Securities Regulations

 

research papers, law journal articles, Newspaper articles and other writings on securities regulations and related topics

Current securities regulations represent major barriers to small and medium sized businesses and their supporters. Many changes need to be put in place to offset the barriers they create. Here we explore the nature of the problems in depth. The articles, studies, white papers and other publications below drill deeply into the details of the current regulations, how they impede capital formation for small businesses and what needs to be changed to turn that around.

Job Creation In America: How Government Regulations Stand In the Way and What Can Be Done About It

by Michael Sauvante, entrepreneur

This document introduces the interconnection between the nation's securities laws and regulations (both federal and state) and startup companies and existing small and medium enterprises (SMEs), and how those laws impact the ability of SMEs to create jobs. It demonstrates that small companies, in particular startups, are the primary engine of job growth in this country (see the Kauffman Foundation study below and their announcement about the Startup Act), yet the laws related to raising capital for such companies impede that function and need to be changed.

However, given the federal and state governments' historically slow response to the needs of the small business community, a case is made for the establishment of a new SRO parallel and equal to FINRA (itself an SRO) to provide a new oversight mechanism focused exclusively on Main Street, as opposed to Wall Street, businesses. This new entity would be dedicated to nurturing capital formation by small businesses and improved liquidity for their investors, while still protecting the investing public.

This document also serves as a good introduction to the impact of securities regulations on small businesses and lays the foundation for the below documents:  A two page summary of this concept (A new way to oversee securities & capital markets related to small & medium-sized enterprises), and a more in-depth exploration (Small Business Capital Markets Regulation: A New Paradigm.) 

See also this short video entitled "Main Street Matters"

IPO market study finds a dysfunctional market structure that fuels unemployment and undercuts small businesses

By David Weild and Edward Kim, Capital Markets Advisors

This study builds a solid case that current public capital markets for small business in the U.S. is completely broken and that an “alternative public market segment” needs to put in place of the current system.

“Grant Thornton’s updated study looks at how the current U.S. IPO market structure drives job losses...” It drills into the collapse of the U.S. public markets for small companies and how that has ramifications that “extend well beyond the venture capital industry and affect “mom and pop” businesses as well.”

It states that “The IPO Crisis is primarily a market-structure-caused crisis, the roots of which date back at least to 1997…” and that “...This equity crisis exacerbates the credit crisis — Good credit starts with a layer of equity. Companies are less able to attract debt capital or credit when they have inadequate equity capital.”

It further observes “In addition to negatively impacting the number of publicly listed companies in the United States, our current market structure is having a deleterious effect on job creation. When companies cannot raise capital efficiently — or at all — they are deprived of their ability to acquire the assets and human resources they need to grow their businesses. If we want to stop this vicious cycle of rising unemployment and its devastating impact on U.S. citizens, we must take steps now to revive our IPO markets.”

See also this Congressional testimony by David Weild, before the U.S. House of Representatives Financial Services Committee Capital Markets and Government Sponsored Enterprises Subcommittee on March 16, 2011. In it, he observes that small initial public offerings – the catalyst for creating new jobs – have nearly disappeared. He points out however, that such a decline is only occurring in the U.S., while those of other nations is increasing.

He concludes it with “Therefore I am also calling for the chartering by Congress of a new national stock market — one that focuses on providing the essential economic model that sustains the infrastructure needed to support small public companies and drives long-term growth and prosperity for all Americans. A market such as this would also drive tax revenues without costing taxpayers a dime.” His testimony and call for a new stock exchange is reported in this Forbes article entitled: Trading Places. See interviews and articles of Weild here.

Securities Regulations And Their Effects On Small Business

by Rosa Maria Moller, Ph.D.

This article was written for the California legislature by the California Research Bureau, part of the State of California's State Library system. It provides a good lay person's introduction to the nature of state and federal securities laws, the impact that securities regulations have on small businesses, and the need for changes in those laws to free up small businesses to better pursue their objectives.

Capital Offense -The SEC's Continuing Failure To Address Small Business Financing Concerns

by Stuart R. Cohn, professor of law and Gregory Yadley, attorney

This article provides a detailed legal analysis of what is wrong with our nation's securities laws, with respect to small businesses, and what should be done about them. The authors examine the principal hurdles facing small businesses seeking to raise capital, analyze the background and potential bases for the current regulatory regime, offer a critique based upon the twin goals of protecting investors and providing meaningful financing opportunities for smaller businesses, and recommend reforms.

