SEC Commissioner Gallagher Discusses Rules on Capital Formation

SEC Commissioner Daniel Gallagher delivered remarks at the Vanderbilt Law School’s 17th Annual Law and Business Conference. He spoke about what he called the “critical capital formation issues” faced by the SEC.

Commissioner Gallagher stated that while he is pleased with the SEC’s recent adoption of changes to Regulation A+ (“Reg. A”), the rule is “not as good as it could have been.” He encouraged companies to ensure Reg. A’s success by reporting any inefficiencies in the regulatory scheme as they began to use the new rules to raise capital. He also stated that while the revisions to Reg. A “were targeted at enhancing the primary issuance of securities,” the SEC’s enhancement of secondary market liquidity for these shares through venture exchanges could reinvigorate Reg. A even more.

Additionally, Commissioner Gallagher explained that Reg. A does little to help facilitate capital formation for an issuer looking to raise $5 million or less. After mentioning Regulation D’s facilitation of crowdfunding as a possible solution to capital formation for smaller companies provided in Rule 506 of Regulation D, he discussed the Rule 504 and 505 exemptions, which permit capital raises of up to $1 million and $5 million, respectively. According to Commissioner Gallagher, the fact that these rules are used infrequently is “directly attributable to the lack of state law preemption.” He stated that the SEC should consider preempting state blue sky laws, raising the offering caps, and expanding the availability of general solicitation in these rules. He also said that it might be time to explore other ways to balance access to capital and investor protection, and to give issuers other choices when raising capital.

Commissioner Gallagher also said that it is impossible for smaller start-ups to comply with the reporting expected of the largest companies. He explained that the SEC should “further segment our small companies into bands” based on commonly used market definitions of “nanocap” and “microcap,” and scale back reporting requirements more radically for the smallest issuers. He expressed his hope that the Division of Corporation Finance would come out with an “aggressive agenda” for disclosure simplification, and that the SEC would perform more rigorous cost-benefit analyses of any new rules.

Lofchie Comment: Stimulating economic growth could take some amount of regulatory loosening, which might involve some risk of wrongdoing. On the other hand, continuing on our current course of growth presents different long-term risks. Which way will the SEC and state governments go?