Wednesday,June 27, 2001
Volume 2001-124
House Subcommittee Holds Hearing on
SEC's Role in Capital Raising Process

The House Subcommittee on Oversight and Investigation yesterday held the first in a series of hearings to examine the federal securities laws. Joan Sweeney, chief operating officer, of Allied Capital Corp., and Greg Halpern, CEO of Circle Group Internet, Inc., were among the witnesses at the hearing. Both called for modernization of the securities regulatory framework to assist the capital raising process for small and mid-sized businesses.

Sweeney is a former member of the SEC's Division of Enforcement. Allied Capital is a business development company registered under the Investment Company Act. In her prepared statement, Sweeney said it is time to re-examine the way in which securities are offered and sold. In her view, too much of the SEC's time is spent on reviewing registration statements - a low valued-added service.

Sweeney explained that the registrant, its lawyers, its underwriters and their lawyers all must comply with the law. Accordingly, she questioned why a 30-day review period, often by an "unseasoned examiner," is necessary. She added that most public deals are not sold from the registration statement which frequently is not read.

Sweeney maintained that the business development company structure has not been successful largely due to the Investment Company Act regime. The Act is overly restrictive and outdated, she said, and seriously restricts the ability of BDCs to raise new equity in the public marker BDCs are not permitted to use the integrated disclosure system to update their shelf registration statements, she explained. In her view, this is an oversight that could be corrected by the staff issuing no-action relief.


However, Sweeney said her firm sought a no-action position to permit it to use the integrated disclosure system for its shelf registration statements. . The request was submitted on July 8, 1998 and the response, received just last week, was that the staff could not grant the relief that Allied was seeking. The staff advised that Allied instead should submit a rulemaking petition. Even if Allied pursues this course of action, Sweeney said there is no guarantee of immediate attention or a positive result.

In his prepared statement, Halpern explained that Circle Group is a consulting firm which helps fund emerging companies. Under the Investment Company Act, a public company may hold no more than 40% of its value in the securities of other companies. This poses a significant problem for companies like Circle Group, he said. As the securities of companies it has helped to fund increase in value, Circle Group can find itself out of compliance, thus becoming a victim of its own success, he said.

Halpern, proposed the creation of a new department at the SEC to serve small business ventures that need assistance in tapping the capital markets. His proposed Small Business Advocacy and liaison Office would be part of the Division of Corporation Finance and would advise small businesses on how to meet the SEC's regulations and requirements.

Circle Group's dropped out of the registration process, partly, out of frustration over the staff's inability to understand the company's business. Halpern noted that Circle Group was not the only company to retire from the registration process in 2000. Hundreds did so, he said, and we'll never know if one of them was the next Home Depot, Dell or Yahoo.