Takeaways from SEC's Access to Capital and Market Liquidity Report to Congress

Yesterday, the United States Securities and Exchange Commission’s (the SEC's) Division of Economic and Risk Analysis published its Report to Congress on "Access to Capital and Market Liquidity." The Report is available here.

The Report attempts to assess, among other things, the impact of the Dodd-Frank Act, on access to capital for consumers, investors, and businesses.

A few interesting takeaways from the Report:

New Rule 506(c) has been a disappointment.  That's my conclusion, not the SEC's, but the numbers speak for themselves.

Rule 506(c) permits companies to engage in "general solicitation" in connection with private placements of securities strictly to "verified" accredited investors. The traditional Rule 506 (now re-numbered Rule 506(b)) prohibits issuers from engaging in general solicitation, but it permits up to 35 non-accredited investors and has a looser "reasonable belief" standard (as opposed to "verified" under Rule 506(c)) for confirming an investor's accredited investor status.

The premise of Rule 506(c) was that companies would have greater access to capital if they could solicit funds broadly from any accredited investor rather than limiting investment to investors with which the company has a preexisting relationship (those that could be reached without engaging in general solicitation) as required under Rule 506(b).

But overwhelmingly, companies raising capital through Rule 506 have continued to use Rule 506(b) rather than taking advantage of the newly created Rule 506(c).  The Report indicates that during the period from the effectiveness of Rule 506(c) (September 23, 2013) through December 31, 2016, issuers reported raising an aggregate of $108 billion using Rule 506(c) as compared to $4.2 trillion raised through Rule 506(b).

That means less than 3% of all capital raised through Rule 506 took advantage of the new Rule 506(c)!

Regulation Crowdfunding has been a disappointment.  Again, that's my conclusion, not the SEC's, but once gain the numbers speak for themselves.

Regulation Crowdfunding permits issuers to raise up to approximately $1 million over a 12-month period in small amounts from a large number of investors over the Internet. The SEC's sanctioning of equity crowdfunding received a lot of hype and attention in the business press at the time of its adoption.

Unfortunately, during the period from the date Regulation Crowdfunding, went effective on May 16, 2016 through December 31, 2016, only 156 companies have taken advantage of Regulation Crowdfunding, by conducting a total of 163 crowdfunding offerings nationwide. Of those offerings, only 28 issuers successfully met their minimum target capital raise. And of those successful offerings, the median amount of capital raised was only $171,000. 

And the aggregate amount of all capital raised through crowdfunding under Regulation Crowdfunding nationwide during 2016 was only $8.1 million!  I wouldn't be surprised if publishers spent more than that amount on paper and ink writing articles about how significant the crowdfunding revolution was going to be.

Regulation A offering are showing some signs of life.  

Regulation A (Reg A) previously allowed companies to raise up to $5 million in a 12-month period. But issuers virtually never took advantage of the traditional Reg A, in part because the dollar limits under Reg A were so low. The JOBS Act required the SEC to adopt rules increasing the dollar limits on Reg A offerings. Those new rules (dubbed Reg A+) now permit offerings up to $20 million (under Tier 1 of the new Reg A) or up to $50 million (under Tier 2 of the new Reg A) in a 12-month period.

The market has certainly noticed. From 2005-2016 issuers typically conducted only about 14 Reg A offerings per year, raising an aggregate of approximately $163 million per year. During the period from the date Reg A+ went effective on June 19, 2015 through December 31, 2016, there were 97 Reg A offerings seeking to raise an aggregate of $1.8 billion.

Although the SEC does not have access to the precise amount of funds actually raised in such offerings, the SEC estimates that 56 issuers raised an aggregate of approximately $315 million during this period. 

Conclusions.

I should caution that all of the trends reported in the Report and summarized above are early, and it is certainly possible that any or all of Rule 506(c), Crowdfunding, and Reg A+ will show gains in popularity as issuers and investors grow more comfortable and more experienced with each of these exemptions from the registration requirements under the Securities Act. But preliminary results certainly have not been encouraging for any of these new or amended exemptions.