What Business Owners Need To Know

by Neil Hare

When most of us think of the Securities and Exchange Commission (SEC), we think of a government agency designed to ensure that public companies provide accurate information to investors, that that employees who have access to “inside information” do not trade on it, and that investment professionals do not exploit, misinform or defraud the average investor on Main Street, USA. We certainly don’t think of the SEC as a means to comprehensively regulate private companies trying to raise capital, especially during a recessionary economy many are heading into recession.

President Ronald Reagan famously answered her rhetorical question about the nine most terrifying words in the English language: “I’m from the government, and I’m here to help.” While we can take that notion with a grain of salt, the truth of the matter is that the SEC is one of the most powerful government agencies you’ll be least aware of, and under current leadership, it’s ramped up its oversight dramatically. asking for an increase. , regulatory demands, and enforcement among all US companies, including more and more privately held companies.

The Great Depression gave birth to the SEC

The SEC was created by Congress in the wake of the Great Depression through the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. In short, one of the causes of the stock market crash of 1929 was false public companies making offerings. and misleading information to investors. To restore public confidence in the securities markets, Congress created the SEC with a mandate to ensure that companies made truthful statements, and that brokers, dealers, and exchanges treated investors honestly and fairly. .

The SEC is considered an independent agency, meaning that although it is part of the executive branch, it has regulatory and rule-making authority outside the control of the president. This is largely because the president’s ability to fire an agency head or commissioner is limited. The SEC may also bring civil enforcement actions seeking an injunction to prevent future violations and civil monetary penalties and recovery of ill-gotten gains. The SEC cannot take criminal action, but works closely with the Department of Justice in support of criminal enforcement or securities violations.

The SEC is also meant to be bipartisan, with three of its five commissioners being from one party and two from the other. Commissioners are appointed by the President and confirmed by the Senate. The SEC’s rules or regulations have the same force as federal law. Other similar independent agencies include the Central Intelligence Agency, the Consumer Financial Protection Bureau, and the Commodity Futures Trading Commission.

Private companies survive and thrive on debt

For privately held companies, small or large, access to credit is one of the key drivers of growth and critical to running the business effectively. For decades, surveys have identified access to capital as the number one concern of American business owners.

Many private companies would prefer to secure capital through debt rather than equity investment for a few reasons. First, most business owners do not want to dilute their ownership in the business they set up or give up management control of the entity unless absolutely necessary. Second, and related, investors may not want to provide equity investments in small or large companies, which may not scale well enough or quickly enough for a significant return on investment, or where they will have no control.

Therefore, private companies often seek debt instruments from their banks, SBA loans, crowdfunding loans, or by issuing debt securities known as bonds, or lines of credit. This is the last type of loan that the SEC has decided to regulate without giving reasons or seeking feedback from the public as is usually the case in the rule-making process.

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SEC seeks to regulate private company debt securities How did SEC achieve this feat? They did this by taking a rule that was intended to protect investors trading in the over-the-counter securities market, also known as the “pink sheets” or penny stocks, and by stipulating that such securities were offered by private companies. This also applies to loans. The rule they use is 15c2-11, which went into effect in 1971 to protect investors from unscrupulous and nefarious cold callers pretending to be stockbrokers to bully them into buying worthless penny stocks. you can watch movies boiler room either wolf of wall street To get a picture of this event.

In 2020 the SEC decided it needed to update Rule 15c2-11 to keep up with advances in technology that have changed the way people invest. Many investors no longer even have landlines to accept cold calls, but are participating in chat rooms in Reddit and other social media sites to make investment decisions – often poor ones. This indicated the need for change.

However, in a surprise move a year later, SEC staff announced that the requirements of Rule 15c2-11 also applied to privately issued debt instruments, and in December 2021 the SEC ratified this approach. In addition, the SEC did not follow its typical rulemaking process where it provides time for public comments on the proposed change. On November 30, 2022, the SEC announced that the new rule would go into effect from January 2025.

It is important to note that one of the main reasons companies stay private is that they do not have to disclose their financial information to the public and incur the accounting and legal costs of doing so under SEC regulations. Rule 15c2-11 is an exception to SEC Rule 144A, which exempts private companies from making public financial filings like publicly traded companies. Debt securities issued by private companies under Rule 144A can generally only be purchased by qualified institutional buyers (QIBs), which are entities with more than $100 million in assets under management.

The average investor on the street cannot buy these securities. QIBs may request financial information from the companies that issued this debt, but they are under no obligation to disclose it to the public at large. Furthermore, there is currently no proposed rule change to allow retail investors to purchase this debt. So, by changing this rule, instead of following its mandate to protect investors, the SEC could have a chilling effect on private companies accessing capital during volatile times in our economy.

Is the SEC overstepping its authority?

Whether you own a privately held business, work for a public company, or invest in the securities markets, you should be aware of the SEC’s role in regulating these fundamental aspects of our economy, Who is the strongest in the world.

The SEC is critical of transparent and fair markets, but that doesn’t mean it should overstep its authority. Certainly, imposing the same disclosure requirements and regulatory burden on private companies as on public companies is an area that should be closely monitored.

About the Author

Neil Hare is a lawyer and president GVC Strategies, where he specializes in small business policy, advocacy and communications campaigns; follow him on twitter @nehare and on linkedin, View more articles and full bio by Neil AllBusiness.com,

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