SEC Director of the Division of Trading and Markets Stephen Luparello testified before the Senate Subcommittee on Securities, Insurance, and Investment, discussing the 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.
To meet these challenges, he explained that the unique needs of smaller companies and their investors should be addressed by exchanges and regulators, such as the fact that smaller companies generally involve greater investment risk. He also mentioned that the SEC is currently considering the comments on a tick size pilot program to inform the SEC on how to address concerns about improving liquidity in the secondary market.
Mr. Luparello went on to describe the Exchange Act provisions that govern venture exchange proposals, stating 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.” Additionally, since maximizing liquidity is “likely to be essential to the success of venture exchanges,” he listed potential initiatives that a venture exchange might explore to promote liquidity, including: (i) limiting all trading to particular times of the day or through particular mechanisms, (ii) attracting dedicated liquidity providers with a package of obligations for making a market in listed companies, and (iii) exploring different minimum tick sizes in ways other than through a tick size pilot.
Mr. Luparello explained that SEC would need to consider a number of things 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 need to end if a listed company reaches a significant size and level of liquidity, as well as how efforts to protect a venture exchange liquidity pool would affect competition.
Lofchie Comment: I wish that the SEC would attend more to the restrictions that it has imposed on the production of investment research and ways that writing research could be made profitable. It is well and good to reduce the cost of going public, or try to improve liquidity, but it would be better if investors had access to 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.