SEC Commissioners Allison Herren Lee and Elad L. Roisman advocated opposing viewpoints on changing the scope of the statutory definitions and exemptions from registration under the Securities Exchange Act and Securities Act.

At the Practising Law Institute's 2021 SEC Speaks program, Commissioner Lee recommended reexamining statutory definitions that define whether an issuer of securities is subject to registration under the Exchange Act; Commissioner Roisman recommended re-examining exemptions from registration under the Securities Act.

Ms. Lee argued that the SEC should "at a minimum" reassess how it defines "shareholders of record" under Section 12(g) and SEA Rule 12g5-1 ("Definition of securities 'held of record'"), as its current application has allowed registration as an issuer under the Exchange Act to become effectively optional for companies that are not listed on an exchange.

Ms. Lee pointed out that "Unicorns," which are private companies valued between $1 billion and $100 billion or more, have increased in consequence to the economy, but are not required to provide public information through periodic reports, proxy disclosures or audited financial statements. She criticized this lack of disclosure as a detriment to the Unicorns' employees who hold equity in such companies, and who, upon leaving their jobs, are unable to determine whether to dispose of their stocks in a funding round or sell them into the secondary markets. Ms. Lee asserted that the shrinking of the public markets will also affect the private markets, which "free ride" on the public markets' transparency of information and prices.

Ms. Lee called on the SEC to address the new opacity in the U.S. equities markets in light of the "explosive growth" of the private markets. She stated that such action would not be unprecedented, as Congress has twice acted to counter increasingly non-transparent markets: first, with the enactment of the Securities Act and the Exchange Act in the 1930s, and then with the 1960s addition of Section 12(g) ("Registration of securities by issuer; exemptions") to the Exchange Act for the OTC markets.

Mr. Roisman highlighted the importance of the SEC's past "expanding" of definitions or thresholds that allowed exemptions from registration or that reduced the expenses of going public. Commissioner Roisman pointed to increasing the limit on securities offerings that could benefit from Rule 701 ("Exemption for offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation") under the Securities Act and providing for an expansion of the term "accredited investor" to potentially include persons who have some demonstrable measure of financial sophistication. Mr. Roisman argued that such "expanding" of exemptions from regulatory burdens will be important to strengthen the U.S. markets going forward, citing the estimated 200,000 businesses that permanently closed due to the COVID-19 pandemic.


Commissioner Lee states: "When we relax or repeal certain of these laws or regulations, [we . . . ] alter incentives and magnify the force and impact of the remaining rules on the books." In other words, expanding exemptions from registration makes it less desirable for an issuer to bear the costs of registering itself or its securities. Ms. Lee views registration as providing a material public benefit, her response to the problem is to restrict exemptions and thereby to force issuers to register (and to bear those costs). While this is a potential approach to the issue, another approach might be to consider whether there is a way to reduce the costs of registration. Along this line, Commissioner Roisman might want to engage Commissioner Lee more directly on the cost/benefit analysis of registration.  

Primary Sources

  1. SEC Speech, Allison Herren Lee: Going Dark - The Growth of Private Markets and the Impact on Investors and the Economy
  2. SEC Speech, Elad L. Roisman: Remarks at SEC Speaks


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