Crowdfund Insider | JD Alois | Aug 2, 2022

The Securities and Exchange Commission (SEC), Small Business Capital Formation Advisory Committee (SBCFAC) met today to discuss liquidity for certain exempt securities in the form of secondary trading. More specifically, the Committee addressed securities issued under Reg CF (Regulation Crowdfunding) and Regulation A (Reg A+).

In opening remarks, SEC Chairman Gary Gensler stated:

“I look forward as well to the Committee’s discussion on secondary market liquidity for investors in Regulation A and Regulation Crowdfunding companies, and for smaller public companies. I would be interested to learn about the Committee’s thinking on these matters as it relates to promoting investor protection and facilitating capital formation.”

Ryan Feit, CEO and co-founder of SeedInvest:

• Highlighted multiple successful offerings listed on SeedInvest that generated significant returns to investors, said there were two major outstanding hurdles to the market.
  • First diversification. Given the high rate of failure for younger firms, Feit advocated for the ability to create funds of early-stage firms under the exemptions.
  • Second liquidity – Waiting five to ten years to get a return, even when the firm is performing well, ultimately leads to less capital for these businesses. The lack of liquidity is a “huge issue,” and regulatory changes could create a “vibrant secondary market.” He also shared that greater clarity on digital securities would be helpful as distributed ledger technology could drive efficient trading in a number of ways.

Joan Adler, partner at Ellenoff, Grossman and Schole:

• In the early days of the JOBS Act, great focus was on primary issuance. Now there is interest in secondary transactions, yet individual investors are challenged to sell shares, and issuers must manage a fragmented regulatory environment as secondary trading does not benefit from state pre-emption – meaning you must deal with the peculiarities of all 50 states and territories. A herculean task.

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Andrea Seidt, the Ohio Securities Commissioner and representative of NASAA:

• She understands the need for capital formation, but she “strongly opposes” a statement in support of secondary trading.
• Pre-emption will lead to harsher outcomes.  She also said Feit’s examples of successful offerings that generated returns for investors was “cherry picking” and demanded more data on the success and failure rate of crowdfunded securities.

Outcome

In the end, the Committee voted on a recommendation to request the Commission allow pre-emption for securities issued under Tier 2 of Reg A+, an exemption that enables issuers to raise up to $75 million and must be qualified by the SEC. The Committee described it as a “pilot program” to support secondary trading that will provide for a harmonized environment to address the issue – one that the Committee has been discussing for years.

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