The U.S. Securities and Exchange Commission unanimously proposed boosting by 10 times the amount of money companies can raise under a simplified public offering, the agency’s latest step to ease fundraising by smaller firms.
The SEC measure released for public comment in Washington today also would preempt such stock deals from state oversight, a change sought by small businesses and Republican lawmakers. Firms could elect to raise as much as $50 million, up from $5 million, while providing investors with fewer disclosures than required of public companies.
The changes to the SEC’s Regulation A are mandated by the 2012 Jumpstart Our Business Startups Act and designed to encourage investment in smaller companies. The exemption has been rarely used in recent years, as businesses complained the requirements are too strict for the limited amount of money that can be raised. The SEC approved only one Regulation A offering in 2011, down from 57 in 1998.
“Our rulemaking goal is to make Regulation A an effective, workable path to raising capital that, very importantly, also builds in the necessary investor protections,” SEC Chairman Mary Jo White said at today’s meeting.
Regulation A offers have typically been subject to both SEC and state oversight, although they required less public reporting by companies as long as the number of investors is limited. Companies using the exemption, often community banks, have had to seek approval by regulators in every state where shares are sold.
“The amount that could be raised through Reg A simply wasn’t worth the delay, to say nothing of the cost,” SEC Commissioner Daniel M. Gallagher said today.
State review of Regulation A deals has been the biggest impediment to its use, said Ben Miller, co-founder of real estate crowdfunding platform Fundrise LLC. States have different standards for approving offers, with some weighing whether investor disclosures are sufficient and others examining the fairness of the deal.
“That’s the big bugaboo, the big structural flaw,” said Miller, whose company has used the exemption to raise money for real-estate developments in Washington. “You can have five, six or seven states involved. That’s a lot of people parenting you.”
Under the SEC’s proposal, companies won’t have to seek state approval if they elect a new version of Regulation A that requires more public reporting. Firms would have to provide investors with audited financial statements, annual and semi-annual reports and reports of changes in control or top management.
The North American Securities Administrators Association, which represents state regulators, said today the SEC’s plan would discourage its members’ ability to police fraudulent offerings. The association called for companies to submit fundraising documents to a central system and get feedback from state regulators within 10 days.
“It is not reasonable for the Commission to expect the states to continue to clean up all of the mess left behind in the wake of preemptive measures like this,” Ohio Securities Commissioner Andrea Seidt, the group’s president, said in a statement.
Representative Patrick McHenry, a North Carolina Republican and co-author of the JOBS Act, said the SEC’s approach “largely strikes the right balance between investor protections and capital formation for small businesses.”
The new exemption would limit individual investments to no more than 10 percent of a person’s annual income or net worth, although regulators wouldn’t verify compliance. The securities would be tradeable, typically on over-the-counter markets such as those operated by OTC Markets Group Inc. The shares may be less liquid and more volatile than public-company stock listed on a public exchange, SEC Commissioner Luis A. Aguilar said today.
“It is my hope that the final disclosure requirements will protect and inform investors, resulting in the investor confidence necessary for the success of” the new exemption, Aguilar said.
The SEC’s 5-0 vote today marks the third major rule under the JOBS Act advanced by the SEC. The SEC proposed rules to permit equity crowdfunding on Oct. 23 and lifted the ban on advertising private stock deals on July 10.
–Editors: Anthony Gnoffo, Gregory Mott