SEC Commissioner Gallagher Discusses Promoting Small Business Capital Formation
At the Heritage Foundation, SEC Commissioner Gallagher discussed key issues in capital markets, particularly small business capital formation.
According to Commissioner Gallagher, small businesses are rarely represented in the regulatory and legislative process. He explained that small business capital formation warrants the SEC's "highest level of priority," stating that the SEC is not doing enough to ensure that small businesses have the access to the capital that they need in order to grow. He noted that the SEC rarely considers "how heavily" rules bear down on registrants.
In order to pursue reforms to capital formation rules, Commissioner Gallagher explained, the SEC must think about its capital formation regime on a "big picture level." Commissioner Gallagher stated that one aspect of the picture is the idea that companies should always have access to capital markets, which could include a "robust" set of private offering exemptions under Regulation D. Furthermore, he said, all rules that apply to small businesses should be easily understandable, and exemptions should focus on alignment with the ways in which companies raise capital, rather than "shoehorning" capital-raising techniques into existing complicated exemptions.
Commissioner Gallagher stated that one of the most important near-term steps the SEC could take to facilitate capital market formation would be to withdraw the Regulation D proposed rule. The proposed rule, he explained, lacks fundamental answers regarding who uses it and for what purpose. Another step, he added, would involve evaluating the secondary market for private company shares in order to improve trading among accredited investors in the private secondary market.
Commissioner Gallagher went on to state that the SEC should finish implementing the JOBS Act's reforms to Regulation A. The JOBS Act, Commissioner Gallagher explained, "breathed new life back into Regulation A." Commissioner Gallagher advocated the creation of "Venture Exchanges" to facilitate the secondary trading of Regulation A shares. The Venture Exchanges, Commissioner Gallagher stated, would be national exchanges that would contain shares which were exempt from state blue sky registration, and the exchanges would be exempted from the SEC national market structure and unlisted trading privileges rules, in order to concentrate liquidity in these venues. Additionally, he noted, Regulation A+ should be finalized with two clarifications: (i) the cap should be raised on the maximum size of offerings from $50 million to $75 or $100 million and (ii) shares issued pursuant to Regulation A+ from Exchange Act Section 12(g) should be exempted.
In order to receive real-world input from small business owners, Commissioner Gallagher recommended that the SEC create an Office of the Small Business Advocate. The Office would be modeled after the Office of the Investor Advocate and receive views from certain segments of the market that find it both difficult and expensive to participate in the normal notice-and-comment rulemaking process.