Local Expert Criticizes Loosening of Securities Regulations

Access to capital is one of the ingredients thinks will help small businesses expand, hire more people and reduce unemployment.

That is the reason Dold cosponsored four bills loosening regulations governing the securities industry which passed the United States House of Representatives Nov. 4 with more than 400 votes according to Dold. The legislation awaits Senate action.

“Small business can’t get access to capital. Capital formation is critical to them,” Dold said of the difficulties companies have obtaining financing in part by selling a piece of the firm to raise money for expansion. “They have to jump through hoops.”

The regulations the legislation will ease are those of the Securities and Exchange Commission (SEC) which was established after the Great Depression in the 1930s to protect investors. A former SEC chairman, David Ruder of Highland Park, is concerned about the proposed changes.

“We should let the SEC and its deliberative process do its rule making,” Ruder said. “All legislative proposals must protect shareholders and the ability of small business to raise money. The SEC is there to regulate the unscrupulous who prey on unsuspecting investors.”

Ruder, a Republican, was appointed SEC chairman in 1987 by President Ronald Reagan and served until 1989. He was dean of the Northwestern University Law School from 1977 to 1985 and continues to teach there.

One thing Dold wants to accomplish is to let smaller companies raise capital without going through the cumbersome registration process with the SEC. Currently the SEC does not require registration for the sale of securities when a business has less than 500 shareholders. One of the new laws raises it to 2,000.

“The registration process is very expensive,” Dold said. “The increase will also exclude option holders,” he added. He believes the exclusion will help start-up firms that have compensated key employees with stock options.

Ruder is well aware of the expense of registration but would not want to see an increase above 500 because it will loosen protection for investors. Part of the expense is the extensive disclosures which must be made so a purchaser of stock can make an informed decision.

“There is no particular reason the number needs to be changed,” Ruder said. “The assumption is a group between 500 and 2,000 does need protection. The level of disclosure is a benefit to the shareholders of the company.”

The four bills also allow the use of advertising for the sale of securities which are not registered, allow the sellers of securities to bundle a number of investors into a group like a limited partnership to be counted as one purchaser and makes it easier for small bank holding companies to deregister.

Dold also has concerns about investor protection but thinks it remains sufficient while making it easier for business to obtain money to expand and hire more workers.

“It’s important we still focus on the SEC to root out fraud,” Dold said. “It’s important to increase access to capital and still put in place investor protection.”

Dold believes allowing individual securities dealers to bundle a group of investors into a limited partnership or limited liability corporation does not significantly lessen the protection investors need to avoid being fraud victims.

“There is no question this is ,” Dold said. “We need to know what the rules are so small business can comply. They will be able to raise capital in a responsible way.”

Ruder is opposed to this exception unless the individuals who participate are clearly defined as those who can afford the risk of losing their investment.

“This should be limited to very wealthy individuals who can be qualified as institutional investors,” Ruder said. He feels the SEC, not Congress, should be given the responsibility to determine who qualifies. “This is about protecting unsuspecting individuals.”