SEC Takes a Look at Capital Raising


We reported in May 2011 about the future of capital formation—through testimony by the SEC Chairman before a Congressional committee and the Committee Chairman’s comments.  At the time Chairman Schapiro had asked the SEC staff to take a “fresh look” at the offering rules.  The next chapter appears to have now begun with the Chairman’s formation of an Advisory Committee on Small and Emerging Companies on Sept. 13, 2011.

With this new committee, the SEC is seeking input on capital raising efforts by both private companies and publicly traded companies with less than $250 million public market capitalization.  According to the SEC’s notice regarding the committee (PDF), its objective is to provide advice on rules, regulations, and policies with respect to protecting investors, maintaining markets, and facilitating capital formation as they relate to (1) capital raising by this group of companies, (2) trading in the securities of private companies and small public companies, and (3) the related public reporting and corporate governance requirements.  The SEC is also seeking public comment.

A Reuters report pointed to the issues raised by online private exchanges and efforts to avoid the 500-shareholder threshold as spotlighting the need to examine capital formation rules.  That article also pointed to a House subcommittee, which was schedule to hold hearing on Sept. 15, 2011 to explore “crowd funding.”  The crowd funding concept, which more often has been associated outside of the investment area, has gained traction recently as a mechanism for investors to pool resources, taking small stakes in private companies.  It raises a number of issues under the existing private offering rules and investor protections statutes and regulations.

The 20-member committee will be composed of private sector business representatives, attorneys, and representatives of institutional investors such as retirement funds.

The SEC also disclosed that it is in the process of re-establishing an Investor Advisory Committee, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

OUR TAKE:  The SEC will have to tackle how to modernize capital formation rules for the Internet age while still adequately addressing investor protection, the SEC’s original mandate.  Advocates point to the potential for significant new job creation if rules are better designed to facilitate capital formation, while detractors point to the real potential for fraud and harm to small investors.

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