SEC Commissioners Differ on Regulatory Approach for Small Cap Companies

In remarks before the 43^rd Annual Government-Business Forum on Small Business Capital Formation, SEC Commissioners Hester M. Peirce and Jaime Lizárraga offered different perspectives on SEC support for small cap companies.

Ms. Peirce highlighted the sharp decline of public companies and encouraged the Commission to reduce burdens on small cap companies, including the barriers to going public and the costs of being public. She noted that small cap companies make up almost half of public companies. Ms. Peirce said, "[a] Commission that wanted to see more companies in the public markets would reduce the barriers to going public..." and argued that the SEC "recently did the opposite by imposing new costs on companies looking to enter the public markets using the Special Purpose Acquisition Company route." (See related coverage.) Similarly, she argued that a Commission that wanted to see more companies in the public markets would reduce costs of being public, yet "the Commission has resisted tailoring regulations so that small cap companies can better afford to participate in the public markets." According to Ms. Peirce, the SEC "brushes aside" the need for scaling by explaining that the rule is so important that every public company, no matter its size, should bear the rule’s associated costs. She argued that small cap companies, in comparison to larger companies, offer greater investment returns and are often more disruptive, operationally nimble and dynamic. Ms. Peirce urged the SEC to identify a better path forward for regulatory treatment of issues that affect small cap companies. 

Mr. Lizárraga acknowledged the challenges that small cap companies face, including navigating a complex regulatory framework, competing for research analysts’ attention and ensuring sufficient liquidity in the secondary market. According to Mr. Lizárraga, the SEC addresses some of these unique challenges by way of its scaled disclosure requirements and phased-in compliance dates. Mr. Lizárraga argued, for example, that under the climate risk disclosure rule, finalized last month, smaller reporting companies are exempt from the greenhouse gas emissions and attestation requirements. He said these companies also benefit from a delayed compliance period, "in recognition that additional time is helpful for them to get up to speed as they prepare disclosures for the first time." He added that smaller reporting companies were provided with additional time to phase in compliance in the cyber incident reporting rule. 

The Commissioners agreed that retail investors benefit when companies go public. Ms. Peirce said that welcoming small cap companies into the public markets gives retail investors a chance to share in growth, and Mr. Lizárraga said it results in a higher supply and greater diversity of companies to choose from when making investment decisions.