Remarks At The Florida Bar’s 41st Annual Federal Securities Institute And M&A Conference, Mark T. Uyeda, SEC Acting Chairman

Thank you, Greg [Yadley], for that introduction and also for your past contributions to the Commission as a member and officer of our Advisory Committee on Small Business Capital Formation as well as its predecessor advisory committee on small and emerging companies.  In total, you served nearly ten years on these committees.  The Commission, investors, entrepreneurs, and smaller public companies have all benefited from your participation and insight.

I am pleased to deliver the R. Franklin Balotti Keynote Address at this year’s [Federal Securities Institute and M&A] Conference.  Frank’s reputation as one of the leading experts of Delaware corporate law cannot be understated.  His treatise, The Delaware Law of Corporations and Business Organizations, co-written with Jesse Finkelstein, was a necessary resource to corporate lawyers.  As a law firm associate, I found myself frequently consulting his treatise to advise clients on Delaware corporate law.

Frank was also not a stranger to the Commission.  In fact, I had the opportunity to learn firsthand from Frank.  It was May 2007, shortly after I joined the Commission the prior year as counsel to then-Commissioner Paul Atkins, where I advised him on, among other subjects, matters relating to the Division of Corporation Finance (“Corp Fin”).  Frank was part of a Commission roundtable on the Federal Proxy Rules and State Corporation Law that was moderated by the then-Corp Fin Director, and current Co-Chair of this Conference, John White, along with the late Marty Dunn.[1] 

During that roundtable, Frank observed that a company should be required to pay for the solicitation of a shareholder proposal only if the proposal “relates to the economic well being of the enterprise.”[2]  The roundtable on which Frank participated was the first of three roundtables organized by then-Chairman Chris Cox on shareholder proposals and the proxy process. 

Thus, it goes to show that the topic of shareholder proxies and proposals is one that is long-standing and not likely to be resolved definitively in the near future.[3]  Recently, Staff Legal Bulletin No. 14M[4] was published to address various concerns that had been received over the past several years — a period in which there was substantial deviation from the staff’s traditional approach in evaluating shareholder proposals under Rule 14a-8.[5]

Rather than discussing shareholder proposals, however, my remarks today will focus on the Commission’s role in fostering innovation, job creation, and economic growth, by maintaining cost-effective regulations for every stage of a company’s lifecycle.[6]

A New Beginning

But first, I want to highlight the accomplishments of the Commission and its staff since the start of the new Administration.  My first priority is to return normalcy to the Commission.  I have been at the Commission for nearly 19 years, under presidents from both political parties.  What occurred under the Biden Administration was a stark aberration from longstanding norms as to what the Commission has historically viewed its legal authority, policy priorities, and use of enforcement.

Over the past five weeks, the Commission has begun the process of returning to its narrow mission to facilitate capital formation, while protecting investors and maintaining fair, orderly, and efficient markets.  One purpose of the Commission’s regulatory mandate is to create capital markets that facilitate the competitiveness and ingenuity of American industry.  Properly implemented, we can help President Trump achieve his goal of a new golden age of economic growth and innovation, creating more jobs, wealth, and prosperity for all Americans.

In addition to removing Staff Legal Bulletin No. 14L,[7] the Commission staff also rescinded Staff Accounting Bulletin No. 121,[8] which had effectively prevented banks and broker-dealers from taking custody of crypto assets.  Regarding the Commission’s regulation of crypto assets generally, I have designated Commissioner Hester Peirce to lead a crypto task force that will seek to develop a comprehensive regulatory framework to provide realistic paths to registration and to craft sensible disclosure frameworks.[9]

Under the prior Administration, the Commission adopted a climate-related disclosure rule,[10] which is currently being challenged in the U.S. Court of Appeals for the Eighth Circuit.[11]  I have begun the process to allow the Commission to deliberate the appropriate next steps for the litigation.[12]  During the adoption of that rule, I expressed my concerns regarding the Commission’s lack of statutory authority, shortcomings in the rulemaking process, and the potential harm that the rule could inflict on our capital markets and economy.[13]

In response to potential cybersecurity concerns raised by market participants and others, the Commission has also exempted certain personally identifiable information from being collected by the Consolidated Audit Trail (“CAT”).[14]  This change brings the CAT closer to the Commission’s original vision of having a system that can explain trading activity during market anomalies, rather than being an omnipresent surveillance systems tracking everyone’s individual movements.

Finally, the Commission’s enforcement work has not stopped.  The agency continues to bring charges for insider trading,[15] inflating financial performance,[16] and breaches of fiduciary duty by investment advisers,[17] among other topics.

Improving Capital-Raising Opportunities for Entrepreneurs

Turning to the main topic for my remarks today, how can the Commission foster innovation, job creation, and growth in the U.S. economy?  It starts with practical and cost-effective regulations that entrepreneurs who are just starting their businesses can rely on to raise the capital needed to fund their ideas.

