Over the course of just the past month, we have observed the SEC pivot to an agenda that is particularly focused on capital raising matters. In the past month, the SEC Staff has issued the following guidance:
– On March 3, the Staff enhanced the accommodations available to companies seeking confidential review of draft registration statements;
– On March 12, the Staff issued new guidance and an interpretive letter addressing what the Staff views as an acceptable process for verifying “accredited investor” status in a Rule 506(c) offering; and
– On March 20, the Staff revised its position on the information that is required to be included in a non-automatically effective registration statement on Form S-3 filed during the period between when a company files its Form 10-K and its proxy statement, permitting registration statements to be declared effective during that period.
This Staff guidance is no doubt an opening salvo in efforts to be undertaken by the Commission and Congress to encourage capital raising by both public and private companies. The developments make it a particularly good time to attend the SEC’s 44th Annual Small Business Forum, which is taking place next Thursday, April 10 at the SEC’s headquarters in Washington DC. Those who are not able to attend in person will be able to tune into a webcast of the program. The full agenda for the program is now available and features a wide range of topics relevant to capital-raising by smaller companies. As Meredith recently noted, the SEC is asking the public to register in advance and submit suggestions ahead of the Forum.
I am honored to be speaking at the program this year, on a panel titled: “Small Cap Playbook: Entering and Advancing in the Public Market Arena.” It promises to be an interesting discussion of the opportunities and challenges faced by smaller companies seeking to raise capital in public markets. I hope that you can join me at this year’s program!
The paper draws insights from a recent survey and ongoing engagement with thousands of Nasdaq-listed companies and advances critical policy proposals to strengthen the public markets and retain the U.S. capital markets’ status as the global standard for economic innovation and wealth creation.
Over the past 25 years, the number of public companies listed on U.S. exchanges has declined 36%, from 7,000 to 4,500, while the number of private equity-backed companies in the U.S. has increased approximately 475%, from 2,000 to 11,500. One of key drivers behind this trend is the increased burden associated with public company status. The decline in the number of public-traded companies is harmful to the overall strength, liquidity, and depth of the U.S. markets. The unjustifiable increase in the burdens and costs that must be borne as the price for the privilege of accessing U.S. public markets has needlessly hampered U.S. companies’ growth, scale, and competitiveness in the global economy. Importantly, it has also limited Main Street Americans from benefiting from the value and wealth creation potential from American innovation.
Nasdaq’s paper recommends pragmatic and results-oriented regulatory changes to restore balance between oversight and accessibility in the public markets. The analysis includes views from companies and argues for proxy process modernization, scaled disclosure with renewed emphasis on materiality, common sense litigation reform, and increased transparency into short selling.
Several of the key policy initiatives addressed in the paper include:
– Proxy Process Modernization, including improving proxy plumbing, common sense proxy access and shareholder proposal reforms, and proxy advisory reform.
– Scaled Disclosure Relief, including anchoring disclosure requirements in materiality, streamlining quarterly reporting practices, and updating scaled disclosure for emerging growth companies, accelerated filers, smaller reporting companies and well-known seasoned issuers.
– Leveling the Playing Field with Smart Regulation, including ensuring audits remain relevant and affordable, updating short selling disclosures, and reining in unproductive litigation practices.
In a Q&A with John Zecca, Nasdaq’s Executive Vice President and Global Chief Legal, Risk, and Regulatory Officer, that was released at the same time as the paper, John was asked “What are the risks if the advice in the report is not taken?” He replied:
I think the biggest risk is that companies skip the public markets, and that will impact the ability of mainstream investors to save for retirement and meet their needs. They’ll have fewer investment options. On top of that, the U.S. economy as a whole will be impacted if there are fewer public companies, generating fewer jobs. And the cutting-edge companies of tomorrow that need to raise capital may not have that capital and may struggle.
Without these modernization reforms, we will lose ground to other countries. If you look around the world now, the U.S. markets are the envy of the world: When I travel, I hear repeatedly that others are looking to emulate the U.S. model. And these other countries are not standing still: They are deregulating and changing their listing rules to try to draw in more companies. So, if the U.S. doesn’t act now, then we are at risk of falling behind in the global capital race.
That’s the core risk, but the good news is that U.S. policymakers understand this, and they see these concerns. The new administration is very focused on improving the public company model.
That’s why we believe this report outlines the right policy ideas at the right time.
Capital-raising is certainly not the only thing on the SEC’s agenda. It is likely that another area of attention will be the rules that the SEC has proposed or adopted over the course of the past four years. Yesterday, members of the House Committee on Financial Services announced that they had sent letters to various agencies “requesting the rescission, modification, or re-proposal of specific Biden-Harris Administration actions.”
The letter to Acting SEC Chairman Uyeda calls on the SEC to withdraw several final and proposed rules, with the members noting in the press release:
These proposals and final rules have not only made our capital markets less attractive to companies considering going public but also have imposed undue burdens on existing public companies. As global economic competition escalates, it is incumbent upon the Commission to abandon misguided rulemakings and work to maintain our capital markets’ status as the envy of the world.
