Building a Dynamic Framework for Offering Reform
Chair Mary Jo White
Keynote Address at the 47th Annual Securities Regulation Institute
New York, New York
Oct. 28, 2015
Thank you, Alan [Beller], for that generous introduction. I am very pleased to be here to help kick off the 47th Annual Securities Regulation Institute. As some of you know, I am no stranger to this program, nor is the SEC staff. I have participated since my early days as U.S. Attorney, and its tremendous success is largely due to its tireless organizers. For many years, that work was led by Anita Shapiro, who is now the President of PLI, along with Laura Shields. Laura has now taken over from Anita, and she will surely continue the program’s record of excellence. Thank you both for all that you do to make this program such a great one year after year.
I have selected a topic that I think is well-suited for a conference of such endurance and importance: how the Commission is building a more proactive and responsive regulatory framework to better assess the impact of regulatory changes on investors and issuers over time in the context of securities offerings. As your opening panelists will no doubt discuss, this important area has seen tremendous regulatory change over the last ten years, including significant new rules in the past year.
The Commission acts as both a facilitator and a guardian of the capital markets. Certainly, issuers should be able to raise capital without needless friction or cost — in fact, our mission rightly calls for it. If focused too tightly, however, the regulatory lens can become myopic if there are single-minded demands to reduce “barriers” and eliminate “costs” to enhance the ability of companies to issue securities. Disclosure and other measures we require and enforce in capital raising are not simply barriers or costs; they are the groundrules that promote confidence, fairness, and efficiency in our markets. Investors are willing to invest because they know protections are in place that will be enforced. This dynamic is at the heart of our mission: capital formation does not occur in spite of investor protection; it occurs because of it.
In pursuing its mission, the Commission’s actions cause a variety of reactions by market participants, sometimes with unpredictable consequences. The Commission tries to foresee these effects and respond accordingly. While this challenge is always present, it seems particularly acute in the regulation of securities offerings. There, the rules must address directly the fundamental choices of investors to buy and issuers to sell, while also contending with a multitude of other factors at play in these choices: macroeconomic conditions, the terms of a particular offering, shifts in technology and consumer preferences, and many more.
Ten years ago, this challenge of prediction and response was posed in securities offering reform. Today, it arises from the new rules flowing from the JOBS Act. But simply writing rules is not enough to address the changes in this new environment; we need a more responsive and agile regulatory framework. And so my central question is: how can the Commission do a better job of assessing the impact of the rules governing offerings on an ongoing basis, so that we can respond more nimbly to issues that arise, whether through guidance, amended regulation, enforcement, or the other tools at our disposal.
The Commission already has a strong foundation for this task. Our rulemakings today incorporate an extensive analysis of the relevant markets and potential impacts, drawing on deep expertise from our Division of Corporation Finance and Division of Economic and Risk Analysis (DERA). The staff regularly helps parties navigate new rules, provides interpretive guidance, and identifies potential rule changes where necessary. And our rules are matched with strong enforcement, as evidenced by the exceptional series of high-quality cases brought over the last year.
But I would like to discuss today how we are doing more. I will start with a brief “case study” of securities offering reform. I will then touch on the significant reforms for offerings brought about by the JOBS Act, and what we have done to begin to assess their impact. And finally, I will describe our focus on improving our ability to adjust to new market practices and other developments following new rules for offerings.
Securities Offering Reform: A Case Study
Since 1933, securities transactions in the United States have been required to be registered or conducted pursuant to an exemption from registration. The framework of the Securities Act — familiar to us all — has proven to be enormously successful over the years at meeting the needs of issuers and investors, in part because of the flexibility it affords the Commission to respond to the needs of investors, companies, and the market.
More than ten years ago, the Commission identified changes to the economic and regulatory landscape that supported just such a response. Advances in communication technology, particularly the use of the internet, had increased the market’s demand for more timely corporate disclosure. Lower computing costs and the proliferation of new software and services also enhanced the ability of issuers to capture and provide this information to investors. And significant regulatory changes required faster financial reporting by issuers and, as required by the Sarbanes-Oxley Act, more frequent review of financial statements.
