SEC Chief Economist Craig Lewis Discusses Capital Formation and the JOBS Act
In a speech at the MIT Sloan School of Management's Center for Finance and Policy, Craig M. Lewis, SEC Chief Economist and Director of the Division of Economic and Risk Analysis (the "Division"), addressed capital formation and the potential impact of new capital-raising opportunities created by the JOBS Act.
Citing the SEC's obligation to determine whether an action will "promote efficiency, competition and capital formation," Director Lewis began by questioning whether capital formation rules actually promote capital formation. (In this regard, he observed that only a small part of the private capital raised since the removal of the general solicitation ban on private offerings has been by issuers that took advantage of the removal.) Addressing the economics of capital formation, Director Lewis framed the conversation around two points of traditional disadvantage for smaller companies: (i) the cost to small companies of finding investors and (ii) the cost to small companies of providing adequate disclosures to investors.
As a result of the proposed expansion of Regulation A and the removal of the ban on general solicitation mandated by the JOBS Act, Director Lewis suggested, the JOBS Act and regulations that are being created thereunder may likely lessen those frictional costs for smaller companies. For example, under the proposed rules, smaller issuers may issue their securities to retail investors through regulated funding portals or brokers, subject to less burdensome requirements relative to registered offerings. While the Director viewed this as a positive, he noted that these smaller issuers will also face trade-offs as they consider how to raise capital, and may encounter tension between the opportunity to seek capital through private offerings and the limited supply of capital available from accredited investors. This limitation, he clarified, may be offset by the ability to raise capital without limit, and without registration and ongoing reporting requirements.
Recognizing that many of these smaller issuances may not reach a national securities exchange, Director Lewis concluded by saying that other market venues may develop ultimately to "facilitate the necessary liquidity to encourage primary investment." He cautioned that, if this does not happen, and if "investors feel that they will not be able to easily divest, or if the securities are not designed to self-liquidate," then investors might simply be reluctant to invest in the first place.