SEC Director of Corporation Finance Delivers Remarks on Capital Formation

SEC Division of Corporation Finance Director Keith Higgins delivered a speech discussing the new SEC capital formation rules and disclosure reform.

Director Higgins explained that the JOBS Act initiated changes in the way that securities could be offered and sold. He noted that it "upended" a primary principle that had become fundamental in securities markets, which was that a private offering could not be conducted by means of general solicitation. Director Higgins explained that the SEC has taken steps to implement the Act, which can be seen in the new Rule 506(c) exemption, which allow issuers to use general solicitation to offer securities. He noted that the SEC is working on expanding the existing Reg. A exemption by allowing offerings of up to $50 million within a 12-month period.

Through the changes that the SEC plans to implement regarding capital formation, Director Higgins explained that a new type of company could emerge - "one that can access the capital markets efficiently and enjoy the trading liquidity of a public company without actually being subject to much of the regulatory framework that was originally built for such companies." Director Higgins noted some questions that must be addressed:

• What is the future of registered offerings in a world filled with new alternative avenues of public capital raising?
• What are the policy considerations for our existing U.S. regulatory system if this shift from registered offerings continues?
• What types of trading markets and liquidity will there be for securities sold pursuant to these new exemptions?
• Will a secondary market for a company's securities appear (a question of what continuing disclosures, if any, the company should provide to investors seeking to buy and sell in this market)?

Director Higgins explained that the SEC must determine the exact parameters for new periodic reporting regimes. He referenced a staff report from December 2013, Report on Review of Disclosure Requirements in Regulation S-K, which provided preliminary recommendations for updating disclosure rules. One concern which the SEC faces, he said, is "disclosure overload." Director Higgins highlighted three examples in which disclosure overload occurs: (i) share-based payments, (ii) accounting policies and (iii) "follow-the-leader" reporting, which occurs when one company makes a disclosure and other companies copy it.

See: Director Higgins' Speech.See also: SEC Amends Private Placement Rules.