At the one event each year where Securities and Exchange Commission (SEC) members speak, Commissioner Allison Herren Lee balked last week at Chairman Jay Clayton's efforts to boost initial public offerings (IPOs) through deregulation.
"We should proceed with care in the approach we take to promoting public offerings, taking into account this complexity, rather than just reflexively blaming overregulation," Lee told the annual securities regulatory gathering.
"If we stay on this path, we may well see a continued decline in both quantity and quality of public offerings, to the detriment of all investors, but especially retail investors whose prosperity is directly linked to the success of public markets," she said.
Lee's comments came at the Practising Law Institute's SEC Speaks. Like so many yearly conferences, this one, normally held in downtown Washington, was switched from in-person to virtual.
With roughly 70% of capital now raised in private markets, there might be a need to reduce regulation, Lee said, but it should be based on data, not intuition.
A declining number of IPOs has been on the SEC's radar screen for years. Many companies are opting to raise capital privately, because doing so comes without the intense scrutiny of public markets.
The commissioner said during her talk it is worth taking a look at the pros and cons of direct offerings.
Looking at the pros, a direct offering can reduce the cost of going public, since it doesn't require an underwriter in the same way as an IPO.
A direct offering also has the potential for avoiding or reducing underpricing, since it allows an issuer greater ability to sell at a price that reflects market forces.
Another alternative to IPOs, Special Purpose Acquisition Companies (SPACs), also merits increased attention, particularly to the risks they pose and sponsor compensation, Lee said.
"In the short term, a SPAC investment acts largely as a blank check, so it is critical that the offering documents clearly disclose the material risks involved, as well as the ways in which the sponsor will be compensated for its services," she said.
Lee warned that, with shares in the post-acquisition operating company a significant source of the sponsor's compensation, a SPACs might create incentive for sponsors to pursue less-than-ideal acquisitions.
A SPAC is a shell company that raises capital in the public markets with the sole intention of identifying and merging with a target operating company.
Like a direct offering, a SPAC can bring a company to market faster than an IPO.
SEC Chairman Clayton led off the two-day session by stressing the importance of the regulator's work with its foreign counterparts in rebuilding from the coronavirus financial downfalls.
"Our country's recovery from the economic effects of COVID-19 is inextricably linked to the broader domestic and global economy," said the SEC Chairman.
Calls for the SEC to regulate corporate culture are wrong-headed, said Commissioner Elad Roisman. "I worry about the commission, or any regulator, trying to define the appropriate culture of an organization, including how and what is sufficient to stress compliance in the day-to-day operation of its business."
Setting and maintaining an organization's culture should be solely the responsibility of a company, squarely in the remit of the management and leadership, he said.
SEC Enforcement Division Director Stephanie Avakian said one of her priorities has been to shorten investigation times in the belief that charges filed soon after an alleged wrongdoing occurs are more impactful.
"We're streamlining investigations to accelerate the pace," she said.
Avakian added that the enforcement team devoted to corporate matters has been increased with significant probing into issuer disclosures.
Looking at COVID-19 fraud, Avakian said microcap scams have been a major area and the enforcement division will continue to be giving it attention.
The SEC's enforcement chief said her ire was raised by the many whistleblowers telling her office many companies are not taking their complaints seriously.
Small business issues
Small business executives often complain to the SEC they struggle with how to connect to investors with the right risk tolerance, industry experience, and investing objectives for their companies, the agency's Small Business Capital Formation Advocate Martha Miller told the gathering.
"Their issues often involve a combination of rules, from the role of "finders" introducing potential investors to companies, to who can invest as accredited investors, to how companies can connect with potential investors outside of their network through general solicitation or using the internet," she said.
She added she often hears from small and emerging fund sponsors federal law and SEC rules make early stage investing more challenging, pushing activity upstream into larger deals.
The current regulatory framework has made it frequently struggling for smaller public companies to get liquidity, Miller said.
"It is important that becoming a public company remain an attractive goal for companies," the SEC Small Business Capital Formation Advocate asserted.