House Subcommittee Examines Access to Capital Issues

At a House Financial Services Subcommittee on Capital Markets hearing, witnesses raised concerns about access to capital and barriers to going public.

Subcommittee Chair Ann Wagner (R-MO) underscored the importance of implementing a regulatory framework that is "streamlined and not overly burdensome." She emphasized that regulation is essential to making public markets more attractive without compromising investor protection but that overly burdensome regulations could prevent innovation, restrict revenue for investors and block small businesses from actualizing their full potential. Representative Wagner also expressed concern that a failure to develop properly fitted regulations could result in (i) private markets being reserved for the wealthy and (ii) hesitation by companies to go public due to "unreasonable regulatory and disclosure obligations." She noted the trend in declining IPOs and publicly traded companies, an issue that has garnered significant attention (see related coverage here and here).

Testimony

Melanie Senter Lubin, Maryland Securities Commissioner, on behalf of NASAA. Ms. Lubin urged Congress to reject the proposed legislation (including, among others, the Small Entrepreneurs’ Empowerment and Development Act (the "SEED" Act); the Improving Crowdfunding Opportunities Act; the Restoring the Secondary Trading Market Act; and the Unlocking Capital for Small Businesses Act.) She warned that such legislation, if passed, would preempt state securities regulators.

Brandon Brooks, Founding Partner, Overlooked Ventures. Mr. Brooks emphasized the importance of making it "easier and more attractive" for companies to go public in order to create greater access to capital, especially for "underrepresented founders and startups located in less-established regions." He said that the increased diversity in venture capital will lead to (i) greater fairness and equity, (ii) a more robust economy through innovative ideas and effective problem-solving and (iii) venture capitalists being able to expand their network and find new sources of talent.

Henry Ward, Co-Founder and CEO, Carta. Mr. Ward argued that the regulatory challenge is not to "make private markets more hostile, but to make private markets work better." By doing so, Mr. Ward explained that the pipeline of companies that can go public will widen. Mr. Ward also argued that regulatory costs are among the reasons a company may choose to not go public.

Rodney Sampson, Executive Chairman and CEO, Opportunity Hub. Mr. Sampson called the lack of capital invested in socially and economically disadvantaged individuals in the United States, "dismal, negligible and shameful." He stated that many venture capital firms and angel investors have become too exhausted with the failures of the private market to invest in businesses operated by members from disadvantaged communities.

Joel H. Trotter, Partner, Latham and Watkins LLP. As a member of the IPO Task Force responsible for proposing the JOBS Act, Mr. Trotter lauded the Act as a "bipartisan success story," claiming that the JOBS Act achieved balanced regulation by encouraging companies to enter the public markets through regulatory accommodations that provide companies with a path to go public.

Proposals

The following legislative proposals were presented are under consideration:

• H.R. ____, the "Middle Market IPO Underwriting Cost Act" which would require the SEC to conduct a study on the costs associated with IPOs for small- and medium-sized companies;

• H.R. ____, the "Senior Security Act of 2023" which would establish an SEC interdivisional taskforce for senior investors;

• H.R. ____, the "Enhancing Multi-Class Share Disclosures Act" which would implement disclosure requirements in any proxy or consent solicitation material for issuers with multi-class stock structures;

• H.R. 1548, the "Improving Access to Small Business Information Act" which would amend the Securities Exchange Act to make clear that "actions of the Advocate for Small Business Capital Formation" do not qualify as a collection of information under the Paperwork Reduction Act;

• H.R. __, a bill to except quotations of Rule 144A fixed-income securities from certain regulatory requirements, and for other purposes;

• H.R. __, a bill to amend the Federal securities laws to enhance 403(b) annuity plans, and for other purposes;

• H.R. ____, a bill to make certain adjustments related to Regulation Crowdfunding, and for other purposes;

• H.R. ____, a bill to amend the Securities Exchange Act of 1934 to require the Advocate for Small Business Capital Formation to promoting capital raising options for traditionally underrepresented small businesses, and for other purposes;

• H.R. ____, a bill to direct the Securities and Exchange Commission to issue regulations requiring certain investment advisers to implement fair valuation procedures and recordkeeping requirements, and for other purposes;

• H.R. ____, a bill to require the Securities and Exchange Commission to revise the definition of accredited investor to exclude Retirement Assets and Retirement Income Assets, and for other purposes;

• H.R. 2534, (116th Congress, Engrossed in House), the "Insider Trading Prohibition Act" which would prohibit certain securities trading by individuals with knowledge of material, nonpublic information; and

• H.R. ____, a bill to require the Securities and Exchange Commission to revise the definition of an Accredited Investor to include a natural person that passes an examination established and administered by the Commission, and for other purposes.