Earlier this year, Rep. David Schweikert (R-Calif.) introduced a bill to enact the Small Company Capital Formation Act of 2011 that has been making its way through the House.
In substance, the bill would modernize an SEC disclosure regime known as Regulation A, which has languished without attention by the SEC and has utterly failed in its mission to foster access to public equity capital. Since the existing regulation limits the amount of capital that can be raised to a clearly inadequate $5 million, pursuing an offering under Regulation A is not a viable alternative for raising significant growth capital.
However, the Small Company Capital Formation Act would increase the maximum offering amount to $50 million, allowing small growth companies to raise more capital. Notably, enterprises relying on a modernized Regulation A to raise growth capital would not escape regulation entirely and would still be subject to the oversight provided by the SEC’s review of offering circulars delivered to investors.
The encouraging news is that the Obama Administration has now also taken up the mantle of small growth company capital formation. The Administration publicly stated in its September 8, 2011 announcement concerning the American Jobs Action that it supports raising the cap on mini-offerings (Regulation A) from $5 million to $50 million. This will make it easier for entrepreneurs to raise capital and create jobs.
Earlier this week [September 12] Sen. Jon Tester (D-Mont.) and Sen. Pat Toomey (R-Pa.) introduced a similar bill in the Senate to increase the Regulation A offering limit to $50 million. If President Obama wants to facilitate the job creation embodied in his job bills, he should endorse this legislation and work to achieve its passage in the Senate and the House.
The existing Exchange Act registration regime can be optimally tailored to recognize the size and scale of small growth companies.
One way to accomplish this is to enact legislation that conditionally exempts small growth companies from the periodic and other compliance obligations imposed on listed public companies until they reach a market capitalization of $250 million, a size threshold the SEC determined earlier this week [September 13] that its newly formed advisory committee on small and emerging companies should consider in carrying out its mandate to study ways of reducing regulatory burdens.
Under current federal law, companies with $10 million or more in assets and 500 holders of record must register their securities under the Exchange Act and hence become subject to the same regulations that apply to listed public companies, a consequence that serves as a disincentive for many small growth to raise significant amounts of capital. This disincentive should be removed.
The solution is legislation conditionally exempting Exchange Act registration to provide the desired regulatory relief, but at the same time requires companies to file periodic reports with the SEC (including annual audited financial statements).
Investor protection can be further advanced by providing for the exemption to lapse when the company's market capitalization reaches $250 million. Small growth companies would be able to deploy the capital raised under Regulation A and focus on developing their businesses without the burdens associated with Exchange Act registration.
The President and Congress should act now and not wait until the SEC's advisory committee completes its work. By acting now to enact the legislation, they can make the basic policy choice to facilitate small growth company capital formation and leave it to the advisory committee to advise the SEC on implementation of the new statute.
Mr. Zuppone, a partner at Paul Hastings LLP and chair of the firm’s securities and capital markets practice, is a former SEC branch chief.