The Securities and Exchange Commission (SEC) has proposed a rule that would impede capital formation, job creation, innovation, productivity improvement, and economic growth by making Regulation D—the primary means by which new companies and young growing companies raise equity capital—markedly more complex and expensive.
Economic research has increasingly demonstrated that most of the job creation in the economy comes from young, dynamic companies—the kind of companies using Regulation D to raise capital. These companies need equity investment to launch and to grow.
Regulation D governs roughly $1 trillion annually of private securities offerings. In 2012, total private placements ($1.7 trillion) exceeded public (registered) securities sales ($1.2 trillion), and Regulation D offerings ($903 billion) account for over half of all private offerings. Two-thirds of Regulation D offerings were equity.
In 2012, more than 234,000 investors participated in Regulation D offerings, of which more than 90,000 participated in offerings by nonfinancial issuers. Although the aggregate amount of capital raised through Regulation D offerings is large, the average offering size is only $30 million, and the median offering size is just $1.5 million.
I recently filed detailed comments with the SEC addressing the likely impact of the proposed rule on the economy, job creation, innovation, and entrepreneurship.
The existing securities regulation framework created by the SEC (together with Congress) makes it expensive to raise capital. Regulatory costs have a particularly pronounced adverse impact on the ability of small and start-up firms to access the capital markets, and these costs should not be increased without very good reason. Current SEC regulatory impediments are such a widely understood and major problem that the 2012 Jumpstart Our Business Startups (JOBS) Act, which was designed to reduce those impediments, secured strong bipartisan support at a time when such bipartisan cooperation is rare.
The SEC should acknowledge this problem by, at the very least, not making it worse. Yet the proposed rule exacerbates these costs (and, for that matter, so does the proposed crowdfunding rule).
The simple fact that these unwarranted rules contain within them over 100 issues regarding which the SEC is seeking comments from the public is illustrative of the fact that they are overly complex and will materially increase the burden on small and start-up business. It will in some cases triple the amount of paperwork for small firms raising capital through Regulation D.
If combined with substantial increases in the accredited investor thresholds that the SEC is contemplating, and regarding which the SEC has sought comments in this proposed rule, then the SEC will almost certainly negate the positive impact of the JOBS Act.
One of the goals of Regulation D when the SEC adopted it in 1982 was “a substantial reduction in costs and paperwork to reduce the burdens of raising investment capital (particularly by small business).” It has certainly furthered that objective. The proposed rule is, however, taking us in the opposite direction.