Sara Hanks Comments on SEC Concept Release, Defends Reg A+, Advocates on Behalf of Companies in Need of Growth Capital

Last week, a meeting of the Securities and Exchange Commission (SEC) Investor Advisory Committee (IAC) held a meeting. On the agenda was the topic of the SEC’s concept release on regulatory harmonization.

The concept release was initiated in recognition of the current ecosystem of private securities which has evolved over time to create a convoluted and confusing amalgamation of rules and exemptions. It should be obvious to everyone that much can be improved.

The task to update and reform the securities exemption regime is monumental. If the Jay Clayton led Commission can improve the ecosystem it will be a huge accomplishment. Securities law is deeply embedded into capital markets and change is always hard but an important goal.

During the Investor Advisory Committee meeting, diverse viewpoints were shared with several panelists criticizing private markets and a relative push to make them more accessible. It is the Commission’s mission to improve both private and public markets while making them more accessible to a wider segment of both investors and issuers – while being safe and transparent.

Sara Hanks, a securities attorney, former SEC staffer and longtime advocate of online capital formation participated in the panel. She provided a much-needed boots on the ground perspective in contrast to some more academic opinions. Hanks, via her company Crowdcheck, is a leading legal services provider for exempt securities offerings like Reg A+ and Reg CF. At the end of last month, Hanks posted an extensive comment letter regarding the SEC concept release expressing her opinion as to what changes should be made.

Following the SEC IAC meeting, Crowdfund Insider caught up with Hanks to ask additional questions regarding her comments and perspective. Our discussion is shared below.


Recently you provided perspective on small companies and access to capital in the current securities exemption regime. What is the problem we are trying to solve here?

Sara Hanks: The issue the Concept Release is addressing is that there are now a number of different exemptions from registration for early-stage companies. Each of them has different conditions relating to who you can sell to, when you can start making offers, and similar matters. These can get confusing and increasingly hard for issuers to comply with. I’ve seen issuers get into trouble by following the rules for the wrong exemption, thinking that they were doing the right thing. So there has to be a way of harmonizing all these exemptions and creating a rational matrix of exemptions that make compliance easier.

You made the comment that “one size does not fit all” during a discussion regarding public vs. private markets. Please explain.

Sara Hanks: What I was trying to get at there was the fact that even when the same exemption is used, one issuer might have completely different objectives from another user, and so you can’t measure success by reference to the same metrics. In particular, with respect to Regulation A, some commentators look only at the companies that use Reg A to become traded companies, and look at their subsequent stock price, as opposed to looking at the number of companies who raise funds under Reg A and wish to remain non-traded. Some companies just don’t want a trading market for their shares yet.

How can private markets be improved?

Sara Hanks: Making compliance easier would be the biggest thing. Compliance with some of the exemptions is appalling. I’m not suggesting that we need to loosen the rules in general, just to make sure that issuers understand clearly what they are supposed to do and when. And I would like investors of modest means not to be completely excluded from the private markets, so long as someone is looking out for their interests. But to flip this question on its head, what would make the private markets “better” would be to make them smaller — improve the public markets so that companies leave the private markets earlier in their life cycle. Make it easier for companies to become and remain public companies.

You made the comment that it would be better to regulate at the sale of an exempt security. Can you elaborate on that idea?

Sara Hanks: We currently regulate both “offers” and sales of securities, and as I used to say when I taught securities law, “everything’s an offer.” That is, any statement which might “condition the market” for an offering. In many cases, when an offer is made, requirements such as the delivery of an offering document are triggered. If the offer is made through channels like TV or radio, or in print, delivery of an offering document is difficult. So it would be better to have these requirements triggered at the time of sale, when someone is actually in the process of giving the issuer money.

You defended Reg A+, a sector of online capital formation that you know well. Why is Reg A+ a good option for some issuers?

Sara Hanks: Regulation A isn’t a great option right now for companies who wish to get listed on a securities exchange, mostly for very technical reasons.