“Securities offering reform,” as it came to be called, was intended to absorb these developments, among others, and improve the offering process. The Commission, shifting to facilitate issuers’ ability to communicate more freely with potential investors, did three basic things.
- First, it created new classes of issuers, including the well-known seasoned issuer, or “WKSI.” WKSIs were meant to be the largest established issuers that were widely followed by investors and analysts in the marketplace. In light of their widespread following and ongoing reporting requirements, offering reform created an automatic “shelf” registration statement for use by WKSIs that allowed them to register securities on a more flexible basis, without requiring a waiting period.
- The second part of the rulemaking was a number of new communication rules designed to facilitate the free flow of business-related information to investors, such as through media, electronic road shows, and free writing prospectuses.
- And third, most critically, the Commission tailored the strong investor protections of the federal securities laws to fit these new rules and the new communications environment.
So, did securities offering reform work? By many measures, yes. For one, the new tools are used quite a bit. Over the three-year period that ended on September 30, 2014, WKSIs undertook more than 1,500 equity offerings, almost three per issuer, with gross proceeds totaling about $523 billion. Over the same period, WKSIs also undertook more than 2,700 debt offerings, more than three per issuer, with gross proceeds totaling about $1.4 trillion.
While these numbers and similar ones suggest a positive reception by issuers, they do not fully illuminate the impact of the regulatory changes on investors — are they receiving the accurate information that is necessary for their investment decisions?
The data are rather limited, but do suggest that there has been an improvement in the frequency and quality of company disclosure since offering reform. One study found that allowing companies to supply voluntary disclosures immediately before an equity offering enables them to place potential investors on a more level playing field before the offering announcement. And a 2014 paper — co-authored by DERA staff — found that, as compared to pre-reform, companies tend to circulate a greater number of more accurate management earnings forecasts and file more free writing prospectuses and Forms 8-K in the 30-day period leading up to an offering.
This evidence is good news for investors generally, but there have also been some indications of potential issues. For example, there has been concern expressed by some fixed income investors that offerings off the “shelf” can frequently involve truncated time periods that do not give them sufficient time to assess all of the factors necessary to evaluate the issuer’s credit. These impacts cause our staff to ask whether any such issue could be addressed by increasing the speed and access by which investors obtain the necessary information or should we consider further adjustments to the 2005 rules, such as “speed bumps” like those introduced for certain asset-backed securities offerings last year?
In addition to these studies, reports, and reports from investors, the staff’s experience with securities offering reform provides a view into its overall impact. Because the rulemaking addressed registered offerings made by public companies, staff in Corporation Finance has a window into the offerings and ongoing financial disclosures made by these companies, so it can assess how they are working. The new JOBS Act exemptions present a harder challenge in assessing impact because we do not have the same window into many of the companies that are, or will be, engaging in these transactions. The changes brought about by the JOBS Act are thus fertile ground for a more proactive approach.
The JOBS Act and the Next Phase of Offering Reform
Companies began to take advantage of the initial public offering “on-ramp” as soon as the JOBS Act was enacted. Since that time, nearly 1,000 emerging growth companies — or EGCs — have confidentially submitted draft registration statements for IPOs, and EGCs represent about 85% of the IPOs that have gone effective since the JOBS Act was enacted. The Division of Corporation Finance processes these registration statements the same way they do others, and generally the staff believes that compliance has been on par with non-EGC registration statements.
The JOBS Act also directed the Commission to amend rules for exempt transactions under Rule 506 and Regulation A, and to create a new exemption for crowdfunding. Final rules are in place for the first two, and I expect the third to be considered by the Commission very soon. Let me touch on each briefly, starting with Rule 506.
Congress directed the Commission to revisit a long-standing difference between public and private offerings by mandating changes to Rule 506 of Regulation D, a safe harbor for private offerings that prohibited general solicitation and advertising to the public. In 2013, the SEC carried out this mandate to lift the ban on general solicitation for certain Rule 506 offerings, provided that all purchasers are “accredited investors” and that issuers take reasonable steps to verify that status. The Commission concurrently implemented an important investor protection by adopting disqualification rules that prohibit bad actors from participating in Rule 506 offerings. The Commission also proposed rules to enhance our ability to collect important information on the operation of the new offering regime, which could help us assess its impact on investors.
