(Bloomberg) — The U.S. Securities and Exchange Commission will propose boosting by 10 times the amount of money companies can raise under a simplified public offering, the agencys latest step to ease fundraising by smaller companies.
The SECs proposal to be issued for public comment today in Washington would expand an exemption that allows businesses to offer shares publicly without having to provide the detailed disclosures required of public companies. The proposal would allow firms to raise as much as $50 million, up from $5 million, and may provide a means to avoid reviews by state regulators.
The changes to the SECs Regulation A are required by the 2012 Jumpstart Our Business Startups Act to encourage investment in small businesses. The number of companies seeking to raise money under the current rule fell to 19 in 2011 from 116 in 1997 as businesses complained the requirements are too strict for the limited amount of money that can be raised.
Well get some insight into what the SEC is thinking about the bigger picture, said Gregory C. Yadley, a partner at Shumaker, Loop & Kendrick LLP in Tampa, Florida, and a member of a commission advisory committee on small business issues. Is the SEC giving us a signal as to whether theyre leaning more toward more registered offerings or more toward exemptions?
Regulation A offers must be approved by the SEC but typically require less public reporting by companies as long as the number of investors is limited. At the same time, companies selling stock under the exemption must have the offer approved by the securities regulator in every state where shares are sold.
Biggest Impediment
State review of Regulation A deals is the biggest impediment to its use, said Ben Miller, co-founder of real estate crowdfunding platform Fundrise LLC. States have different standards for approving offers, with some weighing whether investor disclosures are sufficient and others examining the fairness of the deal.
Thats the big bugaboo, the big structural flaw, said Miller, whose company has used the exemption to raise money for real-estate developments in Washington, DC. You can have five, six or seven states involved. Thats a lot of people parenting you.
The North American Securities Administrators Association, which represents state regulators, has proposed streamlining state reviews even as it wrote the SEC last week to warn against preempting state authority. The association has called for companies to submit fundraising documents to a central system and get feedback from state regulators within 10 days.
State-level review will help the commission root out fraud and abuse in this new marketplace and will give investors confidence that securities sold in these offerings are subject to an adequate level of scrutiny, Ohio Securities Commissioner Andrea Seidt wrote Dec. 12 on behalf of the group.
Approval of the plan would mark the third major rule advanced by the SEC under the JOBS Act. The SEC proposed rules to permit equity crowdfunding on Oct. 23 and lifted the ban on advertising private stock deals on July 10.
