Today, Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, gave the following floor statement in opposition to H.R. 4263, the so-called Regulation A+ Improvement Act, a bill that could harm retail investors and weaken the integrity of the U.S. capital markets.
As Prepared for Delivery
H.R. 4263, the so-called Regulation A+ Improvement Act, is a solution in search of a problem that threatens to undermine protections for mom and pop investors and the integrity of our capital markets.
The bill would arbitrarily and prematurely increase the maximum amount of securities that private companies can sell each year to the public from $50 million to $75 million under the Securities and Exchange Commission’s (SEC) Regulation A+ exemption from registration. Mr. Chairman, such a change makes no sense.
First, the SEC only recently implemented Regulation A+ pursuant to the Jumpstart Our Business Startups (JOBS) Act. Effective June 19, 2015, that rule now allows private companies to raise either $20 million under Tier 1 or $50 million under Tier 2 from the public with less investor protections and oversight than a public securities offering registered with the SEC. What little data we have since it became effective suggests that there is no need to raise that $50 million limit. As of December 31, 2017 only thirty-nine percent of the 172 companies using Tier 2 of Regulation A+ sought the maximum amount of $50 million. And, only three issuers or 5 percent of the 61 issuers that have reported proceeds in Tier 2 offerings actually raised the maximum amount.
Second, in the JOBS Act, Congress specifically directed the SEC to review the Regulation A+ limit every two years, and report its reasons for not raising it to Congress. On April 5, 2016, the SEC sent Congress its report stating, “[g]iven the short period of time that the final rules have been in effect and in light of the limited number of Regulation A+ offerings qualified and completed to date, the Commission does not believe that the information currently reported by companies on the amount of capital raised pursuant to Regulation A+ is sufficient to determine whether it would be appropriate to propose an increase in the Tier 2 $50 million offering limit.”
If my Republican colleagues think that the SEC should be doing more, they only have to wait a few more weeks for the SEC’s next review and report on the Regulation A+ offering limit. There is no reason why Congress shouldn’t acknowledge the SEC’s existing efforts to study the empirical evidence, instead of making arbitrary decisions devoid of any real analysis.
Finally, and most importantly, the bill may harm retail investors and our markets. What my Republican colleagues fail to acknowledge is that the purpose of Regulation A+ is to provide small private businesses with access to financing from mom and pop investors, many of whom are in their community, so that they can grow and eventually enter the public markets as full SEC reporting companies traded on a national securities exchange. As public companies, they are subject to the full set of investor protections under the securities laws, but also gain access to much deeper sources of capital. Indeed, under the current system, eight Regulation A+ issuers have already listed their shares on an exchange, becoming true public companies. This positive development suggests that Regulation A+ is working as Congress intended and expanding it could discourage companies from becoming truly public.
However, it is also clear that additional study of the existing Regulation A+ exemption is warranted. A series of recent press articles highlight the high risk of loss that investors face in investing in companies that have used Regulation A+, even when those companies later list their securities for trading on an exchange. According to a February 2018 article in the Wall Street Journal, seven out of the eight companies that listed their securities for trading on an exchange in 2017 following a Regulation A+ offering are trading an average of 42% below their offering prices. By comparison, companies that engaged in a traditional initial public offering or IPO in 2017 are trading an average of 22% above their offering prices.
Moreover, those Regulation A+ companies were trading lower, even as the S&P 500, which tracks 500 large publicly traded companies, has risen 18% since the start of 2017. Congress should better understand why Regulation A+ companies that have gone public fared so poorly compared to the rest of the market before we go ahead and expand Regulation A+ through legislation like H.R. 4263.
I strongly oppose H.R. 4263 for all of these reasons and urge my colleagues to join me in standing up for retail investors by voting against it. I reserve the balance of my time.