May 11, 2020

SEC Commissioner Peirce Encourages "Bold Action" to Facilitate Capital Formation

Steven Lofchie Commentary by Steven Lofchie

SEC Commissioner Hester M. Peirce encouraged regulators to take "bold action" to facilitate capital formation and help small businesses cope with the economic impacts of the COVID-19 pandemic.

In a statement to the SEC Small Business Capital Formation Advisory Committee, Ms. Peirce encouraged staff to consider temporary adjustments to current securities laws exemptions, such as:

  • allowing issuers that are relying on Regulation A ("Conditional Small Issues Exemption") to make offers through television, radio, or print advertisements; and
  • permitting intrastate offerings under Securities Act Rule 147A ("Intrastate sales exemption") and Rule 147 ("Intrastate offers and sales") to include part-time residents, so that individuals in locations other than their primary residence due to COVID-19 can invest in the communities where they are living.

Additionally, Ms. Peirce asked the SEC to consider whether it should (i) deregulate offers to focus on sales and/or (ii) simplify the current offering framework.


There is an unavoidable conflict between investor protection and capital formation. The conflict is particularly acute in the case of small issuers for whom the costs of a public securities offering may be impractical. (See e.g., SEC Proposes to Ease Limits on Private Placements.)

Rules such as Regulation Best Interest make it riskier for broker-dealers to promote securities issued by start-up ventures to retail investors. (See e.g., SEC Office Advocates for Small Business Capital Formation.) This may be a good time for the SEC to consider whether it has drawn the line in the right place between capital formation and investor protection. Query: should private placement restrictions be eased if firms believe that the suitability requirement makes sales to individual investors overly risky given the high failure rate of small businesses?

One option might be to liberalize Exchange Act restrictions. For example, under the definition of "broker," the regulators might allow banks to act as private placement agents in any type or size of offering. Banks are very likely to have a close relationship with the small businesses to which they have extended credit and may be well placed to act as placement agents. (This suggestion is consistent with economist Hyman Minsky's hypotheses in "Stabilizing an Unstable Economy," a book which received inadequate attention following the last financial crisis.)

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