"Small Business Makes a Large Contribution" Remarks by Arthur Levitt, Chairman U.S. Securities and Exchange Commission Small Business Town Meeting Richmond, Virginia April 21, 1997 U.S. SECURITIES AND EXCHANGE COMMISSION 450 Fifth Street, N.W. Washington, D.C. 20549 Good afternoon. It's a special pleasure to be here today with Congressman Tom Bliley, Chairman of the House Commerce Committee; Small Business Administrator Aida Alvarez; and Director of the Virginia State Corporation Commission's Division of Securities Ronald Thomas. We're here today because we care deeply about small business and we want to make sure we are doing everything we can to make government more responsive to your needs. Like everyone in this room, I've had some experience with small business. In the course of my life, I worked for a community newspaper, helped establish a cattle company, started two weekly newspapers, and founded a small brokerage firm that became a large one. I've savored success and experienced failure. I've been sued by overzealous lawyers, and plagued by irrational government regulations. I've sweated through many payrolls, and worked many long nights. I've also engaged in the desperate search for capital. I know the fear of having to mortgage your future, and your family's future, to keep your business afloat and not give up on your dream. I know the risks -- and fortunately, I also know the rewards. Today, as Chairman of the Securities and Exchange Commission, I STILL preach the gospel of small business to anyone who will listen. According to an article not long ago in Inc., "Most of the 20 million new jobs created during the past 15 years came not from established giants, . . . [but] from the `independent entrepreneurial sector.'" That is one of the most important statistics I've ever heard. You can see why I believe so deeply in the role of the entrepreneur in America -- and why I was proud to organize and Chair the first White House Conference on Small Business in 1980. We wanted to bring legions of entrepreneurs to the seat of government. Our goal was NOT to impress small business with the power of Washington -- it was to impress Washington with the power of SMALL BUSINESS. And judging by the parade of top officials who attended our conference, they WERE impressed. I'm not a top official -- in fact, compared to most federal agencies, the SEC almost qualifies as a small business. But despite our relatively small size, we've been working very hard to try to understand and meet your needs. Let me give you an idea how we do this. Capital Formation Small businesses need to raise capital, but as you know, the capital formation process can be long and arduous. Most small businesses are initially capitalized through the owner's personal savings or loans. The SEC does not become involved at this stage. The next step in the search for capital is generally in the form of loans and investments from friends, relatives, and others. The securities laws allow companies to raise up to $1 million this way with NO federal regulation at all, beyond the obvious rule that you can't defraud people. Many small businesses move on to use banks, savings institutions, and other financial companies to satisfy the need for capital. If they sell stock, they generally begin with venture capitalists, small business investment companies, and a group of people known as "angels," probably because of the way they can come to the rescue. If a company sticks to selling stock in a non-public manner to sophisticated investors such as these, it may raise more that $1 million without SEC registration. This is known as a "private placement." After this, it's not uncommon for a company to graduate to selling securities to the public. If a company wants to sell more than $1 million in stock, the SEC becomes involved. If the amount is less than $5 million, we have a special small business provision call Regulation A that allows you to "test the waters" -- that is, to solicit interest in your stock offering before going through the time and expense of filing with the SEC. If the interest is sufficient, a company need only file a streamlined information document with the SEC, in Question & Answer format, without need for audited financial statements. This document, or offering circular, is reviewed by the SEC staff for completeness. Beyond Regulation A, the SEC has special rules and forms that permit small businesses to raise more than $5 million in a relatively streamlined way. If all goes well at this stage, too, the small business will likely graduate into a bigger business, which is then subject to the normal SEC rules for selling securities to the public. As I noted earlier, we are constantly striving to understand and meet needs of small business. The 1980 White House Conference directed the SEC to host an annual forum on capital formation specifically for small business. It is a place where small businesses can voice their concerns, especially about government regulations that might be having an unintended, or inhibiting effect on small entrepreneurs. It is a place where IDEAS can be raised, about how capital can be raised. Our SEC Forums try to reduce costs for you, through cooperation among small business, federal and state agencies, and regulatory bodies to achieve less burdensome regulation. The Small Business Administration has been an important participant in these forums. These meetings have been held in Seattle, Atlanta, Phoenix, and Providence, Rhode Island, as well as in Washington, D.C. This coming September it will be held in San Francisco and next year in Chicago. Over the past 16 years, participants