The 2017 SEC Government-Business Forum On Small Business Capital Formation Final Report

The SEC has published the final report and recommendations of the 2017 annual Government-Business Forum on Small Business Capital Formation (the “Forum”). As required by the Small Business Investment Incentive Act of 1980, each year the SEC holds a forum focused on small business capital formation.  The goal of the forum is to develop recommendations for government and private action to eliminate or reduce impediments to small business capital formation.  I previously summarized the opening remarks of the SEC Commissioners. See HERE.

The forum is taken seriously by the SEC and its participants, including the NASAA, and leading small business and professional organizations.  Recommendations often gain traction. For example, the forum first recommended reducing the Rule 144 holding period for Exchange Act reporting companies to six months, a rule which was passed in 2008. In 2015 the forum recommended increasing the financial thresholds for the smaller reporting company definition, and the SEC did indeed propose a change following that recommendation. See my blog HERE for more information on the proposed change. Also in 2015 the forum recommended changes to Rules 147 and 504, which recommendations were considered in the SEC’s rule changes that followed.  See my blog HERE for information on the new Rule 147A and Rule 147 and 504 changes.

The 2017 Forum had two breakout groups which discussed exempt securities offerings, including micro offerings and smaller registered and Regulation A offerings.  Many of the recommendations relate to Regulation A. I recently wrote an update on Regulation A, including many suggestions recommended by the Forum.  For a complete review of Regulation A and suggested changes, see HERE.

Forum Recommendations

The following is a list of the recommendations listed in order or priority. The priority was determined by a poll of all participants and is intended to provide guidance to the SEC as to the importance and urgency assigned to each recommendation. I have included my comments and commentary with the recommendations.

1. The first recommendation was also the first recommendation last year. As recommended by the SEC Advisory Committee on Small and Emerging Companies, the SEC should (a) maintain the monetary thresholds for accredited investors; and (b) expand the categories of qualification for accredited investor status based on various types of sophistication, such as education, experience or training, including, but not limited to, persons with FINRA licenses, CPA or CFA designations, or management positions with issuers. My blog on the Advisory Committee on Small and Emerging Companies’ recommendations can be read HERE. Also, to read on the SEC’s report on the accredited investor definition, see HERE.
2. The SEC should issue guidance for broker-dealers, transfer agents and clearing firms regarding Regulation A issued securities and OTC securities. Moreover, the SEC should revise Regulation A to: (i) mandate blue sky preemption for secondary trading of Regulation A Tier 2 securities; (ii) allow at-the-market offerings; (iii) allow all reporting companies to use Regulation A; (iv) increase the maximum offering amount in any twelve-month period from $50 million to $75 million for Tier 2 offerings; (v) consider overriding any state advance notice requirements and putting a limit on state filing fees; (vi) require portals conducting Regulation A offerings to be registered similar to funding portals under Regulation Crowdfunding and require the portals to make disclosures, including those related to compensation.
3. The SEC should lead a joint effort with FINRA to provide clear guidance for Regulation Crowdfunding offerings.
4. Related to Regulation Crowdfunding, the SEC should: (i) remove the cap for investments by accredited investors; (ii) raise the investment cap for non-accredited investors by making the limit applicable to each investment instead of the aggregate; (iii) rationalize the investment cap by entity type, not income; (iv) allow portals to receive compensation on different terms such as warrants, and allow portals to co-invest in offerings; (v) amend the rules for small debt offerings to limit the ongoing reporting requirements to only the note holders and to scale the regulatory obligations to reduce the legal, accounting and other costs of the offering; (vi) increase the offering limit to $5 million in any twelve-month period; (vii) allow the use of special purpose vehicles (SPVs); and (viii) allow testing the waters before a filing.
5. Small intermittent finders should be exempt from broker-dealer registration. See HERE.
6. The SEC should clarify the relationship between exempt offerings that allow general solicitation (506(c)) and those that do not (506(b)) by: (i) applying the facts and circumstances analysis as to whether a particular investor was brought into an offering as a result of general solicitation (thus avoiding the necessity to verify accredited status); and (ii) apply Rule 152 to a Rule 506(c) offering to avoid integration with a follow-on registered offering. I note, however, that I believe Rule 152 already applies or if it does not, that a subsequent registered offering is not otherwise prohibited.
7. Permit an alternative trading system, such as OTC Markets, to file a Form 211 application with FINRA and review the FINRA process to reduce the Form 211 application process burdens. See HERE.
8. Amend the definition of smaller reporting company and non-accelerated filer to include a company with a public float of less than $250 million or with annual revenues of less than $100 million.
9. Related to venture exchanges, Congress and the SEC should look to existing alternative venture exchanges (OTC Markets) and work within the existing framework. See HERE.
10. The SEC should mandate additional disclosure on short positions and enforce Regulation SHO and Regulation T for all IPOs.
11. Proxy advisory firms should be brought under SEC registration so that the SEC may oversee how these firms make recommendations and mitigate conflicts of interest.
12. Withdraw the proposed rule changes to Regulation D, Form D and Rule 156. See HERE.
13. The SEC should lead a joint effort with NASAA and FINRA to implement the private placement broker-dealer as recommended by the American Bar Association. See HERE.
14. The SEC should allow a quick response (QR) code to suffice for delivery prospectus requirements after effectiveness of a registration statement or qualification of an offering circular.
15. Study and propose a revised regulatory regime for true peer-to-peer lending platforms for small businesses and consumers, using current European regulatory and other models as reference.
16. The SEC should expand disclosure requirements for stock promotion activity, including updating Section 17(b) to require better disclosures when a company is engaging promotional and investor relations firms.
17. The SEC should amend unlisted trading privileges rules to allow small and medium-size public companies the option to consolidate secondary trading to one or more trading platforms.
18. The SEC should allow for flexibility in tick sizes and consider making the pilot program permanent. See HERE.
19. The SEC should provide greater clarity with respect to which courts and authorized governmental entities may act to satisfy the exemption from registration for exchange transactions under Securities Act Section 3(a)(10), and communicate the same to broker-dealers.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
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Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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