REMARKS TOTHE NATIONAL ASSOCIATION OFSMALL BUSINESS INVESTMENT COMPANIESPHOENIX ...ABIZONANOVEMBER 15...19/9

"THE SEC AND SMALL BUSINESS FINANCING"

ByROBERTA S. KABMEL...COMMISSIONERSECURITIES AND eXCHANGE COMMISSION

1.ONE OF THE RECURRENT THEMES IN THE CAMPAIGN FOR

DEREGULATION IS THAT GOVERNMENT REGULATION AND PAPERWORKTHREATEN TO STRANGLE BUSINESS~ AND IN PARTICULAR~ SMALLBUSINESS. 11 THE IMPORT OF THIS CRITICISM IS THATGOVERNMENT MAKES TOO MANY EXPENSIVE AND POINTLESS DEMANDSON BUSINESS IN GENERAL. I HAVE SOME SYMPATHY WITH THEFRUSTRATION WHICH IS REFLECTED IN THIS CRITICISM. ALSO~THE PUBLIC IS BEGINNING TO UNDERSTAND THE EXTENT TO WHICHINFLATION IS FUELED BY GOVERNMENT OVERREGULATION.

AT THE SAME TIME~ A NUMBER OF VOICES HAVE CRITICIZEDTHE COZINESS BETWEEN THE FEDERAL GOVERNMENT AND CERTAINBUSINESS SECTORS. A RECENT ARTICLE DESCRIBED THE"EUROPEANIZATION" OF AMERICAN BUSINESS~ BIG AND SMALL.THE ARTICLE CONCLUDED THAT THE TRADITIONAL AMERICANDIFFERENCES BETWEEN BUSINESS AND GOVERNMENT MAY FAST BEDISAPPEARING~ AND QUESTIONED WHETHER THIS WOULD BE ADESIRABLE DEVELOPMENT. 2J

THE TROUBLESOME FACTOR IN THESE OBSERVATIONS IS THATTHEY ARE RELATED. WHETHER GOVERNMENT AND BUSINESS FACEEACH OTHER AS ENEMIES OR FRIENDS~ THE PUBLIC FEELS IGNORED

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SEE E G STATEMENT OF SENAIQR NE~s6N~ 96T~ CON~IST~SESS:; lL~ CONGo REC. S. ~177(OCTOBER L5~ lyi~),LINDLEY~ ROBIN~."U,S, MOVES TO~ARD gEUROPEAN-STYLEPRIVATE ENTERPRISE/' VOL~ 11" O. 1 ~ LEGAL TIMES OFWASHINGTON L8 (OCTOBER IJ~ 1~7),

2.AND HELPLESS. THE PUBLIC DOES NOT BELIEVE IT IS THEBENEFICIARY OF THE EFFORTS OF EITHER BUSINESS OR GOVERNMENT.LEADERS IN BOTH THE PRIVATE AND PUBLIC SECTORS SEEM TO CAREMORE ABOUT POWER THAN SERVICE. IN OUR MASS SOCIETY~ IDENTITYIS REFERENCED TO NARROW CONSTITUENCIES~ RATHER THAN TO THEGENERAL WELFARE.

I BELIEVE THAT THE RELATIONSHIP BETWEEN GOVERNMENT ANDBUSINESS DOES HAVE TO BE CHANGED IN ORDER FOR THE PUBLICINTEREST TO BE PROPERLY SERVED. BUSINESS PROVIDES THE GOODS~SERVICES AND JOBS WHICH ARE REQUIRED FOR THE ECONOMICWELL BEING OF THE NATION. GOVERNMENT SHOULD REGULATEBUSINESS IN ORDER TO SUPPORT HONEST ENTERPRISE~ PARTICULARLYIN THE CONTEXT OF TODAY'S INTERNATIONALLY COMPETITIVEECONOMY~ AND YET TO PREVENT BUSINESS FROM PURSUING ITSPRIVATE ENDS IN A WAY THAT IS UNDULY DAMAGING TO THEPUBLIC'S HEALTH~ SAFETY OR WELFARE.

