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Grading the Commission’s Record on Capital Formation: A+, D, or Incomplete?

Commissioner Daniel M. Gallagher

Vanderbilt Law School’s 17th Annual Law and Business Conference <br/> Nashville, TN

March 27, 2015

Thank you, Jim [Cheek] for that kind introduction.  It is an honor to be here at Vanderbilt today.  Not only because Vanderbilt is such a distinguished university, but because it is home to a dear friend of mine, Craig Lewis.  As Director of the SEC’s Division of Economic and Risk Analysis, Craig did more to transform the agency — in particular by crafting a new paradigm for cost-benefit analysis in the work of the Commission — than any other staffer in the Commission’s recent history.  I miss having Craig at the SEC — our loss is truly Vanderbilt’s gain — but his successor Mark Flannery is doing a great job running with the baton that Craig passed to him.

It is also nice to be in Nashville.  It’s always refreshing to get away from the often-acrimonious debates inside the Beltway and hear some straight talk from real entrepreneurs trying to grow their businesses.  So later today, as part of what I’ve been calling my capital formation listening tour, I’m going to the Nashville Chamber of Commerce to meet with some of these folks and hear what they have to say about how we could be doing our job better.

But, right now, I’d like to take some time to discuss with you what I view to be critical capital formation issues facing the Commission.

I.Regulation A+ and Venture Exchanges

The biggest news, of course, is that the Commission just two days ago adopted final rules implementing Title IV of the JOBS Act, which required us to revitalize the currently-moribund Regulation A offering exemption.[1]  According to a GAO report, old Regulation A suffered from several flaws, including a lack of preemption of state blue sky regulation, and an inadequate $5 million cap on the size of the offering.[2]  As between a Regulation A offering and an unlimited, state-preempted private placement under Rule 506 of Regulation D, the choice was a no-brainer.

I am very pleased that the Commission was finally able to adopt changes to Regulation A to substantially resolve several of the key issues that previously afflicted the rule.  The cap on the size of the offering has been raised to the statutory minimum of $50 million, and offers and sales for so-called “Tier 2” issuers preempt state blue sky law.  The latter point is critical:  issuers looking to make a nationwide offering need only have their offerings qualified by the SEC; they do not need to undergo the review processes, including merit review, of 50+ securities regulators.  We’ve also given these issuers a conditional exemption from Section 12(g) of the Exchange Act, so that Tier 2 issuers have some breathing room to raise capital and grow without triggering the burden of full Section 13 reporting requirements.[3]

I am thrilled about this development.  But, as I noted at the open meeting, the rule is not as good as it could have been.[4]  Three years after the law was enacted, we should have exercised our clear authority under the JOBS Act to raise the offering limit to $75 million.[5]  We should have deemed Regulation A’s semiannual reporting to be “reasonably current” for purposes of Rules 15c2-11, 144, and 144A.[6]  And, we should have allowed reporting issuers to use Regulation A.[7]  But putting these and some other issues aside, in this era of regulatory excess, it is refreshing to see the Commission finally taking action to facilitate capital formation.

That being said, this is no time to rest on our laurels.  We still have a lot to accomplish in order to ensure that Regulation A is a success.

First, setting aside the problems I’ve just mentioned, I expect that additional issues will crop up in practice, despite heroic efforts by some of the brightest and hardest-working staffers at the SEC to anticipate and resolve everything in advance.  I want Regulation A to achieve its goal of being a meaningful, quasi-public means of capital formation.  So, as companies begin to make use of these new rules to raise capital, if you find inefficiencies in our final regulatory scheme, please raise them soon, and raise them loudly.

Second, as I’ve mentioned many times before, the revisions to Regulation A were targeted at enhancing the primary issuance of securities.[8]  But if we could significantly enhance secondary market liquidity for these shares, we could invigorate Regulation A even further.  Investors will be more likely to purchase securities, and at a higher price, if they know they can readily exit their investment.  For this reason, I continue to believe that venture exchanges are the answer to this secondary market liquidity conundrum.