The ability for an investment bank or broker to “stabilize” the stock price and protect against short sellers is limited, especially when, as is typical under current conditions, Reg A offerings are made overtime on a “best efforts” basis. But I know several banks or brokers are looking at changing the process, so this may change in the near future. We don’t need rule changes for this to happen. But for companies who aren’t looking at listing in the near future, Reg A is a great option. It’s not difficult to comply with and the ongoing reporting requirements are not burdensome. I used to think it was a great option for all early-stage companies other than complete start-ups, but we work with a number of newly-formed companies who are very happy with the way Reg A worked out for them. That being said, the old adage “securities are sold and not bought” is still true, so you do need serious marketing efforts by brokers, a marketing specialist or your own customers or fans. We’ve seen a number of good companies withdraw their Reg A offerings because they couldn’t attract attention from the markets.

What about the criticism regarding issuers that used Reg A+ to raise capital, listed on an exchange but then performed poorly?

Sara Hanks: That’s really such a limited number of companies that I think we don’t have a meaningful dataset. I would suggest that we see what happens after banks and brokers address some of the structural issues and then re-assess the success of Reg A.

What are your expectations regarding regulatory harmonization and the outcome of the SEC concept release?

Sara Hanks: It will take far longer than any of us expect or hope!

This is a huge project the Commission is undertaking. The first step will be to redefine what it means to be “accredited,” and I wouldn’t expect to see a proposal on that before early in 2020.

Then of course, everyone will argue about the proposal, so there could be a reproposal, so we could be talking 2021 before that issue is settled. I hope I’m wrong, but so far being pessimistic on timing has generally been the right call.

SEC Small Business Capital Formation Advisory Committee Posts Agenda for Upcoming Meeting

The Securities and Exchange Commission (SEC) Small Business Capital Formation Advisory Committee has posted its agenda for its upcoming meeting this month.

Included on the list of topics, is the effort by the SEC to harmonize the exempt offering ecosystem.

The SEC officially closed comments on its Concept Release in September but feedback has continued to trickle in.

Much of the commentary focused on the need to simplify and improve existing securities exemptions while updating the current definition of an accredited investor to democratize access to private securities offerings. Securites exemptions reviewed include the various vehicles utilized for online capital formation (Reg D 506c, Reg A+, Reg CF).

The Committee will be expected to provide its perspective on how to improve access to capital for small business – a vital aspect of the economy.

Harmonization of pooled investment funds will be discussed – a topic that has been foreshadowed previously by SEC Chairman Jay Clayton.

Pooled investment funds may be an effective vehicle for smaller investors to gain access to private securities. Today, as many people have come to understand, public markets have morphed into more of an exit opportunity for big money while smaller investors are left out of the wealth equation.

The Committee meeting is scheduled to take place at SEC HQ on November 12th with the event commencing at 930AM. The meeting is open to the public but is also live-streamed on the SEC website.


Agenda

 

9:30 Call to order; introductory remarks by Commissioners
9:45 Harmonization: Exempt Offering Framework
In May 2019, the SEC published a concept release seeking comment on potential ways to harmonize the exempt offering framework.

To help provide context for a discussion on the exempt offering framework, the Committee will get an overview of current research data about how small companies are accessing capital.

  • Speaker: Ross Baird, Co-Author Access to Capital for Entrepreneurs: Removing Barriers, published April 2019 by the Ewing Marion Kauffman Foundation. Ross will share findings on the importance of entrepreneurship to the U.S. economy and the types of capital currently available to support new businesses.

Following the speaker, the Committee will work to develop possible recommendations regarding Harmonization. At its August 13, 2019 meeting, the Committee formed a Subcommittee to explore Harmonization topics. The Subcommittee will present the following principles to the Committee, and the Committee will engage in discussion and deliberate on potential recommendations.

