SEC Commissioner Michael Piwowar expressed a commitment to support businesses in their capital-raising activities while also ensuring that rules and regulations operate effectively and as intended. At the 2017 SEC/NASAA Annual Section 19(d) Conference, the Commissioner asserted the importance of facilitating new capital-raising methods. He cited recent amendments to Regulation A and Regulation Crowdfunding, and updates to intrastate and small offerings exemptions, as examples of such SEC support.
Commissioner Piwowar described issues that may arise as new exemptions are implemented. He noted offerings of simple agreements for future equity ("SAFEs") as a potential new cause for concern (see previous coverage for more detail). These offerings have been used in crowdfunding, he explained, despite the purpose of their initial development, which was to make it easier for sophisticated venture capital investors to invest in startup companies. When offered in a crowdfunding context, he said, SAFEs are often made available to retail investors who do not fully comprehend the risks associated with these securities. This is complicated by the fact that terms may vary from offering to offering, a fact that further hinders the ability of inexperienced investors to make informed decisions.
Regulation Crowdfunding requires companies to provide potential investors with extensive educational materials that explain the different types of securities offered and their associated risks. Commissioner Piwowar cautioned that companies and their intermediaries should pay close attention to the ways in which they market securities offerings:
"Intermediaries face a real challenge in educating potential investors about this high-risk, complex, and non-standard security when the security itself is entitled 'SAFE.' Companies and their intermediaries should think carefully about how they name or describe their securities. Securities marketed as 'safe' or 'simple' ought to be just that."
Commissioner Piwowar also stressed that where rules create widespread compliance challenges, regulators have a duty to address the situation, particularly where investors are affected adversely. He cited SEC auditor independence rules like the "Loan Provision," which deems an auditor not to be independent if that auditor has received a loan from a client. This imposes a particularly strict and challenging standard, since auditors are classified as non-independent based on lending agreements that may have no effect on their ability to remain partial and objective.
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