SEC 2011 Forum on Small Business Capital Formation

The following is a (more or less) speaker-by-speaker summary of the two morning session panels at the SEC's 2011 "Government-Business Forum on Small Business Capital Formation." Great stuff here. Crowdfunding, general solicitation, reforms to Reg A - all that. It got feisty over the question of whether the lack of a robust IPO market is all that bad. Is continued expansion of private capital formation the future? (If so, if the focus of reform today is on making exemptions broader to facilitate more private capital formation, no doubt more attention on secondary trading will follow.)

10AM Pacific/1PM Eastern
The forum is breaking for lunch.

Screen shot 2011-11-17 at 9.54.11 AMThe afternoon activities are breakout sessions, not webcast, so I will sign off for now.

950AM Pacific/1250PM Eastern
SEC Commissioner Troy A. Paredes is speaking now. He seems to support the private capital formation reforms (repeal prohibition on general solicitation, expand Reg A, promulgate a crowdfunding exemption) discussed this morning and also sounds themes on easing the path to going public.

940AM Pacific/1240PM Eastern
There is some back and forth now on "preparing the market" and relaxing restrictions on pre-offering communication.

Hogoboom has a contrarian view on eliminating the general solicitation prohibition. Again, this is stream-of-paraphrase:

"I heard what the person from Silicon Valley said. There's a lot of things that happen on the West Coast that wouldn't play well in New York and elsewhere. If people are allowed to make general solicitations, then I don't know who is saying what to who and how many. All those others [solicited but not allowed to invest] told how great an investment it was, they are going to be seeking that stock in the secondary market" about companies for which there is little public information available.

I would presume that Hogoboom likes the paradigm of keeping information close, then disseminating it, making it open to everyone at once, through 8-Ks.

910AM Pacific/1210PM Eastern
Screen shot 2011-11-17 at 9.17.48 AMStream-of-paraphrase/quotation here, of John D. Hogoboom, a securities lawyer in New Jersey:

"I think Professor Coffee nailed it. I've spent 25 years as a securities lawyer. There is not some enormous pent up demand for people to do IPOs that have not been able to do them. It's a shame that the dot com bubble burst like it did. But there are a lot of investors running scared who do not want to put money into an IPO situation."

His theme is challenges faced by smaller public, not private, companies. His materials here.

910AM Pacific/1210PM Eastern
Screen shot 2011-11-17 at 9.15.05 AMKathleen Weiss Hanley of the SEC now speaking. More data on IPOs. Reg D is beginning to overtake public debt as means of financing.

9AM Pacific/Noon Eastern
ThinkEquity CEO just spoke. I apologize but I was distracted. His materials will be posted later, I think I heard? Here is a link to the page where I am getting links to the various presenter materials.

845AM Pacific/1145AM Eastern
Professor John Coffee starts by rebutting David Weild. He says the goal should not be to bring back the smaller IPO. The goal should be for the SEC to help the entrepreneur raise money in an efficient manner, while also maintaining appropriate investor protection. The future will remain with Reg D, private placements, and smaller capital raising mechanisms.

Screen shot 2011-11-17 at 8.48.43 AM""Build it and they will come." May be true for baseball, not necessarily so for capital markets. Coffee thinks entrepreneurs are making a rational choice to forego going public. Part of it is that relaxation of 144 and other restrictions make liquidity, which before had been the more exclusive province of being public, more available to private companies.

"IPOs didn't decline slowly, they want off a cliff . . . A drop that sharp can't just be slow erosion."

Amounts NOT raised in IPOs are offset by the explosion in amounts raised under Reg D. 37,000 offerings, median size around $1 million. 37 Reg D filings a day - and that doesn't show everything that is happening because of the reliance on 4(2). (Sorry, I missed the period of time covered by these stats. Should be in his paper that is provided online?)

In brief, Coffee's views on other points discussed today:

On the general solicitation prohibition: "A vistigial appendix . . . I don't think it has any significant function."

On moving Reg A from $5 million to $50 million: good move; does not remove SEC oversight.

On crowdfunding: "A catchy, fashionable idea, tweeting for investors." As drafted now, should it pass, then we will see, every night in every bar in America, a Danny DeVito-figure hawking securities. "It would add some stigma to the securities marketing process."

Bottom line: Coffee thinks exemptions are the present and are the future; thinks they can even be improved to make things easier for entrepreneurs. But don't create overbroad exemptions, he urges.

Coffee was speaking from prepared remarks, too, but they were obviously his and he delivered them with personality, gusto and good humor.

830AM Pacific/1130AM Eastern
Screen shot 2011-11-17 at 8.35.36 AMStunting the IPO market puts the entire public market into systemic decline, says David Weild of Grant Thornton. His diction and syntax are at once aggressive and impersonal. He seems to be speaking from materials which he acknowledges were prepared by others. (What was cool about the last panel was that people were speaking their own thoughts.)

Here is a link to Weild's slide deck.

The loss of the IPO market has cost the country 10 million jobs, Weild says.

From the Grant Thornton-branded deck: "IPO success rates have been in sustained decline for nearly two decades, despite deals that are increasing in average size and maturity."

820AM Pacific/1120AM Eastern
The earlier panel, blogged about below, was on "exempt offerings," sales of stock by startups and private companies that are not required to go through the registration rules. A new panel up now that is about IPOs and regulation of smaller public companies.