THE FEDERAL REGULATORY AGENCIES~ INCREASINGLY COMPOSEDOF YOUNG PROFESSIONALS AND CAREER BUREAUCRATS~ CONFRONT THEBUSINESS WORLD WITH GOOD INTENTIONS BUT NOT WITH UNDERSTANDINGBASED ON EXPERIENCE WITH THE DYNAMICS OF PROFIT MAKINGENTERPRISE. TECHNOLOGICAL AND ECONOMIC DEVELOPMENTS HAVEMADE MANY REGULATORY SCHEMES IRRELEVANT OR EVEN COUNTER-PRODUCTIVE. ELECTED OFFICIALS TOO FREQUENTLY FAIL TOUPDATE OR SPECIFY THE OBJECTIVES OF REGULATORY PROGRAMS

3.OR HOW THEY SHOULD BE IMPLEMENTED. OFTEN THIS HAPPENSBECAUSE THERE IS NO NATIONAL CONSENSUS ON HOW TO SOLVETHE COUNTRY'S PROBLEMS. THESE AND OTHER FORCES HAVE RESULTEDIN TOO MUCH REGULATION FOR ITS OWN SAKEJ TOO MUCH GOVERNMENTHOSTILITY TOWARD BUSINESS AS A MATTER OF PRINCIPLE ANDWITHOUT ANY PARTICULAR PURPOSE.

YETJ ALTHOUGH I ADVOCATE A GREATER APPRECIATION BYGOVERNMENT FOR THE WORK OF THE PRIVATE SECTORJ AND A MORECOOPERATIVE ATTITUDE BETWEEN BUSINESS AND GOVERNMENTJ IAM CONCERNED THAT THE COMBINED POWER OF BUSINESS ANDGOVERNMENT WOULD NOT BENEFIT OR BE ACCOUNTABLE TO THEPUBLIC. LOUIS KOHLMEIER HAS MADE A VERY TELLING OBSERVA-TION IN THIS RESPECT:

IF THOSE TENSIONS AND CQNFRONTATIONS LBETWEENGOVERNMENT AND BUSINESS! WERE REDUCED TO THEPOINT OF ELIMINATIONJ THEN COOPERATION WOULDENDANGER THE POLITICAL AND ECQ~OMIC FREEDOMSFOR WHICH THE SYSTEM EXISTS. ~

IN THIS CONTEXTJ I PROPOSE TO SPEAK TO YOU ABOUT THEEFFORTS THE SEC HAS BEEN MAKING TO STRIKE A MORE SUPPORTIVEAND COOPERATIVE ATTITUDE TOWARD BUSINESSJ IN PARTICULAR TOADDRESS THE PROBLEMS OF SMALL BUSINESS FINANCING. MANY OFTHESE EFFORTS HAVE BEEN REGARDED BY MY AGENCY AS REGULATORYREFORMJ AND I THINK THAT IS AN APPROPRIATE RUBRIC FOR

3/ KOHLMEIERJ "ODD TIMING FOR BUSINESS 60 IDENTIFY WITHGOVERNMENTJ III FINANCIER 8 (JULY IJ79) ,"

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ANALYSIS. You SHOULD UNDERSTAND~ HOWEVER1 THAT WHETHERREGULATORY REFORM IS VIEWED AS DEREGULATION OR SIMPLYHOUSEKEEPING1 IT CAN REACH FOR ONLY LIMITED OBJECTIVESUNLESS THE BASIC ENABLING STATUTES OF AGENCIES LIKE MINEARE REVIEWED AND REVISED. ~ THE SEC's PRIMARY MANDATEIS INVESTOR PROTECTION1 AND IT IS HARD TO CONCLUDE THATINVESTORS IN SMALL BUSINESS NEED LESS PROTECTION THANINVESTORS IN BIG BUSINESS.

IN TRYING TO STRIKE A PROPER BALANCE BETWEEN ADVER-SARIAL AND COOPERATIVE REGULATION1 OR BETWEEN THE NEEDSOF INVESTORS AND THE NEEDS OF SMALL BUSINESS1 SEVERALTHRESHOLD QUESTIONS MUST BE ANSWERED. WHATI IF ANYTHING1

DOES A REGULATORY BODY WHOSE FUNCTION IS PRIMARILY DIS-CLOSURE DO TO THE DETRIMENT OF SMALL BUSINESS? WHATCAN WE DO TO HELP SMALL BUSINESS?

