Commissioner Gallagher’s Speech Promoting Small Business Capital Formation

SEC Commissioner Daniel M. Gallagher gave a speech at the Heritage Foundation on September 17, 2014 advocating reform to our capital markets, particularly as they relate to small business.

In his speech, the Commissioner noted the importance of small businesses, referring to them as the lifeblood of our economy. Having said this, he bluntly went on to state that the Securities and Exchange Commission (“SEC”) was not doing enough to adequately ensure that small businesses had the necessary access to capital. Commissioner Gallagher acknowledged the importance of small businesses and their need for more efficient access to the capital markets; identified problems that needed to be addressed; and finished by suggesting that this issue be given the “agency’s highest level of priority.” 

Commissioner Gallagher argued there are far too many rules, making it prohibitively expensive for small businesses to access the capital markets. Not only are small businesses negatively impacted, but investors and the general public are harmed as well. He argued these rules make it difficult for small businesses to create new jobs and prevent innovation in the market. Further, the Commissioner argued, these rules harm investors by excluding them from participating in the potentially explosive growth of early-stage companies. The prescription – the SEC should pursue meaningful, substantive and procedural reforms.

Generally speaking, Commissioner Gallagher emphasized reforms that create an “end-to-end solution for accessing the capital markets,” essentially creating a new ecosystem by focusing on not just the primary market, but the secondary market as well. The Commissioner called on all divisions to help with this initiative. He advocated for simpler rules by suggesting a tier-based system, which would reduce the cost of raising capital for small businesses. In doing so, he noted small businesses proportionately pay far more than larger businesses to access capital. He also advocated for a new system to improve secondary markets and help facilitate liquidity. Some of the more specific points Commissioner Gallagher argued are:

Private Markets:

  • Withdraw the proposed amendments to Regulation D;
  • Broaden Rule 504 and 505 to include blue sky exemption; and
  • Review secondary markets with an eye towards facilitating trading among accredited investors.

Public Markets:

  • Pass a less regulated crowdfunding rule to facilitate capital access for start-ups;
  • Finish implementing reforms to Regulation A, including blue sky exemptions for larger offerings;
  • Finalize Regulation A+ with two additions: increase cap on maximum offering size to between $75 and $100 million, and exempt the shares from Section 12(g) of the Exchange Act; and create "Venture Exchanges" to facilitate a more complete ecosystem where a secondary market for Regulation A shares could be bolstered and would contribute to a more complete capital ecosystem.

Commissioner Gallagher also addressed the underrepresentation of the small business community in Washington. Gallagher first applauded the way the Office of the Investor Advocate—which runs the Investor Advisory Committee—looks out for the underrepresented interests of retail investors’ by advising the SEC on the impact that existing and proposed rules have on retail investors. He went on to advocate for the creation of an Office of the Small Business Advocate because small businesses are also underrepresented in Washington.

In asserting his views, the Commissioner acknowledged the complexity of the capital markets and urged academics, practitioners, and interested parties to get involved, provide input, and help to push these issues onto the SEC’s agenda.

Chris Ricci