The letter specifies a list of fourteen adopted and proposed rules to be withdrawn, including:
1. Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure;
2. Short Position and Short Activity Reporting by Institutional Investment Managers;
3. Reporting of Securities Loans;
4. Pay Versus Performance;
5. Investment Company Names;
6. Form N-PORT and Form N-CEN Reporting; Guidance on Open-End Fund Liquidity Risk Management Programs;
7. Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker Dealers and Investment Advisers;
8. Open-End Fund Liquidity Risk Management Programs and Swing Pricing;
9. Regulation Best Execution;
10. Order Competition;
11. Position Reporting of Large Security-Based Swap Positions;
12. Regulation Systems Compliance and Integrity;
13. Outsourcing by Investment Advisers; and
14. Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices.
It looks like Corp Fin would get off pretty easy with this list, with only two Corp Fin rules highlighted for withdrawal. Too bad EDGAR Next did not make the list!
While there have been a few rumors floating around about DOGE working at the SEC over the past two months, it now appears that DOGE contacted the SEC last week to initiate an interaction with the SEC Staff. As this Reuters article notes, the Staff was informed that DOGE has indeed arrived on the scene:
SEC staff were informed that the DOGE task force had contacted the regulator, and that they would be treated as staff for the purposes of network, system and data access. The SEC is establishing a liaison team with the “intent to partner” with DOGE, the email said…
“Our intent will be to partner with the DOGE representatives and cooperate with their request following normal processes for ethics requirements, IT security or system training, and establishing their need to know before granting access to restricted systems and data,” the staff email stated.
A spokesperson for the DOGE task force referred questions to the SEC, whose spokesperson confirmed it was beginning to onboard DOGE members. But the SEC declined to comment on what role, if any, Musk would play at the agency as part of DOGE or what data access the team would have. Musk did not immediately respond to a request for comment.
The article notes that the arrival of DOGE personnel at the agency comes at a time when the SEC is already undergoing staffing changes, with over 600 people agreeing to leave the agency under the resignation and retirement programs that have been offered over the past two months.
During his confirmation hearing, SEC Chairman nominee Paul Atkins noted that he would be definitely willing to work on efficiencies at the SEC if confirmed.
The arrival of DOGE personnel at 100 F Street is not likely to improve the morale around the SEC, where the frequent departures and an overall sense of chaos is undoubtedly contributing to a great deal of distraction and uncertainty for the Staff. I have a great deal of confidence in the talented SEC Staff members who will most certainly be able to continue the agency’s mission amidst this current storm. We all may need to have some patience as the SEC adjusts to a “new normal” over the course of the next weeks and months.
I fully realize that if I had posted a blog with this title and content one year ago, it would have easily been identified as an April Fool’s Day joke – but this is our reality today, and certainly no joking matter.
The efforts that have been made to reduce the federal workforce over the past two months have prompted me to reflect on my time in public service and how important that time was to me as a lawyer and as a person. My conclusion is that I would not be who I am today without the unique experience of working in the federal government.
As I have discussed before, I grew up with only a very cursory understanding of the workings of the federal government and never really envisioned being a part of it. A series of random events and happenstance, including the impression left on my by the movie Wall Street, led me to law school with the express purpose of getting a job at the SEC. And thanks to an internship opportunity that opened up in the SEC’s Office of Administrative Law Judges, I got my shot at public service and tried to make the most of it.
What struck me most about my time in the federal government were all of the incredible people that I encountered there. During my two tours at the SEC, I met so many brilliant and genuinely nice people at the agency, many of whom I am still in touch with today. There was something about working hard together toward a well-defined mission that created a particular esprit de corp that I have never experienced in any other job. While there were inevitably bad times that came along with the good times, it was always easier to navigate those bad times with such a talented and committed group around you. And no matter what we were working on, we always stayed focused on the SEC’s mission, which gave all of us a sense of purpose in our daily work.
When I left the SEC the first time for private practice, I really struggled with the loss of my identity as a public servant. It was very difficult for me to transition out of the federal workforce, and I did not find the work in private practice to be as fulfilling as what I had experienced at the SEC. I also missed the people that I had worked with terribly, and I yearned for that sense of mission that came with public service. These feelings ultimately led to my return to the Division of Corporation Finance at the SEC, with a broader perspective on how the world works and a renewed interest in “doing good” in the federal government.
As I look back on my experience in the federal workforce, I realize that my “SEC Era” really reshaped my views on the role that the federal government plays in our lives and the important work that is being done in Washington and across the country by federal workers. While there are undoubtedly instances of waste, fraud and abuse in the government, we should definitely not paint with too broad of a brush when criticizing the federal workforce. At the SEC and other federal departments and agencies, there are hard-working, dedicated people that are working every day to make our lives better, safer and more productive, and they deserve our gratitude and respect. I would like to thank each and every one of them for their service to our country.
Join us tomorrow at 2:00 pm Eastern for our “Conduct of the Annual Meeting” webcast to hear Chevron’s Mary Francis, The Shareholder Service Optimizer’s Carl Hagberg and Peder Hagberg, Lucky Strike Entertainment’s Matthew Kane and Alliance Advisors’ Jason Vinick discuss the latest developments and provide practice pointers that will help you prepare for your annual meeting. This annual webcast is always a great way to get ready for the annual meeting season!
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