Remarks at the 2011 SEC Government-Business Forum on Small Business Capital Formation
Commissioner Elisse B. Walter
November 17, 2011
Meredith, thank you so much for that kind introduction.
I’m so pleased to have the opportunity this morning to be here with you for the 2011 Government-Business Forum on Small Business Capital Formation. I want to thank everyone in our Division of Corporation Finance, and especially Gerry LaPorte and the rest of our Office of Small Business Policy for organizing today’s Forum and playing the leadership role in our small business initiatives.
My thanks too, go to our panelists – those who are here now and those who will follow – for participating in this important public-private dialogue on small business capital formation and especially for your commitment to enhancing the growth and vitality of our nation’s small business community.
The information you share with us today ensures that we enhance our understanding of the needs of small businesses and their owners.
I hear, loud and clear, the views that these needs are not being met under our current regulatory structure.
I want you to know that the Commission, with the advice and guidance of our team of specialists in the Division of Corporation Finance, stands ready to write the next chapter in our agency’s long-standing efforts to address the concerns of small business.
Your recommendations for facilitating small business capital formation, and in particular, the empirical data I hope you will share with us either today or after the Forum adjourns, will be an important contribution to our ongoing efforts to maintain the vitality of small businesses in the U.S. economy.
As I’m sure you have already heard, and will continue to hear throughout the day, there is no shortage of recommendations today from lawmakers and market participants on possible revisions to the Federal securities laws and rules in order to promote small business capital formation.
I, for one, whole-heartedly agree with the President’s recent request that we review our rules in order to eliminate any unnecessary burdens. And, I know Meredith does, as well. I believe that there are many areas where our rules can and should be improved. But, should any proposed revision to our regulations veer toward sacrificing investor protection, I submit that such revision will surely come at a cost that no one in business can afford – the loss of investor confidence.
In the few minutes I have with you this morning, I of course cannot cover all of the potential legislative bills and recommendations for regulatory changes in depth. Instead, what I would like to do is to take us for a little trip down memory lane when many of these same issues were also at the forefront of our minds. Then, I’ll share just a few thoughts I’ve had about the recent initiatives to address issues concerning small business both inside and outside our agency.
Of course, as you’re going to hear repeatedly today, my remarks are my own and not those of the other Commissioners, the Commission or the staff.1 And, as is appropriate, please know that my thoughts on all of these issues before us today are evolving.
As you now know from Meredith’s introduction, if you didn’t know before, I served as the Deputy Director in Corp Fin from 1986 through 1994. Shortly after I commenced work in the Division, my former boss and dear friend, Linda Quinn, delivered a speech some of you may be familiar with entitled “Redefining Public Offering or Distribution for Today. ”2 In her remarks, she described the Division’s efforts to re-evaluate the concept of what constitutes a distribution or public offering requiring registration under the Securities Act of 1933.
Here are some of the statistics she presented that day. In 1981, about $12 billion of securities were offered by issuers in private placements. O nly four years later, in 1985, that number had gone up under Regulation D alone to $55 billion and that increase in private placement activity had resulted in the creation of a large secondary market for restricted securities. In 1983, annual trading volume in this market was estimated at $2 to 4 billion, and t he trading volume for 1986 was anticipated to exceed $10 billion. Sound like big numbers?
But, when we got an update on some of today’s private placement numbers earlier this month, during the meeting of our Advisory Committee on Small and Emerging Companies, our Chief Economist and Director of our Division of Risk Strategy and Financial Innovation, Craig Lewis, reported that in 2010, $905 billion was offered under Regulation D, with this figure representing the lower bound on the amount actually raised due to the fact that no closing filing is required when a company files a Reg D notice.
With respect to broader capital raising trends, Craig and his team confirmed that there has indeed been a shift from public to private capital raising over the past three years, due both to a decline in public issuances and to an increase in private issuances – with public issuances down by 11% from 2009 to 2010, while private issuances increased by 42% over the same period.
I can only imagine what Linda would be saying if she were still with us today.
I know that many of you, particularly Meredith, share my feelings that it is with a very heavy heart that we go forward in our efforts to once again address issues related to public offerings and distributions without Linda’s keen expertise, intellect, and vision. But Meredith herself is more than up to the task.
The underlying message of Linda’s visionary efforts is an enduring one, and in the view of this Commissioner, should guide us as we analyze these issues today.
In her 1986 speech and throughout her tenure as the Corp Fin Division Director, Linda challenged us to ask, who are the persons who require the protections of the mandated disclosure of the registration process? And, how can we protect them without undue burdens and costs?
The challenge then, and it remains the challenge today, is for us to strike the right balance. And, I think it’s a very important word for us to keep in mind as we move forward on these issues.
That is why I fully support our Chairman’s decision to have Meredith and the Division take a careful look at our offering rules in order to develop ideas for the Commission to consider that may reduce regulatory burdens on small business capital formation. And, in doing so, we must remember to take into account marketplace and broader societal developments.
At the same time, however, we should keep in mind that these considerations raise distinct questions about when and whether a company should go public. On the one hand, I am a great believer in the transparency and oversight that a public offering brings to investors. On the other hand, there are clearly some companies that make the determination to go public prematurely and even some companies that should never go public.
If we can move forward with ideas that are consistent with our investor protection mandate, I believe we can address the needs of the small business community. Of course, I remain very much in listening mode at this stage, but some of my initial reactions to the ideas I’ve heard are as follows:
Review of Certain Offering Regulations
With respect to changes to our offering regulations, any change to the Section 12(g) registration requirements must address, as we were talking about just a moment ago, the fundamental difference that exists between what “held of record” means at a publicly-held company versus the counting that is done at a privately-held company.
Our restriction on general solicitation is one that bears looking at. It appears ripe for re-evaluation because of technological changes. What does general solicitation really mean in an era dominated by electronic communications? Is it still a realistic concept?
And, our rules on public offering communication should be very carefully studied to determine whether the liberalizations afforded larger public companies in 2005 should be extended to smaller public companies.
On the subject of crowdfunding, I personally think crowdfunding is a good idea, but it must have limits. If it’s too big, it will become a haven for fraud and backfire, and I’m very concerned about the notion of a relatively high limit on a person’s income during the year, which might allow them to take everything they earned and put it into extremely risky ventures. And, of course, I continue to believe that antifraud jurisdiction must extend to its furthest possible reaches.
Although I have not yet completed my analysis of all of the recent legislative efforts to address capital formation, I’m hopeful that Congress will avoid being too prescriptive with any legislation it may determine to enact. Of course, we all know that the devil is always in the details. So, if Congress determines that a legislative response is appropriate, I would very much like to see Congress instruct the SEC to use its expertise to define those details. I believe the Commission should, as we have in the past, continue to look for places where we can calibrate the risks of reducing regulatory burdens and the potential cost savings.
Although I can’t predict for you today how our next chapter in addressing the needs of small business will read when it goes to press, I do believe that the Commission will build upon the platform established by this Forum today in a manner that addresses the needs of the small business community and is consistent with its investor protection mission.
As I’ve said many times since I returned to the Commission three and a half years ago, my door and telephone lines are always open. Please don't hesitate to visit or pick up the phone if there are any of these issues that you would like to discuss with me.
Thank you for the opportunity to speak with you this morning.
1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the staff.
2 Linda C. Quinn, Director Division of Corporation Finance, “Redefining ‘Public Offering or Distribution’ For Today,” Address to Federal Regulation of Securities Committee Annual Fall Meeting (November 22, 1986), available at http://www.sec.gov/news/speech/1986/112286quinn.pdf.