New Ways for the Financing of Small and Medium Enterprises and the Challenges of Crowdfunding
Chair Mary Jo White
Opening Remarks for IOSCO Panel 1<br>Lima, Peru
May 11, 2016
Good afternoon. Thank you, Claudia [Cooper]. This panel provides a great opportunity to discuss the SEC’s important work in this space and to share ideas with securities regulators from around the world. When capital markets thrive, businesses prosper, economies grow, and standards of living improve. Discussions such as this one are critical for enabling us to develop our collective knowledge on the most effective ways to facilitate capital formation to further this goal.
In the United States, small businesses play a crucial role in the economy and our capital markets. The SEC has been quite focused in recent years advancing a range of initiatives aimed at facilitating capital formation for small and emerging companies, including by updating and amending our existing rules for smaller offerings and by developing new rules for crowdfunding.
Let me focus briefly first on our new rules for crowdfunding, which will become effective next week. In the United States, crowdfunding has historically been used to fund a variety of projects, usually through donations, with no offer or expectation of a share in the profits from business activities. Individuals who gave money to crowdfunding ventures were just “contributing” to the project — they were rewarded with a “first of its kind” product, a memento, or, in some cases, just the satisfaction that comes from being part of a worthy venture. These individuals generally could not share in any financial returns or profits of the enterprise because it could trigger the application of the U.S. securities laws and the various restrictions and requirements they impose to protect investors and the markets. And, until recently, those laws were not set up to accommodate crowdfunding.
In 2012, a new statute — the “JOBS” Act — created a specific exemption for securities-based crowdfunding transactions that meet certain requirements and directed the SEC to adopt rules to implement those requirements, including a set of specific investor protections. The SEC issued final rules last October, and when the rules go into full effect next Monday, May 16, companies will be able to start raising capital through this new regime. That date has been anxiously awaited by many small entrepreneurs and the advisors who help them.
There is significant interest and excitement in the United States about the use of securities-based crowdfunding, which we hope will give small businesses another tool for raising capital and building vibrant markets. Companies have many options for raising money to fund their businesses, and those seeking capital will ultimately be in the best position to decide whether crowdfunding or another capital-raising option will work best for them.
Importantly, in implementing our statutory crowdfunding mandate, the SEC’s rules seek to maintain strong investor protections, while also streamlining capital formation for smaller issuers. These investor protections include requirements for SEC-registered intermediaries — broker-dealers and new entities called funding portals to serve as gatekeepers to protect investors — as well as offering limits (raising capital by crowdfunding is limited for each issuer to $1 million in a 12-month period) and investment limitations (there are different ceilings depending on an investor’s net worth or annual income and no investor may invest more than $100,000 in the aggregate in all crowdfunding offerings in a 12-month period). There are also specific initial and ongoing disclosure requirements regarding the business and the securities offering and requirements for financial statements, to name a few.
As the market for securities-based crowdfunding begins to develop this year, we will no doubt receive important input from investors and companies about how the requirements could be improved. We look forward to that input and continuing to work to give small businesses access to the capital they need in high-quality markets that have the confidence of investors.
Other Capital-Raising Options
In addition to the new crowdfunding rules, the SEC has recently advanced a range of other initiatives to promote capital-raising by smaller and medium-sized companies.
We have completed all of our other statutory requirements from the JOBS Act to promote capital-raising. In 2013, the SEC created a new exemption that allows companies to engage in general solicitation of the public for certain unregistered securities offerings, provided that all purchasers are “accredited investors” and that issuers take reasonable steps to verify that status. Historically, general solicitation had not been permitted in these types of private offerings.
In 2015, the SEC updated its rules for smaller offerings that allow companies to raise capital through the sale of securities to the general public without incurring the full cost of registration and reporting. This “Regulation A+,” as it is called, allows issuers to raise up to $50 million over a 12-month period. Since effectiveness of Regulation A+ in March 2015, issuers have publicly filed over 85 offering statements, while others have taken advantage of provisions in the rules that allow for non-public staff review of draft offering statements before publicly filing. And the SEC has qualified over 30 offering statements from companies seeking to raise approximately $500 million.
We also implemented statutory enhancements to the registration and reporting process for initial public offerings of common equity securities. These enhancements are known as the “IPO on-ramp.” The JOBS Act provided accommodations for smaller companies that had not yet gone public — “emerging growth companies,” or EGCs, which generally are companies with total annual gross revenue of less than $1 billion. The statute also sets forth conditions for when a company ceases to be an EGC and becomes subject to fuller requirements.
As an EGC, a company can take advantage of registration accommodations and phase into certain disclosure and accounting requirements. For example, EGCs can confidentially submit draft registration statements for their initial public offerings. These confidential submissions are subject to review and comment by SEC staff, as are the filed registration statements. EGCs are also permitted to provide scaled disclosures, such as two years of audited financial statements in a registration statement for its IPO of common equity securities and the same executive compensation disclosure as required of smaller reporting companies.
About 85% of the companies doing IPOs since the statute was enacted have chosen to start as an emerging growth company. Nearly 1,000 emerging growth companies have taken advantage of the ability to confidentially submit draft registration statements for their IPOs.
Through these efforts, investors and companies alike have new choices for both registered and unregistered offerings. As we work to implement and monitor these changes, we are focused on how we can best maintain investor protection and the integrity of the markets, while also improving the ability of smaller businesses to access them in order to grow and drive job creation and economic growth.
Beyond the JOBS Act, we have undertaken additional efforts to further facilitate the ability of smaller companies to raise capital. For example, last October, the SEC proposed to modernize and enhance rules that enable companies to raise capital through local and regional offerings. The internet and other technologies have transformed the way we do business and interact. The proposed rules recognize these developments and would provide our individual states with greater flexibility to facilitate local and regional offerings by issuers, while preserving key investor protections at the state and federal level.
Finally, we have been working to improve capital formation for smaller companies through the SEC staff’s Disclosure Effectiveness Initiative. As part of this initiative, the staff is reviewing the Commission’s key disclosure requirements, and is considering ways to improve the disclosure regime for the benefit of both companies and investors. The goal is to comprehensively review the requirements and make recommendations on how to update them to facilitate timely, material disclosure by companies, as well as shareholders’ access to that information.
As part of this initiative, the staff is considering how our rules can be improved for smaller companies. Just last month, the Commission issued a “concept release” in which we considered and sought comment on aspects of our scaled disclosure system for smaller reporting companies. The scaled disclosure system provides accommodations to smaller reporting companies with regard to certain disclosure requirements, as compared to the requirements applicable to their larger counterparts. We look forward to comments on this concept release to help inform any potential further consideration of changes to the scaled disclosure system.
In addition, the U.S. Congress enacted legislation last year requiring the SEC to further scale or eliminate disclosure requirements for “smaller reporting companies” and other smaller issuers that file with the SEC. The work being done under the staff’s initiative complements the work required of us under this statutory mandate.
As you can tell, the SEC is very engaged in efforts to enhance the regulatory regime for smaller companies and provide new avenues for raising capital. And as we consider rules providing smaller companies with those paths, we are always guided by the lodestar of strong investor protection — for companies to raise capital and thrive, investors must have the utmost confidence in the disclosures of those companies and the integrity of our markets.