* SEC's Schapiro promises rigorous review
* Says even sophisticated investors deserve protection
* Calls for changes to 500 shareholder rule
* Schapiro says that's among things agency reviewing
* House panel chair optimistic SEC will make changes
(Adds comments from Chairman Issa, SecondMarket CEO)
By Sarah N. Lynch
WASHINGTON, May 10 The top U.S. securities
regulator pledged a rigorous review of potentially outdated
private securities trading rules, but stopped short of
endorsing changes being advocated by Republican lawmakers.
At a congressional hearing on Tuesday, Securities and
Exchange Commission Chairman Mary Schapiro was pressed to make
regulatory changes to help small and medium-sized companies
more easily raise capital without going public.
In January, Goldman Sachs (GS.N) decided to limit Facebook
offerings to foreign investors after intense media coverage
spooked the bank into fears it could be accused of violating
rules on soliciting investors. [ID:nLDE70H03Q]
Also at issue was the use of a special purpose vehicle by
Goldman to circumvent a 500-shareholders-of-record rule which
requires a private company to begin public financial reporting.
The rule counts all shareholders individually, but the vehicle
used by Goldman aggregated shareholders into one.
"We are absolutely committed to looking at whether this
threshold makes any sense," Schapiro told the House Oversight
Committee hearing, adding that the agency is conducting an
Republicans want the SEC to raise the 500-shareholder
threshold, or else change the rule so that more sophisticated
investors who understand the markets will not count toward the
"These folks are very sophisticated," said Representative
Patrick McHenry. "For heaven's sake, if you look at these
substantial institutional players, they've got better research
and information than the SEC and the government," he said.
Critics of the current threshold say the cap is too low and
forces companies to raise capital only with large sophisticated
investors and harms the ability of smaller investors to get a
piece of the action. They also fear it creates costly
logistical challenges for companies as they seek to manage the
shareholder total so they do not hit the 500 mark.
In addition they are also concerned that the rule adversely
impacts how companies can compensate employees. Although
option-holders are not counted under the rule, once the option
is exercised, the employee counts toward the 500.
STRIKING A BALANCE
Schapiro sought to strike a balance between lowering
regulatory barriers for companies and protecting investors from
fraud, telling McHenry that sophisticated investors "are no
less deserving of the protections of the securities laws."
She and SEC Corporation Finance Division Director Meredith
Cross assured lawmakers the SEC is exploring whether to exempt
certain investors from the 500-shareholder rule as part of the
SEC's broader review into private securities trading. They also
said they are exploring if the 500 number is the right one.
In addition, Cross said the SEC is thinking about
soliciting input from the public about potential changes to
general solicitation rules.
Republicans and some industry experts who testified on
Tuesday expressed concerns about the general solicitation ban,
which they said is overly restrictive and prevents unaccredited
investors from viewing an offering of unregistered securities.
The advertising ban is designed to protect unsophisticated
investors from swindlers and some say it may violate free
speech protections in the U.S. Constitution. Schapiro told the
committee the SEC is exploring that legal angle as well.
As part of its review of private securities trading, the
SEC is also looking at the electronic platforms that allow
investors to trade shares of unlisted companies.
Barry Silbert, chief executive of SecondMarket, sought to
contrast the advertising restrictions for private offerings
with the kinds of ads that are allowed in other sectors.
"No one prohibits car manufacturers from advertising, even
though children under the legal driving age are viewing the
advertisements," said Silbert, adding that the ban
unnecessarily limits the pool of potential investors and
restricts capital raising.
House Oversight Chairman Darrell Issa told Reuters after
the hearing he feels optimistic that the SEC will take action.
"I fully expect there will be some changes," he said.
Some Democrats on the panel expressed caution about
tinkering with rules designed to protect investors.
"I fully support helping U.S. firms access additional
capital, but I also believe this must be done without
sacrificing critical protections," said the Elijah Cummings,
the committee's top Democrat.
(Editing by Steve Orlofsky and Tim Dobbyn)