The SEC wants to figure out how to make it easier for small businesses to raise capital without endangering investors.
To that end, the SEC has established a new advisory committee, set to run for two years, which will make non-binding recommendations to the commission.
The committee will focus on ‘rules, regulations, and policies’ relating to how small business can access the capital markets and meet the corporate governance and reporting requirements involved. Excluded from the committee’s focus, however, are any ‘policies, practices, actions or decisions concerning the commission’s enforcement program’. For the committee’s purposes, small business means ‘emerging privately held small businesses’ and publicly traded companies with less than $250 million in public market capitalization.
While the SEC’s releases were short on specifics, a testimony last week by Meredith Cross, director of the division of corporation finance, gives insight into what’s driving this review. Crowdfunding is one example. Crowdfunding involves large numbers of very small investors, and has traditionally been used by film makers and other artists seeking funds to complete their projects. Those crowdfunding ‘investors’ generally received a perk - such as a copy of the film - for their ‘investment,’ and not an opportunity to profit. But now businesses would like to use the same concept to sell ownership interests to very small investors. In fact the Sustainable Economies Law Center has petitioned the SEC to exempt ‘securities offerings up to $100,000 with $100 maximum per investor from registration.’
Cross’s testimony raises several questions about crowdfunding, including:
• What information must the company provide to investors?
• Should people or firms that have been convicted or sanctioned for past securities fraud be allowed to participate?
• Should the company raising crowd funds have to notify the commission so it can keep tabs on the situation?
• Should crowdfunded securities be freely tradable?
• Should the SEC regulate websites that facilitate crowdfunding investing?
The SEC named 19 members of and two advisers to the committee. Many are from the fields of business finance, but a few are small businesses, such as Zynga, BlueFly and Tandy Leather Factory. The committee has some geographic diversity. Five members come from California; two each from Texas, New York and New Jersey; and one each from Washington, Utah, Minnesota, Indiana, Florida, Georgia, Massachusetts and Pennsylvania.