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Univ. of Toledo College of Law

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Sunday, June 8, 2008

Campbell on Regulation D

Pernicious Economic Rules: The SEC's Inglorious Role in Limiting Small Business's Access to Capital, by RUTHEFORD B. CAMPBELL Jr., University of Kentucky - College of Law, was recently posted on SSRN.  Here is the abstract:

One of the most curious and misdirected regulatory approaches of the Securities and Exchange Commission is the Commission's relentless refusal to permit small businesses to solicit broadly for external capital. The Commission is ably assisted in this unfortunate approach by state blue sky laws and state securities regulators.

To some extent, it has always been a perfect storm for small businesses in this regard. The Securities and Exchange Commission has never understood small businesses, the way they raise capital and the obstacles they face in the capital markets, and high profile matters have left the Commission little time for (or interest in) the problems of small issuers.

State securities regulators, who hold trumps in the matter, have a notorious hostility to legitimate capital formation activities by small companies. Finally, collective action problems have made it difficult for small issuers to compete for fair and efficient governmental rules respecting capital formation.

As a result, small businesses, which are vital to our national economy and otherwise face enormous structural impediments when they compete for external capital, are further disadvantaged by burdensome, inefficient and anti-competitive governmental regulatory schemes.

The purpose of this article is to make the case for Commission action freeing small companies from regulatory rules that unfairly limit their legitimate capital formation activities. The focus of the article is Regulation D, which is the most likely path small issuers take in order to meet the requirements of the Securities Act of 1933. Regulation D, however, requires issuers in marketing their securities to refrain from any general solicitation. State blue sky laws also effectively prohibit any general solicitation by small businesses attempting to rely on Regulation D.

The Commission can - and should - eliminate both the federal and state prohibitions against general solicitations in Regulation D offerings. Permitting small issuers to solicit broadly in a Regulation D offering would improve small businesses access to external capital without any loss of investor protection.

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