I was delighted to see the SEC’s Advisory Committee on Small and Emerging Companies take up the issue of secondary market liquidity for small company shares, in particular the Committee’s emphasis on venture exchanges.[9]  There also appears to be sincere interest in this idea by the Commission,[10] and it has been a hot topic in Congress lately.[11]  Simply put, there is a real need to pursue venture exchanges for small companies.  The old, tired arguments against them are simply defenses of the status quo by those who either benefit from the status quo, or who can’t escape the past.  The Commission can and should pursue the creation of venture exchanges, and I assume that, if we do not, Congress would be more than happy to do it for us, just as they did on other issues in the JOBS Act.[12]

There is one obvious piece of unresolved business in our Regulation A rule:  it does little to facilitate capital formation for Tier 1 issuers.  These issuers still have to navigate state blue sky law qualification, on top of the SEC’s review and qualification.  There has been improvement to that process, but it did not come from the SEC.  The new NASAA coordinated review program, from the limited sample set we’ve seen so far, appears to bring some speed and predictability to the states’ filing review.[13]  But, agreeing to participate in the coordinated review program means that issuers must undergo merit review.[14]  Merit review, of course, has given investors such gems as the prohibition on the sale of Apple IPO shares in Massachusetts.[15]  How’d that work out?[16]  Moreover, the lack of preemption for offers under Tier 1 — which is worse than the proposal — means that issuers would have to look to state law to determine if they may benefit from the “testing the waters” provisions of Regulation A.[17]

The increased size of the Tier 1 offering may prove useful for issuers looking to raise between $5 and $20 million in capital, as the larger offering size will help further defray the costs of undergoing the full qualification process.  We can also help this segment of issuers by closely supervising the implementation of the coordinated review program.  If NASAA cannot get all jurisdictions on board, and keep them on board — that is, if states start refusing to defer to the conclusions of the primary reviewers — then the SEC should reexamine whether to preempt state law in Tier 1 as well.

Ultimately, however, for an issuer looking to raise $0 to $5 million in capital under Regulation A — that is, within the scope of old Regulation A — our new rules don’t do much to help facilitate capital formation.  Tier 1, with state qualification, remains too expensive; and Tier 2, with ongoing reporting, will likely be too expensive as well.  This is unfortunate.  One solution would be to look at paradigms other than Regulation A, which seem to offer much more promise in helping the smallest companies raise money.

II.Raising Under $5 Million in Capital Shouldn’t Be So Hard


I’ll lead off with the obvious one:  crowdfunding.  Crowdfunding is a bit of a paradox right now.  Accredited investor crowdfunding, a consequence of the JOBS Act mandate to lift the general solicitation ban under Rule 506, has really taken off.  Crowdfunding to non-accredited investors under Title III of the JOBS Act is, of course, still stuck in SEC rulemaking limbo.  Not because the Commission lacks the will to move forward, but rather due to the weight of the accumulated, nanny state investor “protections” thrown into the JOBS Act mandate by the Senate.

Although Rule 506(c) was not specifically intended to facilitate crowdfunding, the rule’s flexibility has given rise to a robust and growing crowdfunding industry.[18]  When you contrast the regulatory framework of Title III crowdfunding with Rule 506(c) crowdfunding, the latter is much more flexible.  Of course, some will say it is the Wild West.  To me, though, it is a great example of the creativity and ingenuity of the markets and market participants.  And:  (1) the antifraud laws still apply, (2) accredited investor verification needs to be complied with, (3) no “bad actors” can be involved, (4) Form D must be filed, (5) and so forth.  Even the Wild West had its lawmen, as difficult as it may be to picture Andrew Ceresney as Wyatt Earp!

