With the passage of the Jumpstart Our Business Startups Act, it makes sense to look at the regulations around capital formation and see how they affect the ability of companies to raise capital and how they chose to do so. Of course larger economic effects may outsize the influence of the choices.
The SEC’s Division of Risk, Strategy and Financial Innovation published a report on capital raising using Regulation D. (.pdf) The Division looked at Form D filings from January 2009 to March 2011.
The most startling aspect of the report is that the SEC has only been collecting Reg D filings in a machine-readable form since March, 2009. There are decades worth of data sitting in paper format. The other flaw is that the Reg D filings do not require a filing as to the final dollar amount of securities sold through the offering. Although the SEC has very exact information about publicly available securities, it only has estimates of private offerings.
Some key findings:
- In 2010, Reg D offerings surpassed debt offerings as the dominant offering method in terms of aggregate amount of capital raised in the U.S.: $905 billion.
- The average Reg D offering is $30 million, but the median Reg D offering is modest in size: approximately $1 million.
- Public issuances fell by 11% from 2009 to 2010 while private issuances increased by 31% over the same period.
I also found it interesting to compare this report’s findings with a recent article published in the Business Lawyer: The Wreck of Regulation D: The Unintended (and Bad) Outcomes for the SEC’s Crown Jewel Exemptions by Rutheford B. Campbell, Jr. The two studies cover different time frames and the SEC excludes some types of filings, but there are some startling differences.
The SEC found that 55% of the offerings were under Rule 506. Campbell found that 94% of the offerings were under Rule 506. The biggest problem is that Rule 504 and Rule 505 offerings are subject to state blue-sky laws. Campbell’s argument is that the failure to preempt state regulation pushes more issuers into the tougher requirements of Rule 506, even though the fundraising totals are small enough to fit under Rule 504 or Rule 505. That still with the ban on general solicitation and advertising under Rule 506.
Both found that very few non-accredited investors purchased securities through the Reg D offerings. The SEC found that 90% of the offering had no non-accredited investors, with average amount of 0.1 non-accredited investors and a median of 0. Campbell merely used a sample, but similarly found that the vast majority of offering were limited to accredited investors.
The SEC study emphasizes that Reg D offerings are the opposite of crowdfunding. The median number of investors in an offering is 4, with almost 90% of the offerings involving 30 or fewer investors and 99% of offerings having fewer than 155 investors.
What’s clear is that capital raised in private offering under Regulation D rivals the capital raised in public offering.
It does leave you questioning why Congress felt the need to remove the ban on general solicitation and advertising on private offering to accredited investors under the JOBS Act. It looks like private offerings are raising lots of capital.
It seems clear to me that the private capital market is poorly understood by the Securities and Exchange Commission and poorly understood by Congress. There needs to be better data and better studies.