The Impact of Securities Laws On Developing Companies: Would the Wright Brothers Have Gotten Off the Ground?

by Stuart R. Cohn, professor of law

This essay addresses the complexity that entrepreneurs face in navigating state and federal securities laws when trying to raise funds for their startup companies and how those laws impede that process. Professor Campbell uses the story of the Wright brothers to paint a "what if" picture of what their lives and efforts might have been like had they had to deal with today's securities laws.

Regulation A - Small Business' Search For A Moderate Capital

by Rutherford Campbell, professor of law

This article addresses one of the key ways that small businesses could raise capital, but rarely do. SEC Regulation A appears on its face to offer small businesses a means to inexpensively raise public capital. It is, however, almost never used by small entrepreneurs, even though it is the only current federal exemption generally available that allows a broad, efficient search for investors. The author blames the SEC and state securities regulators for the failure of Regulation A, but holds out the prospects that, with changes, Reg A could be one of the most effective tools for fundraising available to small businesses.

How the SEC STIFLES INVESTMENT - AND SPEECH

by Joseph McLaughlin, attorney (pdf copy of article here)

Attorney Joseph McLaughlin (whose firm Sidley Austin LLP represents Goldman) wrote in the Wall Street Journal on 2/3/2001 about the approaching confrontation between the SEC and the First Amendment over the issue of general solicitation for the sale of securities. This blog entry, "The Sec, The First Amendment and General Solicitation"further explores the ramifications of the WSJ article.

Local Stock Exchanges & National Stimulus

by Michael Shuman, attorney

The absence of local business investment can be attributed to the paucity of market-clearing mechanisms, essentially local stock exchanges, that would allow local investors to find, buy, and sell local securities. Outdated federal securities laws have left Main Street dangerously dependent on Wall Street, and overhauling them may well be a key to economic revitalization.

The Next Generation of Stock Exchanges

by John Katovich, attorney

As the movement toward larger and more profitable stock exchanges continues, one major gap in capital markets looms large: the supply of capital to the small local companies that are the source of a significant fraction of job and income creation. The lack of equal access to capital for worthy small and medium enterprises reduces their ability to reach their full potential. This paper explores possible new models to fill this gap, in ways that foster sustainable development at the local level and nurture responsible business.

Local Stock Exchanges and their Effect on Regional Economic Development, 1790 to 1930

by Trexler Proffitt, business professor and Kristina Fietkiewicz, accountant

The preceding two articles provide cogent arguments for the need for local stock exchanges. But does history support Shuman and Katovich's conclusions? That record is examined in this study of local stock exchanges in the United States before the advent of the SEC. The authors found a direct correlation between the presence of a local stock exchange and the overall growth of the local economy in the region served.

That growth was directly compared with the growth in the economy for the whole country during the same time. The authors determined that such exchanges, if well designed, "could increase regional economic growth on the order of 100 percent."

Unfortunately, the advent of the SEC and its oversight over stock exchanges beginning in the 1930s has seen a steady and rapid disappearance of local stock exchanges and a consolidation of exchanges at the national level. There is now approximately $26 trillion dollars invested on Wall Street, almost none of which goes to Main Street companies, who nonetheless provide approximately 50% of all the jobs in the country. This study builds a solid case for the revival of local stock exchanges with their obvious benefit to local economies.

CA: Private Offerings Using Non-Registered Broker/Dealers

by Lee Petillon & Mark Hiraide, attorneys

This article explores the topic of "what is the exposure to the issuer of securities, if it engages a 'finder' or other financial intermediary that is not a registered broker/dealer"?  Most startups and early stage companies, in attempting to raise equity capital privately, do not have sufficient contacts themselves to find accredited or sophisticated investors, and accordingly seek the assistance of investment professionals or financial intermediaries to locate investors. The risks to the issuer in using non broker/dealers can be very draconian (potential criminal as well as civil penalties), even though an extremely high percentage of all private placements fall into this category. This is another case of major laws, designed to protect society actually wind up being quite divorced from the real world and the needs of its citizens.

Use of Finders in Securities Transactions

by Wayne Lee, attorney (pdf copy of article here)
Continues with the theme of the preceding article and shows that the problem of using non broker/dealers in raising capital is a nationwide problem, not just in California.

