Opening Remarks before the SEC Advisory Committee on Small and Emerging Companies

Good morning.  Thank you, Sara and Steve.  And thank you all for being here today.  I want to respect the full agenda you have, and so will be brief in my remarks.

My overall perspective on our mission in the important spaces you occupy is that small and emerging companies are critical drivers of innovation and our economy and our rules should provide them a range of options for raising capital, understanding their diversity of business models and capital needs, while ensuring that investors can have the confidence in the market that comes with strong protections.

As it happens, I was in Lima, Peru last week for IOSCO’s annual conference and was on a panel where I discussed the Commission’s approach and recent work on behalf of smaller and emerging businesses.  One subject that was highlighted was equity crowdfunding.

On Monday, as you know, our federal crowdfunding rules came into effect, providing another option for smaller issuers.  There is considerable excitement among entrepreneurs and investors for securities-based crowdfunding, and we hope it will provide a new useful tool for small businesses seeking to raise capital.  As required by the JOBS Act and our rule, a registered broker or funding portal serves as an important gatekeeper between those seeking capital and investors.  We are pleased to see that a number of companies have already filed their Forms C for offerings – 17 companies on the first day and we are now up to 27.  Nine funding portals have completed the registration process with the Commission and FINRA and more are in process.  We are watching developments closely.  The staff of Corporation Finance and Trading and Markets published compliance guidance and are available to answer questions.  It is important that we all continue to strive to make crowdfunding work for issuers and investors.

I am also pleased to note that the Commission published a concept release on April 13 that comprehensively reviews the business and financial disclosure requirements of Regulation S-K.  Among a wide range of other issues, the release discusses scaled disclosure for smaller publicly traded companies, a topic that has been of keen interest to this Committee.  I encourage you to review the concept release and provide your input.  Our goal is to make sure our disclosure system is efficient and effective for investors and companies, and we need input from all stakeholders.

Your agenda today brings to the forefront several other important issues for small and emerging companies.  The first topic you will take up, the definition of an “accredited investor,” is a familiar – and very important one – for all of us.  Last year, this Committee provided recommendations, cautioning that the primary goal of the Commission’s review of this definition should be to “do no harm to the private offering ecosystem.”  The recommendation also suggested including within the definition those investors who meet a test of sophistication.

As you know, in December, the Commission published a staff report that analyzes various approaches for modifying the definition and provides recommendations for potential updates and modifications.  I look forward to hearing your discussion on those approaches, and reviewing any further comments that are submitted to our public file on the report.  I have asked the staff to prepare recommendations on how the Commission should modify the definition, and the comments we are receiving will help inform the Commission in its next steps.

I also very much welcome your discussion this afternoon of Regulation D, one of the primary engines of capital formation in this country.  Approximately $1.3 to 1.4 trillion was reported to be raised through unregistered securities offerings in both 2014 and 2015 in reliance on Regulation D – an amount that is comparable to the amount of capital raised by public equity and debt offerings combined.  The vast majority of those offerings occurred under Rule 506(b), the traditional pre-JOBS Act exemption which does not allow general solicitation.  The activity in exempt offerings is of particular interest now, as issuers, investors, and their advisers seek to take advantage of relatively new options for capital-raising like Rule 506(c) and its allowance for general solicitation.  In 2015, of the approximately $1.35 trillion reported to have been raised in Rule 506 offerings, approximately $38 billion used Rule 506(c).  During 2014 and 2015, about 1600 new offerings were initiated each year in reliance on Rule 506(c).  This area is one that we are monitoring closely and I look forward to hearing your insights.

The three new methods created by our rules for capital raising under the JOBS Act – Rule 506(c), Regulation A+, and Regulation Crowdfunding – are designed to foster new ways for smaller companies to access the capital markets, and we must ensure that the exemptions are both workable for issuers and providing appropriate investor protections.  We all benefit from capital formation that is done in a transparent, safe and efficient way.  As you will hear in the update from Enforcement staff this afternoon, we have drawn on the expertise of staff across the agency and engaged them in a program that is keeping a watchful eye on how these markets develop.  Such inter-divisional working groups help to make us smarter and quicker in assessing the extent of these new markets, their workability under our rules, and the extent of any fraud or other rule violations that are occurring.  This real-time approach should enable us to make any necessary regulatory adjustments and take action against abuses more quickly.