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«FINAL REPORT December 2003 22nd Annual SEC Government-Business Forum on Small Business Capital Formation FINAL REPORT December 2003 The SEC hosts the ...»

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22nd Annual SEC Government-Business Forum

on Small Business Capital Formation


December 2003

22nd Annual SEC Government-Business Forum

on Small Business Capital Formation


December 2003

The SEC hosts the annual Government-Business Forum on Small Business

Capital Formation, but does not seek to endorse or edit any of the Forum’s

recommendations. The recommendations are solely the responsibility of the Forum participants from outside the SEC, who were responsible for developing, voting upon and prioritizing them. The recommendations do not necessarily reflect the views of the SEC, its Commissioners or any of the SEC’s staff members.



Planning Committee


Opening Remarks of Commissioner Cynthia A. Glassman.............. 11 Recommendations

Securities Regulation Recommendations

Taxation Recommendations



Background As mandated by the Small Business Investment Incentive Act of 1980, the U.S.

Securities and Exchange Commission hosts an annual forum that focuses on the capital formation concerns of small business. Called the “SEC Government-Business Forum on Small Business Capital Formation,” this gathering has assembled for 22 years. A major purpose of the Forum is to provide a platform for small business to highlight impediments in the capital-raising process and address their necessity. Each Forum seeks to develop recommendations for governmental or other action to improve the environment for small business capital formation, consistent with other public policy goals, such as investor protection. Prior Forums have published numerous recommendations in the areas of taxation, securities and financial services regulation and state and federal assistance, many of which have been implemented.

The Commission hosted this year’s Forum at the Key Bridge Marriott Hotel in Arlington, Virginia, across the Potomac River from Washington, D.C., on Monday and Tuesday, September 22 and 23, 2003.

Planning and Organization The SEC’s Office of Small Business Policy in its Division of Corporation Finance, in consultation with the Office of Advocacy of the U.S. Small Business Administration, organized a Planning Committee to provide advice and assistance in organizing this year’s Forum. Consistent with the Forum’s statutory mandate, the Planning Committee’s membership included representatives of federal and state government agencies as well as business and professional organizations concerned with small business capital formation. The members of the 2003 Forum Planning Committee are listed on pages 4 and 5.

The Planning Committee recommended that this year’s Forum be held in Washington, D.C. and that it remain focused on securities regulation and taxation, as has been the case in recent years. The Planning Committee members also assisted in preparing the agenda and in recruiting speakers and moderators.


The Office of Small Business Policy worked with members of the Planning Committee in recruiting participants for the 2003 Forum. Both written and e-mail invitations were distributed. The goal was to attract as large a cross-section of the small business community concerned with capital formation as possible. Invitations were sent to participants in previous Forums and to members of numerous business and professional groups and committees concerned with small business capital formation.

Groups assisting in recruiting participants included the National Venture Capital Association, National Federation of Independent Business, National Association of Women Business Owners, Financial Executives International, American Society of Corporate Secretaries, National Association of Small Business Investment Companies, U.S. Chamber of Commerce, North American Securities Administrators Association, National Association of Securities Dealers, American Institute of Certified Public Accountants and Section of Business Law of the American Bar Association.

A total of 145 participants attended the 2003 Forum, including 30 speakers, moderators and SEC staff. The occupations of the participants are shown in the following chart.

–  –  –

* The information in this chart is based primarily on data collected in a survey of participants on the first day of the Forum. When a participant indicated in the survey that he or she had more than one of the designated occupations, the participant was counted as many times as the number of occupations indicated.

Participants who were classified as “Regulators,” however, were not counted as also being lawyers or accountants. “Regulators” includes employees of the state and Canadian provincial securities regulators and securities self-regulatory organizations; it does not include SEC employees, who were excluded for purposes of calculating the percentages in the chart.


The agenda for the 2003 Forum is reprinted starting at page 6. SEC Commissioner Cynthia A. Glassman provided opening remarks to launch the Forum. Her remarks are presented beginning on page 11. The format for the remainder of the Forum included general session panel discussions, workshops, breakout groups and a final general session. The panel discussions and workshops were designed to stimulate recommendations for governmental and other action to improve the environment for small business capital formation, and to clarify issues. Four breakout groups of approximately 20 participants each met in several sessions over the course of one-and-ahalf days. The purpose of the breakout groups was to develop specific recommendations.

One breakout group discussed angel investing and venture capital issues. Two others discussed smaller public company issues. The final breakout group discussed tax issues.

Participants chose to participate in a specific type of breakout group based on their area of greatest interest. Some participants circulated among a number of breakout groups.

At the final general session, a reporter from each of the four breakout groups presented the group’s recommendations. The participants then voted on the securities law recommendations and prioritized them using an electronic audience response system with hand-held voting devices. SEC participants were asked to refrain from voting. The recommendations offered by the tax breakout group were presented at the final general session but were not voted upon by the larger group.

In addition to the activities reflected in the formal agenda, some participants in the Forum met with Pamela F. Olson, Assistant Secretary for Tax Policy, U.S. Treasury Department. Participants in the tax breakout groups met with Fred Hartmen, Tax and Finance Counsel, Senate Committee on Small Business and Entrepreneurship; staff of the House Ways and Means Committee, including Greg Nickerson, Chief Tax Counsel, Alex Brill, Senior Tax Economist, and Bob Winters, Special Counsel; and Jim Clark, Chief Tax Counsel, House Small Business Committee. The Office of Advocacy of the U.S.