  • Harmonization Conceptually
  • Regulation of Offer and Sale
  • Accredited Investor Definition
  • Regulation Crowdfunding/Regulation A
  • Pooled Investments and Gatekeepers
12:00 Lunch Break
1:00 SEC Office of the Investor AdvocateRick Fleming, SEC Investor Advocate, will provide the Committee with an introduction to the Office of the Investor Advocate and its work.
1:30 Harmonization: Pooled Investment FundsThe Harmonization Concept Release included a discussion of whether the SEC should take steps to facilitate capital formation in exempt offerings through pooled investment funds, including interval funds and other closed-end funds, and whether retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds.

To help provide background on various fund-related rules, the Committee will hear from two experts:

  • Speaker: Richard Horowitz, Partner, Dechert LLP. Dechert submitted a comment letter to the SEC on the Harmonization Concept Release.
  • Speaker: John Finley, Senior Managing Director and Chief Legal Officer, Blackstone. Blackstone is an asset management businesses whose assets under management include investment vehicles focused on private equity, real estate, public debt and equity, growth equity, and secondary funds.
2:30 Discussion: The Committee will continue to engage in discussions on harmonization and deliberate on potential recommendations.
3:30 Wrap up and Adjournment

What the European Crowdfunding Industry Recommends for Harmonized EU Rules

Last month, Crowdfund Insider reported on comments by EC Vice President Valdis Dombrovskis, a Commissioner whose portfolio includes Financial Stability, Financial Services, and the Capital Markets Union, indicating harmonized crowdfunding rules may be forthcoming before the end of the year. In a tweet, Dombrovskis stated there is a “willingness to move forward and find compromises, hopefully still this year” (on investment crowdfunding).

Harmonization across all EU member states could dramatically help European SMEs and entrepreneurs access much-needed growth capital.  Platforms could operate across national borders with the assurance of a single set of regulations.

Currently, investment crowdfunding platforms must adhere to national, member state rules which vary dramatically across Europe. This fragmented ecosystem stands in stark contrast to what the European Union ostensibly seeks to achieve. Capital Markets Union has been a longstanding and obvious policy goal of Europe, but while simple in concept, the reality has been far more difficult to accomplish.

The most robust market for investment crowdfunding remains the UK – a country that will sometime soon exit Europe. While the UK platforms will continue to provide online capital formation across the continent, a single set of rules will help all involved. It will also foster competition between crowdfunding providers.

The leading voice for the sector of Fintech has been the European Crowdfunding Network (ECN) an association that has long advocated on behalf of a common-sense approach to regulation. Last month, the ECN published a position paper on what they expect the Commission should produce.

Currently, there are three proposals for regulatory harmonization as the European Parliament, European Commission and the Council have each had their say.

While it appears something (at some point) will be agreed upon, the ECN has itemized its point of view that, hopefully, the Commission will abide by as the industry understands the sector of Fintech better than anyone else.

So what does the ECN seek in final rules?

The ECN has published a position paper that outlines what the industry needs to succeed. The guidance comes in a 12 point outline of key issues. Below is a summary some of the more important aspects of the ECN’s recommendations:

  • Investment crowdfunding should be capped at €8 million. “A limit below €8 million is likely to exclude many of the types of businesses that the Regulation is intended to cover, explains ECN. Currently, the €8 million amount aligns with the prospectus requirement and is the de-facto cap utilized in the UK.
  • Conflict of interest: ECN states that it is very important that CSPs [crowdfunding service providers] be able to align their interests with those of sheir investors by investing in projects and/or charging carry as part of their fee model.
  • Investor classification: ECN believes sophisticated investors must meet one of a set of criteria to be deemed sophisticated:
    • (a) EUR 100k own funds; (b) EUR 2m net turnover; (c) EUR 1m balance sheet; and (2) natural persons that meet two of the following: (a) income of EUR 60k or investment portfolio of EUR 100k; (b) has worked in financial sector, or as an executive in a sophisticated legal person, for at least a year; (c) has carried out 10 significant capital markets transactions per quarter over past four quarters
  • Bulletin Board: This references secondary transactions. The ECN agrees that a buyer and seller should be able to transact on crowdfunded securities while stating there should not be an internal matching system.
  • Customer due diligence KYC: CSPs must apply due diligence measures including identifying the residency of an investor
  • Due diligence on issuers: ECN believes that due diligence is very important but the Parliament’s version (the only one provided) is not practical.
  • Entry Knowledge Test – consequences of failure: This has to do with risk notifications and the reality that many early stage investments have a high risk of failure. The ECN believes CSPs must warn non-sophisticated investors who fail or refuse to complete test but may still allow them to invest
  • Investment limits – There should be none.

