Treasury Report Proposes Measures to Promote Access to Capital
December 11, 2017
Recent US Department of Treasury Report Calls For Changes To Federal Financial Regulations
The U.S. Department of Treasury recently published a report calling for widespread changes to the country’s federal financial regulations. The overhaul is intended to promote growth by loosening market restraints put in place after the financial crisis. In good news for startups and other growing businesses, the report devotes significant attention to promoting access to capital and investment opportunities.
Treasury Report on Capital Markets
The Treasury Department issued the report in response to President Donald Trump’s Executive Order 13772, entitled “Core Principles for Regulating the United States Financial System.” The current Treasury report is devoted exclusively to the capital markets, including debt, equity, commodities and derivatives markets, central clearing and other operational functions.
According to the Treasury, its review has “identified a wide range of measures that could promote economic growth and vibrant financial markets, providing opportunities for investors and issuers alike, while maintaining strong investor protection, preventing taxpayer-funded bailouts, and safeguarding the financial system.”
Recommendations to Improve Access to Capital
In response to the significant decrease in public companies and initial public offerings (IPOS), the Treasury makes recommendations to improve the attractiveness of going public when companies are seeking to raise capital. Acknowledging that an IPO may not be appropriate for many small enterprises, the report also considers recommendations to expand access to capital more broadly.
Below is a brief summary of several key proposals regarding how to promote access to capital and investment opportunities:
- Repeal Pay Ratio Rule: Congress should repeal securities laws that have imposed requirements to disclose information that is not material to the reasonable investor for making investment decisions, including information related to conflict minerals (Section 1502), mine safety (Section 1503), resource extraction (Section 1504), and pay ratio (Section 953(b)).
- Update Regulation S-K: The Securities and Exchange Commission (SEC) should move forward with its update of Regulation S-K. It should also proceed with finalizing its current proposal to remove SEC disclosure requirement that duplicates financial statement disclosures required under generally accepted accounting principles by the Financial Accounting Standards Board.
- Allow Everyone to Test the Waters: Given that the SEC now permits all companies to file for IPOs confidentially, the Treasury recommends that companies other than emerging growth companies (EGCs) be allowed to “test the waters” with potential investors who are qualified institutional buyers or institutional accredited investors.
- Limit Shareholder Proxy Proposals: The SEC should revise Exchange Act Rule 14a-8, which allows shareholders to have their proposal placed in a company’s proxy materials, by increasing the threshold for eligibility.
- Expanded Eligibility for SRCs: Congress should enact legislation to broaden eligibility for status as a smaller reporting company (SRC) and as a non-accelerated filer to include entities with up to $250 million in public float, an increase from the current limit of $75 million in public float. The Treasury also favors legislation extending the length of time a company may be considered an EGC for up to 10 years, subject to a revenue and/or public float threshold.
- New Rules for Finders: The SEC, FINRA, and the states should propose a new regulatory structure for finders and other intermediaries in capital-forming transactions. For example, a “broker-dealer lite” rule that applies an appropriately scaled regulatory scheme on finders could promote capital formation by expanding the number of intermediaries who are able to assist smaller companies with capital raising.
- Expand Accredited Investor Definition: Amendments to the accredited investor definition should be undertaken with the objective of expanding the eligible pool of sophisticated investors, such as broadening the definition to include any investor who is advised on the merits of making a Regulation D investment by a fiduciary, such as an SEC- or state-registered investment adviser.
- Increase Flexibility for Regulation A Tier 2: Regulation A eligibility should be expanded to include Exchange Act reporting companies and increasing the Tier 2 offering limit to $75 million. It also advocates that state securities regulators promptly update their regulations to exempt secondary trading of Tier 2 securities or, alternatively, that the SEC use its authority to preempt state registration requirements for such transactions.
- Relax Crowdfunding Rules: The Treasury recommends several changes, including the authorization of single-purpose crowdfunding vehicles advised by a registered investment adviser. Other proposed changes include waiving he limitations on purchases in crowdfunding offerings for accredited investors; setting investment limits based on the greater of annual income or net worth for the 5% and 10% tests, rather than the lesser; raising the maximum revenue limit from $25 million to $100 million; and increasing the limit on how much can be raised over a 12-month period from $1 million to $5 million.
- Private Funds: Congress should review provisions under the Securities Act and the Investment Company Act that restrict unaccredited investors from investing in a private fund containing Rule 506 offerings.
Given the role of the U.S. capital markets, any proposed changes that are enacted will have far-reaching impacts. For those who may be interested, the full Treasury report is available here. Businesses are also encouraged to consult with experienced counsel regarding how the many ongoing proposals to amend our financial regulations may impact their business plans.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Dan Brecher, at 201-806-3364.