Federal Securities Laws: Closed-Book or Open-Book Exam? - Remarks at SEC Speaks 2022

Good morning. It is so nice to be back in person at SEC Speaks – a welcome change. One thing has not changed, though, and that is the number of times you probably heard, and will continue to hear, that the views expressed are the speakers’ own and do not necessarily reflect those of the Commission, the Commissioners, or other members of the staff, which equally applies to my remarks.[1]

Thank you, Martha Miller!

Speaking of change, I want to take a moment to recognize Martha Legg Miller. Martha was the inaugural Director of the Office of the Advocate for Small Business Capital Formation, and she recently departed the SEC. The SEC could not have dreamed of a better Director to launch a new office with a mandate of advocating for small businesses and their investors. Martha brought wisdom, vision, and creativity, all of which defined the work of the office. She recognized that our small but mighty team needed to proactively engage with and solicit feedback from small companies and their investors who would not otherwise have the time to visit the SEC at 100 F Street NE. Her legacy is extensive and wide ranging - from our novel and interactive educational resources that breakdown the securities laws and empower entrepreneurs and their investors, to behind-the-scenes advocacy for policy changes that gave a voice to entrepreneurs and investors alike within the Commission. Thank you, Martha, for your public service.

The JOBS Act Changed the Playbook for Raising Capital

For my remarks today, I will stay with the theme of change. Earlier this year marked the 10^th anniversary of the JOBS Act. Signed into law in April 2012 by President Obama, the JOBS Act significantly changed the playbook for raising capital. Whether you are just getting started on your capital raising journey, or are a seasoned company looking to go public through an IPO, the JOBS Act had an impact on you.

Before the JOBS Act, the likely options for an entrepreneur looking to raise equity capital were a “private offering” in reliance on Rule 506 of Regulation D or Section 4(a)(2) (formerly known as 4(2)). Companies considering an IPO had to consider what would happen if their “IPO window” closed after they had publicly filed their registration statement on EDGAR.

Much has changed now. Entrepreneurs today benefit from expanded and updated exemptions from registration to serve their capital raising needs. In addition to options existing before the JOBS Act, entrepreneurs today can generally solicit potential investors under Rule 506(c) of Regulation D, conduct a Regulation Crowdfunding offering, or rely on expanded versions of Regulation A, intrastate offerings, or limited offerings under Rule 504 of Regulation D.[2] And when those companies grow and are ready for an IPO, they may be able to test the waters, confidentially file their registration statements, and benefit from scaled disclosure obligations as Emerging Growth Companies, all of which makes the process for going public and staying public less daunting and more attractive.[3]

Making Capital Raising an Open-Book Exam

The new and expanded capital raising pathways are a welcome addition for entrepreneurs and investors looking to support the next generation of job creators.[4] Our Small Business Advocacy team hears this loud and clear during outreach events, including the many outreach events we do with women and minority-owned small businesses.[5] We also hear that the new pathways brought increased complexity to the capital raising process.

This is probably not surprising to you. If you graduated from law school anytime in the last five years and took a Securities Regulation class, more likely than not you had a fact pattern in your final exam asking you to evaluate which capital raising pathway would be best. If you regularly advise startups on capital raising, your client likely asked you a similar question. Luckily for you, the capital raising rules are like an open-book exam. In collaboration with the Division of Corporation Finance, the Small Business Advocacy Team has consolidated all of the SEC’s capital raising and small business resources in one place.[6] Our Capital Raising Hub now contains all the information that you, as a practitioner, are accustomed to finding on the SEC website, including information about the different exemptions from registration, the SEC review process for going public, and small business compliance guides summarizing rulemakings that impact small businesses.

However, for most entrepreneurs determining which pathway to use for capital raising, the process feels like a closed-book exam question. The complexity of the rules is daunting even to the brightest of entrepreneurs. In response, the Small Business Advocacy Team has stepped up our efforts to demystify capital raising for entrepreneurs and their investors, and we are working with outreach partners to spread the message:

• we built an interactive tool – the “Navigator” – that asks users seven simple questions to help identify which capital raising pathway may work best for that entrepreneur’s circumstances,[7]
• we have a suite of one-pagers that we call “Building Blocks” that break down discrete topics that come up often in small business capital raising, like who is an accredited investor, what is general solicitation, or basics on the regulatory landscape for private funds,[8] and
• we have a “Cutting through the Jargon” glossary to explain in plain language some of the commonly used terms and technical concepts in our Federal securities laws.[9]

How Can You Help?

Our work is not done. And we could really use your help.

First, it would be great if you could take a look at the resources and reach out to us if you have suggestions for improvements or other areas we should cover. Is there a term that you have noticed your startup clients struggle with? Let us know and we will consider adding it to our glossary. Is there a regulatory topic that is hard to explain? It may be a good candidate for a future Building Block.

Second, help us spread the word about these resources. Share them with clients or pro bono partners who could use a Securities Law 101 resource. Pass them along to accelerators, incubators, or other organizations who could share them with their members.

Before my time is over, I would like to leave you with a short video that we developed to promote the new Capital Raising Hub and the educational resources there. It should give you a good sense of what we have available.

Thank you for your time today and thank you in advance for your help improving and sharing our resources.