There are other recommendations included in the position paper.

The ECN welcomes forthcoming regulation and believes it will have a positive impact on European startups and SMEs – as well as investors:

“A harmonised regime will at last make it possible for CSPs to provide their services on a fully cross-border basis within Europe, and with this will come an increase the volumes, quality and professionalism of crowdfunding across the continent.”

Now it is up to the Commission to decide what to do. Hopefully, policymakers will take advantage of this opportunity to move forward with the future of online capital formation and foster a workable and robust crowdfunding ecosystem.

The ECN Position Paper is available here.

SEC Investor Advisory Committee Requests an Extension on Deadline for Concept Release Comments

The Securities and Exchange Commission (SEC) Investor Advisory Committee (IAC) has requested an extension on comments regarding the current Concept Release for regulatory harmonization pertaining to securities exemptions.

The Concept Release, akin to a consultation, was launched in June as an attempt to simplify securities rules that have become a stultifying jumble of jargon – nearly impossible for a normal person to comprehend. Many aspects of securities exemptions are outdated or do not make sense. The current deadline for interested parties to submit public comments is September 24, 2019. Comments have been trickling in. Typically, as the deadline nears, submissions will increase in velocity.

The IAC was established by the Dodd-Frank Act to highlight or advise the Commission on regulatory priorities, rules, disclosure requirements and more. The Dodd-Frank Act authorizes the committee to submit findings and recommendations for review and consideration by the Commission.

Earlier this month, the IAC Chair Anne Sheehan, posted a comment requesting an extension of 60 days so their Committee could further deliberate on recommendations which may be submitted by the IAC. Sheehan noted that the current 90 day comment period is long by SEC standards but requested the additional 2 months anyway.

While the IAC has yet to post any public comments on the Concept Release, at least one IAC member has. The SEC Investor Advocate, Rick Fleming, who sits on the IAC, contributed his thoughts in July raising the alarm as to a possible update to the Accredited Investor definition. The current definition, based solely off a wealth metric, has long been known to exclude individuals that possess the sophistication to make investment decisions in exempt offerings, is something he is apparently against.

If the deadline for comments is extended it may push any possible action by the SEC further down the road. It is not clear, how or when the SEC will respond to the IAC’s request.

Concept Release: The Securities and Exchange Commission Asks for Feedback on Ways to Harmonize Securities Exemptions

The Securities and Exchange Commission is seeking comments on the current securities exemption structure. In a release yesterday, the SEC asked the public to provide feedback on “ways to simplify, harmonize, and improve the exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation.”

In the US, there is an alphabet soup of securities exemptions, or methods for companies to raise capital, while remaining compliant under the law. The rules have been created over decades with tweaks and additions that have added to what can only be described as a mish-mash of convoluted rules.

For ordinary people, the structure is Byzantine at best. The only true beneficiaries are lawyers steeped in the acronym-speak of securities law. Issuers pay dearly for this knowledge.

For online capital formation, this publication frequently references Reg D506c, Reg A+ and Reg CF, even while recognizing the fact that most people find this confusing as they simply want to raise capital while being compliant.

Part of the equation and SEC consultation is the definition of an “accredited investor.” Long in use, the current rule is wealth based demanding individuals that qualify to earn over $200,000 a year or have a net worth of more than $1 million. While simple to apply, this metric has failed in recognizing investor sophistication. While common sense dictates that wisdom is not measured by cash in the bank, the current regime has disenfranchised tens of millions of investors. As private markets have become a preferred route for capital formation, the net effect has been to block the masses from some of the most promising investment opportunities in history. Meanwhile, the rich get wealthier.

