The perception: The Securities and Exchange Commission is so focused on churning out overdue rules for compliance with the Dodd-Frank Act, it has neglected to churn out overdue rules on capital formation required under the JOBS Act. Said perception is largely driven by rhetoric from lawmakers in Congress, always eager to find fault with the SEC.

The reality: While Congress spins its wheels on legislative fixes and some sort of “JOBS Act 2.0,” the SEC is considering a variety of rule reforms that could be a boon for small and mid-sized registrants looking for easier, simpler ways to raise capital.

Yes, the SEC has been slow to adopt an equity crowdfunding rule required by the JOBS Act (partly due to investor protection concerns, partly due to the rule’s complexity), but SEC Chairman Mary Jo White insists that rule will arrive by early 2016. Meanwhile, to see what the SEC may really consider in coming months, look beyond its five commissioners to the agency’s Advisory Committee on Small and Emerging Companies.

Among the matters it is considering, and will make recommendations to commissioners on:

Expanding regulatory relief for smaller reporting companies as part of the SEC’s ongoing Regulation S-K review;

Revising the definition of smaller reporting companies to include companies with a public float of up to $250 million;

Creating new “venture exchanges” for companies that can’t yet crack into Nasdaq or NYSE;

Potentially easing rules on executive pay disclosure mandated by Dodd-Frank for smaller reporting companies;

Reconsidering the current definition of an “accredited investor” definition.

The committee’s work has progressed quickly, especially during the past three months. The big question is whether those efforts will gain needed traction. Consider, for example, recommendations the committee submitted at the end of July regarding private placement “finders.” If all goes according to plan, SEC commissioners could consider the recommendation as early as September.

“Bankers always fuss and complain about the 21 days and that it creates an artificial stumbling block.”
Anna Pinedo, Partner, Morrison Foerster

What is a finder? The SEC has no formal definition, despite their prevalence in small-cap and early-stage capital raising. Finders are typically middlemen who help raise capital and attract investors for cash-strapped companies that otherwise fly below the radar of investment bankers and traditional, regulated broker-dealers. Unlike broker-dealers, finders tend to slip through the cracks of both SEC and FINRA oversight because of their informal nature. The goal of any rule would be to bring finders more into the financial mainstream.

A July proposal drafted by Gregory Yadley—a member of the Advisory Committee on Small and Emerging Companies and partner at the law firm Shumaker, Loop & Kendrick—would define finders, expand the use of private placement brokers, and clarify permissible activities. “A finder, not acting as a broker, has no need to be regulated,” he says.

The advisory committee recommendation calls for SEC guidance, no-action letters, or even a rule amendment to put limits on the number and size of finder-aided transactions, prohibitions on handling money or securities on behalf of a client, limits on the number of unaccredited investors finders can work with, and the usual regime of bad actor disqualifications.

These changes would allow finders to “come out of the dark and, for the first time, allow for adequate disclosures regarding compensation relationships between the intermediary and issuer,” Yadley says.

Proponents admit a lot will depend on how the SEC commissioners view the concept and whether they are willing to stand up to state regulators, who would prefer to keep oversight of finders to themselves. “This is another opportunity for the states to try to circumvent whatever the SEC comes up with,” says D.J. Paul, a member of the SEC’s Advisory Committee on Small & Emerging Companies and co-chair of Crowdfund Intermediary Regulatory Advocates. “These recommendations are best served by state preemption.”

“The goal wouldn’t be to gut the broker-dealer regulation system,” Yadley says. “If someone really is a broker who is making recommendations, selling securities, and handling funds they ought to still be registered as a broker. I don’t think that is controversial.”

Paul’s suggestion: SEC commissioners should create a safe-harbor exemption for transactions that fall under an established threshold of around $250,000, or perhaps of a specified number of transactions. “This would really help the kinds of small business that aren’t helped by broker dealers,” he says.

Back to Congress

Meanwhile, as small business advocates lobby the SEC, Congress did take a stab at some JOBS Act-related legislation before its August recess. Over the course of July 14-15, several bills were passed proposing to change registration and reporting requirements for small reporting companies, small business investment companies, and emerging growth companies. They now move along to the Senate Committee on Banking, Housing, and Urban Affairs.