Amendments to Regulation A
The second JOBS Act measure relates to Regulation A, an exemption adopted in 1936 to allow businesses to raise relatively small amounts of capital through the sale of securities to the general public without incurring the full cost of registration and reporting. It was not widely used, and the JOBS Act sought to increase its utility by directing the Commission to adopt rules to, among other things, significantly increase the permitted offering amount. The final rule, often called “Regulation A+,” was unanimously approved by the Commission earlier this year.
Finally, the JOBS Act directed the Commission to adopt rules to implement a new exemption from registration for securities-based “crowdfunding.” The Commission proposed rules for this exemption that would allow investors to invest a limited amount of money in such offerings. The Commission has since received more than 480 comment letters, and we are scheduled to consider the staff’s recommendation for final rules later this week.
What We Have Learned
These are dramatic changes for investors and issuers. We have an obligation to implement them in a way that protects individual investors, promotes a general confidence in the new markets, and is workable for issuers. That is why for all of the new JOBS Act offering rules, staff from across the agency — not just Corporation Finance and DERA, but Enforcement, OCIE and other Divisions and Offices are engaged in closely monitoring practices as they develop. General solicitation under Rule 506, Regulation A+ and crowdfunding demand this heightened, more comprehensive effort. These new offering tools can reach a wider set of potential investors than before, including in some cases investors new to the securities markets -- investors who unfortunately may be most susceptible to fraudulent practices and most in need of our protection.
While it is too early to draw any conclusions from the operation of these new, interdivisional working groups, we do have some preliminary observations. Under Rule 506(c), issuers are taking advantage of general solicitation and advertising, but at a lower rate than issuers using the traditional exemption in Rule 506(b) that does not allow such activity. A record amount, $1.3 trillion, was reported as raised through Rule 506 offerings in the last completed calendar year 2014. But only a small fraction of issuers claimed the new exemption permitting general solicitation.
It is hard to draw conclusions about the impact on investors of this change over such a short period of time, but the staff is continuing to collect and address the tips and complaints we receive. We have some investigations open, primarily focused on companies’ failure to take reasonable steps to verify the status of investors, sales to unaccredited investors, unregistered broker-dealer activity, and some instances of possible fraud. There has not been to date, however, a demonstration of the widespread fraud that some feared would occur.
As for Regulation A+, which just became effective in June, it is obviously too early to draw conclusions. Companies are beginning to take advantage of the new rules in greater numbers than was the case under the prior version of the exemption, with approximately 34 companies publicly filing offering statements and 16 companies filing non-public draft offering statements. The staff has qualified three offerings so far, and it remains to be seen how investors will react to such offerings.
Just as 2005 marked the end of an intense period of regulatory reform focused on larger issuers and their investors, final rules for crowdfunding, if adopted, would complete the far-reaching regulatory change for smaller issuers and their investors mandated by the JOBS Act. Throughout this period, the Commission has been focused on how the new rules will work with one another and with the existing regulatory regime. We have gathered the available data and evidence, drawn educated conclusions, and written the required rules accordingly.
With all of these changes, investors and issuers now face a very different world than when I became Chair in 2013, with new choices for both registered and unregistered offerings. As in 2005, we cannot know with certainty how the new rules will work for investors and issuers in practice. But it is our responsibility to take steps to understand the changes that occur in the market following implementation of these rules and to address any issues through both nimble regulation and unsparing enforcement.
We have always periodically reviewed the operation of our major rules, but today, with significant effort across our staff, we are proactively assessing how our rules for securities offerings are working so that we can more quickly:
- Evaluate their effectiveness and detect problems that may have arisen, such as investor fraud, investor confusion, or investor or issuer dissatisfaction; and
- Respond with guidance, changes to the rules, and enforcement initiatives as appropriate to correct the weaknesses or deficiencies we are seeing.
