SEC Small Business Committee throws down gauntlet on state trading preemption


The Securities and Exchange Commission’s (SEC) Small Business Capital Formation Advisory Committee (SBCFAC) has thrown down the gauntlet. Like the SEC website explains, the SBCFAC was created by the SEC Small Business Defense Act of 2016 and is designed to provide a formal mechanism for the Commission to receive advice and recommendations on rules, regulations and policy issues relating to small businesses, including small state-owned enterprises. Its last meeting produced a clear message: it is time to start providing liquidity in private markets.

It is now up to the whole Commission, made up of two new members, Mark T. Uyeda and Jaime Lizárraga, to heed their advice. A decade after President Obama signed the bipartisan Jumpstart Our Business Startups Act (JOBS Act of 2012), which invited ordinary Americans into the lucrative private capital markets, the job remains half done at best. Two JOBS Act Title III—which became Regulation Crowdfunding (HR reg) – and Title IV – which dramatically improved Regulation A (Reg A+) – showed the success of deregulation. These two titles have enabled a paradigm shift in private business investing by allowing startups and small businesses to accept investments from retail investors. Reg CF is aimed at small and start-up businesses with a 12-month supply limit of $5 million. More mature companies use Reg A+, which combines greater SEC review with a 12-month supply limit of $75 million.

In March 2021, the Commission extended provisions of the JOBS law which freed up more capital. But challenges remain. The first of these is the lack of liquidity in the secondary market, where the first buyers resell the shares. SBCFAC addressed this issue this month by examining the lack of secondary commercial state preemption for both HR reg and Reg A+.

The Meet opened by the Commissioner’s remarks. Commissioner Hester Peirce explained how secondary market liquidity and investor protection complement rather than conflict:

Secondary market liquidity combines capital formation with investor protection. The issuer’s ability to raise capital depends in part on whether buyers of their securities will benefit from strong liquidity in the secondary market.

When presentations began, Ryan Feit, CEO and co-founder of crowdfunding portal SeedInvest, shared the frustration investors feel with their illiquid investments, even when values ​​rise due to rounds at per-share prices. higher :

[W]What happens is that many startup and small business investors burn out quickly. They make an investment or a few, and they’re thrilled about it, and then they actually realize that I might have to wait five to ten years to make a profit out of it.

This ultimately leads to less capital for new projects and ultimately good ideas go unfunded.

Sara Hanks, a reputable securities practitioner and SBCFAC member, spoke about the cumbersome nature of complying with regimes from state to state, which differ in fee structure, timing, notice requirements and other areas. She mentioned possible solutions in the JOBS Act 4.0 that Congress is currently considering.

Indeed, CEI filed comments in June on the JOBS 4.0 Act emphasizing the importance of pre-empting government securities processes for secondary trading among a host of other proposals aimed at improving private capital. .

A representative of the North American Securities Administrators Association (NASAA), a trade organization representing state-level securities agencies, opposed any move to provide liquidity to the private market. NASSA usually opposes any access to private capital markets for retail investors and promotes additional charges for accredited investors. This firmly opposed the JOBS law, filing numerous statements, comments and press releases, at any given time describing it as “an investor protection disaster waiting to happen”. Two members of NASSA, Montana and Massachusetts, sued the SEC halt the implementation of Reg A+ with NASSA in support as amicus curiae. They lost.

But that didn’t deter the committee, at least for Reg A+. They voted 9 to 1 in favor of a pilot program for Reg A+ to pre-empt state securities laws for secondary trading. The ball is now in the stewards’ court. According to JD Alois of Crowdfunding Participant, the committee is expected to “submit a formal recommendation to the Commission in the coming weeks which underlines the need for pre-emption for Reg A+ titles”. Now is the time for the SEC to act for small businesses. And Congress should complement this initiative by passing the JOBS Act 4.0.

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