THE COMMISSION'S OWN ADVISORY COMMITTEE ON CORPORATEDISCLOSURE SUGGESTED ONE ANSWER TO THESE QUESTIONS WHENIT RECOMMENDED IN 1977 THAT THE COMMISSION UNDERTAKE AREVIEW OF ITS REQUIREMENTS FOR SMALL BUSINESS BECAUSE

COMP~lANCE MAY BE UNDULY EXPENSIVE AND ..• A REDUCTIONIN 1Y54 ACT DISCLOSURE OBLIGATIONS MIGHT BE ACHIEVEDWITHOUT AN ADVERSE EFFECT ON DISCLOSURE TO INVESTORS. 51

S£!J E.G., JO~N G, HEIMANN1 "REGULATORY OVERKILL --~HE NEED FOR POSITIVE RESPONSEI" REMARKS TO NATIONALr~NKERS ASSOCIATION (OCTOBER ~I 19/9),REPORT OF THE ADVISORY COMMITTEE ON CORPORATE DISCLOSURETO THE SECURITIES AND EXCHANGE COMMlSSION~ COMMITTEEPRINT 95-261 9~TH CONG'I 2D SESS'I ~12J NOVEMBER 3~ 1977.

5.IN MARCH OF 1978.1 AFTER THE' CHAIRMAN OF THE ADVI SORY

COMMITTEE HAD BEEN NAMED CHAIRMAN OF THE SEC.I THE COMMIS-SION ANNOUNCED SUCH A REEXAMINATION OF ITS EFFECT ONSMALL BUSINESS. 61 DURING THE ENSUING HEARINGS.I MANYDISTURBING QUESTIONS WERE RAISED. IN GENERAL.I IT APPEARS:1) THAT WE LACK ENOUGH INFORMATION TO KNOW WHAT EFFECTTHE COMMISSION HAS ON SMALL BUSINESSj 2) THAT IF WE HAVEAN EFFECT.I IT MAY BE IN TERMS OF VOLUMINOUS REGISTRATIONAND FILING REQUIREMENTS OR DISCOURAGEMENT OF VENTURECAPITAL FORMATION.

ACCORDINGLY.I THE COMMISSION HAS UNDERTAKEN TO MOVE ONTHREE FRONTS: TO GATHER ENOUGH INFORMATION TO MAKE CERTAININFORMED DECISIONSj TO REVIEW IN DETAIL CUR REGISTRATIONAND REPORTING REQUIREMENTS AS THEY APPLY TO SMALL BUSHIESSISSUERS UNDER THE SECURITIES ACT OF 1933 ("SECURITIESACT") AND SECURITIES EXCHANGE ACT OF 1934 ("EXCHANGE ACT")jAND TO REVIEW OUR OPTIONS IN RELATION TO CAPITAL FORMATIONFOR AND BY SMALL BUSINESSES UNDER THE INVESTMENT COMPANYAND INVESTMENT ADVISER ACTS. OVER THE PAST YEAR.I WE HAVEALSO PROPOSED AND IMPLEMENTED A NUMBER OF RULES.I ON AN

6/ SECURITIES ACT RELEASE No. 5914 (MARCH 6.1 1978).

EXPERIMENTAL BASIS~ DEALING WITH THE REGISTRATION ANDREPORTING REQUIREMENTS FOR SMALL ISSUERS~ WHICH HAVERESULTED FROM THE EFFORTS OF THE NEWLY-ESTABLISHED OFFICEOF SMALL BUSINESS POLICY IN THE DIVISION OF CORPORATIONFINANCE.

THE COMMISSION'S FACT-GATHERING HAS TAKEN TWO BASICFORMS. ONE~ THE EXPERIMENTAL TECHNOLOGY INCENTIVESPROGRAM ("tTIP")~ IS A JOINT PROJECT WITH THE DEPARTMENT OFCOMMERCE TO MONITOR THE IMPACT OF CERTAIN REGULATION ONCAPITAL-RAISING AND ON THE AVAILABILITY OF VENTURE CAPITAL.ZI PHASE I OF THAT PROJECT WAS COMPLETED IN MID-SEPTEMBER~AND CONSISTED OF EXPLORATORY STUDIES OF THE ECONOMIC EFFECTSOF COMMISSION REGULATION ON CAPITAL FORMATION FOR SMALLBUSINESS. AMONG THE DISCLOSURE PRACTICES REVIEWED INPHASE I OF ETIP WERE SOME OF THE BASIC AND SOME OF THENEWLY REVISED SMALL-ISSUE EXEMPTIONS. BI THE STUDY WILLCONTINUE TO MONITOR OUR NEW RULES AND FORMS.