The SEC has long discussed their project to review securities exemption harmonization. The common-sense initiative was launched by SEC Chair Jay Clayton who commented on the request for public feedback:

“We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike, no matter where they are located in the United States. Input from startups, entrepreneurs, and investors who have first-hand experience with our framework will be key to our efforts to analyze and improve the complex system we have today.”

While it is not clear if there will be an actionable outcome, the project is long overdue.

[easy-tweet tweet=”We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike” template=”light”]

The concept release seeks input on whether changes should be made to improve the entire exemption ecosystem. The SEC is asking for feedback on the following topics:

  • The limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection or pose an undue obstacle to capital formation or investor access to investment opportunities
  • The Commission should take steps to facilitate a company’s ability to transition from one offering to another or to a registered offering
  • The Commission should expand companies’ ability to raise capital through pooled investment funds
  • Retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds such as interval funds and other closed-end funds
  • The Commission should revise its exemptions governing the secondary trading of securities initially issued in exempt offerings

Crowdfund Insider asked Doug Ellenoff, Managing Director of Ellenoff Grossman & Schole and longtime advocate of financial innovation for his thoughts on harmonization. Ellenoff credited the SEC staff for pursuing a more rational approach to private offerings exemptions:

“In the aftermath of the JOBS Act of 2012, the rules have only become more arcane and I believe more confusing for the public to navigate these regulatory financing options.  While I appreciate the need and history of each of the provisions, other than securities lawyers, what entrepreneur is able to properly process the range of currently available options (pros and cons; expenses etc.)–4(a)(2); 4(a)(6); Rule 504; Reg D– 506(b); 506(c); 3(a)(11), Rule 147 and Rule 147A; Reg A and Reg A+,” stated Ellenoff.

He said there is just no simple, common sense way to explain these provisions:

“I have spoken at hundreds of events to glazed over audiences trying to convey it in a digestible manner … and even seasoned securities lawyers are having trouble making sure their clients truly understand how to proceed legally and make the right judgment call,” Ellenoff stated. “So it’s timely in my judgment to clarify and meaningfully crowdsource responses to the SEC’s list of dozens of questions.  I encourage everyone’s participation.   This is a significant challenge but a magnificent chance to make a meaningful impact on capital formation for entrepreneurs to effect securities law policy.”

Maxwell Rich, a securities attorney and Chief Compliance Officer of leading crowdfunding platform Republic had this to say:

“Republic supports the Commission’s efforts in studying ways that the various registration exemptions used to raise capital in the United States can be simplified, harmonized and improved. While regulation crowdfunding is a nascent and emerging capital formation framework, its interactions with other exemptions such as Reg D and Reg A+ lack synergy and symmetry, which causes investor and issuer confusion.”

Rich said they hope this study will provide “common sense and actionable recommendations” for expanding investment and capital raising opportunities while maintaining appropriate investor protections.

Youngro Lee of NextSeed 3Youngro Lee, founder and CEO of NextSeed and Chair of the Association of Online Investment Platforms, added his voice of support for the SEC’s harmonization initiative.

“This is a very positive development for the future of small business capital formation laws.  The original JOBS Act was instrumental in launching a new industry seeking to provide opportunities for small businesses and everyday investors, but there were real challenges presented by the legal limitations.  Thoughtful harmonization of the various confusing securities offering exemptions could truly accelerate the adoption of new capital formation laws for the benefit of everyone.”

By requesting the public’s feedback on regulatory harmonization we can expect a diversity of opinion on the matter. But in the end, it is what the SEC does with the information. And whether they are willing to act, or alternatively, they feel a need to pass the buck over to Congress.

Regardless, it is painfully obvious action is needed.

The public comment period for the concept release will remain open for 90 days following publication of the release in the Federal Register.


