes-Oxley Act of 2002, such as independent audit committee requirements, CEO and CFO certifications of financial reports, or the requirement that companies continue to establish, maintain, and assess the effectiveness of their ICFR. And, of course, the financial statements of those companies would continue to be audited by an independent outside auditor. What the proposed rules would do is allow these lower-revenue companies, many of which are biotech and healthcare companies, and their investors to benefit from more tailored control requirements so they will be able to redirect savings in growing their companies. We are not proposing these changes in isolation—we are building from the experience we have gained since the JOBS Act of 2012 exempted companies with less than $1 billion in annual gross revenues from the ICFR attestation requirement during the first five years after their IPO. In many cases, the proposed rules would simply extend this widely lauded JOBS Act exemption beyond the five year window for lower revenue companies.

I look forward to your discussion this afternoon. Thank you.


[1] My words 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).

[3] See Chairman Jay Clayton, Remarks on Capital Formation at the Nashville 36|86 Entrepreneurship Festival (Aug. 29. 2018), available at https://www.sec.gov/news/speech/speech-clayton-082918.

[4] Amendments to Financial Disclosures about Acquired and Disposed Businesses, 84 FR 24600 (May 28, 2019).

[5] Amendments to the Accelerated Filer and Large Accelerated Filer Definitions, 84 FR 24876 (May 29, 2019).

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