SEC Government -Business Forum on Small Business Capital Formation

Key Topics & Takeaways

  • Definition of Accredited Investor
    • Chair White stated the SEC will consider the impact that suggested changes to the definition would have on investors
    • Commissioner Aguilar said the SEC IAC provided recommendations on ways to amend the definition of accredited investor to limit and expand the pool of investors
    • Commissioner Gallagher stated he was “yet to be persuaded” that a change to the definition was an issue the SEC should take on
    • Commissioner Stein mentioned that the definition will be a continuing dialogue at the SEC  
  • Tick Size Pilot: Commissioner Aguilar noted the 12 month tick size program received significant criticism

SEC Participants


Panel I:

  • Stanley Keller, Partner, Edwards Wildman Palmer LLP, Boston, Massachusetts
  • Stephen Luparello, Director, SEC Division of Trading and Markets
  • Vladimir Ivanov, Financial Economist, SEC Division of Economic and Risk Analysis
  • Michael L. Zuppone, Partner, Paul Hastings, New York, New York
  • R. Cromwell Coulson, President and CEO of OTC Markets Group, Inc.
  • Robert Malin, Vice President of Sales, NASDAQ Private Market
  • A. Heath Abshure, Arkansas Securities Commissioner, Little Rock, Arkansas

Panel II:

  • Keith F. Higgins, Director, SEC Division of Corporation Finance
  • Stanley Keller, Partner, Edwards Wildman Palmer LLP, Boston, Massachusetts
  • Rachita Gullapalli, Financial Economist, SEC Division of Economic and Risk Analysis
  • Prof. Donald C. Langevoort, Georgetown University Law Center, Washington, D.C.
  • Jean Peters, Board Member, Angel Capital Association, Managing Director, Golden Seeds Fund LP
  • A. Heath Abshure, Arkansas Securities Commissioner, Little Rock, Arkansas

Opening Statements

Chair White

Mary Jo White, Chair of the Securities and Exchange Commission (SEC), opened the forum by commenting that small businesses play a “crucial role” in the creation of the country’s economy and jobs.  She continued that liquidity challenges must be considered in terms of their impact on investors and the ability of small business issuers to access capital markets in the first place. 

The SEC is currently conducting a review of the accredited investor definition, she said, and is soliciting input from the public and other parties.  White stated that the SEC will consider the impact that suggested changes to the definition would have on investors, because investor confidence is an important guide to consider as recommendations are tested.  She concluded that more capital formation “makes our markets the envy of the world.

Commissioner Aguilar

Commissioner Luis A. Aguilar explained that there is “no doubt” that small businesses are the “engine that drive the U.S. economy,” and their success is essential to sustain U.S. economic growth.  He noted that with the Jumpstart Our Business Startups (JOBS) Act, the SEC focused on rulemakings to facilitate the ability of small businesses to access capital markets.  Aguilar continued that a successful investment environment requires a system that works well for both issuers and investors, and the challenge is to develop a process that raises capital in a cost effective way and provides benefits investors and the market itself. 

Congress and the SEC, he said, have sought to protect investors through: limiting general solicitation and public offering to accredited investors, imposing limits on capital under Regulation A and crowdfunding exemptions, and imposing individual aggregate investment limits in crowdfunding transactions.  Aguilar explained that under Dodd-Frank, the SEC is required to review the definition of accredited investor to determine if it should be modified in order to protect investors and the economy. He noted that the SEC’s Investor Advisory Committee (IAC) provided the Commission with recommendations on ways to amend the accredited investor definition to both limit and expand the pool of accredited investors. 

He continued that the IAC is concerned the definition may assume too much, as it contemplates investors who are “supposedly financially sophisticated,” but noted that financial benchmarks do not necessarily correlate with a person’s investment sophistication. 

He concluded by mentioning the SEC considered a 12 month tick size program for small cap stocks, and that the pilot program has received significant criticism and the comment period is still open. 

Commissioner Gallagher

Commissioner Daniel M. Gallagher stated that a robust capital market ecosystem for small businesses requires continued innovation and secondary trading in the private marketplace.  If additional guidance from the SEC would help the market develop further, he said, the SEC should “do it now.”  Gallagher continued that companies currently trading over-the-counter (OTC) may be willing to “up their game if the hurdle wasn’t so insurmountable.” 

