From its very founding, the Securities and Exchange Commission has contained some curious ironies. Established in the wake of the market crash of 1929, which ushered in the Great Depression, its founding director was future presidential dad Joe Kennedy, who made his fortune through bootleg hooch and brazen stock manipulation of the type the SEC was mandated to police.
While the SEC today remains the prime cop of the vast American securities markets, responsible for flushing out Ponzi schemes and insider trading, since 1992 the agency has also been directed by Congress to look out for the special needs of smaller businesses. In other words, an agency known for its crime-busting rectitude in matters involving the big guys simultaneously serves as statutorial ombudsman for smaller concerns.
That was the message SEC officials brought to Cleveland recently in what they billed as a town meeting, the 11th such gathering the SEC has convened around the country. Among the initiatives the agency has taken or is proposing to take to help small business are:
- exempting from SEC registration requirements the awarding of stock to employees of small companies;
- permitting the raising of up to $1 million a year in seed capital;
- raising from $25 million to $50 million the threshold for companies which would be eligible for SEC small business programs;
- raising from $5 million to $10 million the threshold amount at which equity offerings will be subject to SEC reporting and registration requirements. That threshold went from $1 to $3 million in 1982 and $3 to $5 million in 1986;
- permitting small companies to raise up to $5 million a year through exempt offerings of securities, using unaudited financials, which substantially reduces the offering’s cost.
The upshot? As the SEC’s deputy for small business, Barbara Jacobs, put it, “None of these exemptions makes you a public company.”
Perhaps the most potentially valuable initiative is the agency’s decision to relax its “quiet period” rules to permit companies considering going public to test the waters without first pulling the trigger. These tough rules have historically governed the period leading up to a public offering, but the change gives companies considering an IPO the chance to test the waters of investor interest by, for instance, posting notices to that effect on their Web site. The agency concedes this change is a response to the tremendous volume of securities information available on the Web.
At the same time, SEC officials stressed that none of this loosening of its regulations will apply to instances of securities fraud, which continues to be tightly monitored. As if to drive the point home, on the very day the town meeting was held in Cleveland, SEC enforcement officials in the Washington headquarters splashily announced the agency was charging 44 individuals with fraudulent promotion of stocks through the World Wide Web.
These alternative methods for raising corporate capital come as the IPO market has cooled. But the SEC seems bent on making the case that even where successfully completed, the cost of taking a company public is quite high. Attorney Michael Ellis, of the Cleveland law firm of Kahn, Kleinman, Yanowitz & Arnson, noted that for a typical IPO which raises, say, $35 million, the costs for related legal, accounting, printing and insurance services will be well into the hundreds of thousands of dollars. “And that doesn’t even include the 7 to 13 percent of the deal that goes to the brokers raising money,” he said. Plus, there’s the significant loss of latitude in managing one’s company, as well as the public market’s heightened short-term pressure for financial performance.
The agency says it is throwing considerable resources at the small business segment. The SEC’s small business unit, which as corporate finance division director Brian Lane noted had just three people 15 years ago but which now has 25 analysts and attorneys, gets probably 50 calls a day from companies trying to sort out the best option for raising capital.
“We will be your ombudsman,” he said. “Let’s hope it won’t be the enforcement division.”