In a speech at MIT's Sloan School of Management, Craig M. Lewis, chief economist and director of the SEC's Division of Economic and Risk Analysis, told an audience of potential entrepreneurs and investors about the potential benefits of the JOBS Act and some of the unsettled questions about the act's potential effects on the capital markets.
The legislation was designed to promote U.S. job creation and economic growth by improving access to the public capital markets for emerging growth companies.
Lewis said the commission is working to implement rules that support those objectives while also addressing the SEC's role in protecting investors and evaluating the act's effects on market efficiency, competition and capital formation.
"My division has considered whether rules facilitating capital formation do, indeed, promote capital formation," Lewis said. "As part of those efforts, we have been able to develop a better understanding of the types of capital raising activities that characterize the current market and how these practices may change over time."
The JOBS eases existing rules that can hamper the ability of smaller companies to raise capital effectively. In part, this involves making it easier for smaller companies and retail investors to find each other, while allowing growth-stage companies to access larger amounts of capital without the paperwork and compliance requirements of a full public offering.
Crowdfunding
One of the act's major provisions supports crowdfunding, or the idea that smaller companies could raise capital directly from retail investors through a financial intermediary firm or a registered broker.
Smaller firms are expected to be able use these new sources to raise funds directly, without the reporting requirements following a public offering.
"Capital raised through crowdfunding intermediaries could provide an alternative to small business bank lending, which is often unavailable to small business borrowers because of collateral requirements," Lewis said.
Regulation A
Another key provision of the JOBS Act is Regulation A, which would allow companies to raise up to $50 million in capital without full SEC registration and reporting -- but with additional disclosure requirements than under the crowdfunding provisions.
Regulation A is designed to provide an alternative to private placements that are primarily limited to sophisticated or accredited investors, or to a traditional IPO.
Lewis said in 2013, more than 10,000 private securities offerings fell within the limits of the proposed Regulation A.
Solicitation Eased
Another major JOBS act provision would remove the existing ban on general solicitation on investors, with companies being able to contact accredited investors while lowering the costs associated with private placements or public offerings.
Balancing Access and Risk
Among the challenges the SEC is addressing as it considers potential rules is evaluating the implications of the JOBS Act's provisions on investors and issuers.
While the SEC wants to promote capital formation, it also wants to ensure investors have enough information to identify and assess the potential risks associated with new investment opportunities.
Lewis said removing the ban on solicitation, for instance, could increase the odds of "participation by unaccredited investors, either inadvertently or by design to the extent that promoters of fraudulent schemes could more easily reach potential investors."
Another question that can't be answered now is whether the act would promote new capital formation and investment activity, or merely shift fundraising from existing channels into new ones.
"Will investors who are already putting their money into the capital raising efforts of companies simply redeploy that capital into other opportunities, or will new investors enter the markets, bringing an influx of new capital?" Lewis asked.
The liquidity of securities issued under JOBS Act provisions will play a major role in determining the act's ultimate success, Lewis said. Because these securities are unlikely to trade on existing exchanges, new markets or trading venues will need to provide liquidity.
"If investors feel that they will not be able to easily divest, or if the securities are not designed to self-liquidate, then investors may be reluctant to invest in the first place," Lewis said.
Craig Lewis will be among the keynote speakers at the FEI Summit Leadership Conference taking place June 2-3 at National Harbor, MD.