SEC Commissioner Hester Peirce and SEC Advocate for Small Business Capital Formation Martha Miller emphasized the importance for regional economies of a regulatory framework that facilitates capital investment.
Ms. Peirce, in her remarks at the 38th Government-Business Forum on Small Business Capital Formation, urged regulators to revise rules to ease the process of investing by venture capital funds. She also suggested that regulators look for more "creative" methods to allow non-accredited investors to engage in private offerings, as well as improved regulatory options for micro-offerings.
Ms. Peirce called on entrepreneurs and small business owners to offer their input on how to create "thriving regional economies." She cited New York and San Francisco as "attractive places" for individuals looking to invest capital. This is a result, Ms. Peirce asserted, of the "clustering" of capital, innovation and economic growth.
In a separate address at the Forum, Ms. Miller stressed the importance to the economy of capital formation and investment in new companies. She asked participants at the Forum to share their views on "significant capital formation issues," particularly the challenges small businesses and entrepreneurs face when securing access to capital.
Section 2(b) of the Securities Act provides that: "Whenever . . . the Commission is engaged in rulemaking and is required to consider . . . whether an action is necessary . . . in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote . . . capital formation."
The dilemma that the SEC faces is that there is a real conflict between the "protection of investors" and "capital formation." The more the SEC protects investors (at the far extreme, by prohibiting them from investing at all, as the SEC generally prohibits retail investors from participating in private placements), the more the SEC inhibits capital formation. Conversely, while a "buyer beware" policy may support capital formation, at least in the short run, it leads to a lot of fraud.
Defining the right "middle ground" is inherently subjective and uncertain. It also means tolerating (in the sense of accepting as inevitable - not in the sense of forgiving) a certain level of potential misconduct.
When push comes to shove, the regulators often decide it is "safer" to favor investor protection over capital formation. Note, for example, the SEC's adoption of Regulation Best Interest and the various states proposed regulations to impose fiduciary obligations on broker-dealers making "recommendations" to customers. (See SEC Adopts "Retail Best Interest" Rulemaking Package.) While Regulation Best Interest may seem somewhat off-topic to capital formation for small businesses, it is not. If the regulators (federal and state) are going to impose fiduciary burdens on broker-dealers making recommendations to customers, broker-dealers who might otherwise play a role in the capital raising process for small businesses may think it is safer and better business to just push mutual funds.
Bottom line is: when investors invest in small businesses, they are taking on substantial risk, as well as the possibility for reward. Are the regulators prepared to tolerate that?
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