February 18, 2011
The SEC's Campaign Against Small Business
I just came across an article that anyone interested in small business financing should read: Stuart R. Cohn & Gregory C. Yadley, Capital Offense: The SEC’s Continuing Failure to Address Small Business Financing Concerns. As the title suggests, Cohn and Yadley take the SEC to task for failing to enact rules to make capital more easily available to small businesses. I have written several articles on small business exemptions, and this subject is near and dear to my heart. The Securities Act rules are a serious hurdle for entrepreneurs, and it's time to do something about it.
Cohn and Yadley make several recommendations, including the following:
-Broader preemption of state law
-Greater reliance on disclosure and antifraud provisions
-Elimination of the general solicitation and general advertising restrictions
-Elimination or substantial limitation of the integration and aggregation doctrines.
-Increasing exemption ceilings
-Elimination of or a substantial increase in the the numerical limits on purchasers
-Permitting private placement brokers and finders
All of these recommendations make sense to me (and they have some other recommendations that I haven't repeated here). It has always seemed to me that the Securities Act registration requirement and the accompanying SEC rules have several pernicious effects: (1) due to economies of scale in compliance, they give a competitive advantage to larger businesses; (2) they make it almost impossible for a small business to raise money without the involvement of a registered broker: and (3) they divert SEC resources from the more productive activity of policing fraud.
To play devil’s advocate as to that final point, is it possible that we would be better off eliminating the Securities Act registration requirements entirely and focusing more on investor education and fraud prevention?
these changes would make a difference to a small number of companies that have gained popularity with VC's and angels. most small companies start earlier than this stage. many will never require outside investors only debt finance.
here lies a fundamental problem. the basel rules penalize the capital ratios for small company lending. unless these are changed cohn and yardley's changes are merely rearranging deck chairs.
Posted by: bgreen | Feb 21, 2011 6:06:57 AM
I think bgreen's comment poses a chicken-and-egg question: to what extent do small companies turn to borrowing because of the restrictions on raising equity? Absent the SEC restrictions, businesses could do a lot of creative things in financing.
In any event, the fact that there's another problem shouldn't keep us from trying to solve this one.
Posted by: Steve Bradford | Feb 21, 2011 1:14:02 PM