FACT SHEET

CONCEPT RELEASE ON HARMONIZATION OF SECURITIES OFFERING EXEMPTIONS

The Commission issued a concept release that reviews the framework for exempt offerings, including several exemptions from registration under the Securities Act of 1933 that facilitate capital raising.  The concept release seeks comment on possible ways to simplify, harmonize, and improve this exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and promote capital formation.

Background

Over the years, and particularly since the Jumpstart Our Business Startups Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised.  As a result, the overall exempt offering framework has changed significantly.  Our capital markets would benefit from a comprehensive review of the design and scope of the Commission’s exempt offering framework.

Highlights

The concept release requests comment on:
The Exempt Offering Framework Whether the Commission’s exempt offering framework, as a whole, is consistent, accessible, and effective for both companies and investors or whether the Commission should consider changes to simplify, improve, or harmonize the exempt offering framework.
The Capital Raising Exemptions within the Framework Whether there should be any changes to improve, harmonize, or streamline any of the capital raising exemptions, specifically: the private placement exemption and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, the intrastate offering exemptions, and Regulation Crowdfunding.
Potential Gaps in the Framework Whether there may be gaps in the Commission’s framework that may make it difficult, especially for smaller companies, to rely on an exemption from registration to raise capital at key stages of their business cycle.
Investor Limitations Whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (i.e., whether the current levels of investor protection are insufficient, appropriate, or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities, including a discussion of the persons and companies that fall within the “accredited investor” definition.
Integration Whether the Commission can and should do more to allow companies to transition from one exempt offering to another and, ultimately, to a registered public offering, if desired, without undue friction or delay.
Pooled Investment Funds Whether the Commission should take steps to facilitate capital formation in exempt offerings through pooled investment funds, including interval funds and other closed-end funds, and whether retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds in light of the potential advantages and risks of investing through such funds.
Secondary Trading Whether the Commission should revise its rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity.

What’s Next?

The Commission welcomes all feedback and encourages interested parties to submit comments on any or all topics of interest and to respond to one, multiple, or all questions asked in this release.

The concept release will be published on the Commission’s website and in the Federal Register.  The comment period will remain open for 90 days from publication in the Federal Register.


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SEC Director of CorpFin Bill Hinman Provides Crowdfunding Update at Small Business Capital Formation Advisory Committee Meeting

Earlier this week, the inaugural meeting of the Small Business Capital Formation Advisory Committee (SBCFAC) took place at the Securities and Exchange Commission (SEC) in Washington, DC. The new Committee brings together a diverse group of small business proponents including several Fintechs. Led by Martha Miller, the Small Business Capital Formation Advocate at the SEC, the meeting saw the participation of SEC Director of Corporate Finance, Bill Hinman, provide an update on regulatory items of note for the online capital formation sector.

CorpFin has oversight over the existing securities exemptions including Reg D, Reg A+, and Reg CF – each exemption is utilized to raise capital online.

Hinman said the SEC will soon be reporting on both Reg A+ and Reg CF, both part of the JOBS Act of 2012, and how they have been used since they became actionable, perhaps providing valuable insight into progress of the exemptions.

Reg A+ allows an issuer to raise up to $50 million in an “IPO light” type offering requiring extensive offering documents while Reg CF allows an issuer to raise up to $1.07 million via online, FINRA regulated, “portals” or broker-dealers.

Hinman said both he and the SEC Chair, Jay Clayton, have been looking at improving access to capital beyond the coastal centers of innovation. Chair Clayton has consistently stated that access to capital was a top priority for his tenure at the Commission.

Hinman said the SEC was in the process of reviewing previous recommendations which were submitted by this Committee’s predecessor.

Speaking specifically about Reg CF, Hinman characterized the exemption as still small in contrast to other exemptions when considering amounts raised:

“We do think it is important and we want to make certain we optimize Reg CF.”

Hinman reported that the SEC has been receiving a lot of comments as to how the exemption can be improved.

