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SEC Chair Clayton Talks Small Business Capital Formation

Every year the SEC staff does a tremendous job identifying topics, selecting speakers and coordinating the behind the scenes work necessary to organize this all-day event focused on small business capital formation.[1]  Thank you Bill, Jennifer [Zepralka] and the staff in the Division of Corporation Finance and the Office of Minority and Women Inclusion for coordinating this year’s forum. This year I also want to extend a special thank you to our co-hosts—Dean Makhija [Muh-kee-sha] and the rest of the staff at The Ohio State University Fisher College of Business—for opening your doors to us. It is nice to know that a team from the “SEC” can get such a warm welcome at the home of the Big Ten Champions. Finally, I want to thank the panelists and moderators who are taking time out of their busy schedules to share their insights with us.

To those in the audience, or watching online, welcome to the 37th annual Government-Business Forum on Small Business Capital Formation. This is the second year in a row that we are having the Small Business Forum outside of Washington, D.C. I hope it becomes a trend in years to come.

Small business access to capital is at top of mind for me. As such, I have made it a priority to reach out to small businesses nationwide. In my first few months at the SEC, I hosted a group of small businesses from across the country, including Arkansas, Idaho, Michigan, Montana, and North Carolina. Bill [Hinman] and I also attended a high-tech jobs summit in Montana to discuss job creation and capital formation. Last November, we held the Small Business Forum in Austin, Texas. And earlier this year, we continued the conversation about small business capital formation in Nashville, Tennessee.

As I have said before, there are many good, talented people, and many promising companies, between the coasts. Austin, Nashville and Columbus all share something in common. They stand out for their ability to help small businesses grow outside of the traditional areas along the coasts. Earlier this year, Columbus was ranked as one of the top five cities for entrepreneurs and startups out of more than 300 cities across the United States.[2] And this past October, another publication ranked Columbus first out of the top 10 rising cities for startups.[3]

The panels this morning will provide us with an opportunity to hear directly from small businesses and their investors about the options to raise capital as a small business. We also will hear about the particular challenges faced by minority entrepreneurs to access capital. Following the morning panels, you will work on recommendations on how we can improve the regulatory landscape for small businesses.

The Small Business Forum has been a source of ideas for, and feedback on, our rulemaking initiatives at the SEC. For example, in 2018 the Commission expanded the definition of “smaller reporting company.”[4] The amended definition will allow nearly 1,000 additional companies to take advantage of scaled disclosure requirements, reflecting the principle that a one-size regulatory structure does not fit all public companies. The Commission also expanded a key registration exemption used by non-reporting companies to issue securities pursuant to compensatory arrangements and sought comment on other ways to modernize that exemption. These initiatives had been recommendations in prior Small Business Forums.

For 2019, we have a number of initiatives in the near-term agenda that I expect will be of interest to the audience. For example, for our smaller public companies, we will be taking a fresh look at the “accelerated filer” definition and the thresholds that trigger Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires certain registrants to provide an auditor attestation report on internal control over financial reporting. We also will consider expanding testing-the-waters accommodations that enable companies to engage in communications with certain potential investors prior to or following the filing of a registration statement. I also believe it is important to consider ways to encourage long-term investment in our country, so we will be studying the adequacy and appropriateness of mandated quarterly reporting and the prevalence of optional quarterly guidance, and whether our reporting system more generally drives an overly short-term focus.

For exempt offerings, we will be exploring the private offering framework. Our “patchwork” private offering system is complex and it is time to take a critical look to see how it can be improved, harmonized and streamlined. The staff is working on a concept release to solicit input about key topics, including whether our accredited investor definition—a principal regulatory threshold for participation in private offerings—is appropriately tailored to address both investment opportunity and investor protection concerns.

Several of these upcoming initiatives have been discussed at prior Small Business Forums. I hope you spend time this afternoon talking about these topics and share with us recommendations on how to improve our rules in those areas.

Thank you.

ENDNOTES

[1] My words are my own and do not necessarily reflect the views of my fellow Commissioners or the SEC staff.

[2] Bill Frost, The Top 10 US Cities for Entrepreneurs and Start-Ups in 2018, Business.org (June 21, 2018), at https://www.business.org/business/startup/top-cities-for-entrepreneurs-and-startups/.

[3] Kurt Badenhausen, The Top 10 Rising Cities for Startups, Forbes (Oct. 1, 2018), at https://www.forbes.com/sites/kurtbadenhausen/2018/10/01/the-top-10-rising-cities-for-startups/#2e239a046b37.

[4] Amendments to Smaller Reporting Company Definition, 83 Fed. Reg. 31,992 (July 10, 2018).

These remarks were delivered by Jay Clayton, chairman of the U.S. Securities and Exchange Commission, on December 12, 2018, at the Annual Government-Business Forum on Small Business Capital Formation in Columbus, Ohio.