SEC Chairman Jay Clayton touted the Commission’s efforts to promote capital formation during a recent address at the 36|86 Entrepreneurship Festival in Nashville. He also gave a preview of what to expect from the SEC’s upcoming regulatory agenda, including both public registered offerings and private placements.
Promoting capital formation. Clayton heralded the Commission’s efforts to reduce regulatory burdens on pre-IPO and smaller public companies. The decline in public companies over the last decade has been a frequent topic of discussion not just for Chairman Clayton, but also for industry groups. Clayton highlighted three categories of SEC actions relating to improving the climate for companies to go public: (1) scaled disclosure for smaller companies; (2) disclosure modification and simplification; and (3) issuing guidance from the SEC staff on the IPO process.
Regarding scaled disclosure for smaller companies, Clayton drew attention to the Commission’s adoption of amendments to its thresholds for smaller reporting companies (SRCs) in June, which updated the threshold for SRC qualification for the first time in a decade. The new SRC company definition enables a company with less than $250 million of public float to provide scaled disclosures, where the previous threshold was $75 million. The new rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million. According to Clayton, the new definition, which goes into effect on September 10, will allow 966 companies to claim SRC status in its first year.
On the topic of disclosure modernization and simplification, Clayton highlighted several SEC initiatives to streamline its rules and eliminate outdated and redundant requirements. SEC staff is currently working on its final recommendations on implementation of proposed amendments required by the FAST Act that would also incorporate technology to improve investors’ access to company information. He also noted that last month, the SEC proposed amendments to financial disclosure requirements meant to encourage guaranteed debt offerings to be conducted on a registered rather than a private basis. In addition, Clayton remarked that the SEC has recently adopted final rules eliminating disclosure requirements that are outdated, overlapping, or duplicative of other SEC rules or GAAP.
Clayton praised SEC staff in the Division of Corporation Finance who have been providing guidance aimed at facilitating the IPO process. He noted that the JOBS Act gave emerging growth companies the flexibility to start the IPO review process on a confidential basis, which CorpFin has expanded to all first-time registrants and newly public companies conducting IPOs and offerings within one year of an IPO. According to Clayton, CorpFin has received draft submissions for more than 40 IPOs and from over 75 companies engaged in offerings within one year of an IPO under this expanded accommodation.
Next on the agenda. Clayton said that over the next several months, the SEC will revisit the thresholds that trigger Sarbanes-Oxley Act Section 404(b), which requires an auditor attestation report from certain registrants regarding internal control over financial reporting (ICFR). Clayton stated that market participants and smaller companies have expressed that they are overburdened by this requirement. Clayton voiced his support to taking a scaled approach for smaller reporting companies on assessing the effectiveness of ICFR. Clayton said that he has directed SEC staff to formulate recommendations on the auditor attestation requirement that would reduce the number of companies subjected to the requirement. He also advised that the staff is working on a recommendation to expand the ability of companies contemplating raising capital to "test the waters" by engaging with potential investors prior to the filing of a registration statement.
Exempt offering framework. Clayton called for taking a critical look at the SEC’s private exemption landscape, which he described as "an elaborate patchwork." The SEC should evaluate the level of complexity in its current exemptive framework, such as overlapping exemptions that can create confusion for companies and gaps in the framework that impact the ability of smaller businesses to raise capital.
Rather than focusing on just the wealth of the investor, Clayton said, the SEC should consider whether the current rules should be expanded also to focus on the sophistication of the investor, the amount of the investment, and other criteria. Clayton also said that the SEC should examine whether more can be done to allow issuers to transition from one exemption to another without undue friction, and ultimately to a registered IPO.
Clayton said that SEC staff is currently working on a concept release on how to harmonize exempt offerings and encouraged audience members to share their input. "It is extremely important to make sure we get it right," Clayton concluded.
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