SEC Commissioner Elad Roisman urged the agency to address numerous impediments to small business capital formation.

In remarks at the "SEC Speaks" Conference, Mr. Roisman said that the owners of private companies struggle with the decision to enter public markets in light of the associated costs and challenges. As a result, he said, the SEC must evaluate its rules to assess whether it has contributed to this "decreasing public company environment." In addition, Mr. Roisman noted that once they are public, smaller companies face challenges with secondary market liquidity, which can have a negative impact on a company's ability to grow.

Mr. Roisman stated that the SEC has undertaken efforts to promote capital formation (e.g., the SEC recently adopted amendments to modernize disclosure requirements). However, he said, the SEC could do more to encourage capital formation - namely, to take steps to "harmonize the maze of regulations" that make up the exempt offering framework. In addition to its rulemaking efforts, Mr. Roisman said, he hopes the SEC will take "proactive" steps to support entrepreneurs to take advantage of federal securities laws intended to assist them.

Separately, SEC Director of the Office of the Advocate for Small Business Capital Formation (the "Office") Martha Miller reported that the Office assembled a "foundational business plan for 2019" that lays out a pragmatic approach to assist small businesses and their investors in solving problems. Ms. Miller said that the Office is working on (i) establishing a Commission Advisory Committee, (ii) devising policy analyses with current rules and (iii) engaging in outreach efforts to "let people know we are open for business."

Commentary / Steven Lofchie

One step that the SEC might take to address the lack of liquidity in small businesses is to revisit rules regulating the production and distribution of investment research. Following the discovery of material improprieties by firms in the production of investment research on internet companies, the SEC adopted rules that both significantly raised the compliance costs of producing research and diminished the possible business benefits of doing so. These rules should now be reconsidered. The SEC should look for a reasonable balance between ignoring research that is intentionally deceptive and imposing rules that make it cost-prohibitive for investment banks to produce research on mid-sized and small companies. To accomplish this, the SEC should recognize that (i) firms will not produce research unless it is profitable to do so and (ii) it will not be profitable to do so if investment banks are forced to share their research without charge with the world, as opposed to their (favored) customers. No one is going to pay for what is free.

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