If 506(c) crowdfunding is the Wild West, Title III crowdfunding is 1970s East Germany.  The heavy hand of the state is omnipresent and smothering.  As amended by the Senate, Title III gets the theory of crowdfunding wrong, overlaying the usual issuer disclosure and broker-dealer regulatory regimes on crowdfunding transactions and intermediaries.  The result is an over-engineered regulatory approach.  The wisdom of the crowd has been displaced by the all-knowing Washington book club.  And so non-accredited investor crowdfunding, if adopted as proposed, is widely anticipated to be too burdensome for the smallest companies.[19]  Certainly, we can draw from our experience with Rule 506(c) crowdfunding to help inform rulemaking here; it may also be worthwhile to look to the UK FCA’s approach to crowdfunding, which has been operating successfully with a very light touch regime.[20]  A less prescriptive statute would of course greatly ease our ability to make Title III crowdfunding work, and perhaps Congress will look at this issue.[21]

B.Regulation D Exemptions

Despite all the attention paid to Rule 506 offerings, there are two other small issues exemptions in Regulation D.  Rules 504 and 505 permit capital raises of up to $1 million and $5 million, respectively — the former with general solicitation if registered with the states, and the latter without.  The available data show that these rules are infrequently used; issuers much prefer to use Rule 506 for offerings of any size.[22]  This is, I believe, directly attributable to the lack of state law preemption.[23]  To fix these rules, we need to better balance the costs and benefits of each of these exemptions.  For example, we could consider preempting state blue sky laws, raising the offering caps, and expanding the availability of general solicitation — similar to what we have now for Regulation A and Rule 506(c).[24]

Of course, there are some who take a different view:  that the registration and reporting obligations of the SEC are Holy Writ, making exemptions therefrom akin to blasphemy.  Exemptions, in their view, should be tightly cabined, in order to force securities issuance into registered offerings.  Rather than raising up Rules 504 and 505, they would rather see Rule 506 brought low.[25]  It was this view in particular that animated the stifling Regulation D amendments that were proposed in 2013, contemporaneously with our lifting the ban on general solicitation.[26]  The withdrawal of this millstone around the neck of the Regulation D market would give great confidence to market participants, and the Commission should take such action ASAP!  In the meantime, I understand the concern of those who are choosing to forego general solicitation until the Regulation D proposal has been resolved, but I can say it would be an absurd, if not illegal, result for any of the proposed Regulation D amendments to be applied retroactively to ongoing offerings.[27]

Also, apart from new 506(c), we have not changed the fundamental framework of Regulation D since it was initially adopted in 1982.  Given the substantial changes in technology and the markets since then — think Commodore VIC-20 to the Apple watch — it may be time to see if there are other ways to balance access to capital and investor protection, giving issuers other choices when raising capital.  For example, David Burton at the Heritage Foundation is advancing a “micro offering” safe harbor, which would deem certain extremely small or limited offerings as not involving a public offering under Section 4(a)(2) of the Securities Act.[28]  These are the types of ideas we should be exploring.

In doing so, I believe it would be constructive to start from a point of reference of the needs of real companies, and then figure out how to make the securities laws fit those ends.  Imagine that!  For example, when I was meeting with start-ups and small businesses in San Diego earlier this year, as part of my listening tour, a pair of young entrepreneurs running a winery noted their frustration with meeting fundraising goals.  They knew that, if they could just post their offer on Craigslist, they’d be able to readily connect with investors, and spend their time growing their company rather than fundraising.  I know the very thought of having a securities offering on Craigslist just made some people’s heads explode.  But that highlights the divide between the real needs of real entrepreneurs and the unfortunate reality of securities regulation today.  We need to find a reasonable way to bridge this gap.

III.Other Capital Formation Issues

For somewhat larger companies, I believe our rules aren’t fundamentally flawed, but there are certainly some improvements that can be made.

Some take the view that companies have to be perfectly seasoned before we can expose any unaccredited investor to the risk of investing in them.  In this view, companies that are not up to the standard of the largest issuers should be kept out of our most liquid markets.  What is unanswered, of course, is how those companies will get the capital they need to graduate to the “big leagues.”  Or why ordinary investors should be limited to investing in blue chips, rather than taking a chance on a young upstart.

