Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, July 2, 2014

Campbell on Small Business Capital Formation

Rutheford B. Campbell Jr. has posted The New Regulation of Small Business Capital Formation: The Impact - If Any - Of the Jobs Act on SSRN with the following abstract:

An efficient access to external capital by businesses is essential to a market economy. Small businesses, which amount to a vital component of our market economy, face not only structural and economic disadvantages but also legal obstacles in their search for essential, external capital.

The Titles II, III and IV of the Jobs Act were designed, at least apparently, to ameliorate inefficient legal rules governing small businesses’ access to external capital. While the act itself is not without challenges and significant misdirection, it offered the Commission an opportunity to construct regulatory regimes that materially enhance efficient, small business capital formation. The Commission, however, has failed to take full advantage of this opportunity.

Title II of the Jobs Act, as implemented by Commission regulations, changes Regulation D to permit a broad solicitation for investors in Rule 506 offerings. That change amounts to an efficient improvement that will provide some benefit to small businesses in search of external capital. A requirement for the exemption provided by the revised Rule 506, however, is that sales must be restricted to accredited investors only, and that by definition is a limited source of capital for small businesses.

Without significant changes to the Commission’s proposed rules implementing Title III (crowdfunding), the crowdfunding exemption will be less available for small business issuers than efficiency would require. The Commission’s proposed rules are plagued by excessive disclosure requirements for small offerings, integration complications, and unmanageable risks created by actions of intermediaries.

Without significant changes to the Commission’s proposed rules implementing Title IV (popularly called Regulation A-Plus), the exemption provided by Regulation A-Plus will be essentially unavailable for small businesses. This is due to excessive disclosure requirements for small offerings and, more importantly, the failure to provide an effective preemption of state authority over small Regulation A-Plus offerings.

The problems regarding the proposed crowdfunding regulations and the proposed Regulation A-Plus regulations are fixable, if the Commission has the will.

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