A Primer on “Going Public” - How Companies Too Small for the National Stock Exchanges can Access Public Capital

by Michael Sauvante, entrepreneur

SEC registration, Rule 144, Regulation D, Regulation A, Intrastate offerings .... Beyond the well-known process of registering securities with the SEC and listing on a stock exchange, current U.S. laws allow for multiple ways in which private companies can go public (albeit with difficulty as described in the articles above). Which is best for which kinds of companies?  The benefits and disadvantages of each -- and a new alternative -- are detailed in "How to Go Public in the United States," the primer on the current options for companies to access the public capital markets.

 

Articles in Newspapers, Websites and other Publications

Fleeing to Foreign Shores

The New York Times by Graham Bowley

This article highlights the growing problem in the United States of companies electing to go overseas to find capital. It points out that nearly 1 in 10 companies that went public last year did so outside the US. Besides Australia, they turned to stock markets in Britain, Taiwan, South Korea and Canada, according to data from the consulting firm Grant Thornton and Dealogic.  They point out that the US market is still friendly to larger companies, but - "Executives and analysts fear that a long-term structural shift in American equity markets means these markets are now closed to legions of smaller, more ordinary businesses. They could more easily have gone public in the United States in the past. But they now remain private or, for the time being, have to market themselves overseas and rely on foreign investors...As young, fast-growing companies are forced to look overseas for public status and investors, executives and analysts fear that they may increasingly shift their geographic focus — and as a result any jobs they create will be abroad. “Issuers have to put themselves through a grinder to go overseas, so any significant percentage of overseas listings is a sign that our markets have become hostile to innovation and job formation,” said David Weild, a former vice chairman of the Nasdaq stock exchange and a senior adviser to Grant Thornton."

California Retail Bond Investors: New Push To Reach Mom And Pop

Huffington Post by William Alden

This article highlights that even the state of California (and other states) recognizes the need to seek funding from small, retail investors rather than relying solely on institutional and wealthy individual investors. "... Nationwide, states recognize the ability to sell debt to mom and pop investors as a useful tool, as institutional buyers prove fickle in the wake of the financial crisis..." That same rationale applies to the small business community and why securities regulations need to be modified to allow such companies to more readily seek funding from the general public.

Job Growth in U.S. Driven Entirely by Startups, According to Kauffman Foundation Study

Kauffman Foundation

"When it comes to U.S. job growth, startup companies aren’t everything. They’re the only thing." So says this Kauffman Foundation study, The Importance of Startups in Job Creation and Job Destruction, which bases its findings on the Business Dynamics Statistics, a U.S. government dataset compiled by the U.S. Census Bureau. It shows that startups are the main engine of job creation in this country. “These findings imply that America should be thinking differently about the standard employment policy paradigm,” said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. “Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”

Kauffman Foundation Unveils 'Startup Act' Proposal to Boost Growth of New Businesses and Add Jobs to U.S. Economy

Kauffman Foundation

Press conference in which Kauffman Foundation President Carl Schramm and VP Dr. Robert Litan announced a proposed Congressional bill entitled "Startup Act" based on the above referenced study concerning the role of startup companies and job creation in America. They also wrote about it in this article "The Startup Act: A Proposal to Jumpstart the American Economy" See the below video of the press conference held July 19, 2011 in Washington, DC in which Senator John Tester (D-MT) and House Majority Leader Eric Cantor (R-VA) also made presentations in support of this effort.

Few Businesses Sprout, With Even Fewer Jobs

Wall Street Journal, 11/18/10

The Kauffman Foundation study on startups (see above) spells out the fundamental role that startups play in job creation. Unfortunately, new startups are at their second lowest point in 18 years. The article points out that startups are struggling to obtain critically needed funding and suggests several reasons why, but the underlying cause can be traced to the securities laws detailed in the above articles.

The Jobs Report and Small Business

Small Business and Entrepreneurship Council (SBE Council), 1/7/11

Report on the drop in start-up and small business activity. "Finally, regarding the level of entrepreneurship, the number of non-agricultural self-employed has fallen for three straight months - by a total of 79,000 - and from December 2009 to December 2010, the number of self-employed declined by 336,000. Falling entrepreneurship creates problems now and in the future."