Securities and Exchange Commission Small Business Capital Formation Committee Telephonic Meeting

Securities and Exchange Commission

Small Business Capital Formation Telephonic Meeting

Wednesday, December 11, 2019


Key Topics & Takeaways

  • Recommendations Regarding Small Business Capital Formation: The committee discussed and approved two recommendations with unanimous consent. The first approval was of harmonization efforts for exempt offerings for small businesses, and the second was in support of regulation crowdfunding. The SEC will further consider both recommendations.

Opening Statement and Discussion

Martha L. Miller, Director, Office of the Advocate for Small Business Capital Formation

In her opening statement, Miller welcomed the committee and led the discussion of several proposals. She described the first proposal, which supports the harmonization of exempt offerings for small businesses based on four principles, including: 1) an exempt offerings framework that is clear and concise for small business capital formation; 2) language that is simple and easy to understand; 3) elements of well-functioning products, such as Regulation D Rule 506 (b), to remain intact; and 4) integration that should be refined to better utilize exemptions in the offerings framework. After deliberation, the committee amended the proposal principle 4 to read “review” instead of “refine.”

The second proposal was about regulation crowdfunding investment. The proposal originally considered four principles: 1) to streamline and tier regulations for compliance and obligations around crowdfunding; 2) to allow accredited investors to invest unlimited amounts in regulation crowdfunding offerings; 3) to raise the offerings limit of $1.07 million per year for regulation crowdfunding offerings for an issuer; and 4) to allow investors to participate in regulation crowdfunding offerings through special purpose vehicles. After deliberation, the committee amended the first principle to include language for triggers based on the level for offering levels for issuer reporting financial statements and audit levels. The committee amended the proposal to include two additional principles for investment limits: 1) to be based on per annual basis and be calculated based on greater rather than less than income or net worth; and 2) to allow for greater flexibility in portal compensation.

Miller added that the committee would discuss other harmonization and venture capital related topics in February, as well as marketing with respect to offerings and solicitation.

Sara Hanks, Small Business Capital Formation Committee, raised a number of concerns during both discussions, particular to harmonization being prescriptive rather than descriptive. She raised concerns about ambiguous language for purposes of compliance, communication and disclosures. Hanks also recommended including language for conditional approaches about raising the limits for crowdfunding and recommended the SEC visit issuer compliance. She also expressed concerns about compensation and special vehicle language.

Youngro Lee, Small Business Capital Formation Committee, expressed that the conversation about raising the limits for regulation crowdfunding should not get into max level restrictions, but rather to address the arbitrary $1.07 million limit that crowds out investors. He added that the first and fourth principle of the crowdfunding proposal tie in together for investor limits and expressed support for them. Lee recommended that the proposal address special vehicle portal compensation limits as well as cap table calculations.

Catherine Mott, Small Business Capital Formation Committee, added that the committee should consider the implementation of management fees and carried interest.

Jason Seats, Small Business Capital Formation Committee, expressed his desire for the committee to consider pooled investments and marketing during the February meeting.

Jeffrey M. Solomon, Small Business Capital Formation Committee, recommended during the discussion of the crowdfunding proposal that the committee prevent the bleeding over into pooled investments. He added that the committee should consider a framework that utilizes existing regulations for pooled investments to help retail investors diversify their portfolios similar to accredited investors.

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