Remarks at SEC Small Business Capital Formation Advisory Committee Meeting

Thank you, Carla [Garrett], the rest of the Committee, and to today’s guest speakers for sharing your thoughts on the potential effects of the Commission’s proposed rules relating to climate change-related disclosures and SPACs on small businesses.  Welcome to the Committee, Donnel [Baird].  I look forward to your contributions in the months to come.  

Today’s dialogue represents an important part of the rulemaking process given the consequential nature of these proposals for small businesses.  The climate change proposal would vastly expand the disclosure requirements and compliance burdens for all public companies.  When we proposed the rules, I laid out my general concerns, but will not reiterate them here.[1]  Small companies are likely to face unique challenges in complying with the proposal, and I hope to hear today what some of those challenges might be.  Smaller reporting companies would be exempt from the Scope 3 disclosure requirement and would have a longer transition period for compliance than other public companies.  Is this limited relief sufficient?  To justify not exempting small public companies from the rules, the Commission explained that “climate-related risks may pose a significant risk to the operations and financial condition of domestic and foreign issuers, both large and small.”[2]  Do you agree that climate-related risks are material for all small public companies?  If so, do the proposed benefits of the rule justify the costs associated with compliance?  Should the Commission exempt smaller reporting companies from some or all of the proposed climate-related disclosure requirements?  Should the Commission exempt emerging growth companies from some or all of the proposed requirements?[3]  The release was dismissive of the notion that the costs associated with the proposed rules could deter a private company from going public.[4]  Was the Commission correct, or might these new requirements be a material consideration for companies considering going public?

The proposal’s effects will extend to small private companies.  To calculate their Scope 3 emissions, public companies inevitably will demand that private company suppliers supply them with climate data.  Public companies may do more than demand data.  The Commission bluntly stated “[a]lthough a registrant may not own or control the operational activities in its value chain that produce Scope 3 emissions, it nevertheless may influence those activities, for example, by working with its suppliers and downstream distributors to take steps to reduce those entities’ Scopes 1 and 2 emissions (and thus help reduce the registrant’s Scope 3 emissions) and any attendant risks.”[5]  What will the costs be for small private companies to reduce their emissions to improve the public image of their public company counterparties at the behest of the Commission?

The SPAC proposal would require significant changes to the operations, economics, and timeline of SPACs.  I have spoken at length about SPACs and the proposal elsewhere,[6] but again would like to highlight a few questions.  Does the proposal diminish the desirability of SPACs as a vehicle by which small businesses can become public companies?  What is attractive about SPACs to small businesses seeking to enter the public markets, and what about the traditional initial public offering process is uninviting to these companies?  As you consider the proposal, be mindful of the fact that it addresses more than just SPACs; for example, it would deem any business combination transaction involving a reporting shell company and another entity that is not a shell company to constitute a sale of securities.  How will this change affect the ability of reporting shell companies to enter into business combinations with operating companies?  Are there unintended consequences for shell companies and their investors?[7] 

Insights from the committee members, guest speakers, and any subsequent recommendations offered by the committee will be valuable inputs for the Commission to consider as part of the rulemaking process.  Thank you to this committee and its guest panelists for engaging in a thoughtful dialogue on these issues today.  I look forward to learning your views on these subjects.