PHASE II OF THE STUDY WILL ATTEMPT TO IDENTIFYTHE ACTUAL NUMBERS AND TYPES OF SMALL BUSINESSES ANDVENTURE CAPITAL ACTIVITIES WHICH ARE SUBJECT TO SECJURISDICTION. 9/ THE PURPOSE OF THIS RESEARCH IS TO

9/FOR EXAMPLE~ REGU~ATION A, RULES 144~ 146~ 147 AND240J AND rORMS S-16 AND S-18.SEC NEWS RELEASE 79-49 (SEPTEMBER 17J 1979).

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7.DESIGN AND TEST ANALYTICAL MODELS OF CRITICAL ECONOMICSITUATIONS AFFECTED BY SEC REGULATIONS~ SUCH AS TENDEROFFERS~ ACCOUNTING AND DISCLOSURE RULES, FORMULATINGTHESE MODELS SHOULD HELP THE COMMISSION EVALUATEALTERNATIVES FOR ACHIEVING INVESTOR PROTECTION ANDENCOURAGING THE MOST EFFICIENT CAPITAL FORMATION BYSMALL BUSINESSES AND OTHERS.

THE SECOND STUDY IS ALSO A JOINT PROJECT) BUT WITHTHE SMALL BUSINESS ADMINISTRATION, THIS STUDY~ TO BEPERFORMED BY THE COMMISSION'S DIRECTORATE OF ECONOMICAND POLICY RESEARCH) IS DESIGNED TO DETERMINE THE ROLE OFREGIONAL BROKER-DEALERS IN CAPITAL FORMATION) THROUGHUNDERWRITING) MAKING SECONDARY MARKETS) AND RESEARCH. 1Q/SINCE REGIONAL BROKER-DEALERS GENERALLY ARE SMALL BUSINESSES~AND SINCE THEY ALSO HAVE CLOSE DEALINGS WITH SMALL ISSUERS)WE HOPE THAT THIS STUDY WILL PROVIDE US WITH A BETTERUNDERSTANDING OF WHAT) IF ANY~ IMPACT THE SEC HAS ON THEMARKET IN THE SECU~ITIES OF SMALL BUSINESS.

THE COMMISSION'S STAFF IS ALSO REVIEWING OUR ACTIVITIESUNDER THE INVESTMENT COMPANY AND INVESTMENT ADVISER ACTSTO DETERMINE IF IT CAN LIMIT THE REGULATORY BURDEN ON SMALLBUSINESS WITHOUT SACRIFICING INVESTOR PROTECTION, SMALL

lU/ SEC NEWS RELEASE 79-56 (OCTOBER 19) 1979).

8.BUSINESSES ORDINARILY ARE NOT SUBJECT TO THE INVESTMENTCOMPANY ACT. HOWEVER~ COMPANIES WHICH INVEST IN SECURITIESISSUED BY SMALL BUSINESSES~ MAY FALL WITHIN THE DEFINITIONOF "INVESTMENT COMPANY" AND THUS BE SUBJECT TO THE PROVISIONSOF THAT ACT UNLESS SOME EXEMPTION IS AVAILABLE. FREQUENTLYRELIED UPON IS AN EXCLUSION FROM THE DEFINITION OF "INVESTMENTCOMPANY" FOR ISSUERS WHOSE SECURITIES ARE NOT PUBLICLYOFFERED~ AND WHICH ARE BENEFICIALLY OWNED BY ONE HUNDRED ORFEWER PERSONS. 11/ (THE COMMISSION HAS RECENTLY PROPOSEDRULES EXPANDING EXEMPTIONS FROM THE DEFINITIONS OF ANINVESTMENT COMPANY IN VARIOUS SECTIONS OF THAT ACT. 121