He noted that he has yet to be persuaded that a change to the definition of accredited investor is an issue the SEC should be taking on, as the Dodd-Frank removal of the value of primary residence for the purpose of net worth test was a significant change to the definition.  Gallagher concluded that the SEC should instead be focusing time on facilitating capital formation.

Commissioner Stein

Commissioner Kara M. Stein explained that “now more than ever” America needs rules that will improve markets and give investors confidence to invest.  She continued that there are inconsistent options for public and private capital formation, which inhibits efficient capital formation and exposes investors to risks.  Stein stated there are risks when dealing with small issuers and retail OTC markets, and that she wants to see the SEC move quickly toward finalizing crowdfunding and protections under Rule 506.

Commissioner Piwowar

Commissioner Michael S. Piwowar stated that small businesses foster innovation and offer opportunities for millions of Americans, as well as being crucial to increasing prosperity and creating jobs.  He noted that without adequate access to capital, small businesses “may not get out of the starting gate.”

PanelI: Secondary Market Liquidity for Securities of Small Businesses

Stanley Keller started the panel by discussing the importance of secondary market liquidity, stating it was “critical” for the promotion of capital formation.  He continued that liquidity also permits the redeployment of capital, provides benefits for employees, and serves as a safety valve to give companies more control over their future and time to grow.

The fundamental principles of the Securities Act, he said, are that all offerings must be registered or exempt, and that the key factors in applying the exemption are: the differentiation that is made before primary offerings and secondary sales; the differences between both affiliate and non-affiliate sales; and restricted and unrestricted securities.

Keller continued that that there has been an emergence of secondary market trading platforms, but questions their status, as some were registered broker dealers (BDs) and alternative trading systems.  A regulatory challenge to such platforms, he continued, is the level of transparency in a marketplace that may not be a regulated.

Vladimir Ivanov stated that the Reg D market is large and that 99 percent of Reg D offerings raise money under Rule 506.  He continued that Rule 506(c) amounts that have actually been raised are very small compared to those amounts raised by 506(b) offerings.  Ivanov explained that on average, 506(c) offerings only allow for funding from accredited investors and have fewer investors compared to 506(b) offerings.  He stated that the market for private offerings is large and likely to get larger with the passing of crowdfunding rules and the new Reg A, which could spur the demand and liquidity in the secondary market. 

R. Cromwell Coulson explained that this panel was not the right one to talk about the tick-size pilot, but that he would like to foster broker-dealer and capital market commitment to small companies.  He continued that if the tick size pilot is adopted, its primary purpose should be to display liquidity for investors. Coulson also stated that there is a need to fix the Blue Sky laws, because companies need to be in compliance with these laws in every state.  He also explained the need for a JOBS Act “on ramp,” so companies can enter the OTC market.  “It’s important we get out there,” he said, “and fix the initial public trading for all the companies being created through Reg D.”

A. Heath Abshure explained that no state is interested in “getting in the way” or inhibiting small business capital formation.  He continued that in order to establish a transparent and trustworthy secondary market that will function efficiently and people will trust, information must be made available.  With regard to fixing Blue Sky laws, he said, states are aware of the need to provide uniformity and effective regulation in a way that does not increase the burden on issuers and other market participants.  

PanelII: Should the Commission Revise the Accredited Investor Definition?

Stanley Keller opened the second panel by explaining that the JOBS Act definition of accredited investor explains who may generally solicit and the additional steps needed to verify a person’s status.  He said accredited investor definition include balancing investor protection and capital formation, and the important investor confidence.  Keller noted that the IAC gave the SEC recommendations regarding the definition, but there are still questions to be answered.

Professor Donald C. Langevoort stated that there are systemic flaws regarding how investors make investment decisions, and that senior citizens need the most protection and help with investing.  He continued that he would raise the threshold for accredited investors and that the Financial Industry Regulatory Authority (FINRA) and SEC have to work vigorously on bringing more transparency and knowledge to the area. 

Langevoort stated that the Supreme Court “got it wrong” in defining public offering, saying the definition should hinge on the level of sales pressure in the market.

Jean Peters explained that the accredited investor definition is one of the most important issues facing the Angel Capital Association, as individuals can mistakenly invest in inappropriate options.

Commissioner Stein concluded the discussion by explaining “it becomes a decision about how you’re going to deal with trade-offs,” because people desperately try to figure out how to capitalize their ideas and to reach the next level.  She continued that potential changes to the definition of accredited investor will be a continuing dialogue, and that there needs to be more information so that the SEC can make thoughtful public policy choices. 

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