FOR YOUR INFORMATION..............................June 23, 1992
Proposed changes in Securities and Exchange Commission
regulations to simplify and expand exemptions from various
disclosure and reporting requirements for small businesses are
likely to reduce capital costs and enhance competition, staff of
the Federal Trade Commission's Bureau of Economics said in
comments to the SEC made public today. In its comments, the FTC
staff also pointed to some of the proposed changes as ones that
bear monitoring to make sure that they to protect investors from
fraudulent practices as well as promote the growth of small
businesses.
The FTC staff, responding to a March 20 Federal Register
notice, focuses on proposed changes in the SEC's Regulation A
and Rule 504 of Regulation D. Regulation A imposes disclosure
requirements on prospective issuers of public securities but
allows small firms, under certain conditions, to offer securities
publicly with less extensive disclosures than those required of
large firms. The exemption is limited to securities issues of up
to $1.5 million a year. The proposed changes would: (1) allow
small firms to "test the waters" by circulating a written
statement to gauge investor receptiveness prior to making a
public offering; (2) accept a disclosure form already used in
many states in lieu of a similar SEC form; and (3) raise the
ceiling for the exemption from SEC registration and reporting
laws -- from $1.5 million to $5 million.
The SEC also has proposed revisions to Rule 504 of
Regulation D, which permits firms to issue up to $1 million in
securities per year without making certain otherwise required
public disclosures of financial statistics. These changes would
- more -
COMMENTS TO SEC--06/23/92)
include: (1) removing restrictions on advertising such offerings;
and (2) removing resale restrictions on independent investors who
purchase these securities.
In its comments to the SEC, the FTC staff said it believes
that the proposed changes in Regulation A are likely to improve
the efficient functioning of capital markets by reducing
compliance costs for small businesses.
The cost of complying with regulations are a factor that may
discourage firms from entering new markets, the staff said.
Allowing small firms to test the waters with a prospective
offering notice before making a decision about undertaking the
costs of required disclosures is likely to reduce uncertainty and
lead more small firms to decide to raise capital and enter new
markets, the staff said.
As to the SEC's proposal to increase the ceiling for
Regulation A offerings, the FTC staff suggested adjusting the
ceiling regularly by, and indexing the adjustment to, the
percentage increase in the prior year's consumer price index.
This adjustment would reduce both the regulatory uncertainty
about prospective eligibility for some potential applicants and
the likelihood that the SEC will need to spend future resources
revisiting the ceiling, the FTC staff said.
Removing the advertising restrictions on small firms raising
capital under Rule 504 may reduce the cost of disseminating
information about the offering, the FTC staff said. "Lower costs
are likely to increase the level of information available to
investors and thereby improve capital market efficiency and
investor welfare and open new investment opportunities for small
firms," according to the comments. Allowing advertising of these
issues entails a risk, however, that misleading information also
will be disseminated, the FTC staff cautioned. If the proposed
change is adopted, the staff suggested that the SEC "monitor
securities advertising to ensure that its revised Rule 504
regulations do not lead to increase in the incidence of
misleading claims."
The proposed Rule 504 change to lift restrictions on the
resale of small issues could decrease the cost to an investor of
holding a security because the investor could move capital more
readily, the FTC's staff said. Thus, investors may be willing to
accept lower expected rates of return on these issues. Lower
rates of return "would, in turn, reduce the costs of issues for
COMMENTS TO SEC--06/23/92)
small firms, increasing the likelihood of entry and expansion,"
according to the FTC staff. At the same time, lifting
restrictions on the resale of small issues may require careful
monitoring to guard against fraudulent resales of these
securities, the comment notes. "For example, a marketing
operation might buy up a Rule 504 offering and then resell the
issue at a much higher price while making fraudulent claims about
its prospects. Targets of the fraudulent operator might find it
harder to check on the truthfulness of claims because there would
be no disclosures on file with the SEC subsequent to the initial
sale to the marketer." For this reason, the FTC staff
encourages the SEC to monitor for fraud in resales of these
issues and boost enforcement or even reinstate some or all of the
restrictions, if necessary.
The comments reflect the views of the staff of the FTC's
Bureau of Economics, not necessarily the views of the Commission
or any individual Commissioner.
Copies of the staff comments are available from the FTC's
Public Reference Branch, Room 130, 6th Street and Pennsylvania
Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY 202-326-
2502.
# # #
MEDIA CONTACT: Brenda A. Mack, Office of Public Affairs
202-326-2182
STAFF CONTACT: John C. Hilke, Bureau of Economics
202-326-3483
(V920011)
(SEC-Com)