As confirmation hearings began this week for the new administration’s “cabinet of opposites,” it felt like the latest of the President Elect’s potential appointments was barely covered – that is the appointment of Walter “Jay” Clayton as the chair of the Securities and Exchange Commission. While not suffering the media’s wrath in full, headlines still popped up declaring the man “The Most Conflicted SEC Chair Ever” as journalists questioned his ties to Goldman Sachs and other Wall Street firms.
A partner at the law firm Sullivan & Cromwell, Clayton has a corporate securities background, with a specialty in navigating mergers and acquisitions – including the IPO for Alibaba. That would be the same Alibaba who just promised the President Elect the creation of “one million new American jobs” by ensuring the massive retailer would help American small businesses sell their stuff to China.
So, this is good for capital formation overall, right?
Clayton knows his way around a couple of regulations, having helped companies like Alibaba and Ally Financial navigate enforcement actions that included mortgage securities and open investigations by the SEC, so there’s more than a good chance he’s familiar with the Commission’s processes. His transactional background is something the SEC hasn’t had in a chairman for almost ten years, but isn’t unheard of. It’s actually more in line with past SEC chairs, despite being in direct contrast with the prosecution background of outgoing chair Mary Jo White.
Sam Guzik of Guzik & Associates, expects the marching orders from the commander in chief to be job creation first, and deregulation second, expecting Clayton to maintain a priority to address the lower end of the food chain despite his large cap background, starting with small public companies and working his way down from there.
Guzik’s assumption falls in line with the President Elect’s own statement, citing the need “to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers.” On that point, the President Elect isn’t exaggerating.
As Huffington Post contributor and attorney Gary Emmanuel cited from Renaissance Capital in his HuffPo piece, 2016 had the lowest number of IPOs since 2009 despite record highs from the S&P 500, which many believe was the culmination of a growing trend for companies to avoid going public as long as possible. This is an area many in the industry see where the JOBS Act’s Regulation A may have its biggest impact, and Regulation A is an area where the SEC has a lot of sway. Guzik informed me that Congress specifically asked the Commission to review the Regulation A dollar caps with the authority to raise them whenever they want. With Clayton at the helm, whenever they feel it’s time to increase that maximum, they can act on it.
Even with the appointment of a new chairman, there are still two vacancies on the Commission, including an empty Republican seat and an empty Democrat one – leaving Republican nominee Hester Peirce and Democrat nominee Lisa Fairfax waiting in the cold. According to Guzik, the Commission can’t function without filling those seats. Guzik predicts these nominations should come no later than in the next 60 days, and when they do and the full Commission is seated, they will finally be able to appoint the head of the Office of the Small Business Advocate, an office Guzik helped lobby for. Once established, this Office will be able to act as a liaison between Congress, the SEC, and state regulators who more often than not, are online capital formation’s biggest opponents.
Other predictions from Guzik on the incoming administration includes Congress revisiting the proposed Amendments to Regulation D that require 506(c) issuers to make an informal filing to the SEC 15 days in advance of the first sale, as well as a revisit to the House-approved package of bills designed to help startups raise capital more readily, including a measure that would expand the definition of accredited investor to include those with an educational or credentialed background, like investment advisers and brokers with securities licenses who don’t meet the current requirements but know their stuff.
Sara Hanks, CEO of compliance firm CrowdCheck, isn’t prepared to pop a champagne cork on deregulation just yet. “There’s been a lot of speculation about his likely stance, since he is a transactional lawyer as opposed to a litigator by background. However, to extrapolate from that a prediction that he will be focused on capital formation as opposed to enforcement, which some people have, does not seem logical.” Hanks added, “I would say that we might expect him to focus on capital formation because of who selected him, though. He comes from a very prestigious firm and will understand the securities law incredibly well.”
Nobody knows for certain if deregulation will end up being the rule of law over the next four years, despite it being the talk of the town right now; as we all know these things move slowly, and despite its many benefits, deregulation could prove problematic too. Hanks pointed out, “I have seen so many wish lists for deregulation legislation with so many items on them that I do worry that several very large babies might get thrown out with the bathwater!” Hanks concluded that she expected 2017 would be the year that, “People will start to realize that there isn’t any problem at all with the securities law aspects of crowdfunding, but it’s the corporate laws that trip up companies.”
That is where she and securities lawyer Louis Bevilacqua of Bevilacqua PLLC agree. Bevilacqua sees the incoming administration as having the biggest potential effect on smaller public companies, citing some important areas affecting small public companies negatively now, like the inability of smaller companies to file a form S-3 to put up shelf registrations. According to Bevilacqua, these companies now have to rely on selling stock in private placement PIPE transactions and have to go to a different class of investor which can lead to toxic situations that hurt some small businesses. Why not let current SEC reporting companies put up a shelf and register securities? Or better yet, why not let public companies use Regulation A and make it easier for smaller, already public companies to raise capital online too?
It seems most everyone is open to somebody who is welcoming of new legislation. If the new administration can switch things up and make it easier to raise capital – both online and in traditional markets – then that’s a good thing, right? After all, the bad actors will out themselves either way, and investors will demand repercussions. So as long as Clayton and the new SEC are prepared to enforce the laws that actually hurt the little guy, a little deregulation *shouldn’t* hurt – as long as a little goes a long way.
Contact Grant Harvey: firstname.lastname@example.org