OUR EXPERIENCE IN ENFORCING THE INVESTMENT COMPANY ACTHAS DEMONSTRATED THAT SPECIAL TREATMENT UNDER ITS PROVISIONSIS SOMETIMES JUSTIFIED FOR COMPANIES SUCH AS SBICs. BUT THECOMMISSION HAS CONSISTENTLY TAKEN THE POSITION THAT THOSECOMPANIES ORDINARILY SHOULD NOT BE TOTALLY EXCLUDED FROMCOMPLIANCE WITH THE ACT'S PROVISIONS. I NOTE THOUGH THATTHREE BILLS ARE CURRENTLY PENDING IN CONGRESS WHICH WOULDHAVE THAT EFFECT. 131 THE SEC's TRADITIONAL APPROACH HASBEEN ONE TO FACILITATE THE FLOW OF CAPITAL TO ~MALL BUSI-NESSES BY SBICs WITHOUT SIGNIFICANTLY COMPROMISING INVESTOR

ll/ SECTION 3(c)(l). SEE ALSO. INVESTMENT COMPANY A~T RULES3c-2 AND 3c-3~ PROVIDING SPECIAL TREATMENT FOR SHIC ISSUERS.

IV IN~~STM~NT CO~PAN6 ACT REL~AS~ Nos. 10937 (Nov. 13~ 1979);I8g4~~Ng~:19; Ig5g~:1U9q) {Nov. 16~ 1979); AND

S.15331 96JH CONG~~ 1ST SESS.~ 125 CONG. REC. S.9~72(JuLY 979)~ ~.19qO 9bT CONG.~ 1ST S ~ 1 5 C NG.REC. S.~~l 7 (OCTOBER 2~~ 19~9)6 AND HAR. 3~~1~9 TH ~ONG.~1ST SESS.~ 125 CONGo REC. H.286 (MAY ~~ 1979).

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PROTECTION. CONSEQUENTLYJ NUMEROUS RULES UNDER THE ACT AREDESIGNED TO EASE THE REGULATORY BURDENS OF THE ACT ON SBICs.~ SUCH RULES SHOW THAT THE COMMISSION IS COMMITTED TOINCREASING THE ABILITY OF SMALL BUSINESS TO RAISE CAPITALWITHIN THE CONFINES OF OUR ENABLING STATUTES. lSI

THE COMMISSION'S STAFF IS ALSO CONSIDERING CERTAINOTHER ACTIONS WHICH MIGHT HELP SMALL BUSINESSJ BYASSISTING "BUSINESS DEVELOPMENT COMPANIES" WHICH ARE AVARIETY OF VENTURE CAPITAL COMPANIES. THE INVESTMENTADVISERS ACT PROHIBITS REGISTERED INVESTMENT ADVISERS FROMRECEIVING "PERFORMANCE" FEES BASED ON A SHARE OF THE CAPITALAPPRECIATION OFJ OR CAPITAL GAINS UPONJ THEIR CLIENTS'FUNDS. lQI HOWEVERJ SOME INVESTMENT ADVISERS WHO SERVEVENTURE CAPITAL COMPANIES HAVE TRADITIONALLY RECEIVEDPERFORMANCE-BASED FEES. THEREFOREJ THE COMMISSION HASPROPOSED RULE 205-3 WHICH WOULD PERMIT A PERFORMANCE-BASEDFEE UNDER CERTAIN CIRCUMSTANCES. 1Z/ I RECOGNIZE THATCOMMENT ON THIS RULE PROPOSAL HAS BEEN ADVERSE. BUT PERHAPSTHE PROPOSAL WILL BE THE BEGINNING OF A WORKABLE SOLUTION TOTHE PROBLEM OF A REGULATORY SCHEME WHICH DOES NOT SEEM TOFIT LEGITIMATE BUSINESS NEEDS.

~I SE£L E.G'J INVESTMENT COMPANY ACT RULES 3c-2J 3c-3J 17D-1JIBC=lJ AND 18c-2.

15 ADDITIONALLYJ TtlE COMMISSION RELIES ON INFORMAL LIAISONWITH THE SMALL HUSINESS ADMINISTRATION} AND ON CONTACTSWITH ATTORNEYS AND OFFICERS OF SBICs WHO SEEK THE STAFF'SADVICE.

l6I SECTION 205(1).III INVESTMENT ADVISERS ACT RELEASE No. 680 (JuNE 19J 1979).

