Print | Share | Reprint

Schapiro urges senators to rein in capital-raising bill

by Ira Teinowitz in Washington | Published March 14, 2012 at 4:17 PM

Securities and Exchange Commission Chairwoman Mary Schapiro warned senators that a House-passed package of bills to ease capital formation by startup businesses could remove vital investor protections.

"Companies seeking to access capital should not be hindered by unnecessary or overly burdensome regulations. At the same time, we must balance our responsibility to facilitate capital formation with our obligation to protect investors and our markets," Schapiro said in a six-page letter sent Tuesday, March 13, to Senate Banking Committee Chairman Tim Johnson, D-S.D., and its ranking GOP member, Sen. Richard Shelby of Alabama.

"While I recognize that [the House legislation] is the product of a bipartisan effort designed to facilitate capital formation and includes promising approaches, I believe that there are provisions that should be added or modified to improve investor protections."

Schapiro's comments came as senators ready their own package of capital formation measures. Sen. Charles Schumer, D-N.Y., said last week that the Democratic package would go beyond the House package in terms of help for companies raising capital and also offer more investor protections.

Schapiro isn't alone in making the warnings. The North American Securities Administrators Association, which represents state securities regulators, on Monday in its own letter to senate officials called the House package "deeply flawed."

"State securities regulators support efforts by Congress to ensure that laws facilitating the raising of capital are modern and efficient. However, it is critical that Congress not discard basic investor protections."

The House package, approved on a 390-23 bipartisan vote March 8, instructs the SEC to raise the trigger for full registration of a company from the current 500 shareholders to 1,000 shareholders for most companies and to 2,000 shareholders for community banks.

It would establish a new "emerging-growth company" category and allow qualifying companies with less than $1 billion in annual revenues and less than $700 million in public float up to five years to file full SEC disclosure, no matter the number of stockholders. During that time the companies could also delay some auditing of internal controls required by the Sarbanes-Oxley Act.

It would also:

-- Eliminate most SEC curbs on securities advertising as long as ads are directed to "accredited investors," those with $250,000 in annual income or $1 million in investments not including their home.

-- Permit small firms to raise up to $2 million using Internet "crowdfunding."

-- Allow small firms to raise significantly more money annually without having to file SEC paperwork. Under Regulation A currently, small firms are allowed to raise $5 million a year. The legislation raises that amount to $50 million a year.

Schapiro expressed concern about a number of the elements but was especially forceful in her concerns about the emerging-growth companies section.

She said it would "eliminate important protections for investors in even very large companies" and suggested it would be better targeted to smaller businesses.

"I am concerned that we lack a clear understanding of the impact that the legislation's exemptions would have on investor protection," she said. "A lower annual revenue threshold would pose less risk to investors and would more appropriately focus benefits on the smaller business that are the engine of growth whose IPOs the bill is seeking to encourage."

She said several parts of the emerging-growth section could create additional problems. For instance, one provision allowing IPO underwriters to issue analyst reports on the companies they're taking public could foster a return to some of the worst practices of the dot-com era, in which investment banks promised clients favorable research in return for lucrative underwriting assignments.

"I am concerned that the legislation could foster a return to those practices," she said.

She said delaying internal control audits is "unwarranted" and reminded lawmakers that they implemented the requirement after accounting scandals. The mandate has helped improve the reliability of financial reporting, she said.

She warned that the crowdfunding measure could lead to an increase in scams and diminish investor confidence.

Schapiro also said some of the timetables for SEC action in the bill are unrealistic. The crowdfunding's measure, which requires the SEC to take action within six months, requires the agency to analyze costs and benefits that would take well over six months to get and analyze.

The state securities administrators expressed some similar concerns, suggesting the elimination of restrictions on investment bankers writing research reports would be a "tearing down of the Chinese wall" and would hurt investors.

The group also expressed concern that some provisions of the House bill would place unneeded restrictions on state's ability to supervise security offerings.

Share:

Regulatory

Schapiro urges senators to rein in capital-raising bill

Free preview

Meet the journalists

Ira Teinowitz

Senior reporter, Washington bureau

Movers & Shakers

Video

Coming back for more

Sectors