On Feb. 1, the Securities and Exchange Commission (SEC)’s Advisory Committee on Small and Emerging Companies held its quarterly meeting at the SEC’s headquarters in Washington. The committee considered issues in four categories, as listed in the announcement, and it approved all of them for consideration by the Commission.
This first of two articles will set the stage for the meeting and discuss the first issue — whether to allow small and emerging companies to determine for themselves the appropriate tick size at which their stocks should trade. The second article will discuss the rest of the issues the committee considered.
The committee, composed of experts who work for and advise small and emerging businesses, was created by the SEC under a mandate of the Dodd-Frank Act of 2010. A cynic might say that its establishment is a gesture, perhaps a sop, to the small business lobby at a time when the economy is struggling, to show that Congress cares about constituencies other than the largest Wall Street banks.
However, the creation of any advisory committee carries with it some features that can enhance the effort of the favored interest group, because advisory committees are empowered to make recommendations to the respective bodies they advise, and the agencies are required to consider those recommendations. The relationship between the committee and the agency is formalized both in Dodd-Frank and in the Advisory Committees Act.
In the case of this particular advisory committee, it got off to an auspicious start by adopting a set of recommendations that were soon codified by the Jumpstart Our Business Startups (JOBS) Act of 2012, which is designed to give small businesses some innovative and somewhat controversial tools to help them raise capital, in the name of promoting innovation and job creation, a cause nearly every member of Congress wanted to identify with before last year’s election.
The JOBS Act defines small reporting companies as having a market cap of $75 million or less, and the committee proposes to raise this to $250 million. Emerging growth companies are defined as having revenues of $1 billion or less, and for five years, they get relief from some of the compliance burden for public companies. In effect, they have five years to emerge as growth companies; after that, they revert to regular public company status.
It is noteworthy that not everything proposed in the name of small and emerging companies is assumed to be beneficial to securities markets as a whole. Ironically, the SEC’s Investor Advisory Committee, also established under Dodd-Frank, has issued a formal statement expressing its concern over the effect that implementation of the JOBS Act would have on the interests of investors and the potential that the provisions on crowdfunding and general solicitation of investors could have for creating a new wave of securities fraud.
Congress, and especially the House Financial Services Committee (HFSC), has been badgering the SEC to act quickly to promulgate the regulations needed to implement the JOBS Act, at the same time that the same HFSC has attacked the regulatory agenda set forth in Dodd-Frank, especially the existence, the leadership and the activities of the Consumer Financial Protection Bureau (CFPB).
Last year HFSC and then-SEC Chairman Mary Schapiro got into a dispute over how to proceed to implement the JOBS Act. Now these regulations have become mired in the same jam that has caused most of the regulations mandated by Dodd-Frank to continue to languish 2 ½ years after the legislation was enacted. This topic came up during the preliminary portion of the meeting, as one of the committee members asked how the regulations were coming, and he received a non-committal answer from the staff, followed by a remark by Commissioner Daniel Gallagher, a Democrat, that essentially nothing has been done about the JOBS Act regulations in a year.
In her introductory remarks, Acting Chairman Elisse Walter admonished the committee that she disagrees with the formula proposed by some commentators that there is a tradeoff between helping small and emerging companies raise capital and protecting investors in those companies.
When the committee took up the question of whether to allow small and emerging public companies to set their own tick sizes, it recognized that this issue is part of a larger debate over so-called “decimalization,” the quotation of bid and offer prices in extremely small increments.
Whereas years ago stocks were commonly traded in increments of a quarter, or even larger, the advent of electronic trading has made it possible to compress spreads to the vanishing point. A challenging side effect is that this makes it harder for broker-dealers to earn a living.
Proponents of the committee’s recommendation, which was adopted unanimously, hope that by restoring a spread of perhaps 5 or 10 cents, boutique securities firms would be willing to follow and make markets in the stocks of small public companies. Even many of the proponents of this measure doubt that it will be effective, but the industry is eager, if not desperate, to try anything that offers a hope of increasing the liquidity of the market for these securities.
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