10.CONSIDERABLE PUBLIC ATTENTION HAS BEEN PAID TO THE

EFFORTS OF THE OFFICE OF c~ALL BUSINESS POLICY IN THEDIVISION OF CORPORATION FINANCE) AND TO THE CHANGES INREGISTRATION AND REPORTING REQUIREMENTS WHICH IT HASINITIATED. SOME OF THESE INITIATIVES HAVE CONCENTRATEDON IMPLEMENTING CONGRESSIONAL ACTS WHICH LIFTED THE MAXIMUMDOLLAR AMOUNT OF EXEMPTED OFFERINGS. OTHER INITIATIVESHAVE ATTEMPTED TO SIMPLIFY THE COMMISSION'S PAPERWORKDEMANDS ON ISSUERS MAKING SMALL OFFERINGS. THE COMMISSIONHAS) FOR EXAMPLE) MADE SIGNIFICANT CHANGES IN THE REQUIREMENTSUNDER RULE 144) WHICH FACILITATE THE RESALE OF MANY SECURITIESSOLD BY SMALL ISSUERS IN UNREGISTERED PRIVATE PLACEMENTS.THE AMOUNT OF "RESTRICTED" SECURITIES WHICH CAN BE SOLDIN THE PUBLIC MARKETS) INCLUDING THE SECURITIES OF PROMOTERSAND OFFICERS) HAS BEEN GREATLY INCREASED. Lal THE RULEHAS ALSO BEEN AMENDED TO ALLOW NON-AFFILIATES TO TRADEFREELY IN ONCE-RESTRICTED SECURITIES AFTER A THREE OR FOUR-YEAR HOLDING PERIOD) IF THE ISSUER IS A REPORTING COMPANYUNDER THE EXCHANGE ACT. 191

lal SECURITIES ACT RELEASE No. 5979 (SEPT. 19) 1978).lSI SECURITIES ACT RELEASE No. 6032 (MAR. 5) 1979).

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II.THE COMMISSION ALSO HAS LIBERALIZED EXISTING RULES

WHICH PROVIDE SMALL OFFERING EXEMPTIONS FROM THE REGISTRA-TION REQUIREMENTS OF THE SECURITIES ACT. THE COMMISSIONHAS RAISED THE DOLLAR CEILING ON OFFERINGS PURSUANT TOREGULATION A FROM $500~OOO TO $1~500~OOO IN ANY TWELVE-MONTH PERIOD. 2Q/ THE COMMISSION ALSO HAS RELAXED THEDISCLOSURE REQUIREMENTS FOR CERTAIN OFFERINGS UNDER RULE146. 211 Now~ IN OFFERINGS OF $1~500~OOO OR LESSJ THEISSUER MAY SUBSTITUTE THE INFORMATION REQUIRED BY SCHEDULE IOF REGULATION A FOR THE INFORMATION OTHERWISE TO BEFURNISHED AN OFFEREE OR HIS REPRESENTATIVE UNDER RULE 146.PROPOSED RULE 242 WOULD BE AVAILABLE FOR OFFERINGS OF ASMUCH AS $2JOOOJOOO IN ANY SIX-MONTH PERIOD. 221

IN ADDITIONJ THE COMMISSION HAS ADOPTED AN EXPERIMENTALREGISTRATION FORM~ FORM S~18~ 231 FOR THE REGISTRATION FORPUBLIC SALE OF SECURITIES OF CERTAIN DOMESTIC AND CANADIANISSUERS WHICH ARE NOT SUBJECT TO THE CONTINUOUS REPORTINGPROVISIONS OF THE EXCHANGE ACT. FORM S-18 MAY BE USED FOROFFERINGS TOTALING AS MUCH AS $5~OOO~000 IN TWELVE MONTHSJ

INCLUDING UP TO $1~500~OOO IN SECONDARY SALES.

2QI SECURITIES ACT RELEASE No. 5977 (SEPT. 11. 1978).211 SECURITIES ACT RELEASE No. 5975 (SEPT. 8J 1978).221 SECURITIES ACT RELEASE No. 6121 (SEPT. I1J 1979).23/ SECURITIES ACT RELEASE No. 6049 (APR. 3J 1979).