I take a different view:  investors are smart.  They just have to have the information they need to understand what they’re getting into.  If you want to go to the NYSE and buy GE, that’s fine; if you want to go to a venture exchange and purchase shares in the latest Silicon Valley app maker, that’s fine too.  It’s impossible for these smaller start-ups to comply with the reporting expected of the largest companies, though, so I’ve previously advanced a few ideas that I think could help.[29]  For example, we should further segment our small companies into bands based on commonly-used market definitions of “nanocap” and “microcap,” and more radically scale reporting requirements for the smallest issuers.  Unfortunately, our recent rules do not inspire confidence that the Commission can resist slapping small companies with immaterial reporting requirements.  A majority of the Commission decided to apply our extraordinarily burdensome conflict minerals rule to smaller companies, with an oh-so-generous 2 year phase-in.[30]  And, we just proposed hedging disclosure requirements that, over my protest, would apply to smaller reporting and emerging growth companies.[31]  The only time the Commission seems willing to exempt SRCs and EGCs has been when Congress explicitly says to do so — and even then, it’s begrudgingly done.

My skepticism notwithstanding, I hope and expect that the Division of Corporation Finance will come out with an aggressive agenda for disclosure simplification as a result of its much-discussed study of disclosure requirements.  If that study simply affirms our existing disclosure regime, when there has been over a decade of unfinished efforts aimed at streamlining disclosures, it will have been a failure.  The difficulty, of course, is that every piece of disclosure in our rulebook will have some constituency who will cry loudly when their ox gets gored.[32]  But we need to take a hard look at whether the benefits that some assert exist are worth the burden placed on all shareholders — and eliminate or at least reduce the burden when it is not.  On the flip side, we’ve already seen partisans for added disclosure — particularly sustainability or integrated disclosure — make their case for inclusion in this project.[33]  Companies are free to make these disclosures voluntarily.  But I am absolutely opposed to broadening our already-burdensome disclosure requirements to include these non-material issues.[34]

In the meantime, I hope the SEC can do a more rigorous cost-benefit analysis of its new rules, including an analysis of the total burden of regulations.  We have deep and liquid capital markets, and the SEC makes it relatively straightforward for issuers to access them, but we’re steadily attaching more and more strings.  It’s only a matter of time before, like Gulliver tied to the ground by the Lilliputians, companies that have the misfortune to be public issuers will be unable to move, to innovate, to create.  And all investors will be harmed for it.


Unfortunately, despite having passed Regulation A+, the Commission does not merit a grade of A+ in its attention to capital formation issues.  At best, our grade is “incomplete” given the significant number of critical investor protection issues that need to be taken up in the near future.  Yes, that’s right — capital formation and investor protections walk hand-in-hand.  Rulemaking derided as “deregulatory” may nonetheless help investors, if the costs of that disclosure, both direct, in terms of dollars diverted to compliance, and indirect, in terms of the opportunity costs of those dollars, are not outweighed by the benefits.  I believe our rulebook is full of such rules, and hope we can take them on, and soon.


   [1]    Rel. No. 33-9741, Amendments to Regulation A (Mar. 25, 2015) (hereinafter A+ Release).

   [2]    See Government Accountability Office, Securities Regulation:  Factors That May Affect Trends in Regulation A Offerings, GAO-12-839 (July 2012) (discussing views of various stakeholders that complying with state securities regulation requirements and the maximum offering ceiling contribute to Regulation A’s disuse).  These two factors are a double whammy:  the multistate qualification process is expensive, imposing high fixed costs, and the limited size of the offering inhibits issuers from defraying those costs by raising larger amounts.

   [3]    Unfortunately, we did not provide issuers with a “clean” exemption from Section 12(g) registration.  See A+ Release at 57–58.  The exemption is only available to Tier 2 issuers that are current in their reporting requirements, that engage a registered transfer agent, and that have not exceeded a cap of $75 million in market float (or $50 million in revenues for those for which the float is not readily determinable).  Of these additional frictions, the $75 million cap is particularly unnecessary, adding needless compliance costs.

   [4]    Commissioner Daniel M. Gallagher, Public Statement, Statement at an Open Meeting on Regulation A+ (Mar. 25, 2015), available at (hereinafter “Gallagher A+ Statement”).

   [5]    See Securities Act § 3(b)(5); A+ Release at 32; Gallagher A+ Statement.

