Representatives and analysts from the securities industry offered their suggestions for how the Securities and Exchange Commission could reduce barriers to capital formation for small businesses at a House Committee on Financial Services hearing on Wednesday.
Some urged the SEC to speed up its deliberation of regulations that would set the ground rules for crowdfunding under the Jumpstart Our Business Startups Act, while others highlighted the importance of investor protection.
Witnesses from the securities industry specifically recommended
quickly implementing the JOBS Act’s Regulation A+ , which would exempt small businesses raising up to $50 million from registering with the SEC.
“While we wait for the JOBS Act provisions to be enacted, entrepreneurs’ access to capital is limited, and job creation and economic recovery have been put on hold,” said David Weild, senior capital markets advisor for advisory and accounting firm Grant Thornton. He noted his firm’s support for a House bill that would require the SEC to finalize Regulation A+ rules by the end of October.
Others suggested adjustments to current securities law.
Joseph Ferraro, vice president of Prospect Corp., a New York-based investment firm and business development company, requested reforms to laws governing BDCs (a classification created by Congress in 1980 to encourage investment in small businesses).
Current law requires BDCs to invest at least 70 percent of their assets in “eligible portfolio companies,” leaving a maximum of 30 percent for financial companies, Ferraro noted. “This limitation makes no sense decades later given the substantial growth of financial services as a leading job provider in the American economy since 1980.
Financial services companies employ millions of American workers and have a capital magnifying effect that results in more capital flowing into small- and medium-sized American businesses.”
Cromwell Coulson, president and chief executive of OTC Markets Group, a New York-based securities market, recommended updating the Securities Act to require increased disclosure of stock promotion activity, and the people promoting stocks, to encourage market transparency.
Some witnesses proposed new markets — for instance, a parallel stock market for public companies valued under $2 billion. “This new market could allow higher commissions to provide incentives for small investment firms to return to the business of underwriting and supporting small-cap companies. While established markets would continue to operate as they do today, this solution would give issuers a choice in markets,” Weild said.
But Donald C. Langevoort, a law professor at Georgetown University, warned the committee not to abuse inexperienced investors: “[W]e should beware of reforms driven by the desire to attract capital from less sophisticated investors simply because there are so many of them and they might be more excitable and less demanding,” he said.
“[I]nvestor trust is closely tied to capital formation and economic growth...if [investor trust] hits some horrible tipping point and recedes because there is too much perceived risk of opportunism and abuse, capital formation will be damaged by poorly-crafted innovations, not enhanced,” he added.