SEC Director of Division of Trading and Markets Testifies on Establishment of Venture Exchanges (with Lofchie Comment)

SEC Director of the Division of Trading and Markets Stephen Luparello testified before the Senate Subcommittee on Securities, Insurance, and Investment. He discussed approaches that could lead to the establishment of venture exchanges.

According to Mr. Luparello, the two most significant challenges facing small and emerging companies are attracting the attention of a wide range of investors and achieving a liquid secondary market. He also presented research evaluating how market structure can be improved to facilitate secondary market liquidity for smaller companies and their investors.

The SEC Director explained that the unique needs of smaller companies and their investors should be addressed by exchanges and regulators, including the challenge that smaller companies generally involve greater investment risk.

Mr. Luparello described the Exchange Act provisions that govern venture exchange proposals. He stated that in general the SEC has "considerable flexibility to interpret the Exchange Act in ways that recognize the particular needs of smaller companies and their investors."

Mr. Luparello explained that the SEC would need to consider a number of issues when evaluating the rules protecting the liquidity pool of a venture exchange, such as whether it would serve the needs of small companies, their investors, and the broader markets. He said the SEC would also have to evaluate whether and when any period of liquidity pool protection would end if a listed company reached a significant size and level of liquidity, as well as how efforts to protect a venture exchange liquidity pool would affect competition.

Lofchie Comment: It is well and good to reduce the cost of going public, or to try to improve liquidity. An additional improvement would be if investors had access to more research on the companies that they trade. Unfortunately, the SEC's current rules make it hard for firms to make a profit producing research, particularly research on small firms. The SEC might consider attending to the restrictions that it imposed on the production of investment research as well as ways that writing research could be made profitable.

See: Mr. Luparello's Testimony. Related news: NASAA President Testifies on Venture Exchanges (March 10, 2015).