Regulation is the biggest challenge to small businesses that want to raise capital, investment bankers and attorneys told the Securities and Exchange Commission at an SEC government-business forum on small business capital formation on Friday.
One such challenge is the inefficiency of registration requirements, noted John Hogoboom, a member of Lowenstein Sandler. For instance, companies that file forms on EDGAR cannot rely on those documents as part of their ongoing securities-law compliance, he said. Clients often wait to proceed with their capital-raising activities until the SEC reviews administrative changes, said Hogoboom, even for such minutiae as the hiring of two new employees in the past quarter.
Steven Pidgeon, a partner at Snell & Wilmer, remarked that regulators and quasiregulatory bodies such as the SEC and the National Association of Securities Dealers have different definitions and procedures that often conflict. “It would be nice if there were more coordination and cooperation among agencies on the definition of directors,” he said.
Philip Marchal, a director at BMO Capital Markets Corp., and Byron Roth, chairman and chief executive officer at Roth Capital Partners, both remarked that registering securities is the most significant challenge for smaller companies. Roth suggested that the SEC should “make it easier to do the shelf takedowns.”
Only one panelist cited a market challenge as the most pressing issue for small-cap companies seeking capital — and, for that matter, was one of the few to even come close to suggesting a regulatory response. The hedging and shorting of securities in the private investment in public equity arena “bears closer scrutiny,” said Anna Pinedo, a partner at Morrison & Foerster. In response, Roth agreed that the issue needs to be addressed in order to create a level playing field for companies.
Marc Morgenstern, a partner at Sonnenschein Nash & Rosenthal and a moderator of the panel, also asked about the impact of the Sarbanes-Oxley Act on capital-raising activity in the United States. One panelist noted that while a few U.S. companies are choosing to list abroad, they also explore opportunities to list in this country after they have been listed overseas for a year or more. Hogoboom rejected the notion that companies are basing decisions on the Sarbanes-Oxley Act and said, “There is more than SOX going on in the American regulatory regime.”