Speech by SEC Commissioner:
Small Business: The Lifeblood of
Our Nation's Economy
Commissioner Norman S. Johnson
U.S. Securities & Exchange Commission
18th Annual Government-Business Forum on Small Business Capital Formation
September 13, 1999
Good morning. It is an honor and a privilege to have the opportunity to speak to you today. Let me start by giving the standard disclaimer: my remarks are entirely my own and do not necessarily reflect the view of the Commission, other Commissioners, or the Commission's staff.
As some of you may already know, I have a long-standing interest in the development and encouragement of small businesses. In the last year or so, I participated in two of the Commission's Small Business Town Hall Meetings, one in Las Vegas and one in Salt Lake City. And my interest in the challenges facing small businesses predates my arrival at the Commission. In thirty years of law practice, I represented many smaller entities and start-up businesses. As a result, I am well acquainted with the difficulties involved in raising capital and trying to grow a small concern. It is no exaggeration to say "I feel your pain."
Although our current economy presents challenges to small businesses, it presents tremendous opportunities as well. Today's markets are strong and growing. Almost one in three American households today invests its savings and retirement assets in the U.S. securities markets, either directly or through mutual funds. At the same time, technological advances are changing the face of the marketplace itself. Companies and investors are increasingly using electronic communications media most notably, the internet to raise capital, trade securities, and obtain market information and advice.
The dramatic growth of the U.S. securities markets, coupled with the advent of the internet and other electronic media, presents new opportunities for businesses and investors and new challenges for regulators . . . and for you. Together we need to determine
I think this forum, now in its 18th year, can go a long way in helping us achieve these worthy goals. The forum, along with the town hall meetings I mentioned earlier, provides a way for us at the Commission to meet with one of our core constituencies, and, even more importantly, gives you a way to communicate your concerns to us. Our goal in holding these meetings is to bring entrepreneurs together with government regulators. Over the years, participants in the forums and the town hall meetings have offered many ideas for improving our regulations and eliminating unnecessary obstacles to capital formation. These recommendations consistently reflect timely, real-life experiences, and we thank you for them. But no matter how good your suggestions, they matter little unless we act in response. The Commission may not always seem as responsive as you might like, but try us and I do think that we may surprise you.
- how to keep our system of securities regulation up to date, particularly as it affects small business
- how to increase the availability of capital, and reduce its cost, to small business
- how to promote capital growth for small businesses without adversely affecting the investor confidence that plays so crucial a role in the success of our markets
For example, in February of 1998, the Commission proposed to amend Rule 15c2-11, as part of its efforts to address "microcap fraud." Rule 15c2-11 requires market makers for Bulletin Board and Pink Sheet stocks to review basic issuer information before publishing quotations for that issuer's securities. The rule contains a "piggyback" provision that allows all market makers to publish quotations for a security without reviewing any information once one market maker has published quotations for the security for at least 30 days. Under the original proposal, the amendment would have eliminated the piggyback provision and expanded the information that broker-dealers must review for certain issuers who do not file periodic reports with the Commission. As I am sure you all know, the original proposal caused a great deal of controversy. The comment letters we received opposed the amendment overwhelmingly, focussing on the effect the amendment would likely have on the liquidity of the over-the-counter market and the ability of small businesses and start-ups to raise capital.
The Commission responded to these concerns by reproposing the Rule 15c2-11 amendment in February of this year. In some ways, the reproposal narrowed the original amendment to address more directly perceived abuses in the microcap market. Primarily, the reproposal excluded securities meeting certain requirements relating to daily trading volume, bid price, and net tangible assets of the issuer. I recognize that, even after the changes, the reproposed amendment remains controversial. The Commission received almost 400 letters commenting on the reproposal, most of them critical. In addition, many of you took the time to share with me personally your concerns that the costs of the amendment would greatly outweigh its benefits.
I have responded to your concerns. Although I originally supported the amendment to Rule 15c2-11 with some hesitancy, my misgivings have grown and crystallized over the past several months. I have no quarrel with the efforts of our staff they performed their work admirably on both the initial proposal and reproposal. Nevertheless, I am not convinced that market makers should bear the burden of reviewing and confirming issuer information to the extent required under the reproposal. The amendment to Rule 15c2-11 is likely to reduce transparency and liquidity for the securities of non-reporting issuers.
Combatting fraud whether it involves microcap or large cap securities is the Commission's overarching mission. But it is certainly possible to "throw out the baby with the bath water." We cannot allow the existence of fraud to serve as a justification for measures that might effectively preclude many deserving smaller companies from accessing capital markets. As a result of these concerns, I have preliminarily decided not to support the proposal to amend Rule 15c2-11 in its current form. While it is unclear at this time what the Commission as a whole might decide, you should be encouraged that Commission Unger some months ago also expressed strong doubts about the advisability of the reproposal. The Commission's staff is considering how to proceed with the reproposal. They have told me that they are evaluating a variety of approaches.
Just as your opposition to the proposed amendment to Rule 15c2-11 has caused me to rethink my earlier views, I think that there is a critical and continuing role for you to play. The concerns that led the Commission to propose amending Rule 15c2-11 have not disappeared. Fraud and manipulation involving small companies, particularly in those promoted over the internet, remain a major problem for the Commission and for investors. This forum provides an excellent opportunity for you to suggest constructive alternatives to address these problems. I note that the agenda includes sessions devoted to the internet and secondary markets for small businesses. For example, this morning's panel moderated by Charles Bennett is right on point. Jamie Brigagliano from the Commission's Division of Market Regulation will participate in what will surely be a lively discussion of Rule 15c2-11 and other important market issues for small businesses. Also, rest assured that Brian Lane and Richard Wulff, Chief of the Small Business Office, will pass along your thoughts so that I and other members of the Commission may have the benefit of your insights.
In sum, the Commission and small businesses share an interest in streamlining the capital formation process. At the same time, we must remain vigilant in protecting investors. Over the years, the participants at these forums have been sensitive to both of these concerns, and I am confident that you will continue this tradition. We at the Commission continue our commitment to promoting the interests of small businesses. I ask you to continue your commitment to us. Your help has been invaluable. Together, let us strengthen our focus on ways to reduce unnecessary impediments to capital formation for small businesses, while at the same time ensuring that investors receive adequate protection.
I look forward to working with you to find ways to increase the availability and lower the cost of capital to small businesses. Small business is truly the lifeblood of this nation's economy. At times you may feel that the Commission is unresponsive to your concerns, but I can assure you that your views always receive due consideration. I look forward to listening to and learning from you in the future, as I have in the past.