SEC Advisory Committee on Small Business: A New Market for Small Business Stock

After our brief editorial pause, let’s return to our review of the SEC Advisory Committee on Small and Emerging Companies’ recommendations.  This blog focuses on the Committee’s recommendations regarding a separate U.S. Equity Market for securities of Small and Emerging Companies.

In making its recommendation, the Committed noted:

  1. Current U.S. equity markets often fail to offer a satisfactory trading venue for the securities of small and emerging companies because they fail to provide sufficient liquidity for such securities and because the listing requirements are too onerous for such companies.
  2. The frequent failure of U.S. equity markets to offer a satisfactory trading venue for small and emerging companies has discouraged initial public offerings of the securities of such companies, undermines entrepreneurship, and weakens the broader U.S. economy.
  3. Establishing a separate U.S. equity market specifically for the securities of small and emerging companies, where these companies would be subject to a regulatory regime strict enough to protect investors but flexible enough to accommodate innovation and growth, offers promise of providing a satisfactory trading venue for small and emerging companies, which may encourage initial public offerings of their securities.
  4. A possible feature of an appropriate regulatory regime for such a market would be limiting investor participation to accredited investors who meet a standard designed to assure that the regulatory protection afforded is appropriate given the characteristics of those investors.
  5. The separate U.S. equity market for small and emerging companies could be an exchange established under Section 6 of the Securities Exchange Act of 1934, an  alternative trading system operated under 17 C.F.R. § 242.301, or some other appropriately  regulated trading venue.
  6. Other actions by the U.S. Securities and Exchange Commission with  respect to trading venues may also be warranted in order to encourage small business capital  formation and facilitate liquidity in the securities of small and emerging companies,  including in the context of the Commission’s rulemaking to implement Section 3(b)(2) of the  Securities Act of 1933.

Based upon this analysis, the Committee recommended that the Commission should facilitate and encourage the creation of a separate U.S. equity market or markets that would facilitate trading by accredited investors in the securities of small and emerging companies, and such small and emerging companies would be subject to a regulatory regime strict enough to protect such investors but flexible enough to accommodate innovation and growth by such companies.

As for my editorial comment, I’d say “Fat Chance.”  We can’t even get simple rules on general advertising and solicitation for accredited investors in Rule 506 placements issued by the SEC. Let alone the new “Crowdfunding” market.  I would not look for this new market any time in the future.

As always, if you wish more information, feel free to contact us for more information about this or any other Going Public transaction.

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