SEC Commissioner Kara Stein discussed improving SEC rules to support innovation and facilitating capital formation. She delivered her remarks at the Stanford University Rock Center for Corporate Governance.
Commissioner Stein asserted that part of the SEC’s mission is to facilitate investment in innovative companies and “make venture funds’ deployment of capital work as smoothly as possible.” She also stated that the SEC is focused on new capital-raising methods, and must ensure its securities laws are flexible enough for a wide variety of companies and funding needs.
Commissioner Stein explained the SEC is considering several new options to “promote and enhance capital formation and help U.S. companies remain at the forefront of innovation.” She stated that Regulation A+, which would enable companies to offer up to $50 million in a 12-month period without registering its securities with the SEC, is one potential fundraising option for small and medium-sized businesses. Reg. A+ would allow small businesses to raise money from the public with a “streamlined approach to oversight” by the SEC.
In addition, Commissioner Stein focused on newer forms of capital raising, stating that equity crowdfunding is a challenging concept. She stated that equity crowdfunding is a “new regime” that “does not neatly fit into our 80-year old securities law framework.” As to the success of crowdfunding in the long-run, Commissioner Stein explained that the SEC’s rules will “matter more than ever.” Additionally, she suggested considering whether crowdfunding would work better by pooling each class of crowdfunding investors into a fund vehicle.
Commissioner Stein discussed the idea of regional exchanges, a subject recently promoted by other SEC Commissioners. She explained that these exchanges could allow small companies to exclusively trade their shares, providing a “new runway for growth for smaller companies.” Commissioner Stein stated that she supports the SEC issuing a Concept Release to gain perspective on this area.
Lofchie Comment: Innovation to foster investment in the capital markets will require deregulation. Deregulation will likely lead to an increase in economic growth. It will also likely increase the risks of misconduct. The question is who in a position of authority is willing to advocate for taking such risk. Commissioner Stein’s speech reflects ambivalence. On the one hand, she asserts the “need [for regulation] to evolve in the areas of both capital formation and investor protection to adapt to today’s rapidly changing marketplace.” However, in the immediately following paragraph, the Commissioner states:
“But many aspects of our securities laws have held up remarkably well. The basics are strong and simple: clear disclosure to investors, good corporate governance, eliminating conflicts of interest, straightforward approaches to fees and costs, transparent public trading markets, being a good fiduciary when managing others’ money, and so on. Time and time again, these basics have led to some of the strongest, most productive companies in the world. I think it’s no accident that the American approach to capital markets, including SEC oversight, has been emulated by many . . . .”
While it might be that the tidal wave of regulation has slowed, it has not turned. In this regard, please return to Commissioner Gallagher’s graphic illustration of all the new regulations to which the financial industry has become subject under Dodd-Frank. See generally SEC Commissioner Gallagher Issues Statement and Diagram on Aggregate Impact of Financial Services Regulations (with Lofchie Comment).
If government is to examine itself critically, if it is to take a hard look at which regulations work, which regulations don’t, and which are too burdensome, then such an examination must be broader than looking at crowdfunding or small companies in Hawaii. In a broader context, Commissioner Stein’s speech barely scratches the surface. It does nothing to advance a real reconsideration of the regulation of the businesses that drive the economy. Put another way, are we really balancing the goals of growth and investor protection by supporting small stock exchanges in Hawaii if, at the same time, we are imposing hundreds of millions and perhaps billions of dollars in costs by requiring disclosures in regard to conflict minerals or compensation ratios?