The concept is a proactive and responsive regulatory framework — initiated “out of the gates” following a rulemaking and marked by interdivisional collaboration and an enhanced role for DERA economists. The goal is to continue to protect investors throughout the development of an ever-more dynamic and multi-faceted market for securities offerings.
Enhanced Monitoring and Ongoing Assessment
The first aspect of the new post-regulation framework is enhanced monitoring and assessment — particularly as to the impact on investors. The working groups that we have established for recent rulemakings are designed to develop a deep base of experience in their respective markets. The groups are tailored to each market — monitoring the use of general solicitation in private offerings is very different from monitoring offerings under Regulation A+. And these groups are intended to complement our agency-wide initiatives to identify and address risks to investors and markets.
Very importantly, these monitoring activities help the staff better understand potential abuses and facilitate a rapid enforcement response. But they also help the Commission identify new practices in the market that could impact investors, potential inefficiencies in the various offering methods, and relationships with other channels for building capital, such as bank loans and private equity.
The objective is to develop a broad understanding of the overall market that will serve as a firm institutional grounding for any future regulatory changes. When proposing or adopting any rule, the Commission undertakes an extensive economic analysis of both the current state of the affected market and potential effects on that market. Thanks to our team of highly trained economists, we are putting this expertise to work not just in anticipation of a rulemaking, but also thereafter.
One small but important piece of this program is to explore whether we can more specifically identify the effects actually caused by a regulation we have adopted. Drawing the connection between a specific rule and an impact on investor protection or capital formation is notoriously difficult. An increase in the number of fraud actions or amounts of capital raised is far from conclusive — there are many other variables at work. But there are potentially critical insights to be derived from any connection between rule and outcome.
At my direction, the Division of Economic and Risk Analysis is redoubling their efforts not only to enhance our ability to understand ongoing developments in the capital markets but also to try, to the extent possible, to understand the particular impacts of our rules after their implementation. Many of you have thought about the role of these connections in the marketplace, and I invite your input about how best to rigorously assess the impact of these regulations over time.
Responsive Regulatory Adjustments and Enforcement
The second part of our responsive regulatory framework for securities offerings is the use of smart, targeted regulatory adjustments and enforcement. All too often, when investors or issuers have difficulties, there is a call for fundamental reform. It is important that we consider such measures. But we should also consider targeted adjustments directed at discrete problems. In many cases, these measures can be accomplished faster than more structural changes, and they can carry an outsized positive impact, particularly for enhancing investor protection.
The Commission’s rules for disclosure are a place where we do this. A focused approach to enhanced disclosure can make a real difference quickly and with considerable impact. For example, in the wake of the financial crisis, the Commission issued an interpretive release providing new guidance about disclosure on liquidity and funding in light of the complex financing alternatives available to modern issuers. Similarly, the staff has issued guidance on disclosures relating to sovereign debt exposures, cybersecurity risk disclosures,  and potentially misleading non-GAAP financial measures.
In addition, as you know, the Division of Corporation Finance, through its Disclosure Effectiveness Review, has been considering ways to improve the public company disclosure regime for the benefit of both investors and companies. As the core of our investor protections, disclosure must be as effective as possible for all investors, and this objective is fundamental to the staff’s review. Investors need information that is presented in a transparent, complete, and understandable manner. For the most part, our rules do a good job. But good disclosure is fundamentally about effective communication, and what is effective today may not be effective tomorrow. Sweeping reforms are not always required to address such changes, but the Commission should be regularly recalibrating and updating its suite of disclosure requirements to adapt to continual changes in the marketplace.
To that end, the Commission recently issued a Request for Comment for Regulation S-X. Our next step will be to address Regulation S-K and certain Industry Guides, including the guide for disclosures by bank holding companies and the guide for mining companies. As we move forward on this project, I will be keenly interested in investors’ views on whether they are receiving the information they need to make informed investment decisions and whether the information is presented at the right time and in the optimal manner.
