U.S. Capital Raising in the Spotlight

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The competitiveness of capital markets in the United States and the impact of regulations on capital raising activities by emerging companies have been put in the spotlight again by recent correspondence between Congressman Darrell Issa (R-CA), Chairman of the House Committee on Oversight and Government Reform, and Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission. The wide-ranging inquiry from Chairman Issa elicited a thoughtful response from Chairman Schapiro, which carefully reviews the SEC’s regulation of communications around initial public offerings and the viability of various private capital raising activities (including the growth of secondary markets for private company securities), as well as the broader economic and other factors behind a reduction in the number of public companies and initial public offerings in the United States. Chairman Schapiro outlined a number of new SEC initiatives in her response, including SEC staff review of (i) the restrictions on communications in initial public offerings; (ii) whether the general solicitation ban should be revisited; (iii) the number of shareholders that trigger public reporting, including questions regarding the use of Special Purpose Vehicles; and (iv) the regulatory questions posed by new capital raising strategies, such as “crowdfunding.” Chairman Schapiro also indicated that the SEC is in the process of forming a new Advisory Committee on Small and Emerging Companies.

On March 22, 2011, Chairman Issa sent a letter to Chairman Schapiro. The letter raised concerns about whether the current securities regulatory framework had a negative impact on capital formation which has led to the dearth of initial public offerings (“IPOs”) in the U.S., as well as the extent to which SEC regulations potentially limited other capital raising activities by small and emerging companies.1 The letter from Chairman Issa also sought specific information regarding the economic studies conducted by the SEC staff in these areas, along with information concerning the consideration of costs and benefits in connection with SEC rulemakings. In her response dated April 6, 2011, Chairman Schapiro stated that she has requested that the SEC staff take a fresh look at the agency’s rules in order to develop ideas for the SEC about ways to reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection.2 The SEC’s stated mission, as Chairman Schapiro reiterated in her letter, is to facilitate capital formation, along with protecting investors and maintaining fair and orderly markets.

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