Small Business Initiatives under the Securities Acts

By Coffey, William J.; Schier, Lewis | The CPA Journal, January 1995 | Go to article overview

Small Business Initiatives under the Securities Acts


Coffey, William J., Schier, Lewis, The CPA Journal


In 1992 the Securities and Exchange Commission (SEC) established new policies and procedures permitting small businesses to enter U.S. capital markets with reduced disclosure for registration and reporting. Despite minimum publicity, through April 1994, small businesses of all types have filed almost 600 registration statements using the new Forms SB-1 and SB-2.

Capital Sources Are Changing

Because the nature of banking has changed radically over the last several years, banks are lending less to corporations than in the past. The traditional bank strategy of accepting deposits to make loans will continue to change as individuals save through mutual funds or invest in debt and equity markets. Lending to small business will continue to decline as banks become involved in more profitable activities, such as foreign currency trading, underwriting activities, multi-national corporation cash management services, and the development of derivative financial products. Moreover, the expectation that the considerable difference between short and long term interest rates will narrow encourages corporations to look for other sources to support their operating and investing activities. Capital markets fulfill these needs.

The SEC quickly recognized recent changes in banking practices and moved to ease entry into the public marketing and trading of securities by adopting several changes to earlier regulations under the securities acts.

In July 1992 (expanded in April 13), the Commission adopted final rules and new forms for its small business initiatives (SBI). These rules extended existing registration requirements under the Securities Act of 1933 (the Act) with the introduction of Forms SB-1 and SB-2. Likewise, the Commission lessened the periodic reporting burden of the Securities Exchange Act of 1934 (the Exchange Act) with new Forms 10-SB, 10-QSB, and 10-KSB and modified the proxy rules for small issuers. Issued at the same time, new Regulation S-B contains rules to simplify the registration and reporting requirements of the securities acts for small business.

The Securities Act of 1933

The Act contains legislation of enduring importance. Its purpose is to provide full and fair disclosure to investors concerning securities offered in interstate commerce, leaving intact intrastate jurisdiction under the various state "blue sky" laws.

To achieve this objective, Congress empowered the SEC with rule-making authority to implement the provisions of the Act. The law requires Federal registration as a means of selling securities in interstate commerce.

However, Section 4 of the Act includes an important provision that addresses transactions exempt from registration. Regulations A and D contain rules that apply to exempt offerings. The small business initiatives, although focused on new registration forms, include modifications to liberalize selected rules under the aegis of exempt transactions.

The Securities Exchange Act of 1934

The stated rationale for the Exchange Act is that a national public interest is affected by transactions conducted on securities exchanges and over-the-counter markets. Thus, an imperative exists for Federal regulation over public markets as well as transactions by officers, directors and principal security holders (insiders). Moreover, to remove impediments to perfecting the mechanisms for a national market system, the law requires certain reports, some on a continuing basis.

Integrated Disclosure System

After over 40 years of rules and regulations, SEC registration and reporting requirements became so cumbersome and expansive that during the late 1970's Congress considered replacing the Act and the Exchange Act with a new statute, the Federal Securities Code. Its purpose would have been to integrate registration and reporting requirements into one law. After much debate, the idea was shelved. However, the SEC staff, using its historical legislative mandate, was able to achieve many of the objectives of the moribund Federal Securities Code by adopting Regulation S-K and revising existing Regulation S-X. …

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