In 2012, the JOBS Act introduced the concept of crowdfunding into the federal securities laws,[18] and in 2015, the Commission adopted Regulation Crowdfunding (“Regulation CF”).[19]  I worked on both the proposing and adopting releases for Regulation CF.  Almost ten years later, has Regulation CF achieved its intended goal of “provid[ing] startups and small businesses with capital by making relatively low dollar offerings of securities…less costly”?[20]  Unfortunately, the answer is “probably not.”

Notwithstanding the availability of Regulation CF, along with other rules available to entrepreneurs to raise capital without registration, 77% of small business owners reported being concerned about their ability to access capital.[21]  Accordingly, it is not surprising that for the past three years, the Commission’s Office of the Advocate for Small Business Capital Formation has recommended “targeted regulatory changes” to the exempt offerings regime, including Regulation CF.[22]  Unfortunately, the Commission’s prior leadership did not act on these recommendations.  To ensure that entrepreneurs have access to the capital needed to fund their ideas and grow their startups, I have requested Commission staff to begin the process of exploring ways to implement these recommendations.

The changes can take several forms, and some proposals may require legislative action to amend the governing statutes.  However, when crafting regulations that are intended to be relied upon by startup companies, the Commission should follow a guiding principle – the regulations must be relatively straightforward to comply with and not impose a disproportionate amount of compliance costs, while still providing appropriate investor protection.  A company relying on Regulation CF to raise $5 million may need to pay over $500,000 in fees to the funding portal, lawyers, and accountants.[23]  Should more than 10% of the funds raised by an entrepreneur who may still be working out of his garage go towards paying compliance and legal fees?  Or is a portion of that money better spent executing the business plan to build a product or provide a service?

Complex regulations increase transaction costs.  Many entrepreneurs have raised concerns about the complexity of the Commission’s current regulatory regime for exempt offerings.[24]  Paying operating expenses, such as legal and compliance fees, was one of the top three financial challenges facing early-stage companies, and running out of cash was one of the top two reasons that startups fail.[25]  To help alleviate these challenges facing entrepreneurs, the Commission should aim to reduce the complexity of its exempt offering regulations and their associated compliance costs.

Empowering Retail Investment in Private Companies

Conversations regarding the Commission’s exempt offering regulations usually have two aspects.  First, is how to enable private companies to obtain more capital through cost-effective means.  Second, is how to enable more retail investors to place their capital into private companies.

Discussions of this second aspect has largely focused on the accredited investor definition.  The concept of accredited investor anchors rules 506(b) and 506(c) in Regulation D.  Pursuant to rule 506(b), sales to non-accredited investors require the issuer to prepare additional disclosure.[26]  It is therefore not surprising that 96% of rule 506(b) offerings excluded non-accredited investors.[27]  Pursuant to rule 506(c), sales can be made only to accredited investors.[28]

In other offering exemptions, the accredited investor concept also plays a role.  Under rule 504, general solicitation is permitted if sales are made only to accredited investors.[29]  Under Regulation CF and Regulation A Tier 2, non-accredited investors are limited as to their securities purchases, while there are no limitations for purchasers who are accredited investors.[30]

Accordingly, qualifying as an accredited investor can serve as a gateway for individuals to invest in private companies.  Most commentators seem to agree that the current income and net worth thresholds for an individual to qualify as an accredited investor[31] either need to be changed or are insufficient.[32]  Some call for the thresholds to be indexed to inflation, either from 1982 levels[33] or only on a going-forward basis.[34]  Others call for non-financial ways to qualify – either in addition to or in lieu of the income and net worth tests – such as qualitative professional criteria[35] or certifications,[36] completion of an educational program,[37] or an investor test.[38]

In exploring ways to allow for greater retail investing in private companies, any changes to the accredited investor definition should be considered together with how companies are likely to accept investments from individuals – directly or through pooled investment vehicles.  If the latter, then consideration should also be given to changes under the Investment Company Act that would permit more retail investors to invest through private funds.

Another consideration is whether the “all or nothing” approach of the accredited investor definition is appropriate.  If an individual does not qualify as an accredited investor, even under an expanded definition, should he or she not be able to have any exposure to private offerings?  Or should the Commission’s exempt offering regime use a sliding scale approach and allow any individual to invest at least a small amount in private companies over the course of a year?[39]  This issue is worthy of further consideration.[40]

In advocating for a policy goal of empowering retail investment in private companies, it is not lost on me that most startup companies fail and return nothing to their investors.  However, investments in private, growth-stage companies that are higher-risk, higher-reward may be beneficial as part of a person’s diversified portfolio, particularly if the exposure itself is through pooled investment vehicles.  If an individual believes that the risk is appropriate and is protected against fraud, then our regulatory regime should not deny such individual a source of potential wealth accumulation and portfolio diversification.  Investor protection cannot be achieved through paternalistic policies.

Accordingly, I have directed the Commission staff to explore regulatory changes that enable greater retail investor participation in the private markets, whether through modifications to the accredited investor definition or otherwise, while continuing to ensure that those investors are protected against fraud and bad actors.