Beyond regulation is, of course, enforcement. When market misconduct is readily and swiftly identified, fraudulent behavior is deterred and participants have increased confidence in the integrity of the markets. In focusing enforcement resources on these new markets as they become live, we are able to quickly respond to evidence of fraud or other misconduct and demonstrate to investors that we are protecting their interests. It is critical that we vigorously project our presence from the enactment of new rules to protect investors, both for their sake and the sake of issuers trying to raise capital through these new means. We cannot afford for investor confidence in these new offering regimes to be undermined, which would frustrate their fundamental purpose — helping companies raise the capital that fuels new businesses and jobs.
The last ten years have witnessed a dramatic change in the regulatory landscape for offerings. Investors in our capital markets demand that we have an immediate and intense focus on assessing and addressing the impacts of those changes. At the SEC, we have embraced this critical responsibility with a new, interdivisional approach that seeks to monitor new rules from their inception so that our tools of regulation and enforcement can be quickly deployed. Through this dynamic regulatory framework, our objective is to ensure that offering reforms both past and present continue to serve investors and issuers in the securities markets that help drive a strong, vibrant American economy. Your input and observations are essential to the success of our efforts.
Thank you for listening and have a great conference.
 See “SEC Announces Enforcement Results For FY 2015,” Press Release No. 2015-245 (Oct. 22, 2015), available at http://www.sec.gov/news/pressrelease/2015-245.html (describing 807 enforcement actions in Fiscal Year 2015 covering a wide range of misconduct, and obtaining orders totaling approximately $4.2 billion in disgorgement and penalties).
 See Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports, Release No. 33-8128 (Sep. 5, 2002), available at http://www.sec.gov/rules/final/33-8128.htm and Section 408 of the Sarbanes-Oxley Act of 2002.
 See Securities Act Rule 405.
 See Securities Act Rules 163, 163A, 168, and 169.
 This information is based on staff estimates using Securities Data Corporation (SDC) data on registered offerings for the three years ending September 30, 2014 by issuers identified as WKSIs filing under Section 12(b) of the Securities Exchange Act as of October 1, 2013, to September 30, 2014, excluding offerings by subsidiaries and joint ventures, private offerings, asset- or mortgage-backed securities offerings, and initial public offerings, and offerings that were withdrawn from registration or canceled.
 For example, approximately 58% of WKSIs filed at least one automatic shelf registration statement. This information is based on staff estimates using EDGAR filings on Forms S-3ASR and F-3ASR in the three years ending September 30, 2014, by issuers identified as WKSIs filing under Section 12(b) of the Securities Exchange Act as of October 1, 2013, to September 30, 2014. Because automatic shelf registration statements are automatically effective upon filing, issuers can begin selling securities immediately. By contrast, a staff analysis of newly filed non-automatic shelf registration statements on EDGAR between January 2006 and December 2014 shows that the average number of days from filing to effectiveness was approximately 46, and the median was 28.
Another example showing use of the tools in securities offering reform is that approximately 43% of WKSIs and 15% of non-WKSIs used a free writing prospectus. This information is based on staff estimates using EDGAR filings on Form FWP in the three years ending September 30, 2014 by issuers identified as WKSIs filing under Section 12(b) of the Securities Exchange Act as of October 1, 2013, to September 30, 2014.
 See Shroff, Nemit, Amy X. Sun, Hal D. White, and Weining Zhang, 2013, “Voluntary Disclosure and Information Asymmetry: Evidence from the 2005 Securities Offering Reform,” Journal of Accounting Research 51(5), 1299—1345; available at http://onlinelibrary.wiley.com/doi/10.1111/1475-679X.12022/full.
 In particular, the study finds that, post-reform, in the 30-day period prior to an offering, companies provide the market with an average of 25% more disclosure (measured as the total number of management earnings forecasts, free writing prospectuses, 8-Ks, and earnings announcements) and the average error in management earnings forecasts is roughly 70% lower than in the pre-reform period. See Clinton, Sarah, Joshua White, and Tracie Woidtke, 2014, “Differences in the Information Environment Prior to Seasoned Equity Offerings under Relaxed Disclosure Regulation,” Journal of Accounting and Economics 58, pp. 59—78; available at http://www.sec.gov/dera/staff-papers/working-papers/divisionsriskfinworkingpapersrsfi-wp2013-05pdf.html.
