Statement at Open Meeting on Reg A+
Commissioner Daniel M. Gallagher
March 25, 2015
Thank you, Chair White. Today I am delighted that the Commission is fulfilling its JOBS Act mandate to revitalize Regulation A, which has, for too long, been an underused way of raising capital, particularly as compared to its better-known cousin, Regulation D. We have an urgent need to ensure that our rules promote capital formation for small businesses, and I hope that public exempt offerings under Regulation A can take their place beside private exempt offerings under Regulation D and registered offerings as viable means of raising capital. Indeed, I’ve not been shy about my view that Title IV of the JOBS Act set the stage for us to do something revolutionary to encourage small business capital formation.
I’d like to thank the Division of Corporation Finance, particularly Keith Higgins, Sebastian Gomez Abero, Zachary Fallon, and Shehzad Niazi; the Division of Economic and Risk Analysis; and the Office of the General Counsel for the hard work and dedication put into getting this rule done.
The SEC’s rules today generally hew closely to the text and spirit of the JOBS Act, and for that they should be applauded. In particular, the rules raise the offering limit under Tier 2 to $50 million, and preempt offers and sales of securities in Tier 2 offerings. According to a GAO report, a low offering limit and the lack of state preemption have been critical reasons for the lack of Regulation A offerings, and today’s rule squarely addresses those two issues. I am also pleased to see some other useful features in the rule, such as a streamlined path for Exchange Act registration of Regulation A securities, and real efforts to scale the Tier 2 periodic reporting regime for smaller-sized issuers, including the novel approach of semiannual reporting. I believe these features balance the need to provide investors with up-to-date, decision-useful information while avoiding unnecessary requirements that would over-burden issuers.
That said, there are a few areas where this rule falls short — where we could have safely done more to facilitate capital formation, but lacked the boldness to take the needed action. With the expectation that we will at some point in the future revisit this rule — perhaps as part of a discrete post-implementation review process that we are required to implement under Executive Order 13579 — I wanted to run through a few of these areas.
First, I am quite disappointed that the offering limit was not raised in the final rule. Congress in the JOBS Act gave us a baseline number, $50 million, but also told us in no uncertain terms that we have the authority to raise the cap, and that we are mandated to consider doing so every two years. I don’t believe $50 million was chosen out of any particular necessity — perhaps it was just 10 times bigger than the old limit, and Congress knew we needed at a minimum an order of magnitude change in our rule. We should not have felt constrained by Congress’s statutory floor, but rather should have done the analysis and picked our own number. Unfortunately, the rule today simply implements Congress’s limit and takes a wait-and-see approach on raising it. I look forward to the biennial study of the threshold, to be done by April 2016 according to today’s release, and hope we can take bold action then.
Second, the rule introduces a needless transactional friction by failing to deem Regulation A’s semiannual reporting to be “reasonably current” for purposes of Rules 15c2-11, 144, and 144A. By not deeming balance sheets with dates up to 9 months to be “reasonably current,” issuers may need to file updated financial statements on a “voluntary” basis on Form 1-U in order to bring current the issuer’s financial information. Without such “voluntary” filing, issuers may spend half the year — two periods of three months each — in blackout periods during which new quotations cannot be initiated, or resales made under Rules 144 and 144A. In the past, the Commission has assumed that quarterly reporting was necessary to meet the “reasonably current” requirement, but in conjunction with adopting semiannual reporting today, it would have been more than appropriate to provide that such reporting meets the reasonably current requirement. Unfortunately, we have not done so, thereby creating a risk that our rules today backdoor a quarterly reporting requirement on issuers, as securityholders or broker-dealers demand that these more frequent filings be made.
Third, we should have allowed reporting issuers to use Regulation A. It’s not entirely clear why issuers already complying with the full periodic reporting regime would have wanted to do a Regulation A offering, but on the other hand Private Investments in Public Equity, or PIPEs, are clearly used from time to time. Perhaps a use for a Regulation A offering, or what I will call a half-PIPE, would have developed too — at which time we could have assessed that use and determined whether additional restrictions were necessary. But it never will now, because we couldn’t see our way to giving issuers the flexibility. This is too bad.
While we’re on the topic of scoping, I do want to note that, while I agreed with the decision not to extend Regulation A to Business Development Companies, I do think we should consider whether improvements to Regulation E for BDCs would be useful.
Fourth, I think we should have provided a clean 12(g) exemption, without the age-out provision included in the final rule. Exchange Act Section 12(g) was intended to ensure that companies with broad enough public shareholder bases would be required to provide periodic information to investors. Critically, our Tier 2 reporting regime already largely accomplishes that goal. And simple economics dictates that at some point, even a robust Regulation A regime is going to be insufficient for a larger company, which will instead need to do a registered offering, and can enter the full periodic reporting regime at that point.
All this being said, however, we shouldn’t let the perfect be the enemy of the good, and let me be clear, this is a good rule that we are adopting today.
But, as good as the rule may be, it should not be the end of the Commission’s capital formation agenda. The development of venture exchanges for small cap shares, including Regulation A issuances, would greatly enhance liquidity in these shares, thereby facilitating greater demand and higher prices for the initial issuances of these securities. I am very glad to see that today’s rule commits to the continued exploration of venture exchanges, including for Regulation A shares. Congress appears to be thinking about this issue as well — which is all the more reason why we should move forward expeditiously. We shouldn’t tempt Congress to force us to promote capital formation when we can do it ourselves, organically. With venture exchanges, we may need Congress’s help with certain statutory provisions, but we should be proactively conveying that to Congress rather than passively waiting for Congress to ask us.
Finally, I believe that the amendments we are adopting today don’t go far enough to help issuers that are trying to raise under $5 million. Issuers that want to raise more can do so, and the greater offering proceeds will help offset the offering costs, but companies that are only looking to raise the smaller amount aren’t helped by our action. The entity doing the most for these companies is NASAA. If they can make the coordinated review program for state blue sky laws a success — that is, if they can get the remaining states to sign on, and then to stick closely together rather going their separate ways — it will be a significant achievement. I encourage continued SEC cooperation with NASAA on Tier 1 offerings, and will be watching closely to see how the coordinated review program operates in practice. Moreover, we at the SEC should be continuing to look for other ways to help companies that are looking to raise very small amounts of capital. If there are other ways to structure our exemptions so as to provide sufficient protections to investors without being cost-prohibitive for companies, we should do so.
But those are topics for another day (although hopefully another day in the very near future). We have to start somewhere, and today’s rule is a very good place to start. I am happy to support it, and I have no questions.
 Entry into the full Section 13 reporting regime obviously carries with it several significant, new burdens. And the Commission seems to want to add more burdens every day, even on small companies. Even if these burdens seem to be individually minor, their effect in the aggregate is significant. See, e.g., Rel. No. 33-9723, Disclosure of Hedging by Employees, Officers and Directors (Feb. 9, 2015); see also Commissioners Daniel M. Gallagher & Michael S. Piwowar, Joint Public Statement, Joint Statement on the Commission’s Proposed Rule on Hedging Disclosures (Feb. 9, 2015). This proliferation of regulations (see, e.g., Commissioner Daniel M. Gallagher, Public Statement, Statement on the Aggregate Impact of Financial Services Regulations (Mar. 2, 2015), available at http://www.sec.gov/news/statement/aggregate-impact-of-financial-services-regulation.html) creates disincentives for companies to raise capital in the public markets and grow.