The Small Business Capital Formation Advisory Committee (SBCFAC) of the Securities and Exchange Commission (SEC) threw down the gauntlet. As the SEC’s website explains, the SBCFAC was established by the SEC Small Business Advocate Act of 2016 and is designed to provide the Commission with a formal mechanism for receiving advice and recommendations on rules, regulations, and policy matters relating to small businesses, including small businesses. companies. Its latest meeting sent a clear message: the time has come to provide liquidity to the private market.
The onus is now on the full commission, with two new members, Mark T. Uyeda and Jaime Lizaraga, to follow their advice. Ten years after President Obama signed the bipartisan Jumpstart Our Business Startups (JOBS Act of 2012), which invited everyday Americans into the lucrative private capital market, the job is half-done. The two JOBS Acts, Title III — which became Regulation Crowdfunding (Reg CF) — and Title IV — which vastly reformed Regulation A (Reg A+) — have demonstrated regulatory success. These two titles enabled a paradigm shift in private company investment by allowing startups and small businesses to accept investment from retail investors. Reg CF caters to smaller and smaller companies with a 12-month offering limit of $5 million. More mature companies use Reg A+, which combines higher SEC scrutiny with a 12-month offering limit of $75 million.
In March 2021, the Commission expanded the JOBS Act provisions to free up more capital. But challenges remain. The first of them is the lack of liquidity in the secondary market, where the initial buyers resell the shares. SBCFAC addressed that issue this month by reviewing the lack of secondary business state preemption for both Reg CF and Reg A+.
The meeting started with the Commissioner’s speech. Commissioner Hester Pearce talked about how secondary market liquidity and investor protection are complementary rather than opposed to each other:
Secondary market liquidity marries the idea of capital formation and investor protection. An issuer’s ability to raise capital depends in part on whether securities buyers enjoy strong secondary market liquidity.
As the presentations began, Ryan Feit, CEO and co-founder of crowdfunding portal SeedInvest, relayed the frustration investors felt with their illiquid investments despite rising prices due to pursuing rounds at high per/share prices:
[W]Many startups and small business investors burn out quickly. They make an investment or something, and they’re excited about it, and then they actually realize that I might have to wait five to ten years to get any return on it.
This ultimately leads to less capital for new projects and eventually good ideas don’t get funded.
Sarah Hanks, a prominent securities practitioner and SBCFAC member, spoke about the difficult nature of complying with state-by-state regulations, which vary in fee structure, timing, information requirements, and other areas. He mentioned possible solutions Congress is currently considering in the JOBS Act 4.0.
In fact, CEI filed comments in June on the JOBS Act 4.0 and focused on the importance of preempting state securities procedures for secondary businesses, among other proposals to improve private capital.
Opposing any measure to provide private market liquidity was the North American Securities Administrators Association (NASAA), a trade organization representing state-level securities agencies. NASSA traditionally opposes all access to the private capital markets for retail investors and further increases the burden for accredited investors. It strongly opposed the JOBS Act, filing numerous statements, comments, and press releases, at one point describing it as an “investment protection disaster waiting to happen.” Two NASA members, Montana and Massachusetts, filed suit with the SEC to block implementation of Reg A+ with NASA in support. A friend of the court. They lost.
But that didn’t stop the committee, at least for Reg A+. They voted 9-1 in favor of a pilot program to preempt state securities laws for secondary trading of Reg A+. The ball is now in the commissioner’s court. According to JD Alois Crowdfunding Insider, the committee is “submitting a formal recommendation to the Commission in the coming weeks that outlines the preemption requirement for Reg A+ securities.” It’s time for the SEC to act for small businesses. And Congress should complement this move by passing the JOBS Act 4.0.