Sullivan and Cromwell Partner Jay Clayton, President Donald Trump’s nominee to head the Securities and Exchange Commission, is being hailed as an accomplished securities lawyer who will likely champion a capital formation agenda. While some industry officials are applauding such a focus, others warn that an easing of the reins around capital formation must also include proper investor protections.
During her term, former SEC Chairwoman Mary Jo White focused heavily on another part of the SEC’s charter: protecting investors.
Clayton’s agenda will likely include pushing rules that “streamline” the capital formation process, said Steve Crimmins, a partner with the law firm Murphy & McGonigle in Washington, to make that process “quicker and cheaper and more accessible for small- and medium-size businesses.” Crimmins, who served for eight years as the SEC’s deputy chief litigation counsel, said Clayton would likely accomplish that goal through the use of better technology “to deliver documents related to capital formation and overall to streamline the approval process.”
While capital formation “is critically important, you want to make sure that as part of that process you build in the investor protections to keep fraudsters away from Main Street investors,” Crimmins added. “Exactly what those protections are will be something that will require a lot of creativity and thought.”
Clayton’s bio touts his participation in an array of M&A and capital markets transactions involving financial institutions, telecommunications, airlines and other international companies, including the initial public offering of Alibaba and the acquisition of Lehman Brothers by Barclays Capital. He also counseled Goldman Sachs in connection with the investment of $5 billion by Berkshire Hathaway and the U.S. Treasury’s Troubled Asset Relief Program (TARP), and was involved with the sale of Bear Stearns to JPMorgan Chase.
The SEC and Crowdfunding
Clayton’s SEC will likely focus on ways to promote crowdfunding.
“This administration is going to be very good for crowdfunding because the general consensus in the industry is that it has been over-regulated,” said Richard Swart, chief strategy officer at NextGen Crowdfunding, in a mid-January interview.
The “general consensus” among those in the crowdfunding industry is that the amount of regulation applied to Regulation Crowdfunding was “excessive,” Swart continued, because of the “very small amounts of investment per investor, and the relatively high cost and ongoing compliance burden on small companies that use” the rule.
(Related: FINRA Expels First Crowdfunding Portal)
Reg CF, or Title III, crowdfunding rules allowed startups to raise capital from non-accredited investors via crowdfunding and became effective last May. Members of the Obama administration, Swart added, as well as many officials at the SEC, now feel that their concerns over potential fraud in equity crowdfunding were “exaggerated,” Swart said, noting the strong growth in Reg CF, “doubling quarter over quarter.”
Swart sees the new Congress acting swiftly to increase the amount companies can raise under Reg CF. Rep. Patrick McHenry’s Fix Crowdfunding Act, which passed the House Financial Services Committee last June, “has been stalled,” Swart reported, but he thinks that with Republicans in control of the House and Senate, “it is likely Congress will act quickly” on that bill.