810AM Pacific/1110AM Eastern
A rally was planned, I think to promote the crowdfunding exemption, to occur in DC this morning. Representative McHenry, the sponsor of the crowdfunding bill that passed the House, is on the agenda to speak. If I can find a picture of the rally, I'll post it.

740AM Pacific/1040AM Eastern
First panel now over. I may take a brief break.

Screen shot 2011-11-17 at 7.40.24 AM

730AM Pacific/1030AM Eastern
Gregory C. Yadley, a lawyer in Tampa, now speaking. Talking about the 500 shareholder limit. Is it a true reflection of what is a public market, he asks. For small companies that do not have their stock held in the manner big companies do, it can add up.

710AM Pacific/1010AM Eastern
Yokum Taku of the Palo Alto office of WSG&R now speaking. He quickly gives a smattering of details on what his startup law practice is like:

  • Has completed 100 private company financings in the last year or so.
  • The typical financing involves a two person startup raising between $500,000 to $1.5M.
  • These entrepreneurs do very little disclosure; they do not do a Reg D private placement memo.
  • His clients expect him to get convertible debt financings done for "five to ten K."

Screen shot 2011-11-17 at 7.10.21 AMHe is in the thick of it. From his home, he sees Mark Zuckerberg walking to work every morning.

Taku turns to the general solicitation prohibition. Many startups find funding through public pitch events, incubator programs, etc. "Does it make sense that three name brand angel investors later have a rescission right, just because the issuer solicited over the internet?"

"Would be better if there were bright line rules," Taku says, on resales of private securities. The Section 4(1)1/2 exemption is too vague. The lack of information is troubling, too; buyers in secondary markets sometimes don't even know the fully diluted capitalization of the company they are buying into.

7AM Pacific/10AM Eastern
Screen shot 2011-11-17 at 7.02.52 AMA. Heath Abshure, Arkansas Securities Commissioner, says that state regulators are the better and more proper regulators of a crowdfunding exemption. "The focus needs to be reasonable regulation," and not, as Prof. Bradford had said, "as little regulation as possible." Abshure thinks the states have not been given a chance to coordinate and come up with a crowdfunding exemption that would work and would leave authority with them to regulate crowdfunded offerings. "They [the states] can provide a uniform way of dealing with this. . . I think we are the more appropriate regulator here."

Bradford rejoins that the federal exemption should be passed, with preemption, and that preemption can later be removed when the states get around to coming up with their uniform exemption. Abshure says it ain't easy to get authority back, once taken away.

655AM Pacific/955AM Eastern
Bradford now talking about how sensitive crowdfunding will be to regulation. Too many filing, disclosure or other requirements, you make it necessary to involve lawyers, you "destroy the exemption's utility." Regulate the platforms, he says. They are visible, they can afford the lawyers, they can be the gatekeepers. Require the crowdfunding sites to enforce the rules for issuers, such as they are (e.g., the bad actor rule?).

"That's the problem I have with the House bill . . . you don't have that gatekeeper."

State brokerage laws should be preempted too, Bradford says, in a federal crowdfunding exemption, not just an issuer registration preemption.

Further thoughts from me on keeping lawyers out of crowdfunding, at this prior post.

645AM Pacific/945AM Eastern
Steven Bradford, the professor with the slidedeck on crowdfunding (link below), says crowdfunding could do for capital formation what Google did for search. Interesting analogy!

Screen shot 2011-11-17 at 6.47.02 AMBradford now talking about whether crowdfunding sites (a/k/a platforms or, in the verbiage of proposed legislation, "intermediaries") might be treated as brokers or investment advisers. Bradford thinks they should not be and should not be regulated as either.

He wouldn't have believed a year ago that a crowdfunding exemption would become law, but today it looks like it probably will happen.

"There will be more fraud if we allow crowdfunding, but that is a trivial point," Bradford says. No question there is an outsized risk of fraud in crowdfunding, as well as increased self-dealing by the entrepreneur. But, "the real question is whether the capital formation benefits of crowdfunding outweigh" the costs of fraud. Bradford says they do, and that the trick is to get the limits right. Limitations on size of offering and size of individual investment.

645AM Pacific/945AM Eastern
Screen shot 2011-11-17 at 6.37.19 AMGraham just finished by talking about how state preemption should extend to Rules 504 and 505. Those are other Reg D exemptions that no one uses because states overlay regulations that make reliance on those rules impractical. "Nearly everyone uses 506, even for offerings under one million dollars." That's because 506 is the only one of the three that preempts state registration requirements. He also mentions that many are now simply relying on a 4(2) exemption and skipping Reg D filings altogether. (That reduces transparency.)

640AM Pacific/940AM Eastern
Stephen M. Graham, a Seattle attorney, is speaking now about how the prohibition on general solicitation really doesn't serve entrepreneurs well and doesn't seem to add anything to investor protection if the offering is otherwise conducted under Rule 506 of Regulation D and investors are restricted to those who are accredited.

630AM Pacific/930AM Eastern
A speaker on the first panel will be a professor, C. Steven Bradford, who will speak about crowdfunding. Here's a link to a slidedeck, "Crowdfunding and Federal Securities Law," that looks like it covers Prof. Bradford's recommendations for an ideal crowdfunding exemption (aggregate and individual investment caps).

6AM Pacific/9AM Eastern
The SEC is holding its annual "Forum on Small Business Capital Formation" today. I am going to try to live blog through a couple of the morning panels. I'm not there in Washington DC, I'm watching the webcast. See this agenda for the forum.

Screen shot 2011-11-17 at 6.00.35 AM

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