Advisory Committee on Small and Emerging Companies

On September 13, 2017, the SEC Advisory Committee on Small and Emerging Companies held an open meeting to discuss the Sarbanes-Oxley (“SOX”) auditor attestation requirement, the final report that will be issued prior to the expiration of the Committee’s current charter and whether updates are needed to Securities Act Rule 701.  In its discussion of the SOX auditor attestation requirement, the Committee considered the associated compliance costs and a proposal to change the “smaller reporting company” (“SRC”) and “non-accelerated filer” definitions to a company with either (1) a public float of less than $250 million or annual revenues of less than $100 million.  The SEC’s proposed amendments to the SRC definition from June 2016 did not cover non-accelerated filers.  The Committee then discussed its draft report to the SEC, which emphasized a number of recommendations it has made in the past, including the following:

  • Providing regulatory certainty for finders, private placement brokers and platforms that are not registered as broker-dealers and are involved in primary and secondary offerings of unregistered securities in order to help smaller businesses raise capital.
  • Supporting an expansion of the “accredited investor” definition to take into account measures of sophistication, regardless of income or net worth, thereby expanding rather than contracting the pool of accredited investors.
  • Extending to SRCs the same accommodations made to EGCs with respect to disclosure requirements, and finalizing the proposed amendments to increase the financial thresholds in the SRC definition and revising the definition of “accelerated filer” to include companies with a public float of $250 million or more, but less than $700 million.
  • Amending Item 407(c)(2) of Regulation S-K to require issuers to describe, in addition to their policy with respect to diversity, if any, the extent to which their boards are in fact diverse, by including disclosure regarding race, gender and ethnicity of each board member.
  • Preempting state regulation of secondary trading in securities of Tier 2 Regulation A issuers that are current in their ongoing reports in order to improve secondary market liquidity.
  • Allowing smaller exchange-listed companies to voluntary choose trading increments or tick-sizes greater than the one penny in order to help small and mid-cap companies raise capital.

The Committee then turned to a discussion of various proposed changes to Securities Act Rule 701, including, among others, removing the requirement that consultants be “natural persons,” removing the $5 million aggregate limitation (the “hard cap limit”), clarifying that material amendments to any security previously issued under Rule 701 does not result in a new grant or sale, clarifying the application of Rule 701 to RSUs, clarifying that expanded disclosure is only required to be provided for sales that occur after the hard cap limit is exceeded, and clarifying the timing and delivery requirements for expanded disclosure.

A copy of the Committee’s draft report is available here.

The SEC Advisory Committee on Small and Emerging Companies will hold its next meeting on Wednesday, September 13, 2017 at 9:30 a.m. ET.

The Committee will begin with a discussion of the Sarbanes-Oxley Act auditor attestation requirement.  The Committee will also consider whether updates are needed to Securities Act Rule 701.  In addition, the Committee will decide the final report that will be issued before the expiration of the Committee’s current charter.  See the full meeting agenda here.

The meeting will be open to the public and available via webcast on the SEC’s website.

The SEC announced that the next meeting of the Advisory Committee on Small and Emerging Companies will be held on Wednesday, May 10, 2017, beginning at 9:30 a.m. The committee will focus on the interests and priorities of emerging and smaller public companies.

The committee will discuss the underwriting of small offerings with updates from SEC staff about the tick size pilot program and from state securities regulators about their latest enforcement report.  The committee will also consider recommendations on secondary market liquidity for Regulation A, Tier 2 securities and the treatment of “finders” that assist companies in capital raising activities.

Meetings are open to the public and are also webcasted on the SEC’s website.

In a recent letter, the Chamber commented to the SEC’s Advisory Committee on Small and Emerging Companies about the Committee’s consideration of the factors affecting the trend of companies remaining private and deferring their IPOs.  The Chamber’s letter attributes some of the “hurdles” of becoming a public company to the SEC’s complex disclosure requirements, recent specialized disclosure requirements, and the influence of proxy advisory firms on governance in U.S. public companies.  The Chamber recently published a white paper, Essential Information:  Modernizing Our Corporate Disclosure System, which addresses materiality as a guiding principle for securities disclosures and cautions against “special interest disclosure” requirements.  Presumably, the SEC will continue to advance the disclosure effectiveness initiative, which had been undertaken under former Chair White’s leadership.

The Chamber’s letter is available here:  http://www.centerforcapitalmarkets.com/wp-content/uploads/2017/02/2017.2.15-US-Chamber-Letter-to-SEC-re-advisory-cmte-meeting-on-companies-staying-private.pdf?x48633

The Chamber’s white paper is available here:  http://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/U.S.-Chamber-Essential-Information_Materiality-Report-W_FINAL.pdf?x48633

Because they can….  This was the conclusion of the discussion at the SEC Advisory Committee on Small and Emerging Companies earlier in the week (see our prior post regarding the meeting).  The Committee discussed statistics relating to the number of companies that are undertaking IPOs, the number of venture-backed companies receiving substantial private investments, trends relating to acquisitions of venture-backed companies (presumably instead of IPOs), and the various factors contributing to this noticeable trend.  The Committee hosted various speakers, including a representative of E&Y.  The E&Y presentation contains interesting market data and may be accessed here:  https://www.sec.gov/info/smallbus/acsec/giovannetti-presentation-acsec-021517.pdf.

The SEC’s Advisory Committee on Small and Emerging Companies announced its agenda for its upcoming February 15 meeting.  The committee will discuss:

  • Secondary market liquidity for Regulation A Tier 2 and non-exchange listed companies;
  • Broker-Dealer status of “finders”;
  • Why more companies are staying private; and
  • Finalizing board diversity recommendation.

The meeting is open to the public and will start at 9:30 a.m.  The meeting will be webcast on the SEC’s website.

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: https://www.sec.gov/info/smallbus/acsec-100516-nacd-dominguez.pdf.

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.