Making IPOs Attractive Again

Whether a retail or institutional investor places their money into a private company, they likely share the same financial goal for their investment – ultimately attaining liquidity for the investment and achieving a return.  Typically, companies have provided this liquidity through a sale of the company or an initial public offering (“IPO”).  In the past three and one-half years, increased antitrust enforcement has reduced sales of startups to larger companies.[41]  Additionally, over the past twenty-plus years, the number of IPOs has drastically declined.[42]

As entrepreneurs grow businesses past the startup stage, they will likely require capital from institutional investors, such as venture capital funds.  Without attractive opportunities for the company to sell itself or become publicly traded, what incentive does a venture fund have to make an investment?  While I have to defer to the Department of Justice and the Federal Trade Commission on antitrust enforcement, there are things that the Commission can do to help make IPOs attractive again.

One of the more innovative regulatory changes during the past fifteen years was the JOBS Act’s creation of emerging growth companies (“EGCs”) and the concept of an on-ramp for compliance with disclosure requirements.[43]  Unfortunately, over the past few years, the Commission failed to provide any relief for EGCs to use this on-ramp in several adopted rules, including cybersecurity disclosure,[44] amendments to rule 10b5-1,[45] and clawbacks.[46]  Additionally, for the stayed climate-related disclosure rule, the Commission provided only limited relief for EGCs.[47]

Appropriately tailoring the Commission’s wide-reaching disclosure requirements for newly public companies may, on the margin, incentivize more companies to go public.  In turn, venture funds may see more attractive exit opportunities for their investments and decide to provide funding.  This funding would then enable companies to execute their business plan, create jobs, and contribute to economic growth.

With a view towards achieving these goals, I have asked the Commission staff to review the EGC definition and recommend potential changes, including how a company qualifies and the duration for which it retains the status.  As part of its review, I have also requested the Commission staff to consider how EGCs could benefit from having an on-ramp to comply with certain existing disclosure obligations.

Scaling Public Company Disclosure Requirements

The Commission’s role in fostering economic growth does not end with the company’s IPO.  Public companies continue to compete for capital and resources to fund product development, market expansion, and new lines of business.  The Commission’s rules governing disclosure obligations should consider a company’s size and resources so that smaller companies are not disproportionately burdened as they compete.

The Commission introduced scaled disclosure based on a company’s size in 1992,[48] and it was an innovative creation at the time.  However, the Commission’s current rules with respect to filer categories and associated disclosure obligations are needlessly complex and do not provide sufficient scaled disclosure benefits.  As an example, a company with a $250 million public float is subject to the same disclosure requirements as a company with a $250 billion public float.

This outcome results from the fact that the Commission has not changed its thresholds for a company to qualify as a large accelerated filer or accelerated filer since they were established in 2005.[49]  At the time, approximately 18% of reporting companies had a public float of at least $700 million and qualified as a large accelerated filer, while 23% of companies had a public float between $75 million and $700 million and qualified as an accelerated filer.[50]  Today, the percentage of large accelerated filers has doubled – to 36% - while the percentage of accelerated filers has declined to 7%.[51]  Besides not updating the qualification thresholds, the Commission also has not sufficiently scaled the disclosure requirements between the two  categories.  Currently, only one requirement differentiates large accelerated filers – the 60 day deadline for filing Form 10-K.[52]

Besides the staleness of the thresholds to qualify as large accelerated filer and accelerated filer, the relationship between those categories and the smaller reporting company definition can also overlap, thereby increasing complexity and compliance costs.  As Commissioner Peirce has highlighted, “even we at the SEC need diagrams to figure…out [the overlapping definitions].”[53]

Depending on a company’s public float and revenue, it can qualify as both a smaller reporting company and either an accelerated filer or a non-accelerated filer.[54]  This distinction has real-world cost implications as non-accelerated filers do not need to provide an auditor attestation of the company’s evaluation of its internal control over financial reporting.[55]  Does it make sense that some smaller reporting companies[56] need to continue to pay for this annual attestation?  When the Commission last had the opportunity to address this issue in March 2020, Commissioner Peirce lamented that she “continue[d] to be disappointed that [the Commission] ha[s] not fully re-aligned the [smaller reporting company] and non-accelerated filer definitions.”[57]

Outdated financial thresholds, lack of scaling, and overlapping definitions can result in a complex and ineffective regulatory regime, imposing unnecessary costs on companies and their shareholders.[58]  Accordingly, the Commission should be considering whether to re-align the Commission’s filer categories to reflect the size and makeup of public companies today.  Following any potential re-alignment, the Commission should also review its disclosure requirements and identify rules that should apply only to the largest companies.

Conclusion

In the Chairman’s suite at SEC headquarters, there is a frame containing securities certificates issued by Sears, Roebuck and Co.  At one point in time, it was the dominant retailer in America.  Our capital markets regulatory system, however, provided opportunities for new competitors, such as Amazon in the 1990s,[59] to obtain financing and enter the market.  As we head into an era of artificial intelligence, quantum computing, and other new technologies, there will be companies that race to build business models around these innovations.  These companies, whether they are the size of Amazon in 1994 or 2025, or any time in between, will require capital at every stage of their lifecycle to innovate, hire, and grow.  The Commission will need to have cost-effective regulations in place if we expect these developments to occur in America and not abroad.

Thank you for your time this morning.