Speech by SEC Commissioner:
Remarks at 2009 SEC Government-Business Forum on Small Business Capital Formation
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
November 19, 2009
Thank you, Meredith [Cross], for your kind introduction.1 It is a pleasure to be here today at this important gathering to discuss capital formation for small business. I, too, would like to welcome today's attendees, both here in Washington and those participating by Webcast. I also would like to thank our distinguished panelists for making time in their busy schedules to participate today. Your input is invaluable. And, of course, "thank you" to the many members of the Commission staff who have made today's forum possible, with a special "thank you" to Gerry Laporte.
Although attention often seems to focus on larger enterprises, we need to appreciate that small and emerging businesses offer unique opportunities for investors, entrepreneurs, employees, and consumers. Smaller companies, however, also face distinct challenges and hurdles. Today's discussions will highlight some of the difficulties facing small business, particularly given the current economic climate.
The observations and insights that flow from forums like this one help us craft an appropriate regulatory framework over time. In practice, the regulatory regime may need further tailoring to ensure that it is appropriate for companies of different sizes. A small firm should not necessarily be subject to the same regulatory demands that a Fortune 500 company is required to shoulder. Among other things, one needs to consider the disproportionate burden that a given regulatory requirement can impose on a small business and the costs we all bear if, as a result, businesses struggle to get off the ground or expand. When a small business can't secure funding at a reasonable cost, for example, the economy is deprived of the firm's full participation in the marketplace.
There is a longstanding tradition of scaling federal securities regulation in important respects to provide small enterprises relief from select burdens that may be especially challenging for them. Consider section 3(b) of the '33 Act authorizing the Commission to adopt rules exempting certain small offerings from the demanding and time-consuming registration requirements of section 5. Under section 3(b), the Commission has adopted Rules 504 and 505 of Regulation D. By allowing an issuer to forego a statutory prospectus and registration statement, these rules facilitate capital formation for startups and other small companies long before they even consider going public. Rule 506 also has encouraged small business capital formation by providing certainty and predictability in the form of a safe harbor under section 4(2) of the '33 Act.
As recently as 2007, the Commission adopted a host of reforms designed to ease the regulatory burden smaller public companies face and otherwise to achieve regulatory simplification for such firms.2 The Commission also expanded the number of companies that can avail themselves of the more streamlined and efficient regulatory regime. These reforms further evidence that federal securities regulation — and SEC rulemaking in particular — can be fashioned in order to accommodate the unique features of small business while continuing to ensure that investors are protected.
In my view, the Commission should actively consider other ideas for refining securities regulation so as to encourage small business capital formation. Startups and other small businesses drive innovation, spur job creation, and provide opportunities for investors to earn higher returns. New and smaller enterprises deliver cutting-edge goods and services to our economy and pressure more established companies to compete more aggressively. When properly tailored, the securities law regime can avoid unduly impeding small business as an essential source of economic growth and wealth creation.
The next panel — academics' perspectives on the Commission's accredited investor definition — is sure to be a source of ideas that will shed light on today's important topic. As a law professor myself, I look forward to the discussion.
With that, I'll turn things back over to Meredith [Cross] and Gerry [Laporte] to begin the next panel.