   [6]    See Gallagher A+ Statement.  The SEC currently deems only quarterly reporting to be reasonably current.  As a result, an issuer complying with only semiannual reporting will not be reasonably current for two three-month periods out of the year.  (For a calendar-year company, it would be January through March (until the annual report is filed), and then June through September (until the semiannual report is filed).)  The staff’s suggestion is that issuers who want to take advantage of any of these provisions can “voluntarily” file quarterly reports on Form 1-U.  See A+ Release at 186.  When QIBs demand quarterly reports so they can transact, or a broker-dealer demands updated financial information to initiate a quotation, the quarterly reporting regime hardly seems “voluntary.”

   [7]    See A+ Release at 22; Gallagher A+ Statement (noting that it’s not clear why reporting companies would want to do Regulation A issuances, but that, on the other hand there is a market for Private Investments in Public Equity, or PIPE, transactions.  If there is no demonstrable or concrete harm in permitting quasi-public investments in public entities (“half-PIPEs”) we should extend issuers the ability and see how the market develops).

   [8]    See, e.g., Commissioner Daniel M. Gallagher, Public Statement, Opening Statement to the March 2015 Meeting of the SEC Advisory Committee on Small and Emerging Companies (Mar. 4, 2015), available at (hereinafter, “March 2015 ACSEC Statement”); Commissioner Daniel M. Gallagher, Speech, Whatever Happened to Promoting Small Business Capital Formation? (Sept. 17, 2014), available at (hereinafter, “Heritage Speech”).

   [9]    See SEC, Press Release, SEC Announces Agenda for March 4 Meeting of the Advisory Committee on Small and Emerging Companies, 2015-41 (Feb. 27, 2015), available at

[10]    See, e.g., Chair Mary Jo White, Public Statement, Opening Remarks at Meeting of SEC Advisory Committee on Small & Emerging Companies (Mar. 4, 2015), available at; Commissioner Luis A. Aguilar, Public Statement, The Need for Greater Secondary Market Liquidity for Small Businesses (Mar. 4, 2015), available at; Commissioner Kara M. Stein, Speech, Supporting Innovation Through the Commission’s Mission to Facilitate Capital Formation (Mar. 5, 2015), available at

[11]    See, e.g., U.S. Senate Committee on Banking, Housing, & Urban Affairs, Subcommittee on Securities, Insurance, & Investment, Hearing, Venture Exchanges and Small-Cap Companies (Mar. 10, 2015).

[12]    The SEC has a substantial amount of flexibility in its rules and exemptive authority to achieve the changes necessary to make venture exchanges work.  It is possible, however, that some additional flexibility would need to be statutorily-conferred.  There are myriad issues to work through.  On the market structure side, there is a need for exemptions from statutory Unlisted Trading Privileges, and from the SEC’s National Market System rules, in order to concentrate liquidity in the Venture Exchange.  (UTP may be one of the provisions requiring a statutory fix.)  In that regard, use of the SEC’s Exchange Act 11A(c)(3) authority to prohibit brokers from executing orders other than on the Venture Exchange could be useful.  See Stephen Luparello, Venture Exchanges and Small Cap Companies—Testimony before the U.S. Senate Committee on Banking, Housing & Urban Affairs Subcommittee on Securities, Insurance, & Investment (Mar. 10, 2015), at 9–10.  The Venture Exchange’s listing standards would need to be appropriately scaled for the smaller companies that it would list—which would likely require flexibility with regards to Section 18 of the Securities Act in order to ensure that state preemption is not lost for an appropriately scaled set of listing standards.  Additionally, the SEC would need to ensure that its authority under Exchange Act 12(c) is sufficiently capacious, such that listing a small company’s shares on a Venture Exchange would not trigger full Section 13 periodic reporting under Section 12(b).  Rather, something more reasonable should be required—for example, the Regulation A+ periodic reporting regime.  There’s a lot of complexity, but I’m confident that with the smart people at the Commission, and with good external input, we can get this done.

[13]    See, e.g., Nick Bhargava, Executive Vice President, Groundfloor Finance Inc., Letter to Hon. Mary Jo White, Chair, SEC (Nov. 18, 2014) (commenting on company’s positive experience with NASAA coordinated review process).

[14]    Issuers can skip the coordinated review program and make the offering in only disclosure review states, but then have to individually negotiate each state’s program.

