SEC Commissioner Daniel Gallagher urged the commission on Wednesday to fulfill its mandate to promote capital formation. The SEC should institutionalize an enhanced small business focus, Gallagher said in his prepared remarks, because its current small business mandates are “generally treated as afterthoughts on the ‘back end’ of the rulemaking process.”

Gallagher challenged the SEC to enhance its ability to review and update existing regulations that have been on the books for decades. He added: “We almost never consider how heavily the weight of the entire corpus of rules bears down on registrants. Only rarely do we remove any of our rules even after they have long since ceased to serve their purpose or have become obsolete or worse.”

In making his recommendations, Gallagher suggested that the agency create an Office of the Small Business Advocate, modeled after the SEC’s Office of the Investor Advocate. It would report to the commission and “take charge” of the SEC’s Advisory Committee on Small and Emerging Companies and the Government-Business Forum.

The portion of the commissioner’s remarks on regulatory process maps closely to issues we at the Milken Institute Center for Financial Markets (CFM) are exploring through our new FinTech: 21st Century Market and Policy Developments program. We are considering alternative regulatory approaches that would enhance coordination and regulatory agility while allowing regulators to more effectively satisfy their investor protection and capital formation objectives. These models might rely on increased use of pilot programs, aggregation and analysis of data and outcomes, and more frequent iteration in the rule-making process. Already, we are seeing some of these methods deployed through the Consumer Financial Protection Bureau’s Project Catalyst, as well as the SEC’s implementation of its Tick Size Pilot Plan.

With respect to specific medium-term recommendations for promoting capital formation in private markets, Gallagher suggested:

  • Withdrawing additional proposed Regulation D rules tied to Title II of the JOBS Act. The proposal “does more harm than good,” Gallagher said, noting that it would stifle private markets “while achieving no clear offsetting investor protection goals.” See the CFM Comment Letter on Amendments to Regulation D.
  • Broadening the blue-sky exemption under Regulation D. The exemption should be broadened to provide greater choice between Rule 504, 505 and 506 offerings, because “99% of the capital raised under Regulation D is pursuant to the Rule 506 exemption” due to the fact that Rule 506 offerings are blue-sky exempt.
  • Improving secondary-market liquidity. The creation of additional “facilities” to improve liquidity and innovation in the secondary marketplace, as well as a review of resale rules, would go a long way toward increasing secondary-market activity.

Among his list of recommendations for the public markets, Gallagher included:

  • Implementing crowdfunding. Gallagher said crowdfunding should not be treated as a “curiosity,” adding that if the rule is unworkable, the SEC “should be loudly telling Congress that we need a legislative fix.”  SeeCFM’s Comment Letter on Regulation Crowdfunding.
  • Implementing Regulation A+. Gallagher called responses from state regulatory officials “disappointing,” adding: “I simply do not understand why a federal registration and review regime – tailored for smaller companies but nonetheless comprehensive – that does not divest states of their antifraud enforcement authority, should be viewed as representing a threat to investors.” Gallagher proposed two amendments to Regulation A+: Increase the size of offerings from $50 million to $75 or $100 million, and exempt Reg A+ shares from Section 12(g) of the Exchange Act. See CFM’s Comment Letter on Regulation A+.
  • Scaling Disclosure Requirements. Gallagher said the JOBS Act “was a floor… not a ceiling,” and advocated for replacing current scaled disclosure requirements for a “small reporting company” with a two-tier system of scaling for “nanocap” and “microcap” companies. The two-tier scaling structure would provide “significant scaling” for nanocap companies of up to $50 million in capitalization, with more moderate scaling for microcap companies with capitalizations between $50 and $300 million.  See How the Feds Can Save the IPO Market.

Daniel Gorfine is the director of financial markets policy and legal counsel in the Washington office of the Milken Institute. He focuses on entrepreneurship, capital access, and financial market issues.

Jackson Mueller is a policy research analyst at the Milken Institute’s Center for Financial Markets. His focus is on capital formation policy and financial markets education initiatives.

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