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From Securities Regulation Daily, May 13, 2015

House panel debuts venture exchange bill, other capital formation efforts

By Mark S. Nelson, J.D.

The House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises heard testimony on the newest capital formation bills this afternoon. Subcommittee Chairman Rep. Scott Garrett (R-NJ) said his venture exchange bill and three other bills would help to fill gaps left by the Jumpstart Our Business Startups (JOBS) Act and would push the SEC to justify the continued existence of some of its regulations.  

But Carolyn Maloney (D-NY), the subcommittee’s ranking member, said that while she sees the potential benefits of some of the latest bills, she worries that some of them may alter the balance between investor protection and the bills’ collective goal of lowering the costs of capital formation. The four bills the panel examined today would complement a larger package of bills the subcommittee reviewed a few weeks ago.

Separately, a different House panel earlier today conducted a hearing designed to ask if regulations adopted under the Dodd-Frank Act go too far. The panels’ questions to witnesses on the financial reform law divided mostly on party lines, but at times the hearing devolved into an almost proxy hearing on whether to re-authorize the Export-Import Bank’s charter, which is set to expire in 23 legislative days. Representative Maxine Waters, ranking member of the Financial Services Committee, used her opening remarks on the Dodd-Frank Act hearing, which echoed her May 1 press release, to lead the push for a hearing and vote on the bank’s reauthorization.

Venture exchanges. The Main Street Growth Act, sponsored by Rep. Garrett, would add new Exchange Act Section 6(m) to allow the trading of small company stocks on venture exchanges. The bill would advance an idea rekindled in late 2013 by SEC Commissioner Daniel M. Gallagher in his remarks to a commodities conference. Speaking a year later, ahead of this year’s adoption of the SEC’s so-called Regulation A+ release, Gallagher reiterated that venture exchanges could augment the latest changes to Regulation A.

Representative Garrett said his bill would help to create a secondary market for the trading of small, pre-initial public offering companies. He explained that venture exchanges could improve the prospects of small companies, disfavored by existing markets, by helping these stocks’ liquidity and by lowering small companies’ capital formation costs. Like Gallagher, Rep. Garrett said the bill would close gaps left by the JOBS Act.

Stephen Luparello, director of the SEC's Division of Trading and Markets, told the Senate Banking Committee's Subcommittee on Securities, Insurance, and Investment this past March that venture exchanges are one of several “innovative approaches” the SEC is considering. SEC Commissioner Kara Stein has urged the agency to publish a concept release on venture exchanges, a move the North American Securities Administrators Association, Inc. has also said could help to clarify how these venues may impact small company equity securities.

William Beatty, NASAA president and director of the Washington Securities Division, said in a written statement to the same Senate panel that heard from the SEC’s Luparello that Congress should carefully review the policy aims of any venture exchange legislative proposals. “Given these available sources of capital, the question becomes, what is the additive value of venture exchanges, which are by definition more opaque, less efficient, more volatile, and more illiquid than U.S. public markets, which continue to be the envy of the world?”

Other capital formation bills. Under the Fair Access to Investment Research Act of 2015, proposes to amend Securities Act Section 5 to add a safe harbor for covered exchange traded fund (ETF) research reports, even if the broker-dealer participates in the registered offering or distribution. These reports would be defined to include a report published by a broker-dealer about an issuer or its securities where the issuer is an ETF, and meets specified requirements regarding listing, market value, and reporting. The broker-dealer must publish these reports in its ordinary course of business. The bill also would amend the Investment Company Act, and would give the SEC authority to make needed changes to Securities Act Rule 139.

The Accelerating Access to Capital Act of 2015 would direct the SEC to revise General Instruction I.B.1. of Form S-3 to retain the existing $75 million provision but to clarify that eligibility to use the form can be based on this amount or that the registrant has at least one class of securities listed and registered on a national securities exchange.

Yet another bill would require the SEC to periodically review its significant regulations and hold a Commission vote on whether each of these regulations is outmoded (or otherwise too burdensome) or no longer necessary. The Commission then would have to amend or repeal the rules identified during the review. The SEC also would have to report to the House Financial Services Committee and the Senate Banking Committee on its review and actions.

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