In a presentation to the SEC’s Advisory Committee on Small and Emerging Companies, the chair and the vice-chair of the American Bar Association’s State Regulation of Securities Committee suggested different options to address the lack of secondary market liquidity for Regulation A Tier 2 and non-exchange listed companies. Vice-Chair Richard Alvarez said that secondary market liquidity will never be fully achieved unless the blue sky laws are preempted by federal law, but Chair Martin Hewittt suggested that, rather than concentrating on preemption, everyone should consider what they agree upon as far as the information that could be provided by these companies to address states’ concerns about the protection of investors.
Reg A Tier 2 offerings. Regulation A Tier 2 offerings may not exceed $50 million in a 12-month period with limits on sales by selling security holders. The offers are subject to audited financial statements and ongoing reporting requirements. Acting Chair Michael Piwowar noted in opening remarks that between June 19, 2015, when the amendments to Regulation A took effect, and January 31, 2017, there were 181 offerings under Regulation A, 103 of which have been qualified for the issuers to begin making sales.
Alvarez acknowledged that federal preemption is very unpopular with state regulators, but in his view, state laws are overly burdensome and stunt growth and innovation. He recommended that the SEC extend federal preemption for Regulation A Tier 2 issuers and redefine "qualified purchaser" with respect to the amount of securities that can be purchased.
Hewitt advised that states’ main concern is that there is insufficient information available to small investors. Rather than rush to preempt state laws, he recommended that minimum disclosure requirements be adopted. He also urged the states to adopt a universal manual exemption.
Many of the advisory committee members supported the idea of preemption for the Regulation A Tier 2 offerings, but said it should be done in collaboration with the states. The Reardon Firm’s Patrick Reardon suggested that the North American Securities Administrators Association be given a period of time, such as two years, to come up with an agreement among the states and then take the recommendation to Congress. Otherwise, preemption is inevitable and the states will have no role, he said.
Finders. The second topic for the morning’s discussion was whether to re-issue a former recommendation to the Commission on the regulation of finders and other intermediaries in small business capital formation transactions. The committee issued a recommendation in September 2015. Because of ambiguities in the definition of a broker, some smaller market participants rely on unregistered parties to identify and solicit potential investors.
Reardon said the committee had a very unsatisfactory conversation with the former director of the Division of Trading and Markets on this subject, on which a tremendous amount of time has been spent over the past 16 years without results. He has concluded that the SEC has no plans to act in this area and if anything gets done, it will come from the Hill. He added that the ABA’s Business Law Section Task Force has also urged the SEC to take action, so there is no need to cover old ground.
Sara Hanks, a co-chair of the advisory committee and a co-founder of CrowdCheck, noted that the staff issued a no-action letter on broker-dealers in the M&A context, but there is still uncertainty in other areas (M&A Brokers, January 31, 2014, revised February 4, 2014). No-action letters generally apply only to the party that seeks the staff position, but others may rely on them she added. A number of committee members suggested enforcement actions to ensure that everyone is playing by the same rules, but others said it should not be selectively enforced.
A staff member from the Division of Trading and Markets requested that any recommendations address the protection of retail investors. She also said the staff is a little short on resources but the no-action or exemptive processes are available to those seeking clarity in this area.
The afternoon sessions included discussions on why more companies are remaining private and a recommendation on board diversity.
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