 See Asset-Backed Securities, Release No. 33-9638 (Sep. 4, 2014), available at http://www.sec.gov/rules/final/2014/33-9638.pdf (among other changes, providing additional time for investors to review and consider a securitization offering by requiring issuers using a shelf registration statement to file a preliminary prospectus containing transaction specific information at least three business days in advance of the first sale of securities in the offering).
 This information is based on staff estimates using final prospectus filings on Form 424B4 and 424B1 between April 2012 and September 2015. EGC status was identified based on analyzing several types of filings. See also Ernst & Young, The JOBS Act 2015 Mid-Year Update (Sept. 2015), available at http://www.ey.com/publication/vwluassetsdld/jobsact_2015midyear_cc0419_16september2015/$file/jobsact_2015midyear_cc0419_16september2015.pdf?OpenElement.
 See Section 201(a)(1) of the Jumpstart Our Business Startups Act (the “JOBS Act”).
 See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (Jul. 10, 2013), available at http://www.sec.gov/rules/final/2013/33-9415.pdf.
 See Amendments to Regulation D, Form D and Rule 156 under the Securities Act, Release No. 33-9416 (Jul. 10, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9416.pdf. The Commission has yet to act on the staff’s recommendation for final rules.
 See Section 401 of the JOBS Act.
 See Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A), Release No. 33-9741 (Mar. 25, 2015).
 See Section 302(a) of the JOBS Act.
 See Crowdfunding, Release No. 33-9470 (Oct. 23, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9470.pdf.
 Scott Bauguess, Rachita Gullapalli and Vladimir Ivanov, “Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009—2014” (forthcoming 2015).
 Based on an analysis of Forms D filed since 2013, companies have reported that they initiated approximately 3,300 such offerings, and raised approximately $42 billion. By contrast, companies reported that they initiated approximately 40,000 offerings under the traditional exemption in 506(b), and raised approximately $1.3 trillion.
 Our Office of Investor Education and Advocacy has also issued investor alerts and bulletins related to the changes to Regulation D.
 See Lit. Rel. No. 23394, SEC v. Ascenergy LLC et al., Civ. No. 2:15-cv-01974-GMN-PAL (D. Nev., Oct. 13, 2015), available at, http://www.sec.gov/litigation/litreleases/2015/lr23394.htm. Ascenergy solicited investors on crowdfunding websites and its own website to purchase royalty interests in oil and gas wells. The company filed a Form D claiming the use of 506(c) and did a general solicitation. The Commission sought and obtained a temporary injunction and asset freeze.
 See, e.g., Scott Bauguess, Rachita Gullapalli and Vladimir Ivanov, “Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009—2014” (forthcoming 2015); Joshua White and Scott Bauguess, “Qualified Residential Mortgage: Background Data Analysis on Credit Risk Retention (Feb. 2015); Vladimir Ivanov and Scott Bauguess, “Capital Raising in the U.S.: An Analysis of Unregistered Offerings using the Regulation D Exemption, 2009-2012,” (Jul. 2013); Vladimir Ivanov and Scott Bauguess, “Capital Raising in the U.S.: The Significance of Unregistered Offerings Using the Regulation D Exemption,” (Feb. 2012).
 See Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Management’s Discussion and Analysis, Release No. 33-9144 (Sep. 17, 2010), available at https://www.sec.gov/rules/interp/2010/33-9144.pdf.
 Division of Corporation Finance Disclosure Guidance: Topic No. 4, European Sovereign Debt Exposures (Jan. 6, 2012), available at http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic4.htm.
 Division of Corporation Finance Disclosure Guidance: Topic No. 2, Cybersecurity (Oct. 13, 2011), available at http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm.
 Division of Corporation Finance, Non-GAAP Financial Measures (Jul. 8, 2011), available at http://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.
 See Request for Public Comment, available at http://www.sec.gov/spotlight/disclosure-effectiveness.shtml.