By Sarah N. Lynch
WASHINGTON, Dec 18 (Reuters) - Start-up companies will be
able to raise much more capital through certain public stock
deals without facing costly regulatory burdens under a proposal
announced by U.S. securities regulators on Wednesday.
The Securities and Exchange Commission's plan is the last
major outstanding rule requirement from the Jumpstart Our
Business Startups Act, a 2012 law that eases regulations to help
small businesses raise capital and go public.
It would update a rule on the books known as "Regulation A,"
a measure intended to spur capital-raising by exempting certain
public offerings from SEC registration requirements.
Under Wednesday's plan, known in regulatory parlance as
"Regulation A-plus," companies can decide to increase the amount
of money that they can raise under Regulation A deals from $5
million under current rules to $50 million in a one-year period.
The proposal would exempt deals between $5 million and $50
million from oversight by the states.
However, any deals above the $5 million mark would also be
subject to some additional regulatory requirements.
They would be required, for instance, to file audited
financial statements and annual and semi-annual reports. In
addition, investors would be capped on how much stock they could
Under the SEC's plan, deals below $5 million would be
subject to state review.
Companies could still opt out of state scrutiny for these
smaller deals. In order to do so, however, they would also need
to file audited financial statements and face the same
heightened requirements as the larger offerings.
Congress required the SEC to update the rules governing
Regulation A in large part because its use has steadily declined
in recent years.
In 2011, there were only 19 Reg A deals filed with the SEC,
compared with 116 in 1997, according to a July 2012 report from
the Government Accountability Office.
Securities legal experts have attributed the decline in part
to the low $5 million cap.
However, many have also said companies have been deterred
from using Regulation A because, although such offerings are
exempt from SEC registration, they generally still must be
registered in every state where they are sold.
This can be time-consuming and costly because each state has
varying "blue sky" laws governing securities.
SEC Commissioner Dan Gallagher, a Republican, said Wednesday
that some of these state reviews can take as long as seven
months. He called the Regulation A offerings of today "low,
slow, costly and burdensome - a toxic stew of impediments."
To remedy this concern, the JOBS Act gives the SEC the
authority to preempt the states from overseeing Regulation A
offerings if they are offered on a stock exchange or if the
deals are only sold to sophisticated, "qualified" purchasers.
Some commissioners on Wednesday said they felt the proposed
pre-emption of state law is consistent with congressional
intent, but others raised concerns about whether the plan could
hinder state regulators' ability to police for fraud.
State securities regulators share the latter view, and have
urged the SEC not to take this route, saying it would harm their
ability to protect investors.
In late October, the states came up with a plan to offer a
streamlined registration process so that any company that wants
to offer Regulation A deals in multiple states only needs to
register the securities once.
While Wednesday's proposal would automatically pre-empt
state oversight of deals above $5 million, the SEC's proposal
also asks questions about whether the states' streamlined
registration process is a workable alternative.
SEC Chair Mary Jo White said Wednesday that because
Regulation A has been so under-used in recent years, the current
proposed pre-emption of state law "appears necessary."
However, she added she is open to exploring the alternative
recently floated by the states.
"I will be closely watching the continued development of
this program and would like to hear more about how this program
could effectively resolve the challenges identified with the
current approach to state securities law compliance," she added.
In a statement, North American Securities Administrators
Association president Andrea Seidt panned the SEC's proposal,
saying it could lead to more fraud, and tax the states'
resources as they struggle to crack down on scam artists.
"It is not clear why the commission would remove state
oversight in a high-risk area where both federal and state
resources should be fully leveraged to provide sufficient,
regular review," Seidt said.
"It is not reasonable for the commission to expect the
states to continue to clean up all of the mess left behind in
the wake of preemptive measures like this."
The public will get 60 days to comment on the SEC's proposed