From the Regulators

Revised exemption will allow smaller companies to sell up to US$50 million of securities in a 12-month period

By James Langton |

U.S. securities regulators Wednesday adopted rules to bolster the exempt market and proposed a new rule to enhance regulatory oversight of high frequency traders (HFTs).

In a bid to facilitate access to capital for smaller companies, The U.S. Securities and Exchange Commission (SEC) adopted final rules that update and expand an existing prospectus exemption for smaller issuers, known as Regulation A. The revised exemption, which was mandated the JOBS Act, will allow smaller companies to sell up to US$50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements.

The final rules provide for two tiers of offerings. Tier 1 offerings allow firms to issue up to US$20 million in a 12-month period, with a maximum of $6 million offered by selling security-holders that are affiliates of the issuer. Tier 2 offerings, which impose additional disclosure and ongoing reporting requirements, allow firms to offer up to $50 million, with a maximum of $15 million from affiliated selling security-holders.

"These new rules provide an effective, workable path to raising capital that also provides strong investor protections," said SEC chair, Mary Jo White.  "It is important for the commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies."

The final rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to "qualified purchasers" in Tier 2 offerings.  Tier 1 offerings will be subject to federal and state registration and qualification requirements.

Commenting on the final rules, William Beatty, president of the North American Securities Administrators Association (NASAA) and Washington Securities Director, expressed concerns about the role for state regulators under the new exemption.

"We appreciate that all five commissioners recognize the efforts of state securities regulators and NASAA to successfully implement a modernized and streamlined coordinated review program for Regulation A offerings to help small and emerging businesses raise investment capital. The program has been lauded for effectively streamlining the state review process that promotes efficiency by providing centralized filing, unified comments, and a definitive timeline for review," Beatty said.

"However, it appears that the SEC has adopted a rule that fails to fully recognize the significant benefits of this program to issuers and investors alike. We continue to have concerns that the rule does not maintain the important investor protection role of state securities regulators and must look more closely at the final rule as we evaluate our options," he added.

The rules will be effective in 60 days.

Closing a regulatory gap

To enhance regulatory oversight of HFTs and other prop trading firms, the SEC proposed a rule Wednesday that would require dealers that are active traders in off-exchange markets to become members of a self-regulatory organization (SRO).

The amendments would narrow an exemption from SRO membership that was initially adopted to accommodate exchange specialists that did limited hedging, or other off-exchange business. However, it has since become taken advantage of by prop traders and HFT firms.

The proposed amendments would amend the exemption to target the firms that it was originally designed for by eliminating the current prop trading exemption and replacing it with a more focused exemption that applies to off-exchange trading by a floor-based dealer that is solely for hedging the risks of its floor-based activities.  The SEC says that the amendments would enhance regulatory oversight of active proprietary trading firms, such as HFTs.

"This proposal embodies a simple but powerful principle of the federal securities laws – the protection of investors and the stability of our markets require that trading is overseen by both the commission and a strong self-regulatory organization," said Mary Jo White, SEC chairwoman.  "Today's proposed rules would close a regulatory gap by extending oversight to a significant portion of off-exchange trading."

The SEC will seek public comment on the proposed rule amendment for 60 days following its publication.