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Small Company Capital Formation Act is key to driving job growth

Seven million new jobs. That’s what America needs just to return to our prerecession employment levels. To help us climb out of this hole, America’s entrepreneurs need better access to financial capital they can use to bring innovations to market, expand their operations and – most important – hire more workers.
Statistics show that small- and mid-size businesses – those with fewer than 500 employees –provide 60 to 80 percent of new private-sector jobs created annually. In fact, many leading companies in Minnesota began as small enterprises that became public companies through initial public offerings (IPOs). For example, Regis, Stratasys, SPS Commerce, American Medical Systems and Buffalo Wild Wings all had IPOs that raised less than $100 million.

Remaining a private company is a viable path to growth for some, often leveraging the resources and expertise of private equity firms. However, the health of our public capital markets – and small businesses’ ability to access them – are critical to the economy and job growth.

As the Star Tribune has recently covered in its “New ideas, no money” series, today the number of companies taking the public path to prosperity has ground nearly to a halt. Moreover, small IPOs in particular have virtually disappeared from the marketplace. From 1991 to 1997, the vast majority – 80 percent – of IPOs raised less than $50 million. Last year, a mere 16 percent of IPOs in the United States were of that size.
Complex reasons for the decline
The reasons behind the decline are complex and often misunderstood. While the increased costs of complying with the Sarbanes-Oxley Act are frequently cited, the true causes lie in the numerous regulatory changes that have harmed what once was the world’s most efficient and attractive capital market.

These changes date back to 1997 with the SEC’s introduction of new order handling rules. Regulatory changes intended to increase transparency instead ruined the underlying structure of the market. The cumulative effects of these changes, combined with technological advances, destroyed the economics available to investment banks that once provided critical support and liquidity to public companies.

The reality is that entrepreneurs no longer have as vibrant of an IPO market as an exit option as they did for decades.
Fortunately, some leaders on Capitol Hill – including Rep. Erik Paulsen of Minnesota – recognize the need to revive the IPO market for small companies. Paulsen is a sponsor of the Small Company Capital Formation Act of 2011, a bill introduced by Rep. David Schweikert of Arizona.
The bill would amend a key regulation in the Securities Act of 1933. “Regulation A” was intended to give small businesses easier access to equity capital by allowing them to use an IPO process that’s simpler and less expensive than that required for larger companies.
Three key measures
Under the new bill, the amount of capital small businesses could raise under the Regulation A process would increase from $5 million to $50 million. The bill proposes three key measures that will greatly benefit small companies. First, it drives down costs for issuers by permitting the use of a simpler “Offering Circular” for the SEC’s review. Second, it opens up the Regulation A exemption to a size that will allow companies to list on the NYSE and NASDAQ and to avail themselves of the so-called “Blue Sky” exemption, thus avoiding costly state-by-state filings. The current Regulation A limit of $5 million is below NYSE and NASDAQ listing minimums. Third, it allows issuers to gauge the viability of an offering by meeting with investors before incurring the significant costs of an offering.
As an early proponent of the Small Company Capital Formation Act, Grant Thornton has been working with lawmakers and has made recommendations to the bill’s sponsors that we believe would further improve Regulation A and protect investors.

As the bill proceeds through the legislative process, it deserves the attention and endorsement of Congress and the American business community. The Small Company Capital Formation Act of 2011 is a first step toward improving public capital-raising opportunities for emerging companies in Minnesota and beyond. It also holds the greater promise of spurring business innovation, generating new jobs and helping revitalize the U.S. economy.

Jarod Allerheiligen is the managing partner for the Minneapolis office of Grant Thornton LLP. He can be reached at

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Comments (2)

  1. Submitted by myles spicer on 07/11/2011 - 09:10 am.

    Jarod makes a valid point in the need for equity capital, but that is not what is stifling small business today (I currently run a company with 150 emplyees, we have expanded throught the recession, and I have owned small businesses for 55 years).

    The real problem facing small business today is lack of debt financing — the inability or unwillingness of the banking industry to lend. the reasons are many — too complex and far reaching to describe here; but the effect is to choke off the growth potential of growing a small business.

    IPO’s are great — but rare among small businesses, and suspect in today’s capital markets where the securty of already strongly capitalized companies are a safer haven.

    Sure,the Act Jarod decribes would be a plus — but without working capital the present small businesses (and those that may go public) cannot thrive, grow, or perhaps even survive. That issue must take the higher priority now.

  2. Submitted by Patrick Donohue on 07/13/2011 - 10:44 pm.

    Jarod, great article. Capital formation is a MAJOR issue in our nation. You put it correctly – this Act is a FIRST step – and we have many more required to get small business the access to the capital markets it deserves. Capital formation in the United States has been stifled by antiquated securities laws – many are 70+ years old – that are now being dictated by case law, reforms and no-action letters with the SEC, and FINRA bulletins. Doesn’t that alone give you a headache?! Many practicing securities attorneys can’t give straight answers on what is acceptable when attempting to solicit and exchange private capital. It’s not just SarBox, Reg FD, Dodd-Frank act – it’s the culmination of many issues that make raising capital (aka buying and selling securities) a nightmare…Making this process easier would provide substantial liquidity to small business.

    Patrick Donohue @DealPen

    BTW – Thank you to Grant Thornton for taking the lead on issues in the US capital markets. GT has done a great job on this subject; I enjoy the white papers and appreciate its congressional testimony.

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