The economic events of recent years have hit small companies particularly hard. While virtually everyone has suffered, small companies endured a double hit as they experienced substantial challenges to sales and profitability as well as a widespread inability to raise capital. This inability to raise capital was made worse by these economic events, but the current capital raising regulatory structure was also a major contributing factor. Fortunately these negative events appear to have generated some potential changes in the small company capital raising arena that could be very beneficial. These changes still face a number of challenges, but momentum appears to be building in their favor.
Small companies have historically faced a number of significant regulatory challenges and compliance requirements when raising capital. Some of these problems are the result of outdated compliance requirements that do not reflect the current small company situation. Other problems have resulted from “one size fits all” compliance requirements that do not contemplate the special needs of small companies and the economic restrictions under which many of them operate. The net result has been that small companies have been restricted in many situations in their ability to raise capital. This has been a particular problem in connection with public securities offerings by small companies.
In response to these concerns, several legislators in both the House and the Senate have submitted legislative proposals that are designed to ease the regulatory burdens on small companies in the capital raising process and to ensure that such regulatory burdens correctly reflect small companies’ situations. One significant proposal would increase the offering limits for Regulation A offerings from the current $5 million level to $50 million. Regulation A has been available as an exemption from registration under the Securities Act of 1933 for a long time, but historically it has not been used very often. This is probably primarily due to the relatively low offering limit. Regulation A contains some fairly substantial benefits for issuers, including the ability to solicit indications of potential interest from investors before an offering by use of several forms of media (although state laws may have an impact here). A substantially increased upper limit on Regulation A offerings could be a significant advantage to small companies’ capital raising efforts.
Other proposals would raise the triggering threshold for mandated SEC reporting from the current 500 shareholder level. This could be a significant aid to smaller companies as they grow. We have seen many companies elect to stay private longer in today’s economy, and the ability to defer becoming a public reporting company would be advantageous in many cases. This issue has been in the news lately as companies such as Facebook have attempted to avoid becoming reporting companies even in the face of rapid growth and expansion. A change in these requirements might also benefit community banks. Lawmakers have also proposed such things as easing restrictions on communications with potential investors in securities offerings due to the significant changes in communication methods that are now available and facilitating “crowdfunding” in certain situations.
One key factor here is that these proposed changes appear to have bipartisan support in both the House and the Senate. The Obama administration also publicly stated its support for the proposed change in the Regulation A offering limits. Hopefully this bipartisan spirit can facilitate the adoption of these changes.
The SEC is also focused on this area. The Division of Corporation Finance recently reported to Congress on reducing the burden on small company capital formation. The SEC appears to be focusing on possible changes in the triggers for public reporting, restrictions on general solicitation in private offerings, and restrictions on communications in public offerings, as well as possible easing of restrictions in the crowdfunding area. It appears that the SEC is taking crowdfunding seriously as a capital raising tool for small companies and is evaluating ways to ease the associated regulatory burdens.
We are very encouraged by all of these items as they could significantly facilitate the ability of small companies to raise capital. This in turn could help to support growth and expansion among these companies. This could become a key driver of a sustained economic recovery.