Microcaps Seek Reform of Rule Limiting Stock Sale
BY Matthew Phan
August 2, 2005--With confirmation hearings underway for SEC chairman nominee, Christopher Cox, two advocacy groups for small public companies are pushing for freer access to capital through reform of Rule 504.
Rule 504 currently allows only non-reporting companies to sell
"restricted" securities worth up to $1 million, which means the assets
can be sold only if the company registers under a state law to provide
public disclosure to investors before a sale; otherwise, such freely
tradable stock may only be sold to accredited investors.
Advocates claim the original Rule 504 provided a far more flexible and
low-cost means to raise capital for small firms, private and public
Created by the Reagan Small Public Company Reforms of 1982, the 504
originally allowed reporting and non-reporting firms alike to offer
freely tradable securities worth up to $500,000, later raised to $1
million. However, complaints of fraud led to regulation in 1999 that
tightened the rule to its current form.
The business advocacy groups want to reinstate Rule 504 -- to allow all
companies to sell freely tradable securities to an unlimited number of
both accredited and non-accredited investors -- as well as increase the
$1 million cap to $5 million.
As "the cost of compliance is not matching up to their expectations of
raising capital," many firms with less than $50 million market
capitalization decide to "go dark," or not be public, said Frank
Speight, chairman of both groups, the Microcap Company Political Action
Committee (MCPAC) and the National Small Public Company Leadership
According to Speight, such small public companies are "beyond the
venture capital stage" and need millions to fund their business plans,
amounts easy to raise only in the public capital markets. He said the
groups chose the $5 million cap because a $1 million offering would
raise $850,000, a large amount in 1982 but not much now, while the
groups estimate the average microcap needs about $4.2 million.
Not everyone supports the lobbyists' proposed changes. George Victor,
director of quality control at Holtz Rubenstein Reminick LLP, a New
York-based accounting firm, suggests that the small companies facing
difficulty in raising capital may have problems more fundamental than
regulatory structure -- "if a company has difficulty in attracting
capital, the changes are not going to help them," he said.
Speight believes that his groups' proposed changes would benefit the
larger economy by easing capital flow. With tradable securities, an
investor can liquidate his assets and use the return to reinvest in
another company, he argues; by way of example, he said his business
development firm, American Capital Partners, funded 17 different
microcaps with just $2 million in 1986, something the current
restrictions would never allow.