Advisory Committee on Small and Emerging Companies

On October 5, 2016, the SEC Advisory Committee on Small and Emerging Companies held a public meeting to discuss, among other things, board diversity for public companies.  As part of the meeting, the National Association of Corporate Directors (the “NACD”) gave a presentation titled “Advancing Exemplary Board Leadership, which highlighted various statistics concerning board diversity, including that, in 2015, at S&P 500 companies, women comprised 20% of all directors, African Americans comprised 8.6% of directors, Hispanics/Latinos comprised 4.8% of directors, and board members of Asian descent comprised 1.8% of directors.  The NACD presentation stressed that board diversity should reflect both identity (e.g., gender, race, and ethnicity) and skills, such as professional experience, and emphasized the link between diverse boards and improved public company performance.  The NACD presentation also noted that progress in increasing board diversity in the United States has been relatively slow and the United States falls behind many countries in the percentage of women on boards.  However, the NACD presentation found that a significant number of public companies took certain initiatives to increase their board diversity, including expanding search criteria, diversifying the composition of the nominating and governance committees, increasing the size of the board, instituting or changing tenure-limited mechanisms, and adopting formal racial and/or gender diversity targets.

The NACD presentation is available at:

The Securities and Exchange Commission has published the agenda for the October 5 meeting of the Advisory Committee on Small and Emerging Companies.

The Advisory Committee plans to discuss and cover Regulation S-K disclosure requirements, research on corporate board diversity and outreach relating to capital raising for smaller companies.

In addition, the Division of Trading and Markets will provide updates on equity capital market structure initiatives, a tick-size pilot, and the treatment of “finders”.

The meeting begins at 9:30am and will be live streamed via the SEC’s website.

This summer, the House Financial Services Committee passed the Main Street Growth Act, which calls for legislative changes to promote the formation of venture exchanges.  The idea that securities exchanges specially designed for trading smaller and younger firms might be a useful addition to U.S. equity markets has been on people’s minds at the SEC and Congress since the SEC Advisory Committee on Small and Emerging Companies proposed it in March 2013.

Both the committee recommendation and the bill, however, are skeletal in nature.  Neither do much to address the liquidity and investor-protection concerns that give some lawmakers and regulators pause.  In a forthcoming essay, I set out a template for venture-exchange regulation that deals directly with these issues.

Contrary to some commentators, I argue that the best way to support liquidity is not by regulating tick sizes.  Rather, I propose market microstructure rules that mandate fully transparent call-auction trading and limit trading to the listing exchange.  The primary virtue of this structure is that it would concentrate liquidity on certain venues and at certain times.

Some also propose limiting venture exchanges to accredited investors.  Because this would compromise liquidity, however, I contend that a better approach would be to require that the exchanges provide a warning that investing in venture-exchange companies is very risky, only suitable for sophisticated investors, and could result in total losses.

I argue that the most efficient and effective way to protect investors who participate despite these warnings would be to deemphasize ex ante regulation, in particular, mandated disclosure, much of which venture-exchange investors would likely ignore, and instead emphasize ex post regulation, in particular, SEC enforcement of the rules against securities fraud, market manipulation, and insider trading.  Finally, rules could mandate venture-exchange listing standards that eliminate the smallest and youngest firms, and require that platforms engage in a substantive review of each company that seeks to list before allowing them to do so.  These steps would mitigate the risks, yet leave these markets open to everyone.

The essay is forthcoming as a chapter in the Handbook on Law and Entrepreneurship (Gordon Smith & Christine Hurt eds., Cambridge Univ. Press 2017).

Jeff Schwartz is a professor in the S.J. Quinney College of Law at the University of Utah.

On July 19, 2016, the Advisory Committee on Small and Emerging Companies met to discuss the “accredited investor” definition, the Regulation A market, and the Commission’s recent proposal regarding the definition of “small reporting companies.”  In introductory remarks, Chair White shared that the Commission has received 40 comment letters regarding the Commission’s study on the definition of “accredited investor” and hopes to receive further input from the investment community and the Advisory Committee.  The Advisory Committee confirmed its proposed recommendations to the Commission Staff, which include expanding the definition of “accredited investor” to encompass those with professional accreditations (including Series 7, 65, 82 and Chartered Financial Analyst), prior investment experience and, those who pass an accredited investor examination, among other criteria.  Commissioner Stein, in discussing the proposal for modifying the thresholds for SRCs, expressed particular concern about whether the benefits of scaled disclosure will outweigh the potential lower liquidity and high cost of capital that may result from such changes.  By expanding the definition to include companies with up to a $250 million public float, Committee members stressed that companies, including those prospering through successful Regulation A+ offerings, will enjoy a lighter regulatory burden, which should make offerings more attractive.  The SEC has requested comment on this proposal.

Chair White’s remarks are available at

The agenda for the July 19 meeting of the SEC Advisory Committee on Small and Emerging Companies was recently announced.  During the meeting, the Committee will consider the “Accredited Investor” definition recommendation as discussed during the May 18 meeting.  There will also be an update and review of the first year of Regulation A+. The meeting will conclude with the SEC’s proposal to amend the “Smaller Reporting Company” definition.

The meeting will be live-streamed via the SEC website:

The SEC has announced the agenda for its May 18 meeting of the Advisory Committee on Small and Emerging Companies.  The meeting will focus on the definition of “accredited investor”, where the recent SEC staff report will be discussed. The Committee is then set to discuss unregistered securities offerings under Regulation D.

The meeting will begin at 9:30am ET and is open to the public. For more information, please see the SEC’s press release.

In connection with today’s meeting of the SEC’s Advisory Committee on Smaller and Emerging Companies, Chair White made introductory remarks.  Chair White touched on a number of the initiatives that the Advisory Committee had addressed prior to its recent renewal.  Chair White also provided updates on a few matters, including the following:

  • Proposed Changes to Rule 147 and Rule 504.  The staff of the Commission is reviewing the comments received and developing recommendations for final rules for the Commission’s consideration.
  • Accredited Investor Study. The Commission encourages market participants to provide comments.
  • Simplified Disclosure for Smaller Issuers.   The Division of Corporation Finance is advancing its Disclosure Effectiveness initiative, which includes consideration of the disclosure requirements for smaller companies.
  • Finders. The Staff in the Division of Trading and Markets continues to review this issue.
  • Market Structure. Chair White referenced the tick size pilot program, which will be implemented later this year.  Chair White noted that, “the Staff also continues to study and remain receptive to innovative industry efforts designed to facilitate secondary market liquidity for smaller companies.”

The text of the remarks are available here:

Several materials have been posted to the SEC website that provide useful data regarding the private capital markets see below links:

The DERA presentation notes that during the period from September 23, 2013 through December 31, 2015, funds have conducted 392 offerings in reliance on Rule 506(c) and operating companies have conducted 187 such offerings, which is quite modest by comparison to the number of offerings made in reliance on Rule 506(b).

Since the effectiveness of the amended Regulation A, the report shows that 68 Regulation A filings have been made, but only three Regulation A offerings qualified to date.