Revisiting Reg D

In an attempt to provide guidance to the SEC, the final report from the forum listed 36 securities law recommendations in the order of priority established as the result of polling the 60 securities industry trade and legal groups in attendance. The highest ranking recommendation was that “the SEC should specifically consider the impact of rulemaking on small business investing when implementing the Dodd-Frank Act.”

Refreshingly, the consensus recommendations proceeded into more granular and arcane territory. Another recommendation stated that “the Commission should allow ‘private placement brokers’ to assist issuers in raising capital through private placements of their securities offered solely to ‘accredited investors’ in amounts per issuer up to 10% of the investors’ net worth (excluding primary residence) with full written disclosure of the broker’s compensation…in aggregate amounts up to $20 million per issuer.” Specifically, the recommendation is referring to the “gray market” of unregistered securities transactions by so-called “finders” who raise funds on a success fee basis for small businesses in need of seed, bridge, growth or mezzanine financing.

The amount of this activity is hard to quantify, but its importance is not. The July 10 Report and Recommendations of the American Bar Association Task Force on Private Placement Broker-Dealers (PPBDs) recently noted: “[T]he activities of PPBDs [are] of critical importance to the efforts of a vast number of small businesses, and without their assistance it is unlikely that a great percentage of such businesses would ever be successful in raising early stage funding. [...] Small business creation is the key to creating jobs in America. Small businesses create many more new jobs than large public companies who have no need for PPBDs.”

Ultimately, the ABA report issued its own recommendation that “the SEC, NASD, and State Administrators should work to establish a simplified system for the registration of PPBDs” and that PPBDs should be permitted to engage in “limited activities,” echoing a previous recommendation from the same body back in 2005.

Reader Response
Will the SEC take heed? Perhaps not, according to the self-ascribed “rant” that I received from small business corporate finance activist Bob Koveleskie. Koveleskie is the founder and president of BizFin.com, an always-timely online corporate finance resource for entrepreneurs and small businesses. A champion for the thousands of small businesses seeking startup and expansion capital, Bob noted that amidst the backdrop of a stagnant economy, “it is the entrepreneur, startup and middle market businesses trying to raise capital that are getting hurt. [...] Allowing finder’s fees to be paid to unregistered financial consultants would enable billions of dollars to become more accessible to businesses through the efforts of consultants, CPAs and attorneys.