Small Business Administration organized all of these meetings.

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Good morning, and thank you, Gerry, for that introduction. It is a pleasure being here this morning to welcome you to the 22nd Annual Government-Business Forum on Small Business Capital Formation. Let me state, at the outset, that the views I express here today are my own and not necessarily those of the Commission or its staff.

I have worked on small business issues throughout my career as an economist in both the public and private sectors. When I spent a year on loan from the Federal Reserve to the Treasury Department’s Office of Capital Markets Legislation in 1980, I was staff liaison to the Small Business Advisory Committee. When I returned to the Fed, I worked on a study of commercial bank lending to small businesses and participated on an interagency task force on small business. Under Chairman Paul Volcker, as the Fed’s small business economist, I was also responsible for handling calls and complaints from small business owners, and I still haven’t forgotten some of the calls I got in the late 70’s when the prime rate went over 18%. Needless to say, they weren’t very friendly.

When I left the public sector, I continued to work on small business issues as a consultant, focusing on bank lending to small business. In 1996, I testified before Congress on consumer and small business banking issues.

So, I am well aware of the importance of small business to our economy. In preparing my remarks for this morning, I came across some powerful statistics from the Small Business Administration that underscore the impact of small business on the U.S.

economy. In 2002, there were nearly 23 million small businesses in the United States.

These firms:

• represent more than 99.7% of all employers;

• employ more than half of all private sector employees, including 39% of hightech professionals such as scientists, engineers and computer engineers;

• generate 60-80% of net new jobs annually; and

• create more than 50% of non-farm private gross domestic product.

The requirement for an annual forum, mandated under the Small Business Capital Formation Act of 1980, reflects Congress’ recognition of the importance of small business to our economy as a whole. It provides you an opportunity to hear from and interact with our staff and the staffs of other government agencies on issues that are 11 important to small business, and it is our opportunity to hear and learn from you.

Another means of communication is available to you through the Office of Small Business Policy within the Division of Corporation Finance. The office has rulewriting functions, provides interpretive advice, and acts as the SEC’s small business ombudsman.

I encourage you to make use of the resources of this special office.

I want to emphasize the important role that those of you who are from small business issuers, and your advisers, can play in the Commission’s rulemaking process. It is critical that small business issuers take advantage of the comment process to inform us of your views on the effectiveness of our proposed rules and the special regulatory burdens and compliance costs that are associated with them. The Commission is very sensitive to the impact of its rules on small business, and the more informed we are about the effect of our rules on small business, the more narrowly we can target our rules to achieve our objectives.

As you know, last year the Commission adopted several new rules pursuant to the Sarbanes-Oxley Act of 2002. Even before the enactment of Sarbanes-Oxley, we had begun work on accelerating the filing of quarterly and annual reports, requiring certification of those reports by CEOs and CFOs, and speeding up the disclosure of personal securities trading by corporate insiders. Under Sarbanes-Oxley, we required companies to disclose material off-balance sheet arrangements, added a requirement for listed companies to disclose whether they have a financial expert on their audit committees, and required an annual report assessing the quality of their internal control over financial reporting.

In each of these areas, we tried to be sensitive to the concerns of small business issuers about cost-effectiveness. I’m sure we didn’t satisfy everybody, but we did make a number of accommodations.

• Public companies with less than $75 million in market capitalization were exempted from the accelerated deadlines for quarterly and annual reports.

• Public companies with less than $25 million in revenues and $25 million in market capitalization (our definition of “small business issuers”) were not required to provide a table of contractual obligations.

• Small business issuers got an extra six months to comply with the new rule requiring disclosure of whether they have an audit committee financial expert on their audit committees.

• Public companies with less than $75 million in market capitalization got an additional nine months to comply with the new rules requiring a report on internal control over financial reporting.

–  –  –

Now that the flurry of Sarbanes-Oxley rulemaking has subsided, companies both large and small are in the process of adjusting to the new rules, and the Commission is in the process of assessing the effectiveness of the new rules. We are monitoring whether the rules are achieving our objectives, looking out for unintended consequences and seeing whether any changes to the rules need to be made. I’ve heard anecdotal evidence that some companies are having difficulty finding directors willing to sit on corporate boards and that finding audit committee financial experts has been a particular problem for small business. As the Sarbanes-Oxley rules get fully implemented, these are issues that we need to monitor.

We’ve also heard anecdotal evidence we’re aware of that some smaller public companies may forego their public reporting status rather than comply with the new Sarbanes-Oxley governance requirements. Of course, good corporate governance and clear and accurate financial reporting are the right objectives, regardless of whether your company is large or small.

But as an economist, I think we need to re-examine whether we are providing the appropriate incentives. We recognize that it is important for small businesses to grow and prosper; our economy needs the new jobs and new products small businesses create.

Yet some of you are telling us that we do not make it easy enough for small businesses to raise the capital they need to expand. With some exceptions, we generally expect small businesses to comply with the same regulatory requirements that apply to more established companies. And even when a small business makes it to the public company stage, where capital raising should be easier and cheaper, compliance costs—regulatory as well as financial—may act as a disincentive to expansion. Obviously, if that is happening, that is a serious concern.

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