On November 7, 2019, the SEC Investor Advisory Committee held a meeting on the topics of (i) whether investors use environmental, social and governance (ESG) data in making investment and capital allocation decisions; and (ii) the SEC’s recent concept release on harmonization of securities offering exemptions. For more on ESG matters, see HERE and for my blog on the SEC’s concept release on exempt offerings, see HERE. Both SEC Chair Jay Clayton and Commissioner Allison Herren Lee made remarks before the committee. As always, it is helpful in navigating our complex securities laws and regulatory priorities to stay informed on matters involving SEC decision makers and policy setters.
The Investor Advisory Committee was created by the Dodd-Frank Act to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the committee to submit findings and recommendations for review and consideration by the SEC. Since its formation, the committee has made over 20 recommendations to the SEC on a wide range of pertinent topics.
Several panelists during the meeting expressed concern over the lack of information on private offerings, other than the fact that with the information the SEC does have, it is known that private offerings outpace public markets. Information is generally learned from Form D filings, but not all private offering issuers file a Form D. Moreover, there is no reliable or centralized resource as to how private offerings perform. As a result, panelists at the meeting do not believe that exemptions should be expanded. For example, one law professor stated that there is little evidence that retail investors would have better returns if allowed to invest in private securities. The negative opinions were strong.
However, there is another side, and not surprisingly I am a proponent of increasing private offering availability for retail investors. Absolutely there is no evidence that overall returns would increase and possibly they would not. Private offerings, especially in start-ups, are among the riskiest of all investments. Nonetheless, when they do perform, they also provide the highest returns. Also importantly, it is this start-up culture that fuels the American economy, creates new jobs, supports technological and scientific advancement that is increasingly left to private sectors, and keeps America competitive in the global economy.
There are ways to increase access to private markets without letting fraudsters run amuck with grandma’s retirement account. The definition of an “accredited investor” can be amended to add individuals with professional licenses, investment and/or financial experience (including through employment) and education such as through an accredited investor exam. Increased access to professionally managed funds that invest in private markets is another option.
Also, access to private markets can be increased, and investor protections increased through the regulation of private market finders. I am a strong advocate for a regulatory framework that includes (i) limits on the total amount finders can introduce in a 12-month period; (ii) antifraud and basic disclosure requirements that match issuer responsibilities under registration exemptions; and (iii) bad-actor prohibitions and disclosures which also match issuer requirements under registration exemptions. I would even advocate for a potential general securities industry exam for individuals as a precondition to acting as a finder, without related licensing requirements. For example, FINRA, together with the SEC Division of Trading and Markets, could fashion an exam similar to the new FINRA Securities Industry Essentials Exam (see HERE) for finders that are otherwise exempt from the full broker-dealer registration requirements.
Form D’s can also become mandatory in order to preserve the federal exemption being relied upon which will add to the information that the SEC has on private offerings, though not their success. However, I can’t think of any methodology for the SEC to gather information on the success of private offerings, that wouldn’t be overly burdensome and cumbersome on both the issuing companies and the government regulators. Furthermore, this information will provide little beneficial additional knowledge. It is known that most start-ups fail, that 9 out of 10 businesses fail within the first 10 years, that if you invested $1,000 in Amazon in 1997 it would be worth $1,362,000 as of September 4, 2018 and the numbers are similar for Netflix, Twitter, Google and many others.
Inaction is the same as action, it has a result. I agree with Chair Clayton that access to private markets needs to be expanded and that the lack of data on the results of private investments is not a good enough reason to do nothing.
Remarks by Chair Jay Clayton
Prior to the meeting, SEC Chair Jay Clayton delivered prepared remarks on the meeting topics and provided a list of areas of focus he would like to see the committee address. Consistent with prior statements, Chair Clayton stresses that ESG means many different things to different investors and different companies, even in the same sector. He is concerned about requiring disclosures of immaterial information or information that is not designed to assist in investment decisions. Chair Clayton suggests focusing on the committee members and panelist use ESG data including whether the use of such data designed to improve investment performance over a particular term, to screen certain activities, companies or industries to address a particular objective or policy, or a combination of these goals.
Chair Clayton also made suggestions for areas that the committee should consider reviewing and making recommendations on. The topics suggested include:
(i) Self-directed individual retirement accounts (IRAs) including whether retail investors have enough protections;
(ii) Teachers and military service members including additional initiatives the SEC can take to protect these investor groups;
(iii) Minority and non-English-speaking communities including whether there are regulatory barriers discouraging access to investment services or leading to higher prices or inferior financial product choices;
(iv) Retail access to investment opportunities including opening access to private investments that currently or traditionally have only been available to institutional investors. In this regard, Chair Clayton would like to consider changes to fund regulations to align the interests of retail investors with fund managers (a regulation best interests for fund managers?);
(v) Retail investor protections in an increasingly global world including a study of the differences in the securities laws and investor protections between the U.S. and abroad. In this regard, Chair Clayton specifically pointed out that he does not believe that U.S. investors have proper assurances, based on regulatory regimes, that non-U.S. companies actually meet reported ESG standards. Similarly he points out concerns with audit quality in some foreign countries (see HERE for information on the SEC’s cautionary statement regarding audit quality in China);
(vi) LIBOR transition including how the SEC can help market participants address and respond to the risks of the transition away from LIBOR;
(vii) Index construction including whether retail investors and their advisors understand indices from a technical perspective and market exposure perspective and whether the SEC should increase required disclosures for indices; and
(viii) Credit rating agencies including the level of influence they have in the marketplace and whether their disclosures are sufficient.
Remarks by Commissioner Allison Herren Lee
Commissioner Allison Herren Lee is the newest member of the SEC commission. Like the market as a whole, Commissioner Lee is focused on ESG matters. The last time the SEC issued guidance on climate-related disclosure was in 2010 and since that time, scientific knowledge of climate change and its risks has increased significantly. Climate change risks are very real and could impact everything from the physical location of equipment to human resources to the value of assets.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
LAnthony@AnthonyPLLC.com
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including sitting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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