America’s small businesses and the investors who love them may soon get their wish, if comments made on September 23 by SEC Chair Mary Jo White prove to have teeth.
Speaking at yesterday’s Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies meeting, Ms. White confirmed Title III rules would soon be implemented.
In a release dated September 18 announcing the September 23 meeting, Ms. White stated the meeting would address the recommendations related to intrastate crowdfunding, among other issues.
“I am pleased that the advisory committee is moving forward with recommendations on these important topics,” she said. “Having pointed input from the small business community and the public is essential as we continue our efforts to facilitate capital formation.”
In preparation for the September 23 meeting, the committee submitted recommendations to Ms. White.
“The ability of emerging companies to raise capital in the private markets is critical,” the committee wrote.
They noted 40 states plus the District of Columbia have either fully enacted crowdfunding or have legislation in some stage of development. Included are 17 who have fully enacted some form of state-based crowdfunding, nine which have passed legislation but who are still finalizing rules, 12 with pending legislation, and three which are considering action.
The committee also raised concerns with Rule 147 of the Securities Act. Commonly known as the “safe harbor” rule, it assists companies seeking to meet the requirements for the Section (3a)(11) exemption.
The rule has not been updated for 41 years, of a state inertia which concerns the committee.
“State regulators and practitioners have indicated that current requirements in Rule 147 make it difficult for issuers to take advantage of the new state-based crowdfunding provisions,” the committee wrote.
The committee described three reasons for that difficulty.
Out of state residents cannot participate in an offering. “This is an impediment in the age of the Internet and social media,” the committee said.
A business considered to be doing business in the state must pass three “80 percent” tests in order to qualify. They must generate at least 80 percent of their revenues in the given state, maintain at least 80 percent of their assets in that state, and use at least 80 percent of the offering’s gross proceeds there.
“These tests are difficult to satisfy and render many contemporary small businesses seeking local financing ineligible to rely upon the rule,” the committee wrote.
Issuers must also be incorporated or organized in the state where the offering would be conducted.
The committee provided three recommendations to Ms. White.
Out of state residents should be allowed to view offers made in reliance on Rule 147, but sales should be limited to residents of the state where the issuer’s main office is located.
The committee also recommended the removal of the three “80 percent” tests, while suggesting alternative criteria should be used for determining the relationship between the issuer and the state where all sales occur.
The final recommendation was to eliminate the requirement of a company having to be incorporated or organized in the same state where all sales occur.
Over the coming weeks and months Bankless Times will be interviewing industry insiders and inviting them to submit their thoughts on Title III’s implications.