[15]    See Paul Atkins, Great Moments in Financial Regulation:  Apple IPO deemed too risky, Wall St. J. (Apr. 28, 2010) (“For example, before 1996, certain initial public offerings of stocks were subject to merit review in certain states, where the state decided if a security is a "bad" investment and thus not appropriate to be offered to its citizens.  In fact, this is exactly what happened to Apple Computer when it first went public in 1980.  Massachusetts prohibited the offering of Apple shares because they were ‘too risky,’ and Apple did not even bother to offer its shares in Illinois due to strict state laws on new issues.”).

[16]    Or, how do you like them apples?

[17]    Testing the waters communications are defined as “offers”; although pre-filing testing the waters communications could be made under federal law pursuant to Regulation A, the failure to preempt offers under Regulation A means that issuers will need to comply with state laws regarding the timing of offers.  State laws may or may not provide an exemption from qualification requirements for testing-the-waters communications under Regulation A.  See, e.g., 21 VAC 5-40-70(A) (conditional exemption for testing-the-waters communications for Regulation A and Rule 504 offerings).

[18]    That is to say, Rule 506(c) is generally applicable, rather than being limited to crowdfunding.  It does appear that the JOBS Act’s congressional sponsors were aware of the potential for Rule 506(c) to be used for crowdfunding, and added some provisions into the statute to facilitate this usage.  See JOBS Act § 201(c); see also Jason W. Parsont, Crowdfunding: The Real and the Illusory Exemption, 4 Harv. Bus. L. Rev. 281, 297–300 (2014).

[19]    See, e.g., Samuel Guzik, SEC’s Proposed Crowdfunding Regulation:  Six Deadly Sins, Crowdfund Insider (Jan. 9, 2014), at  I share all of these concerns with the scope of the statute and the SEC’s proposed rule implementing it.  In addition, we should consider whether there is any flexibility to raise the $1m cap on offering size from $1 million to $5 million; again, larger offerings may help defray some of the fixed offering costs.

[20]    See JD Alois, FCA Publishes Review of Crowdfunding Regulations States; “No Need to Change”, Crowdfund Insider (Feb. 3, 2015), at

[21]    See Heritage Speech.

[22]    Vladimir Ivanov & Scott Bauguess, Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009‐2012 (July 2013), at

[23]    See id. (“Rule 506 accounts for 99% of amounts sold through Regulation D.  More than two‐thirds of non‐fund issuers could have claimed a Rule 504 or 505 exemption based on offering size, indicating that issuers value the Blue Sky law preemption allowed under Rule 506.”); see also, e.g., Rutherford B. Campbell, Jr., The Wreck of Regulation D:  The Unintended (and Bad) Outcomes for the SEC’s Crown Jewel Exemptions, 66 Bus. Law 919 (2011).  The worst part is that the higher transaction costs of a Rule 506 offering, including the requirements to provide financial statements, etc. that are not imposed on the lower offerings, are still less burdensome than state qualification under Rule 504 and 505.  Put differently, switching to a Rule 506 offering is not a costless exercise, but rather reflects the least worst approach for many small businesses.

[24]    Offerings that are truly local in character can proceed under a state’s securities laws using the intrastate exemption.  I am interested in the idea of expanding the intrastate exemption for regional offerings; given the growth in major metropolitan areas and in technology since the adoption of the Securities Act, the idea that an “intrastate” offering in New York City must be limited to New York, and not Connecticut or New Jersey, is silly.  The same goes for Washington, D.C., Maryland, and Virginia; or Massachusetts, New Hampshire, and Rhode Island.  If we can do this, we should simultaneously determine whether to retain a role for state regulators under either Rule 504 or 505, or whether to preempt state law in one or both of those provisions.  Practically, as Campbell points out, this could be accomplished by recasting these exemptions as under 4(2), similar to Rule 506, rather than unpreempted 3(b) which is their current source of statutory authority.  See id.

[25]    The options of “not raising capital” or “raising capital abroad” in one of the increasingly-robust global capital markets are improperly discounted in this view.  See, e.g., Commissioner Daniel M. Gallagher, Speech, Can the U.S. Be an International Financial Center (Jan. 13, 2015), available at

[26]    See Rel. No. 33-9416, Amendments to Regulation D, Form D and Rule 156 (July 10, 2013).

