FOR YOUR INFORMATION..............................June 23, 1992
Proposed changes in Securities and Exchange Commission regulations to simplify and expand exemptions from various disclosure and reporting requirements for small businesses are likely to reduce capital costs and enhance competition, staff of the Federal Trade Commission's Bureau of Economics said in comments to the SEC made public today. In its comments, the FTC staff also pointed to some of the proposed changes as ones that bear monitoring to make sure that they to protect investors from fraudulent practices as well as promote the growth of small businesses. The FTC staff, responding to a March 20 Federal Register notice, focuses on proposed changes in the SEC's Regulation A and Rule 504 of Regulation D. Regulation A imposes disclosure requirements on prospective issuers of public securities but allows small firms, under certain conditions, to offer securities publicly with less extensive disclosures than those required of large firms. The exemption is limited to securities issues of up to $1.5 million a year. The proposed changes would: (1) allow small firms to "test the waters" by circulating a written statement to gauge investor receptiveness prior to making a public offering; (2) accept a disclosure form already used in many states in lieu of a similar SEC form; and (3) raise the ceiling for the exemption from SEC registration and reporting laws -- from $1.5 million to $5 million.
The SEC also has proposed revisions to Rule 504 of Regulation D, which permits firms to issue up to $1 million in securities per year without making certain otherwise required public disclosures of financial statistics. These changes would
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include: (1) removing restrictions on advertising such offerings; and (2) removing resale restrictions on independent investors who purchase these securities.
In its comments to the SEC, the FTC staff said it believes that the proposed changes in Regulation A are likely to improve the efficient functioning of capital markets by reducing compliance costs for small businesses.
The cost of complying with regulations are a factor that may discourage firms from entering new markets, the staff said. Allowing small firms to test the waters with a prospective offering notice before making a decision about undertaking the costs of required disclosures is likely to reduce uncertainty and lead more small firms to decide to raise capital and enter new markets, the staff said.
As to the SEC's proposal to increase the ceiling for Regulation A offerings, the FTC staff suggested adjusting the ceiling regularly by, and indexing the adjustment to, the percentage increase in the prior year's consumer price index. This adjustment would reduce both the regulatory uncertainty about prospective eligibility for some potential applicants and the likelihood that the SEC will need to spend future resources revisiting the ceiling, the FTC staff said.
Removing the advertising restrictions on small firms raising capital under Rule 504 may reduce the cost of disseminating information about the offering, the FTC staff said. "Lower costs are likely to increase the level of information available to investors and thereby improve capital market efficiency and investor welfare and open new investment opportunities for small firms," according to the comments. Allowing advertising of these issues entails a risk, however, that misleading information also will be disseminated, the FTC staff cautioned. If the proposed change is adopted, the staff suggested that the SEC "monitor securities advertising to ensure that its revised Rule 504 regulations do not lead to increase in the incidence of misleading claims."
The proposed Rule 504 change to lift restrictions on the resale of small issues could decrease the cost to an investor of holding a security because the investor could move capital more readily, the FTC's staff said. Thus, investors may be willing to accept lower expected rates of return on these issues. Lower rates of return "would, in turn, reduce the costs of issues for
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small firms, increasing the likelihood of entry and expansion," according to the FTC staff. At the same time, lifting restrictions on the resale of small issues may require careful monitoring to guard against fraudulent resales of these securities, the comment notes. "For example, a marketing operation might buy up a Rule 504 offering and then resell the issue at a much higher price while making fraudulent claims about its prospects. Targets of the fraudulent operator might find it harder to check on the truthfulness of claims because there would be no disclosures on file with the SEC subsequent to the initial sale to the marketer." For this reason, the FTC staff encourages the SEC to monitor for fraud in resales of these issues and boost enforcement or even reinstate some or all of the restrictions, if necessary.
The comments reflect the views of the staff of the FTC's Bureau of Economics, not necessarily the views of the Commission or any individual Commissioner.
Copies of the staff comments are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY 202-326- 2502.
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MEDIA CONTACT: Brenda A. Mack, Office of Public Affairs 202-326-2182
STAFF CONTACT: John C. Hilke, Bureau of Economics 202-326-3483