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SEC Commissioners on Capital Formation

By Anna T. PinedoAnna T. Pinedo | Morrison & Foerster LLP,

Recently, various SEC Commissioners, including Commissioner Stein and Commissioner Gallagher, have addressed issues related to capital formation in their public remarks.

At a Los Angeles County Bar Association conference, both noted that one of the Commission’s most important objectives remains facilitating capital formation, while, of course, preserving important investor protections. In her remarks, Commissioner Stein addressed the transformational changes that have occurred to the “capital formation continuum.” She focused her remarks for the first time on how an issuer might use Regulation A+ as a financing alternative or a stepping stone, and how Rule 506 offerings might continue to provide the flexible financing option that has proven a reliable source of capital for companies at all stages of their growth.

She called for “a comprehensive review and rationalization of our capital formation tools…” and suggested that a starting point might be tackling Regulation A+ and making the exemption a flexible option for issuers. In a more recent speech, at the “Live from the SEC” conference, Commissioner Stein acknowledged that “the continuum of capital formation has changed dramatically” and considered the international aspects of crowdfunded and Regulation D offerings.

It is encouraging that the Commissioners are discussing the future of Regulation A+ (it’s been nearly a year since the Commission released its very thorough Regulation A+ proposed rules), and discussing financing options as existing on a continuum.

Most issuers carefully weigh the costs and benefits of various financing alternatives available to them, and take into account restrictions on resales, disclosure requirements, the ability to use general solicitation or general advertising, and investor comfort or familiarity with the offering format. Rather than considering each exemption (whether existing or proposed) in isolation, taking a more holistic approach is likely to lead to a more robust range of capital formation alternatives.

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