Similarly, securities offered pursuant to Rule 506 of Regulation D, promulgated under section4, are exempt from state securities registration requirements.38


Proposals to amend Regulation A There have been various efforts to amend Regulation A. Commentators noted that, while over the years the offering threshold has been increased to the current $5 million amount, the dollar amount has not kept pace with changes related to capital formation. The topic of increasing the Regulation A dollar threshold was discussed at the SEC’s Government-Business Forum on Small Business Capital Formation on November 18 2010.39 Moreover, in 2009, the recommendation to raise the dollar threshold made it into the final report of the SEC’s Government-Business Forum on Small Business Capital Formation.40 Statistics demonstrate that the offering threshold of


Regulation A is too low and does not align with market realities.41


Observers have, in fact, highlighted this issue for


a long time, because “the cost of making the offering, including fees for attorneys and accountants and printing costs consume an inordinate percentage of the proceeds of the offering.”42


almost 20 years.43


The threshold has not been increased for Smaller and emerging companies have


faced many capital-raising challenges in recent years. Changes in market structure and other developments affecting the IPO market have led to a paucity of IPOs for smaller companies.44


Smaller companies also have found


the costs associated with being a public, reporting company increase. Regulation A has not provided a viable capital-raising


vehicle for smaller companies principally due to the low dollar threshold and the burdens associated with state blue sky compliance. In connection with a hearing before the House Committee on Financial Services on December 8 2010, regarding amending the Regulation A offering threshold to $30 million, William R Hambrecht, chairman and CEO of WR Hambrecht + Co, stated that, “according to public records, since 2005 there have only been 153 Regulation A filings and of those 153, an astoundingly low number of 13 have actually priced.”45 Representative Barney Frank, who chaired the hearing, noted that the proposal to amend Regulation A should not be “a partisan or terribly controversial one.” Hearing participants noted that the small IPO market has virtually disappeared. Representative Anna G Eshoo testified that, “[I]n 2004, there were 40 IPOs at $50 million or less. In 2005, there were 38 IPOs at $50 million or less. In 2009, there was one.”46 Following the financial crisis, concerns about the


availability of capital for smaller, emerging companies intensified, led, in March 2011, to the introduction of legislation that would have increased the Regulation A offering threshold. On March 14 2011, Representative David Schweikert introduced in the US House of Representatives the Small Company Capital Formation Act,47


access the capital markets – allowing them to invest and hire employees.48


which was designed to encourage small companies to In introducing the proposed legislation,


Schweikert, vice-chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, said: “Taking a small business public is an important, but expensive process that requires millions in underwriting costs … Raising the Regulation A threshold to $50 million is one way to lower those costs and promote economic growth and job creation. At a time when so many small businesses are in need of capital, this is a common sense proposal that will make our capital markets more vibrant and competitive.”49 As discussed in the Introduction, the Small Company


Capital Formation Act was part of a broader effort to address US job creation and economic competitiveness and to amend or repeal certain sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act.50


In


connection with the legislative proposal, the House Committee on Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises held a hearing on March 16 2011, regarding these legislative proposals to promote job creation, capital formation, and market certainty, including the Small Company Capital Formation Act.51


Industry


representatives testified in support of the proposed Regulation A reform,52


as exemplified by testimony from


David Weild, senior adviser of Grant Thornton, who provided an analysis of the devastating decline in numbers of small IPOs, demonstrating that small businesses and entrepreneurs cannot access the capital they need to grow and create jobs.53


Weild applauded the Small Company


Capital Formation Act as the beginning of a campaign to bring back the small IPO market. In addition to the cost benefits for small companies, he noted that an increased offering threshold opens up the Regulation A exemption to an offering size that would allow companies to list on the NYSE and NASDAQ and to avail themselves of the blue sky exemption, thus avoiding very costly state-by- state filings. Other observers voiced a preference for an increased Regulation A threshold combined with Congress also pre-empting state regulation for these offerings similar to Regulation D offerings. Weild also noted the importance of the test-the-waters provision of Regulation A, citing a steady increase in IPOs that are postponed,


JOBS Act Quick Start 53


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