A panel that advises the Securities and Exchange Commission on
Friday recommended an exclusive exchange be created for micro- and
small-capitalization public companies that would only be available
for only high net-worth investors.
The panel, the advisory committee on small and emerging
companies, voted to urge the SEC to support the setting up of an
exchange for small publicly traded companies that would be
accessible only for high-income individuals such as "accredited
investors," who must have a net worth excluding their home of $1
million or more or income of $200,000 or more for at least two
years.
Companies listing on an exchange set up for high-net-worth
investors may not be required to provide costly prospectuses and
other disclosures that are necessary when retail investors are
involved. Backers contend that this would drive down costs
associated with public offerings and could encourage private
companies to take the plunge into becoming almost-public companies.
However, retail investor advocates worry that small investors would
be blocked from making desired investments.
Stephen Graham, co-chairman of the panel, told MarketWatch that
it is difficult for small private companies to "cross the line" and
become publicly traded because of the costs involved in being a
public company. He said the SEC would be responsible for
determining what kind of disclosure would be required for this
group.
"You can drive the disclosure regime and the costs associated
with that way down," Mr. Graham said.
The committee, made up of 20 individuals in the small publicly
traded business space including angel investors, state regulators
and small bank executives, met at the SEC and voted unanimously to
make the recommendation.
The commission doesn't have to follow the recommendations of the
panel, but their suggestions usually carry weight with the agency
and some of their recommendations have been incorporated into the
JOBS Act, legislation approved by Congress in April to help
increase capital formation.
In fact, Republican commissioner Dan Gallagher told reporters
that he wasn't sure whether such an exchange for small publicly
traded companies should only be limited to accredited investors. He
said the SEC could tailor disclosure requirements through the
agency's listing standards rules to make it less costly for
companies. However, he noted that the a broader exchange for small
companies may be better.
"We need to focus on more on these types of markets for the
average investor as well as sophisticated investor," he told
reporters. "There is all this fear that you hear from consumer
groups about growth of the private markets, the lack of
transparency, so why wouldn't we then focus on a public market that
is truly public."
Retail investor advocates were less than thrilled at the idea of
an exclusive market for high net-worth investors. Charles Rotblut,
vice president of the American Association of Individual Investors,
told MarketWatch that it's a question of fairness and access.
"An accountant that does not have the wealth to be an accredited
investor, but understands financial statements, would not be
allowed to invest," Mr. Rotblut said.
Mr. Rotblut added that such an exchange would also raise new
risks for high-net worth investors who don't necessarily have the
knowledge, experience or skill to understand the potential
investment.
"Having wealth does not mean you have the knowledge to always
make intelligent investment decisions," Mr. Rotblut said.
Mr. Graham said the exclusive exchange would act as an
intermediary stepping stone for small companies to enter the
broader markets. The institutions would only trade on the special
exchange and companies could later expand their disclosure regime
and move to traditional exchanges. He added that the exchange could
be set up by Nasdaq OMX Group Inc. (NDAQ), NYSE Euronext (NYX) or
any other company, as long as the SEC gave its blessing.
Heath Abshure, commissioner of Arkansas Securities Department,
said he worried about what kind of disclosures small public
companies trading on the exchange would have to make.
"If we're not going to require them to disclose very complex
compensation structures that have no material effect, fine," he
told MarketWatch. "But if we're not going to require them to
disclose the results of operations on a periodic period, that's not
okay."
Spokesmen for Nasdaq and NYSE Euronext didn't respond to
requests for comment.
The panel also recommended that the SEC and participants should
explore other alternatives, such as the creation of a private
secondary market in the shares of private companies as means of
helping to facilitate capital formation for companies that don't
want to float their shares on an exclusive exchange.
Lona Nallengara, acting director of the SEC's division of
corporation finance, told MarketWatch that one other approach to
create liquidity could be to have small micro-cap companies pay an
exchange or an intermediary market maker to quote their
securities.
The number of small-capitalization companies is large. According
to Grant Thornton, 81% of all listed companies are small cap or
smaller, representing cumulatively 6.6% of total listed company
value.
Write to Ronald D. Orol at rorol@marketwatch.com
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