This past Thursday, the SEC held its 33rd annual Government-Business Forum on Small Business Capital Formation—a lengthy title for a day-long meeting of regulatory and business minds, all in an effort to develop recommendations which the SEC could eventually use to help mold upcoming changes to regulation. Specifically, this year’s forum was meant to be the breeding ground for intelligent discussion on current issues, most importantly, those weighing heavy on small business owners’ shoulders: the provisions of Titles III and IV of the JOBS Act and the call for final rules in that space, as well as the need for clarification surrounding reporting requirements for small cap companies.
Since its passing, the JOBS Act has been a pivotal piece of legislation aimed to benefit small business; new mediums for much needed capital formation, including the addition/specification of crowdfunding and private placement offerings, as well as the somewhat complex guidelines directly correlated to those mediums were long overdue in the eyes of some, while others felt that opening up these options to investors and businesses alike would create fertile ground for disaster. Although the statistics are slow to stream in, it is clear that the passing of the JOBS Act created a flurry of revenue boosting activity in the small business arena by way of capital formation. Progress in the regulatory world, however, has not been nearly as active; in fact, little has been done since 2012 toward finalizing rules laid out in the Act. At this year’s forum there were both high hopes for forward movement and realistic expectations based on lackluster progress from forums of years past.
Here’s what took place.
The morning began with a bevy of panelists offering their unique insights into the world of capital formation, including specific concerns surrounding the pressing need to protect investors while opening up opportunities for small cap businesses. Among those who spoke, Chair Mary Jo White addressed attendees and other panelists with a pointed message about the desperate need for progress in regulation with a careful eye on investor protection. Other notable speakers, including Commissioners Gallagher and Stein addressed the SEC’s desire to finalize Reg A+, and the importance of clarification on the accredited investor definition. The morning’s panel discussions weighed heavily on the topic of secondary market liquidity as well as the continued growth of the small business sector, with numerous references to the need for regulation that was up to date with current technology and business environments. It was clear that the most pressing issue, from the perspective of the SEC as an organization, was that with new outlets for investment comes a great deal of concern about the occurrence of fraud, and the subsequent need for holistic, potentially more strict regulation. The stagnation of the SEC to finalize JOBS Act provisions was, in their words, directly related to these very real concerns.
For the better part of the day, forum participants focused on addressing issues directly related to the definition of an accredited investor as this important aspect of previous legislation has been a point of contention with business owners and regulators alike. In essence, the accredited investor definition allows for a small, somewhat elite group of high net worth individuals the opportunity to invest in alternative investments including those intimately associated with equity crowdfunding and lending options. Currently, only those who meet specific net worth and income requirements are allowed to help the small business community move forward in terms of capital formation through private investing via Internet-based platforms. The forum called for specific recommendations from participants in an effort to make changes that fairly opened up the landscape of investing to a broader range of individuals while also providing the disclosure necessary for those investors to make sound investment decisions.
The afternoon panel discussions brought spirited debate regarding the definition in question, namely from Professor Donald Langevoort of Georgetown University Law Center—his remarks were focused not on the need to change the definition, but on the more critical necessity for more in-depth information from both the Commission and companies participating in the rapidly expanding crowdfunding space. He reminded attendees that the purpose of the JOBS Act was to move small business forward, and that the stall from the SEC in offering final rules for Titles III and IV was a direct impediment to its initial purpose. Other panelists discussed what it might mean to change the accredited investor definition—some in favor of tightening the reigns and therefore reducing the pool of approved investors, and others in favor of broadening the definition in an effort to expand the number of investors. After arguments were heard from both sides of the coin, participants were released to one of four breakout sessions in order to draft final recommendations for the SEC.
The afternoon sessions sparked further discussion on the topics of exempt securities offerings, secondary market liquidity for small business securities, the definition of accredited investor, as well as the effectiveness of disclosure for smaller reporting companies. Each breakout group was tasked with developing high level, pointed recommendations on the assigned topic and present back to the moderators at the end of the day. The overarching message heard at the plenary session after the day concluded was this: investors need a certain level of protection, while small businesses need accessible channels for capital. Each breakout group had a lengthy list of recommendations directed at addressing both issues, presenting an opportunity for the SEC to review the need to loosen disclosure and reporting requirements for small cap companies, the creation of a trading platform for those companies, as well as a beneficial shift to the accredited investor definition. For the latter, the specific recommendations were as follows:
- Maintain the current net worth and income thresholds, keeping the exclusion of a primary residence in the calculation. Those who qualify under these requirements should be allowed to invest in alternatives at any level they deem suitable for their specific situation.
- The SEC should compile clear and comprehensive data regarding the economic impact of investing in alternatives, as well as the potential harm directly related to the private placement market.
- The SEC should consider adding distinct categories under which individuals could qualify as an accredited investor, in lieu of the net worth or income calculations. These should include a test of sophistication for each individual that could include education, experience, specific training or those who are licensed through FINRA.
- The SEC should not consider excluding retirement assets for the purpose of the net worth test to deem an individual an accredited investor.
- Companies offering private placement securities or those utilizing crowdfunding for the purpose of capital formation should be held accountable as far as verification of those claiming to be an accredited investor.
Although the forum has not been positively viewed by some participants, mainly due to the lack of actual progress after its conclusion each year, there were a number of incredibly pressing issues discussed this year, and high hopes for beneficial forward momentum from the SEC on JOBS Act initiatives. With the lengthy list of recommendations provided by participants, the Commission has quite a bit to swallow over the next few months. The general hope from those in attendance was that the well intentioned recommendations will be taken seriously, and that the final rules for Titles III and IV of the JOBS Act will be created and implemented in line with the feedback provided directly from those who so desperately need the SEC’s direction: the small business community. Last year’s forum recommendations were compiled and presented to the public through the SEC web site in late June of this year, and the expectation is that history will repeat itself for this year’s forum recommendations.
In the interim, those interested in reviewing the morning session of the Government-Business Forum on Small Business Capital Formation can view the video recording on the SEC web site, once released by the organization. A copy of last year’s forum recommendations can be reviewed there also.