[27]    See Keith Higgins, Speech, Keynote Address at the 2014 Angel Capital Association Summit, (Mar. 28, 2014).

[28]    See David R. Burton, Building An Opportunity Economy:  The State of Small Business and Entrepreneurship—Testimony before the Committee on Small Business, U.S. House of Representatives (Mar. 4, 2015) (recommendation number 43 at p.15).

[29]    See Heritage Speech.

[30]    See Rel. No. 34-67716, Conflict Minerals (Aug. 22, 2012).

[31]    See Rel. No. 33-9723, Disclosure of Hedging by Employees, Officers and Directors (Feb. 9, 2015); see also Commissioners Daniel M. Gallagher & Michael S. Piwowar, Joint Public Statement, Joint Statement on the Commission’s Proposed Rule on Hedging Disclosures (Feb. 9, 2015).

[32]    I expect even the required disclosure of the ratio of earnings to fixed charges has its devotees.

[33]    See, e.g., US SIF, Disclosure Effectiveness Review (Sept. 18, 2014); Interfaith Center on Corporate Responsibility, Disclosure Effectiveness Review (Sept. 24, 2014); Sustainability Accounting Standards Board, Disclosure Effectiveness Review (Nov. 12, 2014).

[34]    So how can we get informed decision-making in this area?  One idea could be to have a Commission-authorized pilot program.  Our investor advocate, Rick Fleming, recently spoke about the need for layered disclosure, similar to a company website.  See Rick A. Fleming, Effective Disclosure for the 21st Century Investor (Feb. 20, 2015), available at (In my view, if the SEC wants issuers to provide effective disclosure to the 21st Century investor, the data needs to be both layered and structured.  To understand what is meant by the term “layered data,” simply picture a company website.  The company does not put all the information into one long web page that requires users to scroll down endlessly.  Rather, the information is split into manageable pieces that utilize appealing graphics, with tabs and hyperlinks to help users quickly find the information that is most important to them.  By similarly layering the data in an S-1 or 10-K, the SEC could greatly assist the individual investor who takes it upon herself to research an investment opportunity.”).

Obviously he is not the first to suggest layering disclosures, but it is a powerful illustration that the current disclosure framework works for neither companies nor investors.  So let’s let issuers produce layered websites of disclosure information drawn from existing SEC filings.  Issuers would not be required to present all the information — just that which they believe their investors would find decision-useful.  We could then solicit feedback from investors on the content and design.  We would obviously need to give an exemption from liability and filing requirements of the federal securities laws (e.g., the website would not be deemed to be a free-writing prospectus, for example).  As the information would be drawn directly from the filing, there is no incremental risk of it being incorrect.  Investors would need to be instructed not to rely on the information in the website.  I believe there are some cutting-edge companies, as well as major investors, that would be willing to commit to participate in this pilot, particularly if it meant they would have a stronger voice in helping shape the next generation of disclosure.

This may seem a bit radical, but I think radical is what we need at this point in time, when the trend seems to be inexorably toward imposing enhanced regulations on issuers.  Some of you have probably seen my chart of new rules imposed on financial services companies — since 2010 alone.  See Commissioner Daniel M. Gallagher, Public Statement, Statement on the Aggregate Impact of Financial Services Regulations (Mar. 2, 2015), available at (linking to pdf of diagram).  Lest we forget, under this avalanche of rules from prudential regulators and the SEC, lies a public company.  Nonfinancial reporting companies may not be quite so buried, but I cannot think of a single rule in our pipeline right now that would get rid of some of the myriad inefficiencies in how issuers raise capital.  Instead, from here to the horizon are new, Dodd-Frank-mandated burdens.  Larger companies are better able to bear the onslaught, because they are better able to bear fixed costs of disclosure.  But their ability is not infinite, and every dollar that is spent on disclosure that is not material to investors is a dollar out of those investors’ pockets, and a dollar not spent on R&D or capex that could actually increase the value of that investment in the future.

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