in our forums have offered many ideas for improving our regulatory scheme. These recommendations consistently reflect timely, real-life experiences; but no matter how good they are, they amount to little unless the government acts in response. I'm happy to be able to tell you that many recommendations HAVE led to SEC action. Let me give a few examples: * As a result of a forum recommendation, we now exempt the employee compensation arrangements of small companies from registration with the SEC; * Small businesses can now raise up to five million dollars in a year through exempt public sales of securities using unaudited financial statements -- this reduces the costs of filing substantially; * We have worked to facilitate the growth of company bulletin board-based stock trading mechanisms, which help small companies provide a more liquid market for shareholders; and we helped facilitate the Small Business Administration's Angel Capital Electronic Network. I expect Administrator Alvarez will discuss this at greater length. In addition to these forums, we're also undertaking a series of town meetings -- of which this is the eighth -- to make sure smaller businesses throughout the country are aware of the many special opportunities that exist for them to raise capital. After learning more about your concerns and problems in raising capital in the securities markets, we attempt to design programs that will meet your needs, while protecting investors. As Director Thomas, knows we've been working with the states to make it easier to raise capital. The state of California, for example, made offerings of securities to sophisticated California residents exempt from state registration requirements. But there was no parallel federal exemption, so not long ago, we created one. We'll gladly consider similar exemptions for other states. As many of you know, the Commission also raised the threshold, from $5 million to $10 million in assets, before a company becomes "public", or, in other words, is required to report to us regularly under the federal securities laws. These exemptions make sense. But sometimes it's not enough to exempt people from rules -- sometimes you have to CHANGE the rules themselves. We haven't been shy about doing that, either. In February, the SEC adopted new rules that I believe will reduce the cost of private capital formation and especially benefit small businesses. When securities are sold in private placements, the purchaser must hold them for a period of time before selling them in the public markets. Before, if you sold stock privately, the purchaser had to hold the stock for 2 years; now it is only 1 year. Also in February the SEC proposed amendments to permit certain smaller or less seasoned reporting companies to price securities on a delayed basis after being reviewed by the SEC in advance, if they meet specified conditions. The proposals are intended to provide flexibility and efficiency to qualified registrants, enabling them to time their offerings to advantageous market conditions. Simplification Apart from re-examining our regulatory requirements to find ways we can improve things for the thousands of companies that go to market each year, we are also looking to make other changes administratively: * we have created a new headquarters unit that specializes in small company filings and the needs of small businesses; * we have appointed a special Small Business Ombudsman, Bill Toomey, to answer your questions and act as your advocate at SEC headquarters; * we've put a special package of SEC information for small businesses on-line at our World Wide Web site. I encourage you to visit our site -- www.sec.gov. In addition to the small business information, it contains investor alerts, litigation releases, and access to our huge EDGAR database of corporate information, which is an incredible research tool for businesses of every size. It will also include our new pamphlet -- "Q&A: Small Business and the SEC" -- a plain English guide to help you understand the federal securities laws. A copy of the pamphlet is in the materials we've given you today. The Commission has also established a special electronic mailbox on our Web site. We're hoping that you'll use it to send us your best ideas about electronic prospectuses and other ways to take advantage of new technology. * * * I've discussed many things this afternoon -- perhaps too many. I hope I've given you a sense of how the SEC is working to meet your needs today. This is a Commission that believes in entrepreneurs and in the miracles they can and do perform. When people focus too narrowly on the Fortune 500, I tell them there's another group that's just as important -- the "Small Business 21.5 Million." When people try to gauge the health of the American economy, I tell them to look not only at the Dow-Jones Industrial Average, but also at the earnings of American sole proprietors and partners -- which have grown dramatically over the past several years. And when a corporate CEO starts to get too self-important, I remind him that during the last recession, it was not the CAPTAINS of industry, but the FOOTSOLDIERS, who generated more than 2 million new jobs -- large firms LOST about 4 million. I believe in big business. I know how important it is to the future of our nation. But I also know that the American economy is the strongest in the world because it stands on TWO legs, not one. I thank you for your contribution, and look forward to CONTINUING to work with you to find ways to lower the cost of capital for you, the entrepreneurs on whom so much of our nation's economic future depends. # # #