Congressional Panel Looks at Barriers To Small Businesses Raising Capital
By Jeff Bater
Witnesses testifying before a congressional panel holding a hearing June 12 on reducing barriers to capital formation suggested ways for small companies to raise capital more efficiently, including “regulatory re-engineering” and tick size reform.
The House Financial Services Committee’s Subcommittee on Capital Markets and Government Sponsored Enterprises explored obstacles to obtaining funding in capital markets. One witness, Shane B. Hansen, a partner at Warner Norcross & Judd LLP, said the one-size-fits-all system of regulating securities broker-dealers unnecessarily increases the costs that business owners incur to sell, buy, or grow their small and mid-sized businesses through privately negotiated mergers, acquisitions, business combinations, and sale transactions.
Hansen called on lawmakers to support a bill, the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2013 (H.R. 2274), to balance federal regulation of securities broker-dealers with respect to privately negotiated business sales, mergers, and acquisitions.
“Regulatory re-engineering is urgently needed to lower regulatory costs incurred by small and mid-sized privately held businesses and the M&A professionals who serve them,” he testified. “Re-engineering is needed to make federal securities relevant and effective in this business context. In this context the perception of public perception under the current ‘one-size-fits-all’ system of broker-dealer regulation is illusory, as there are thousands of small firms engaged in M&A brokerage activities who are not registered because the current body of regulation simply does not address the professional services they provide to small and mid-sized businesses.”
Small Business Capital Barriers
The Small Business Investor Alliance submitted public comments to the subcommittee relating to the hearing, urging Congress to enable the Securities and Exchange Commission to lower regulatory burdens and costs for lower middle market private equity funds and business development companies, or BDCs. “It is time to make common sense adjustments to some of the time-consuming and costly regulations that are draining valuable resources from America’s small businesses,” said Brett Palmer, president of the Small Business Investor Alliance. “The best way to reduce barriers to small business capital formation is to put a regulatory structure in place that simultaneously enables efficient deployment of capital and promotes healthy capital markets. The changes we have asked for will go a long way toward achieving that balance and help small businesses create jobs.”
One BDC is Prospect Capital Corporation. Its general counsel, Joseph Ferraro, testified the firm’s capital has helped create thousands of American jobs over the years and is needed in the current economic uncertainty. He said BDCs have stepped into a role commercial banks have largely abandoned — lending to small- and medium-sized American businesses that might not otherwise obtain financing to grow. Ferraro said modest changes to securities laws could enhance the benefits offered by BDCs to the American economy.
R. Cromwell Coulson, president, CEO and director of OTC Markets Group Inc., voiced support for a pilot program implementing tick size reform, saying it could help restore a balance that incentivizes market making to create more liquidity for investors.
“With tick size reform, we expect investors will see more displayed liquidity on the bid and offer,” he said. “This will lead to a multiplier effect of competing liquidity providers willing to provide larger execution sizes at the bid and offer to attract order flow. Increased liquidity will lead to a higher willingness of many investors to trade and be filled on the bid and offer or better, leading to a higher quality investor experience.”
The testimony at the hearing can be found at http://about.bloomberglaw.com/blaw2/files/2013/06/hansen.pdf, http://about.bloomberglaw.com/blaw2/files/2013/06/ferraro.pdf, and http://about.bloomberglaw.com/blaw2/files/2013/06/coulson.pdf.