Remarks at the 2011 SEC Government-Business Forum on Small Business Capital Formation
Commissioner Troy A. Paredes
U.S. Securities & Exchange Commission
November 17, 2011
Thank you for the kind introduction. It is no surprise that this year’s Forum on Small Business Capital Formation has carried on the tradition of earlier Forums in bringing together a terrific group of participants to discuss how we can best promote small business.
A great deal of gratitude is owed to all of those at the SEC – especially, Gerald Laporte – for their efforts in organizing this important event. I also want to thank our distinguished panelists.
I am pleased to have this chance to share with you some of my own thoughts on small business. The underpinning of my remarks this afternoon is this: Ensuring that small and emerging businesses can access the capital they need to start and grow is essential to spurring economic growth and to maintaining and furthering our country’s competitive edge in an increasingly global marketplace.1
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Why does small business matter so much? For me, four answers jump to mind most readily.
First, startups and maturing businesses create new jobs and opportunities for people.
Second, small business drives new innovations and technologies that lead us to work more productively; that enable us to transact more efficiently; that allow us to relieve and remedy illness and hardship; that permit us to communicate and network better with each other; and that empower us by making us more informed.
Third, in providing our economy with cutting-edge goods and services, new and smaller companies are a vital source of competitive pressure that disciplines larger enterprises to run themselves more successfully.
Fourth, small and emerging companies provide opportunities for investors to earn higher returns and to accumulate wealth – core investor goals – by expanding the investment options investors enjoy. Investors primarily invest so that they can earn income and build wealth. This means that investors need opportunities to invest, and that investors are better served when offered more choices. Small business capital formation not only allows small businesses to start and grow, but it also affords investors an expanded mix of choices for putting their money to work. In other words, promoting small business is part and parcel of fulfilling the desire of investors to commit their financial resources to valuable investment opportunities.
In sum, small business matters so much because if fuels economic growth and improves our standard of living. As I like to put it, companies that today are household names can trace their origins to entrepreneurs and innovators of earlier periods who had the wherewithal and backing to start and grow a business.
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For a new company to emerge and a small firm to take off, more is needed than an entrepreneur’s ingenuity, hard work, and determination. Small business also needs capital.
Raising capital, however, can be costly in terms of out-of-pocket expenses and time and effort. Financial and other regulatory burdens can be particularly challenging for smaller companies. Indeed, by making it disproportionately costly for small business to raise capital, regulatory burdens can create barriers to entry and expansion. This is problematic. For when businesses struggle to get off the ground or grow because they cannot secure funding at a reasonable cost, the economy is deprived of their full participation in the marketplace. In other words, we all lose out when the conditions do not exist for small business to thrive.
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So, what does this mean for the SEC? In my view, it means that we need to consider opportunities to alleviate regulatory demands and burdens that stifle the funding and growth of small business. It means that the Commission should press forward on refining the regulatory regime to allow issuers more flexibility to raise capital privately, and that we need to consider regulatory changes that address the risk that the regulatory regime itself unduly dissuades companies from going public and listing on U.S. exchanges.
Given this, I am pleased by the recent discussions and activity that have centered on such worthwhile ideas as:
- modernizing the prohibition on general solicitations under Regulation D so that businesses can raise funds more efficiently and at lower cost;
- increasing the shareholder threshold at which a private company is forced to report publicly;
- facilitating the use of Regulation A for offering securities;
- facilitating “crowdfunding” as a means for small business to raise capital more easily from individuals;
- allowing smaller companies more flexibility when communicating during a public offering; and
- easing the regulatory burden of being a public company so that going public becomes a more attractive option for smaller companies.
In particular, I am encouraged that several bills in Congress are headed in the direction of promoting capital formation. And I am pleased that the President has expressed his intent to “cut away the red tape that prevents too many rapidly growing startup companies from raising capital and going public.”
Also of note is that, in recent weeks, a group called the IPO Task Force presented a number of detailed recommendations to the Treasury Department in a report entitled, “Rebuilding the IPO On-Ramp: Putting Emerging Companies and the Job Market Back on the Road to Growth.” These thoughtful recommendations deserve careful consideration.
Still more ideas are sure to be offered. For example, I look forward to continuing to engage with the Division of Corporation Finance throughout its ongoing capital formation regulatory review and to considering input from the new SEC Advisory Committee on Small and Emerging Companies. And, of course, the recommendations that grow out of this 2011 Forum will warrant attention.
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As I suggested, I very much welcome the current focus on small business capital formation. But much more needs to be done. We need action. We cannot just talk about small business capital formation; we need to take concrete steps to facilitate it. This includes turning the kinds of regulatory developments that are being considered into actual regulatory change that makes a tangible difference for small business. The Commission itself needs to advance reforms that will open up for small business more efficient, lower-cost pathways to capital. After all, facilitating capital formation is fundamental to the SEC’s mission.
1 The views I express here today are my own and do not necessarily reflect those of the Securities and Exchange Commission or my fellow Commissioners.