The following is an excerpt from a bill summary of the “Improving Access to Capital for Emerging Growth Companies Act.”
Amends the Securities Act of 1933 to reduce from 21 to 15 the number of days before a “road show” that an emerging growth company (EGC), before its initial public offering (IPO) date, may publicly file a draft registration statement for confidential nonpublic review by the SEC.
A financial “road show” is an offer, other than a statutory prospectus or a portion of one, that contains a presentation regarding an offering by one or more members of the issuer's management and includes discussion of one or more of the issuer, such management, and the securities being offered.
Typically, a road show is a series of meetings across different cities, often before an IPO, in which top executives from a company have the opportunity to talk with current or potential investors.
Prescribes a grace period during which an issuer that was an EGC at the time it filed a confidential registration statement (or, in lieu of that, a publicly filed registration statement) for SEC review, but ceases to be an EGC, shall continue to be treated as an emerging market growth company for one year or, if earlier, until consummation of its IPO.
Amends the Jumpstart Our Business Startups Act to direct the SEC to prescribe conditions under which a registration statement filed (or submitted for confidential review) by an issuer before its IPO may omit financial disclosure information for historical periods otherwise required.
The FDIC encourages insured depository institutions to serve their communities and recognizes the importance of the services they provide. Individual customers within broader customer categories present varying degrees of risk.
Accordingly, the FDIC encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk. Financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of customer accounts or individual customer operating in compliance with applicable state and federal law.
The FDIC is aware that some institutions may be hesitant to provide certain types of banking services due to concerns that they will be unable to comply with the associated requirements of the Bank Secrecy Act (BSA). The FDIC and the other federal banking agencies recognize that as a practical matter, it is not possible for a financial institution to detect and report all potentially illicit transactions that flow through an institution.

 Included in the legislative line-up:

The SBIC Advisers Relief Act, which would amend the Investment Advisers Act to exempt SBICs from certain SEC registration and reporting requirements.

The Holding Company Registration Threshold Equalization Act, which would amend Title VI of the JOBS Act and raise the threshold number of shareholders of record at which savings and loan companies must register with the SEC. It also sets a new threshold for the number of shareholders a savings and loan company can have and still terminate its registration.

The Small Company Simple Registration Act, which would require the SEC to revise Form S-1 to allow smaller reporting companies to incorporate by reference any documents they file with the SEC after the effective date of a registration statement. By merely making a mention of those documents, they would be treated as actual filings.

The Access to Capital for Emerging Growth Companies Act would change the treatment of emerging growth companies. It would reduce the number of days that an EGC is required to have a confidential registration statement on file with the SEC before a “road show” from 21 to 15, and would allow an issuer to retain EGC status through the date of its IPO if it was considered as such at the time of filing its confidential registration statement.

Anna Pinedo, a partner with the law firm Morrison Foerster, characterized the current batch of House bills as “fixes,” with the one pertaining to EGC road shows likely to be the most welcomed. “We spend a fair bit of time trying to map out the schedule and thinking about when is the right time to go ahead and do the public filing,” she says. “Bankers always fuss and complain about the 21 days and that it creates an artificial stumbling block.”

Potentially a more important bill—although one that failed to move onto the Senate before the recess—is the RAISE Act (Reforming Access for Investments in Startup Enterprises Act). It would create a new federal exemption from registration for resale of private company securities, so long as the shares are only resold to accredited investors and remain restricted.

The JOBS Act raised the threshold for the number of shareholders that triggered the need to publicly register from 500 to 2,000 (excluding employee shareholders). The goal was to give companies more time to get their act together, and raise even more capital before going forward with an IPO. The catch: Companies are lingering longer in pre-IPO limbo.

Currently, federal law only provides a safe harbor and state securities law preemption for private company resales if the seller has held those shares for at least 12 months. Easing that restriction, and others, would allow greater liquidity for shareholders and companies alike.

“It would be a big improvement,” Pinedo says. “We read about all these companies that are remaining private and becoming very large companies. It is denying reality if you don’t think there aren’t transfers of those securities taking place now. So, why not have a clearer path and more certainty about how you document those transfers?”