The SEC adopted a rule on Monday to help companies raise capital without going public, another in a series of efforts likely to further bolster private markets.
Commissioners voted 3-2 on Monday to expand several exemptions to federal securities laws that require issuers to register with the SEC and publish financial statements and other key information before accepting investors’ money. Companies also will be allowed to make such exempt offerings, as they are known, within as little as 30 days of one another, instead of the six months currently.
Chairman Jay Clayton noted, this will “increase efficiency and facilitate capital formation,” a central part of the SEC’s mission. He also added that it would reduce regulatory costs and burdens for companies by streamlining a patchwork of securities-law exemptions carved out by Congress and regulators over the years.
“Today’s rule significantly expands private-market access to investors without first putting in place appropriate investor protections,” SEC commissioner Caroline Crenshaw said Monday. “As a result, issuers will be able to conduct larger and more frequent private offerings with fewer restrictions.”
The rule also increases limits on the amount of money that smaller companies can raise via exemptions. For example, startups will be able to collect up to $5 million through online crowdfunding initiatives, up from $1.07 million currently. Participants in crowdfunding initiatives will be able to invest the greater of their annual income or net worth, rather than the lesser of the two. Companies also will be allowed to gauge investor interest without running afoul of restrictions on advertising private offerings to nonaccredited investors.
SEC economists said the changes “may increase aggregate potential investor losses,” noting that the higher fundraising limits “may make it easier for smaller, higher-risk issuers to access capital through these exemptions.” The agency didn’t estimate the likely impact of the rule on the amount of money that private companies are able to raise.
Critics of the trend toward growing private markets say that promising young companies—for example, Facebook in the late 2000s—have been able to remain private for years, depriving individual investors of the chance to share in their growth. At the same time, other private firms such as We Co. have been able to attain multibillion-dollar valuations without providing their investors with the information required by SEC registration requirements.
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