House Quizzes SEC on IPOs


What is the US Securities and Exchange Commission doing to address the dearth of small and medium-sized companies going public was the lead question in the House Financial Services Committee’s SEC oversight hearing on Capitol Hill today, June 21.

Committee Chairman Jeb Hensarling (TX-R) noted that the US capital markets had seen a steady decline in companies launching an initial public offering over the past two decades.

“We have roughly half the companies going public than we did 20 years ago,” he said.

SEC Chairman Jay Clayton testified that he shared Chairman Hensarling’s concerns and noted that the opportunities available to ordinary investors are shrinking on a relative basis because the US public capital markets are shrinking on a relative basis.

Jay Clayton

Jay Clayton, SEC

“It troubles me,” he said. “I believe that the quality of opportunities that you see in the public capital market space is not as good as the quality of opportunities that are available to people with a great deal of capital in the private market space.”

The SEC looks to take a two-prong approach to address the issue by focusing on the supply of companies looking to raise capital and the number of accredited investors who are available to make private investments.

Hensarling and Clayton agreed that if only companies valued at $1 billion are coming to the public capital markets to raise funds, then something is wrong with the system.

Clayton also announced that the regulator would host an open meeting on June 28 to address multiple issues regarding small and mid-sized companies, which would include amending the definition of “smaller reporting company,” as well as revisiting the thresholds of Sarbanes-Oxley’s 404(b) reporting requirement.

From the private investor perspective, he also agreed with Rep. Brad Sherman (CA-D) that the definition of “accredited investor” needed modernization.

“When the accredited investor rules came out- $1 million in assets and $200,000 in income, were staggering high numbers in the 1980s,” said Rep. Sherman. “Now, in effect, those numbers represent one-third of their purchasing power. Ten times the number of families fit into the category, which means ten times of people do not get the protection.”

With the increased pool of accredited investors, Sherman questioned the value of the current definition.

“Why can’t anyone just charge into the minefield,” he asked. “Why do we limit that to explosive ordnance disposal experts?”

Clayton responded that letting any investor charge into the minefield without ascertaining to some extent that they are capable of handling the private investment arena was a viable option.

“We chose the accredited investor definition as a gatekeeping function of the private investor space,” he added.

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