Securities and Exchange Commission Chair Clayton addressed attendees at the Nashville 36|86 Entrepreneurship Festival regarding the Commission’s capital formation agenda. Clayton noted that the Commission has taken a number of steps to reduce the regulatory burdens for smaller companies, pointing to the amendments to the definition of “smaller reporting company,” the recently adopted disclosure modernization and simplification amendments to Regulation S-K and Regulation S-X, and the Division of Corporation Finance’s guidance extending the confidential submission process for registration statements to non-emerging growth companies. That being said, Clayton outlined his views regarding the need to reverse the decline in the number of public companies that has occurred over the last two decades. While many would contend that there is sufficient private capital available to fund the growth of promising privately held emerging companies, Clayton once again noted that “Main Street investors” generally are foreclosed from investing in high quality private companies.
Clayton noted that the Commission is considering suggestions and comments made at a Commission roundtable regarding supporting smaller public company secondary market liquidity. Of course, the roundtable did not address changes to the regulatory framework for equity research, which most smaller public companies would observe is the key to secondary market liquidity.
He noted that the Commission intends to consider the thresholds that trigger Sarbanes-Oxley Section 404(b) auditor attestation. Clayton used the example of biotech companies with little or no revenue that must devote considerable resources away from research and development and toward professional fees related to the attestation process. This is interesting as JOBS Act 3.0 currently contains a measure that would provide for a Section 404(b) exemption for “low-revenue” issuers, such as biotech companies. Perhaps the bill will inspire the Commission. Chair Clayton also noted that the Staff of the Commission is working on a recommendation to expand the ability to “test the waters” to non-emerging growth companies. This measure also would be addressed if JOBS Act 3.0 were to be passed.
Chair Clayton also discussed revisiting the exempt offering framework. This has come up a few times in public remarks and also is included in the Commission’s regulatory flexibility agenda. Clayton mentioned a “comprehensive review of our exemptive framework to ensure that the system, as a whole, is rational.” He suggested a number of questions that may be raised in a concept release to be issued by the Commission, such as whether we have overlapping securities offering exemptions that may create confusion for companies, and whether we have gaps in the exempt offering framework. He also noted that consideration ought to be given to the rules that “limit who can invest in certain offerings” and to expanding the focus to taking into account “the sophistication of the investor, the amount of the investment, or other criteria rather than just the wealth of the investor.” Finally, he mentioned examining integration issues.