offerings. There have been many regulatory changes that have provided greater legal certainty as to the availability of private offering exemptions, such as the safe harbours contained in Regulation D, especially Rule 506. In large measure, as a result of these changes, a number of securities offering methodologies involving exempt offerings have developed and become increasingly popular. Many of these offering methodologies have come to resemble the process used for public distributions of securities. Investors have become more receptive to participating in private placements and owning so-called restricted securities as the limitations on hedging or transferring restricted securities have been relaxed. More recently, private secondary markets have developed that provide liquidity opportunities for holders of the securities of private companies to sell their positions. Other commentators and academics note that a variety
of market structure changes may be the cause of or may contribute to the decline of IPOs, and, especially smaller company IPOs. During the 1990s and early 2000s, consolidation in the investment banking sector led to the disappearance of many boutique or speciality investment banks that had as their focus financing transactions for smaller companies. Some commentators point to the drop in bid-ask spreads that took place following decimalisation in 2001. In 2003, as a result of the fallout from the dot- com boom, rules and regulations were adopted that imposed restrictions on research analyst coverage and required the separation of research and investment banking activities. The burdensome regulations imposed significant compliance costs on investment banks with research activities and changed the nature of research coverage. As a result, the fewer, larger investment banks that remained after industry consolidation focused their resources on covering fewer companies (usually giving preference to larger, well-capitalised companies). These various factors seemed to change the economics associated with smaller company IPOs and tend to favour IPOs by larger, more established companies. Also, the view developed that larger companies, with a longer track record and more predictable earnings histories, make better public companies or are better able to function as public companies.
SEC developments The SEC has tried to keep pace with changes in the capital markets and has consistently introduced reforms that sought to balance investor protection needs with the need to provide issuers with access to capital. Since the early 1980s, the SEC has undertaken a number of steps to facilitate capital formation. The SEC has, among other
8 JOBS Act Quick Start
changes, created and modified the integrated disclosure system, instituted and expanded the continuous and delayed offerings processes, permitted the electronic submission of most SEC filings, and generally tried to accommodate the needs of both large and small issuers. In 2005, the SEC undertook a series of changes related to securities offerings and offering-related communications, referred to as securities offering reform. Although this reform benefited principally the largest and most sophisticated issuers (well-known seasoned issuers, or WKSIs), the changes also expanded the range of permissible communications, even during IPOs. In December 2004, the SEC established the Advisory Committee on Smaller Public Companies to “assist the SEC in evaluating the current securities regulatory system relating to disclosure, financial reporting, internal controls, and offering exemptions for smaller public companies.”9 The Advisory Committee charter stated that its objective was “to assess the impact of the current regulatory system for smaller companies under the securities laws of the United States and to make recommendations for changes.”10
The Advisory Committee considered the effect
of many new regulatory requirements on smaller public companies, as well as capital-raising alternatives for smaller companies. In 2006, it issued its final report, containing 33 recommendations, many of which focused on capital formation, including a recommendation that a new private offering exemption from the Securities Act registration requirements be adopted that would not prohibit general solicitation and advertising for transactions with purchasers that do not need all the protections of Securities Act registration requirements. The Advisory Committee noted that the ban on general solicitation in a private offering resulted in excessive concern about the offeree that may never actually purchase securities, rather than on protection of the actual investors. The Committee also noted that, given the pace of technological change, the bank had become outmoded and limited issuers from using the internet and other tools to communicate with potential investors. This was not the first time that a recommendation had been made to ease the prohibition on general solicitation. In 2007, practitioners that were members of an American Bar Association Committee submitted a letter to the SEC containing recommendations for a comprehensive overhaul of the securities laws governing the private placement of securities.11
The letter cited problems with the private
offering process that impacted capital formation. In May 2007, the SEC approved publication of eight releases designed to update and improve federal securities regulations that significantly affect smaller public
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