Remarks at the Small Business Capital Formation Advisory Committee Meeting

Good morning, ladies and gentlemen, and welcome to our first Committee meeting of the year.[1] I want to start by saying how glad I am that we are able to reconvene (if only virtually) after the government shutdown forced us to cancel in the fall. That disruption only reminded me how valuable this forum is, for I have long believed that involving industry practitioners in the regulatory process makes government smarter, more responsive, and less burdensome. Indeed, your contributions bring both rigor and market insight to the SEC's role in facilitating capital formation. So, I am grateful that this Committee can return to its regular cadence and thank you for your flexibility in light of the wintry weather conditions.

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In just a few moments, the Committee will build on a discussion that it began last summer regarding a regulatory framework for finders. As staff in the Division of Trading and Markets emphasized at our previous meeting, identifying potential investors remains one of the most persistent challenges for small businesses, especially those seeking capital below the range that typically attracts investment from venture capital firms or registered broker-dealers. Regulatory uncertainty only compounds those barriers by deterring individuals from serving as finders-and companies from engaging them. The perspectives shared at our previous meeting underscored the need to address ambiguity in this space and I look forward to hearing the Committee's recommendations on how we might foster greater clarity.

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Later this afternoon, meanwhile, the Committee will turn to the private secondary market and its increasingly critical role in meeting liquidity needs.

As more firms stay private, two related pressures have intensified: demand for investment opportunities in private companies and the need for liquidity among existing investors, especially early investors and employees for whom compensation includes equity.

Several platforms have emerged to address these pressures. But I understand that our existing regulatory framework has, in some respects, made that work challenging. Many privately issued securities remain restricted from resale under our rules for at least a period of time. Issuers may also impose additional transfer restrictions to maintain visibility into their shareholder base.

Layered atop of these frictions is the further complication that secondary trading of private securities is almost always subject to state blue sky laws. Individual investors can sometimes navigate this patchwork through the so-called "manual exemption," which generally permits secondary transactions of securities listed in designated securities manuals. But complying with state manual exemptions can be costly and time consuming for both investors and issuers.

Of course, this Committee has examined blue sky laws before. Last year, it recommended that the Commission preempt state blue sky laws for off-exchange secondary trading in companies that make available robust, publicly accessible, and timely public disclosures, such as those required by Regulation A Tier 2.

That recommendation reflects a sound instinct as many of the limitations on secondary trading in private markets are designed to protect investors. Private companies generally do not provide ongoing disclosures, which means that investors are not as easily able to make a reasoned investment decision. One way to address this, as the Committee's recommendation recognized, is to consider allowing secondary trading in companies that provide some sort of ongoing disclosure. Of course, that approach would not necessarily resolve the separate issue of company-imposed transfer restrictions beyond what current law requires. So, more structurally, another way to overcome these concerns is to encourage larger, later-stage private companies-the kind of companies that historically would have undergone an initial public offering earlier in their life cycle-to again go public sooner.

Which brings me to a broader point-and to my priority to reinvigorate an IPO pipeline that has diminished by roughly 40 percent in recent decades. As I recently testified before Congress, this trajectory tells a cautionary tale that the SEC is working to rectify, first, by re-anchoring disclosures in materiality so that investment decisions can turn on economic signals rather than on regulatory noise; second, by de-politicizing shareholder meetings and restoring their focus to significant corporate matters; and third, by allowing public companies to have litigation alternatives so that we shield innovators from the frivolous and investors from the fraudulent.

With that context, I am grateful that we will be hearing from a distinguished group of guest speakers to continue our discussion on finders and to begin exploring the private secondary market. This Committee's insights, rooted in the real-world experience of its members, will be essential in enhancing capital formation for America's small businesses. So thank you once again for your continued service, and for the thoughtful guidance that you provide. I look forward to a productive and engaging meeting ahead. Thank you.