In a series of public speeches since the inauguration, the Securities and Exchange Commission’s (SEC) Acting Chair, Mark Uyeda, has outlined an agenda indicating that he intends to facilitate capital formation and expanded investment opportunities.

Mr. Uyeda has directed SEC staff to explore regulatory changes in four key areas:

• Revising the emerging growth company (EGC) definition and disclosure exemptions to encourage more initial public offerings (IPOs).
• Updating the filer categories and disclosure requirements to reduce disclosure requirements of smaller companies, particularly Smaller Reporting Companies (SRCs).
• Expanding retail investor access to private markets by modifying the “accredited investor” definition to facilitate retail participation in private offerings.
• Reforming Regulation Crowdfunding (Regulation CF) and other exempt offering frameworks to reduce compliance burdens for entrepreneurs and startups.

Revitalizing the IPO Market

To rejuvenate the initial public offering (IPO) market, which, in recent years has generally seen fewer companies, and very few small and mid-cap companies, going public, Mr. Uyeda seeks to reduce regulation for newly-public companies. Mr. Uyeda directed SEC staff to review the “emerging growth company” (EGC) definition. Potential changes include adjusting qualification criteria and the duration of EGC status, along with implementing on-ramped (i.e., phased) compliance measures for certain disclosure obligations. These adjustments aim to make the public markets more attractive to private companies considering an IPO. The decline in IPOs can be attributed to many factors in addition to the often prohibitive regulatory and administrative burdens on public companies, including widespread availability of capital in the private markets, expanded liquidity opportunities through secondary trading in the private markets for insiders and early investors, and market expectations about the revenue and maturity of IPO candidates. But despite these other factors, Mr. Uyeda hopes that loosening EGC criteria and on-ramp compliance measures will encourage more private companies to go public.

We believe that making it easier for companies to become public, and therefore easy for investors from all walks of life to invest in them, has much promise. Not only has the number of U.S. public companies declined precipitously in this century, but the number of U.S. retail investors has also been in steep decline since the 1950s. Reversing both trends would benefit U.S. issuers and U.S. investors. As discussed more fully below, we believe that regulatory changes that facilitate IPOs will be most effective if they are accompanied by changes that reduce the ongoing regulatory costs and burdens of being a public company.

Updating Filer Categories and Disclosure Requirements

Mr. Uyeda noted that the financial thresholds for SEC filer categories have remained unchanged since 2005, despite major changes in the size and composition of public companies. He advocated updating the large accelerated filer, accelerated filer, non-accelerated filer, and smaller reporting company (SRC) thresholds and tailoring disclosure requirements to ensure that smaller companies are not disproportionately burdened. These changes could reduce some of the compression in reporting requirements between the smallest and largest companies, thereby promoting a more equitable regulatory environment. Updating filer categories and scaling disclosure requirements can streamline the reporting process for smaller and mid-cap companies, fostering a more balanced market environment and making post-IPO life more manageable for such issuers.

Reevaluating the “Accredited Investor” Definition

Recognizing the pivotal role of “accredited investor” status in private fundraising under Regulation D, Mr. Uyeda proposed revisiting its definition. The goal is to allow more retail investors to participate in private markets by eliminating the means-based barrier that the accredited investor requirement imposes. This reevaluation could lead to a broader potential investor base for small, private companies, fostering increased ability to raise capital. Since its adoption in 1982, the accredited investor definition has been substantively amended four times, with the last amendments in 2020.

While making capital more available to small issuers is always an admirable objective, we fear that lowering the bar to participate in Regulation D private placements is likely to drive relatively little new investment while adding risk for vulnerable retail investors.

Expanding the pool of accredited investors without adequate safeguards could expose less financially sophisticated investors to higher risks and greater losses. The offering exemptions provided by the Securities Act generally stem from Congress’s long-held view that institutional and other sophisticated investors do not need the same level of protection as retail investors. Mr. Uyeda recognizes that “most startup companies fail and return nothing to their investors,” but he believes that the SEC can amend the rule to expand who qualifies as an accredited investor to balance the desire of some unaccredited investors to expose their portfolios to higher-risk, higher-reward opportunities, while still protecting unsophisticated investors from fraud. This remains to be seen.

Moreover, many issuers (and their advisors) in private capital raises intentionally exclude individual investors even under the current framework because they believe that the friction that individual investors add, both during execution of the transaction and if disputes arise down the road, makes the relatively limited capital available from individuals unattractive. If issuers are already shy of investors who meet the current definition of accredited investor, it seems reasonable to expect that they will have little interest in dealing with true retail investors, with less sophistication, less money, and less ability to sustain losses. Likewise, the corporate forms used by many private placement issuers, frequently LLCs and LLPs, are simply not designed to accommodate large numbers of investors. While, in theory, broadening the accredited investor definition would permit more retail investors to participate in private markets, we question whether it would produce real value for issuers or investors.

In addition, much of the difficulties for retail investors in the private markets stem not from their initial investment but rather from resale transactions. Without significant funds, most individual investors require more liquidity than institutional investors. Individuals who do not meet the current accredited investor definition generally cannot hold restricted securities for the indefinite time periods that private placement issuers require because they rely on their investments for income and retirement and may need to liquidate them to address financial exigencies that more well-heeled investors are less vulnerable to. Accordingly, if the SEC pursues expanding the accredited investor definition, we believe that there will need to be significant reform to resale restrictions and exemptions to facilitate growth in secondary markets for restricted securities and ultimately encourage more active private capital markets.

Regulation Crowdfunding for Startups

Mr. Uyeda identified challenges faced by entrepreneurs in accessing capital, observing that 77% of small business owners reported concerns about capital accessibility in 2024. He suggested that Regulation Crowdfunding has not met expectations and advocated simplifying the SEC’s exempt offering regulations to reduce compliance costs. Regulation Crowdfunding plays a relatively minor role in the current framework for exempt offerings, with far more companies relying on Regulation D and other offering exemptions. But simplifying Regulation Crowdfunding and making it more cost-effective could bring expanded usage by early-stage companies that lack the resources and history to attract larger investments from accredited investors.

Other Potential Changes

While these proposals seek increased capital formation and market participation, careful consideration of potential risks and implementation challenges is crucial to ensure sustainable and equitable market growth. Mr. Uyeda’s proposals appear well-intended, but we question whether making major changes to the private placement framework is where the SEC should focus its efforts. As described above, we believe the proposals that make it less expensive and less awkward to be a public company, including updating the EGC definition and other filer categories and disclosure requirements, offer the most promise for adding vigor to the U.S. capital markets.

Along with these ideas, we would suggest that the Commission and Staff look for other areas that burden public companies, including: (i) excessive auditor costs arising from Sarbanes-Oxley era requirements; (ii) restrictions on capital raising created by the so-called “baby-shelf” rules and inflexible application of the existing requirements for Form S-3; and (iii) robust executive compensation disclosure, including Compensation Discussion & Analysis, and substantial management time and third-party fees that come from it.

Reforming the current framework of securities regulation, including through some of the ideas that Mr. Uyeda proposed, could facilitate more fruitful markets for issuers and investors. However, Mr. Uyeda’s proposals require further rulemaking actions or other formal steps, and some of them may never be adopted. Likewise, Mr. Uyeda’s tenure is limited. President Trump has nominated former SEC Commissioner Paul Atkins to take over as Chair for Mr. Uyeda, but Senate confirmation hearings have not yet been scheduled. As a result, there is significant uncertainty surrounding these proposals.