New SEC rules aim to bolster small-company investment

New SEC rules aim to bolster small-company investment
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Small companies looking to raise investor capital may find it easier under new and amended rules relaxing federal registration requirements.

The Securities and Exchange Commission (SEC) voted unanimously Oct. 26 in favor of the two rules, drafted in response to 2012’s Jumpstart Our Business Startups (JOBS) Act. The JOBS Act permits general solicitation, or advertisement, of securities sales and crowdfunding.

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The new rule, Rule 147A, and the amended Rule 147 of the Securities Act, will allow firms to solicit capital funding outside of their states while still avoiding federal registration. The rules continue to require companies operating only in one state to sell within their states, but it allows firms to advertise their offerings online on crowdfunding platforms.

"The new exemption from registration under the federal securities laws for local and regional offerings eliminates an existing restriction on offers that has been outmoded by the tremendous expansion of internet communications," SEC Chairwoman Mary Jo White said. 

The SEC also raised the amount of equities that can be sold or debt that can be raised by a firm in a 12-month period without registering with the SEC. That new threshold, under Amended Rule 504 of Regulation D rises to $5 million of securities, up from $1 million. 

Avoiding SEC registration allows firms to circumvent a litany of compliance costs and White said the changes to the rules will give state securities regulators more flexibility and could help facilitate capital formation. 

Result of chaotic federal-state laws. 

In addition to intrastate firms being able to use the internet to solicit capital investments, the new rule allows companies to be incorporated out of state. In order to qualify for the intrastate exemption, firms will need to confirm that their principal place of business is in-state. 

Moreover, intrastate companies will need to obtain written representation of residency from each purchaser and limit offering resales to intrastate residents for a six-month period. 

James Angel, a finance professor at Georgetown University, told The Hill Extra that the need to make this rule is a reflection of the chaotic federal-state regulatory relationship. 

“This makes things slightly better in its own complicated way,” Angel said. “If you’re in a state like California, Texas, or even Alaska, those are pretty big states, so I can see how somebody would want to sell to somebody just in that state." 

Angel said businesses operating in small territories, like Delaware or the District of Columbia, "the state borders are so confining as to make an intrastate offering ridiculous,” Angel said. 

The amended rule will increase the pre-registration maximum for debt offerings and security sales to $5 million, but has a special provision to disqualify certain bad actors from participating.

Jim Toes, president of the Security Traders Association, told The Hill Extra that the amended rule is critical for small businesses who struggle to attract capital investment in the current economic and regulatory environment.

“Getting banks to commit resources to doing [initial public offerings] on companies that are small...the incentives are just not there," he said. The rule "enables companies that only have an idea to get some meaningful financing in the early stages to turn that idea into a reality.” 

Not Enough Protection.

But Angel said certain bad-actor provisions may not be enough to protect investors.

“The problem is that the SEC has not grappled with how to protect public investors in non-registered companies,” he said. “The real issue is, how do you make sure [investors] are given enough information to monitor their investments?

“How do you surveil for insider trading? These are all very important issues that the SEC is sticking its head in the sand on,” Angel said. 

New Rule 147A and amended Rule 147 will be effective 150 days after publication in the Federal Register. 

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