By Neil Hare
When most of us think of the Securities and Exchange Commission (SEC), we think of the government agency designed to ensure that public companies provide accurate information to investors, and that services that have access to “inside information” do not trade in it, and that investment professionals do not exploit, misrepresent or mislead the average investor on Main Street, USA. Of course, we don’t think of the SEC as a way to regulate private companies that are trying to raise capital, especially in times of a depressed economy, and many think it’s heading into a recession.
President Ronald Reagan responded to his interview with what are the nine scariest words in the English language: “I’m from the government, and I’m here to help.” While we can take that idea with a grain of salt, the truth of the matter is that the SEC is one of the most powerful government agencies you’ll ever know, and under current leadership, it’s looking to a significant improvement in his care. , legal requirements, and enforcement among all American companies, including, many and others, privately held.
The Great Depression triggered the SEC
The SEC was created by Congress in the wake of the Great Depression through the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. In short, one of the reasons for the stock market crash of 1929 was public companies. gives a lie. and misleading information to investors. To restore public confidence in the securities market, Congress created the SEC and laws to ensure that companies are honest, and that brokers, dealers and exchanges deal with those who invest honestly and fairly.
The SEC is considered an independent agency, which means that although it is part of a branch of the industry, it has administrative and legislative powers outside of the president’s control. This is largely because the president’s power to fire a director or commissioner is limited. The SEC may also bring civil enforcement actions seeking orders to prevent future violations and civil monetary penalties and forfeiture of illegal profits. The SEC cannot bring criminal actions, but it does work with the Department of Justice in the enforcement of criminal or securities violations.
The SEC is also bipartisan, requiring three of its five commissioners to be from one party and two from the other. The President appoints the commissioners and is approved by the Senate. SEC rules or regulations have the same authority as federal law. Other independent agencies include the Central Intelligence Agency, the Consumer Financial Protection Bureau, and the Commodity Futures Trading Commission.
Private companies survive and thrive on debt
For privately held companies, small or large, access to debt is one of the key drivers of growth and is critical to successful business. For decades, research has identified access to capital as the number one concern of American business owners.
Many private companies will choose to protect capital through debt rather than investing in equity for a few reasons. First, many business owners do not want to compromise their rights in the business they founded or give up control of the company if it is absolutely necessary. Second, and related, investors do not want to make deposits in companies, small or large, that may not scale well or quickly enough for a significant return on investment, or where they will have little control.
Therefore, private companies often seek debt instruments through lines of credit or loans from their banks, SBA loans, debt collectors, or by issuing debt securities. also known as chains. It is this type of final bill that the SEC decided to regulate without much reason or by seeking feedback from the public as is often the case in legal proceedings.
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The SEC seeks to regulate private equity securities How did the SEC accomplish this task? They did this by taking the law that was intended to protect investors in the stock market, also known as “pink sheets” or penny stocks, and deciding that it – also applies to this fee provided by private companies. The law they use is 15c2-11, which was enacted in 1971 to protect investors from being bullied into buying worthless pennies from unscrupulous and cold callers. are afraid of pretending to be stock marketers. You can watch movies A plant house or No The Wolf of Wall Street to get a picture of this item.
In 2020 the SEC decided it was necessary to update Rule 15c2-11 to accommodate advances in technology that have changed the way people invest. Many entrepreneurs no longer have a cell phone to accept cold calls, but instead participate in chat rooms on Reddit and other social media sites to make investment decisions – often poor ones. This shows the need for change.
However, in a surprise that a year later, SEC officials announced that the requirements of Rule 15c2-11 also apply to debt instruments issued privately, and in December 2021 the SEC approved the opinion a. In addition, the SEC did not follow its usual legal process where it provides time for public comment on the proposed change. On November 30, 2022, the SEC announced that enforcement of this new rule will begin in January 2025.
It is important to note that one of the main reasons companies are neutral is that they do not have to disclose their financial information to the public and incur accounting and legal fees for doing so under SEC regulations. Rule 15c2-11 is an exception to SEC Rule 144A, which allows private companies to file public financial statements as if they were publicly traded companies. Debt securities issued by private companies under Rule 144A can only be purchased by qualified institutional buyers (QIBs), which are companies with more than $100 million under management.
The average street investor cannot buy these securities. The QIB may request financial information from the issuer, but is not required to disclose it to the general public. In addition to this, there is currently no legal change required to enable retail investors to buy this debt. Therefore, instead of complying with its rules to protect investors, by changing this rule, the SEC can have a calming effect on private companies that receive capital during bad times in assets and our abundance.
Is the SEC overstepping its authority?
Whether you own a privately held business, work for a public company, or invest in the securities market, you should be aware of the role the SEC plays in regulating these key areas of our economy, the most power in the world.
The SEC is critical to a fair and just market, but that doesn’t mean it should overstep its authority. In fact, applying the same disclosure requirements and regulatory burden to private companies as to public ones is one area that needs to be looked at carefully.
About the Author
Neil Hare is a lawyer and President GVC strategy, where he specializes in small business policy, advocacy, and social media; follow him on Twitter @nehare and so on LinkedIn. See Neil’s story and full biography AllBusiness.com.
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