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Opening Remarks to the Government-Business Forum on Small Business Capital Formation

Chair Mary Jo White

Nov. 19, 2015

Thank you, Keith and Sebastian.

This is our 34th annual Government‑Business Forum on Small Business Capital Formation – the latest in a remarkable series of open and direct discussions that have given the Commission critical insight into the impact of our rules on small businesses and on their efforts to raise capital.  This Forum can be counted on to be another frank and productive conversation, and we welcome all of your perspectives as leaders of the small business community.

The Commission has been quite busy over the last year advancing initiatives aimed at facilitating capital formation for small and emerging companies.  I want to highlight those efforts today, many of which were discussed and the subject of recommendations in past Forums.  I will then step back to provide a few brief observations on what we are seeing so far in the markets already impacted by the regulatory changes of the last few years.

A Changing Regulatory Landscape for Small Businesses

Let me begin with our work in connection with the JOBS Act.  Most recently, Commission finalized rules last month to permit startups and small businesses to raise capital by offering and selling securities through crowdfunding.  There has been keen interest in these much‑anticipated rules, and the Commission and its staff worked very hard to simultaneously meet the statutory requirements of the JOBS Act, make the rules workable for businesses, and protect investors in this new market.  The rules will be effective next May, and we will be closely monitoring how well they work.

In addition, in March, the Commission approved final rules increasing the offering ceiling and modernizing the Regulation A exemption, which we call Regulation A+.  These rules became effective in June, and we have already begun to see a number of offerings using the exemption.  Here too, we will be keenly focused on the operation of the rules, and I hope to see small businesses putting Regulation A+ to good use.

Finally, building on the study on decimalization required by the JOBS Act, the Commission approved a proposal by the national securities exchanges and the Financial Industry Regulatory Authority, submitted in response to a Commission order, for a two-year pilot program that would widen the minimum quoting and trading increments – the tick sizes – for stocks of smaller companies.  To allow market participants to coordinate the complicated changes required to implement the pilot, the likely start date for the pilot was recently adjusted to October 3, 2016.  We are anxious to receive the data produced by the pilot.  

These efforts have marked the end of our major work under the JOBS Act, and we have sought to refocus on using our own discretion to further enhance the ability of small businesses to raise capital.  Most significantly, the Commission recently approved a proposal to modernize our Rule 147 for intrastate offerings and to amend the exemption in Rule 504 of Regulation D to raise the permitted threshold to $5 million.  We look forward to hearing your comments on these proposals and how they might facilitate capital formation by smaller companies.

A Few Observations on the Impact of Recent Regulatory Changes

While it is obviously too soon to assess the impact of these recent actions, the Commission staff has been closely following the effects of regulatory changes where we now have a somewhat longer track record.  One example is the Commission’s implementation of the statutory mandate to change Rule 506 of Regulation D, a safe harbor for private offerings that prohibited general solicitation and advertising to the public.  In 2013, as directed by Congress, the SEC lifted the ban on general solicitation for certain Rule 506 offerings, provided that all purchasers are “accredited investors” and that issuers take reasonable steps to verify that status.  At the same time, the Commission adopted rules to disqualify bad actors from participating in Rule 506 offerings and proposed rules to enhance our ability to collect information on such offerings. 

So what have we seen?  The staff has been following the market and making its results public, most recently last month.  They have observed that issuers are using the new rule to raise capital, but at a significantly lower rate than issuers using the traditional avenue that does not permit general solicitation.  They have also not observed widespread fraud, as some had feared would occur, but we have received tips and complaints and we have some investigations open.  

Another example of regulatory change under the JOBS Act was the creation of “emerging growth companies” and an “on-ramp” for initial public offerings.  Since then, we have observed some 1,000 emerging growth companies take advantage of that process and confidentially submit draft registration statements for IPOs.  EGCs represent about 85% of the IPOs since passage of the JOBS Act.  The staff processes these registration statements the same way they do others, and generally the staff believes that compliance has been on par with non-EGC registration statements.

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With all of these changes, investors and companies alike have new choices for both registered and unregistered offerings, and today’s discussions will focus on the new options.  As we work to implement and monitor these changes – and consider potential new initiatives – we are focused on how we can best maintain investor protection and the integrity of the markets, while also improving the ability of small businesses to access them in order to grow and drive job creation and economic growth.  I would ask that your recommendations today take into account the investor protections that are so fundamental to market confidence and success.

Let me close by thanking all of the panelists, moderators, and participants in today’s program.  I also want to commend the staff of the Division of Corporation Finance for their work in organizing today’s Forum, as well as the Office of the Investor Advocate, our Division of Economic and Risk Analysis and the Division of Trading and Markets for their contributions.  

Thank you again for your time and efforts today.  The staff, my fellow Commissioners, and I highly value and look forward to your input. 

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