The SEC & “Small and Emerging Companies”: Could the Rules Governing Private Capital Change?
This week, the SEC announced the formation of an Advisory Committee on Small and Emerging Companies (“Committee”) “to focus on interests and priorities of small businesses and smaller public companies.” You can find the SEC’s announcement here.
Of great importance to all small or private companies, the SEC intends to explore capital raising through private placements and public securities offerings for privately held small businesses and publicly traded companies with less than $250 million in public market capitalization. The SEC noted that it must strike a balance between facilitating capital formation and protecting investors.
For such companies, this is good news. Currently, once a private company gains 500 shareholders and has $10 million in assets, it is required to make the same disclosures as a public company. For small companies, the regulatory expense of preparing disclosures can be prohibitive. The disclosures required of the company include:
- its company’s operations;
- its officers, directors, and certain shareholders, including salary, various fringe benefits, and transactions between the company and management;
- the financial condition of the business, including financial statements audited by an independent certified public accountant; and
- its competitive position and material terms of contracts or lease agreements. Small Business FAQ from the SEC.
The SEC’s new Committee could weigh in on increasing the number of shareholders allowed before triggering reporting requirements or making it easier for companies to publicize their shares.
Coincidentally, this week Rep. Patrick McHenry (R. N.C.) introduced legislation that would make it easier for private companies to use “crowd funding.” According to the Wall Street Journal, “The measure would allow an unlimited number of people to contribute a total of $5 million to a crowd-funded start-up, with individual contributions capped at $10,000, or 10% of their annual incomes.” Read the WSJ Article here. Additionally, House Majority Whip Kevin McCarthy (R., Calif.) has brought up the need to ease restrictions on direct mail or advertisements to solicit investors for private placements. Currently, several exemptions to registration do not permit public solicitation or general advertising in connection with a private securities offering.
Although the SEC has formed the Committee, it will be up to the SEC to decide whether to implement any policies or regulations recommended by the Committee.
Changes in private capital could be coming in the future, but for now, private companies must continue to adhere to the SEC’s limitations on private funding. To be sure that your company is in compliance with securities laws, it is important to consult an attorney with experience in securities law for legal advice.