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SEC Has Its Eye on Small-Biz Capital Raising, Chief White Says

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Twenty-seven companies have filed Form C with the Securities and Exchange Commission to start equity crowdfunding offerings and nine funding portals have completed the registration process with the agency and the Financial Industry Regulatory Authority, with more “in process,” SEC Chairwoman Mary Jo White said Wednesday.

“We are watching developments closely,” White said during a meeting of the agency’s Advisory Committee on Small and Emerging Companies.

She added that staff in the agency’s divisions of Corporation Finance and Trading and Markets have published compliance guidance on the agency’s equity crowdfunding rules under the Jumpstart Our Business Startups (JOBS) Act, which became effective Monday. Both divisions “are available to answer questions. It is important that we all continue to strive to make crowdfunding work for issuers and investors.”

Indeed, White said that the agency is “monitoring out the gates” how the three capital-raising measures the agency put into effect under the JOBS Act “are working.” Those measures include Rule 506(c), Regulation A+ and Regulation Crowdfunding, which White said are designed to foster new ways for smaller companies to access the capital markets, but “we must ensure that the exemptions are both workable for issuers and providing appropriate investor protections.”  

The “vast majority” of offerings under Reg D occurred under Rule 506(b), the pre-JOBS Act exemption that does not allow general solicitation, White said.

The activity in exempt offerings “is of particular interest now, as issuers, investors and their advisors seek to take advantage of relatively new options for capital-raising like Rule 506(c) and its allowance for general solicitation,” she added.

In 2015, of the approximately $1.35 trillion reported to have been raised in Rule 506 offerings, approximately $38 billion used Rule 506(c).  During 2014 and 2015, about 1,600 new offerings were initiated each year in reliance on Rule 506(c).

But White said at the meeting that the agency has “not seen a real uptick in fraud in that [506(c)] space yet.”

Margaret Cane, a specialist attorney in the SEC enforcement division’s office of market intelligence who’s also working with the division’s JOBS Act task force, said that the agency has filed eight JOBS Act-related cases, with five of them currently in litigation.

“Activity in the Rule 506c space is light in comparison to 506b, but … we have seen more fraud in private offerings than in the public space,” Cane said.

Accredited Investors

The committee also discussed the recommendations that it gave to the Commission regarding changes to the accredited investor definition.

White noted the Committee recommendations caution that the primary goal of the SEC’s review of the definition should be to “do no harm to the private offering ecosystem,” and suggested including within the definition those investors who meet a “test of sophistication.” The SEC published in December a staff report analyzing various approaches for modifying the definition. The SEC has received 30 comments on the report, with comments on all sides of the debate — some say the SEC should do nothing because the definition has worked well; others say that the asset and net worth thresholds should be increased or decreased. Much agreement has been voiced that the SEC should consider alternative ways to qualify an accredited investor aside from income and net-worth thresholds.

The comments “we are receiving will help inform the Commission in its next steps,” White said.

Stephen Graham, co-chairman of the committee as well as the co-chairman of Fenwick & West’s Life Sciences Practice and managing partner of the firm’s Seattle office, said that he’s “not sure I understand the problem we’re trying to solve” regarding the definition. The accredited investor thresholds were set in 1982, “but does that make them wrong? Has [the definition] failed from an investor protection point of view? Are we seeing increased fraud in this segment? I’m not sure that we are.”

But Gregory Yadley, a partner and chair of the corporate practice group in the Tampa, Florida, office of Shumaker, Loop & Kendrick LLP, stated that there’s a “logical extension of opening it [the definition] up to people who are unaccredited. We should be talking about expanding the sphere of Americans who can invest in the private market and not restrict them.”

— Check out SEC’s Equity Crowdfunding Rules Finally Kick In on ThinkAdvisor.


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