SEC Chairman Wants to Ease Path for Investor Access to Private Placement Offerings

August 31, 2018

Trump-appointed SEC Commissioner Jay Clayton Says He Wants to “Ease Path for Investor Access to Private Placement Offerings and Startup Investing”

Per Aug 31 WSJ front page article courtesy of veteran business reporter Dave Michaels, “The Securities and Exchange Commission wants to make it easier for individuals to invest in private companies via private placement offerings advanced by some of the world’s hottest startups and lesser known startup initiatives, the agency’s chairman said in an interview.” As reported by WSJ columnist Michaels, “..for decades, regulators have typically walled off most private deals from smaller investors, who must meet stringent income and net-worth requirements to participate because of the added risk private investing holds. Mr. Clayton said the SEC is now weighing a major overhaul of rules intended to protect mom-and-pop investors, with the goal of opening up new options for them.”

sec commissioner jay clayton view private placement regulation
SEC Commissioner Jay Clayton wants to lower the barbell on regulations for private placement offerings

Private securities, mostly off the radar of federal regulators, are usually sold to sophisticated investors such as venture capitalists and sophisticated private investors. There is typically less information available about the firms, increasing risks for investors. These private capital raising initiatives, generally referred to as ‘private placements’ are typically advanced under SEC Regulation D and available only to accredited investors (and up to 35 non-accredited investors). “Reg D” offerings preclude the Issuer from having to file a formal registration submission with the SEC other than notice of completed subscriptions after the raise is done. Otherwise, companies that seek to offer shares to retail investors can only do so through a formal public offering (“IPO”), a historically expensive process that requires an Issuer to budget hundreds of thousands of dollars before raising any money. IPO initiatives require months of document submission and regulatory review and compounded by the assortment of fees related to engaging a registered broker-dealer to serve as underwriter for a prospective public offering. In more recent years, startups and other private companies seeking to raise capital more easily and less burdensome fashion found relief courtesy of President Obama, who spearhead the JOBS Act, which led to SEC Regulation Crowdfunding aka Regulation CF (also know as “Reg CF”) and Regulation A. Reg CF is intended for “micro cap” raises of approximately $1 million, while Reg A offerings are intended to be used for more formidable capital raises; typically those seeking $2mil-$50mil.

Regulation Crowdfunding, which comes from Title III of the JOBS act, was adopted in May of 2016 as a way to reduce regulatory restrictions thus making it possible for companies to raise capital from both accredited and non-accredited investors. This means that companies who are looking to raise up to $1,070,000 are now able to do so through crowdfunding portals. Regulation A+ (also known as Title IV of The JOBS Act or Reg A+) allows companies to raise up to $50 million from both accredited investors and the general public. This regulation is similar to a traditional initial public offering (IPO). However, in a Reg A+ offering, a company soliciting investments from the general public will remain private. Additionally, Reg A+ offerings allow companies to raise capital faster and less expensively than in an IPO.

“The fact that Trump-appointed SEC Commissioner Jay Clayton is contemplating a further ease of restrictions on private placement offerings is no doubt welcome news to a broad universe of startup entrepreneurs”, stated Peter Berkman, a Tampa-based securities attorney and Of Counsel to investor document preparation firm LLC. Added Berkman, “Making it less onerous for budget-constrained startups to secure the funding required to advance a cogent business plan is a positive, but only if any revisions or relaxation of current rules does not enable unsavory promoters of private stock offerings to obfuscate already well-established know-your-customer rules and other full-disclosure rules designed to protect ill-informed and elderly investors, or other investors who would, by any measure not be able to afford losing their entire investment in a private placement or other type of illiquid investment product.”

Per the Dave Michaels reporting, a move to allow more participants in private markets could benefit regions of the U.S. where venture capitalists are fewer in number. “There is a massive capital gap in the middle of the country,” said Patrick Henshaw, a vice president at Cincinnati public-private partnership Cintrifuse who attended a Nashville conference where Mr. Clayton spoke.The SEC plans to issue a lengthy paper in the coming months—known as a “concept release”—that will seek public comment on how to revamp the capital-raising process, including by expanding access to private stock sales.

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Trump-appointed SEC Commissioner Jay Clayton Says He Wants to “Ease Path for Investor Access to Private Placement Offerings and Startup Investing”