“Right now we count about 1300 offerings done under the crowdfunding [Reg CF] regulation. Out of that 1300, a little less than half, about 520 or so, have actually raised the targeted amounts. And I think a total of about $110 million has been raised. So, relative to Reg D, or even Reg A, the amounts are modest, but the numbers are increasing and we hear a lot of interest when we go out and speak around the country. So this is something we will be keeping an eye on.”

Hinman said the SEC will be looking for the Committee’s recommendations when it comes to Reg CF. Hinman said there might be some things they can do to improve the exemption, such as raising the limits for the amount that can be raised as well as the amounts that investors can put in.

In months past, a group of Fintech leaders in the US petitioned Chair Clayton to raise the Reg CF limit to $20 million.

“We are interested in the Committee’s thoughts on crowdfunding…,” Hinman stated.

Hinman also addressed Regulation A (Reg A+), Title IV of the JOBS Act. This updated exemption was segregated into two tiers with tier 2 allowing an issuer to raise up to $50 million while being exempt from state review (blue sky). The SEC is due to report on the status of Reg A+ this year as well.

Hinman said they are going to be looking at the size of raises under tier 2 of Reg A+ perhaps intimating an inclination to push the cap higher. There have been previous discussions, and proposed legislation, to mandate an increase for Reg A+, thus making it more palatable for larger issuers.

Tier 2 has gotten a lot of activity, according to Hinman. In part because of lack of state review (tier 1 must be state reviewed) – a costly and time-consuming task for an issuer and the reason old Reg A was never utilized.

“We see a lot of folks doing tier 2 offerings at amounts that could have been raised under tier 1. So they are willing to go a little bit further in the disclosure and live with tier 2 standards to afford themselves the preemption protections.”

Since Reg A+ came into existence, Hinman reports that 360 offerings have been submitted under tier 2. About 277 have actually been qualified by the SEC Staff and 132 of these offerings have actually raised proceeds.

“There is a bit of delay from when folks get qualified as to when the deal gets done.”

The total amount raised under tier 2 has been $1.4 billion, according to Hinman, an average per deal of about $10.6 million.

“Again, we are looking at the size limits there,” said Hinman. “And other ways that may be improved.”

Hinman said the Committee’s input will be very valuable.

“We are looking as to how we can harmonize our private placement exemptions,” Hinman explained. “We are thinking about doing a concept release on the harmonization of our various private placement exemptions. There is a whole network of exemptions, some would call it a patchwork, that have grown over time, some by statute … Reg D being the larger and most often used.”

Hinman posed the rhetorical question as to can the SEC do things to make this patchwork of exemptions fit better together and better serve a company’s lifecycle.

He touched upon the current definition of an accredited investor, a rule that excludes most of the population from participating in the majority of exempt offerings – something many people view as a regulatory disenfranchisement.

“Right now we see a very binary system in terms of accredited investors. Generally, if you are an accredited investor you can invest unlimited amounts – if not [accredited], you cannot invest a penny.”

Hinman said they want to examine if this is the “right approach.” Perhaps there are opportunities to scale access across all exemptions.

The discussion regarding the definition of an accredited investor was described as a forthcoming, significant release, from the SEC.

Many crowdfunding industry participants believe that Reg CF is mortally wounded in its present iteration, exemplified by the lack of utilization and its many obvious flaws. Any change to the definition of an accredited investor could go far in fixing the overall shortcomings of online capital formation.

Most other international jurisdictions do not offer a “patchwork” of exemptions. Typically there is only one with some segmentation between investor sophistication.

Depending on what the SEC finally produces in its harmonization project, the Commission has a unique opportunity to improve access to capital, as well as access to investment opportunity, for the entire country. While no timing on the pending concept releases was provided, one would assume the reports will surface in the coming months.

Small Business Advocate Martha Miller said they hear a lot of questions about progress at the SEC pertaining to access to capital. She said they ask “where is it?” She said here it is … referencing Hinman’s comments and the forthcoming concept releases.