Shapiro on Small Business and our Economy

Excerpt from Chair Mary Schapiro’s Nov 17, 2011 Review on how the SEC works to Support Small Businesses – U.S. S.E.C

As you know, studies suggest that small businesses have created 60-to-80 percent of net new American jobs over the last ten years.

But there is a footnote to that statistic: the most vigorous small business job creation comes from small businesses determined to get much larger. Job growth comes from emerging enterprises trying to grow out of their warehouse space and into a corporate campus or to jump from single downtown location into retail sites nationwide. It comes from companies that need access to capital to make that jump.

Today’s focus is on creating an environment in which those small businesses have that access, one in which they can compete successfully for a share of our country’s investment capital.

Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and we believe that companies seeking access to capital should not be overburdened by unnecessary or superfluous regulations.

As we examine ways that the regulatory structure might better facilitate small business capital formation, though, it’s important to keep in mind another critical facet of the SEC’s mission: investor protection. We must balance the instinct to ease the rules governing capital access with our obligation to protect investors and markets.

This can be a challenge. Even necessary regulation can impose burdens that are disproportionately large for small businesses with limited resources.

As the daughter of a small businessperson, I am familiar with the unique challenges small businesses face. I know that instead of planning year-to-year or quarter-to-quarter, that sometimes it’s day-to-day. And I recognize that challenges that a larger business would barely even notice can be significant drains on resources and time to an enterprise that needs to focus everything on making its place in a competitive market.

It’s also important to note that investor protection shouldn’t just be a priority for investors and their advocates. Confidence in the fairness and honesty of our markets is critical to capital formation. Investors who understand that financial market participants are honest, that disclosures are accurate, and that markets offer a fair chance to earn a reasonable return are more likely to make needed capital available, and demand less in return for doing so.

And so, in this forum and through other efforts, the SEC is seeking strategies for meeting regulatory goals while reducing the weight borne by small businesses.

That is why I have instructed our staff to take a fresh look at some of our offering rules, and to develop ideas for the Commission to consider that would — in a manner consistent with investor protection — reduce undue regulatory constraints on small business capital formation. Among the issues that we are considering are:

  • The restrictions on communications in initial public offerings;
  • Whether the general solicitation ban should be revisited in light of current technologies, and capital-raising trends;
  • The number of shareholders that trigger public reporting, including questions surrounding the use of special purpose vehicles that hold securities for groups of investors; and
  • The regulatory questions posed by new capital raising strategies, including crowdfunding.

In conducting this review, we are gathering data and seeking input from many sources, including small businesses, investor groups and the public at large.

In addition, two weeks ago, we convened the first meeting of the SEC’s new Advisory Committee on Small and Emerging Companies. This initial meeting has produced a number of insights on these and other relevant issues, from committee members representing businesses, investors, academia and regulators.

The re-examination of existing regulations is also of a piece with a goal I set when I returned to the SEC as Chairman: to make sure that the agency was up to date, that the regulations we enforce reflect the current realities of the financial markets.

For 77 years, the SEC has contributed to small business growth by supporting a capital marketplace in which confident investors invested money in growing businesses. We worked to create a culture of compliance that supported transparent markets marked by high liquidity, strong secondary market trading and investor protection.

Full transcript at http://www.sec.gov/news/speech/2011/spch111711mls.htm

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Net Worth “Accredited Investor” – much ado about nothing

Is this something or nothing?

Today the SEC adopted the new Net Worth Standard that excludes the value of someone’s home from a calculation that allows individuals to be categorized as accredited investors.  Is this much to do about nothing? Should we want to be labelled an accredit investor?  (see http://www.sec.gov/news/press/2011/2011-274.htm for details on the new standard announced today December 21st, 2011).

What is an ‘accredited investor’?  Someone who no longer needs the protections provided by the SEC as provided through the process of registration and regulation.  It implies that you will take all necessary steps to evaluate these investments and do not need the basic protection provided through the registration process.

The real question is not if a home value should be included but whether having a $1M in assets (with or without a home) truly qualifies you as able to evaluate unregistered/unregulated investments.  In my experience, many full time advisers and investors with several million are not qualified to evaluate and invest in unregulated/unregistered investments.

The changes were made to conform the SEC’s definition of an “accredited investor” to the requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (final rule No. 33-9287).  See below for pertinent details:

Under the amended rule, the value of an individual’s primary residence will not count as an asset when calculating net worth to determine “accredited investor” status. The amendments also clarify the treatment of borrowing secured by a primary residence for purposes of the net worth calculation. Under certain circumstances, they also permit individuals who qualified as accredited investors under the pre-Dodd-Frank Act definition of net worth to use that prior net worth standard for certain follow-on investments.

SEC rules permit certain private and limited offerings to be made without registration, and without requiring specified disclosures, if sales are made only to “accredited investors.”

The amended net worth standard will take effect 60 days after publication in the Federal Register. Beginning in 2014, and every four years thereafter, the Dodd-Frank Act requires the Commission to review the “accredited investor” definition in its entirety and to engage in further rulemaking to the extent it deems appropriate.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com