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THE MOST RECENT INITIATIVE IN THE REGISTRATION ANDFILING OF SMALL ISSUES OF SECURITIES IS THE COMMISSION'SPROPOSED RULE 242. THIS IS A PROPOSED EXEMPTION FROMREGISTRATION FOR LIMITED OFFERINGS UNDER SECTION 3(B) OFTHE SECURITIES ACT. SECTION 3(B)~ UNLIKE THE PRIVATEOFFERING AND RULE 146 EXEMPTIONS UNDER THE SECURITIES ACT~DOES NOT REQUIRE A DETERMINATION AS TO THE SOPHISTICATIONOR WEALTH OF PERSONS TO WHOM THE SECURITIES ARE OFFERED.

PROPOSED RULE 242 WOULD ALLOW CERTAIN DOMESTIC ANDCANADIAN ISSUERS TO SELL AS MUCH AS $2~OOO~OOO OF THEIRSECURITIES IN ANY SIX-MONTH PERIOD TO ANY NUMBER OFSO-CALLED ACCREDITED INVESTORS INCLUDING CERTAIN INSTI-TUTIONS~ PRIMARILY BANKSJAND TO 35 OR FEWER OTHER PERSONS.THE ONLY COMMISSION FILING REQUIREMENT WOULD BE OF ANOTICE AFTER THE CLOSE OF THE MONTH IN WHICH THE FIRSTSALES ARE MADE UNDER THE RULE WITH UPDATES AT SIX-MONTHINTERVALS. HOWEVER} PROPOSED RULE 242 INSTITUTES CERTAINCONTROLS OVER DISCLOSURE BY SPECIFYING THE INFORMATIONWHICH MUST BE FURNISHED NON-ACCREDITED PURCHASERS.THAT INFORMATION~ IN ESSENCE~ IS WHAT WOULD BE REQUIREDBY PART I OF THE COMMISSION'S NEW FORM S-18J BUT ONLY IFMATERIAL.

SINCE THE COMMISSION IS STILL RECEIVING COMMENTS ONPROPOSED RULE 242} AND NO DECISION HAS BEEN REACHED CONCERNINGITS ADOPTION~ IT WOULD BE INAPPROPRIATE FOR ME TO EXPRESS ANYOPINION OF MY OWN AT THIS TIME. HOWEVER} I WANTED TO

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13.DESCRIBE THE PROVISIONS OF PROPOSED RULE 242 TO POINT OUTTO YOU THE DIRECTION OF THE COMMISSION'S PROGRAM FOR SMALLBUSINESS.

ANOTHER GOOD EXAMPLE TO SHOW WHERE WE ARE MOVING ISTHE COMMISSION'S EXPERIMENTAL REGISTRATION FORM~ FORM S~18.THIS IS A SIMPLIFIED FORM AVAILABLE FOR PUBLIC OFFERINGSTOTALING $5~000~000 OR LESS IN VALUE PER YEAR~ WITH MORELIMITED REQUIREMENTS FOR NARRATIVE AND AUDITED FINANCIALDISCLOSURE THAN FORM S-l.

ON OCTOBER 16~ 1979~ THE COMMISSION ANNOUNCED ANO-ACTION POSITION REGARDING THE REGISTRATION OF DEBTSECURITIES VALUED AT $1~500JOOO OR LESS ON FORM S-18WITHOUT QUALIFICATION UNDER THE TRUST INDENTURE ACT OF1939. ~

DURING THE FIRST SEVEN MONTHS FOLLOWING THE COMMISSION'SADOPTION OF FORM S-18J MORE THAN $74 MILLION IN VALUE INCOMMON STOCK HAS B~EN REGISTERED ON THE FORM. IN ADDITIONJ

ALMOST $5)000)000 OF CONVERTIBLE AND NONCONVERTIBLE DEBTSECURITIES WERE REGISTERED ON FORM S-18. ALMOST ONE-THIRDOF THOSE REGISTRANTS HAVE HAD NO OPERATING HISTORY.

~/ SECURITIES ACT RELEASE No. 6136 (OCTOBER 16~ 1979).

14.I HAVE HEARD THE COMPLAINT THAT ALL THE COMMISSION'S

ACTIVITIES CONCERNING SMALL BUSINESS FINANCING ARE NOTDEREGULATION SO MUCH AS RE-REGULATION. IT IS TRUE THAT THECOMMISSION'S REVIEW AND REVISION OF ITS REQUIREMENTS WITHREGARD TO SMALL BUSINESS HAS BEEN PREMISED ON A SORT OFHOUSEKEEPING APPROACH WHICH I MENTIONED TO YOU EARLIERTODAY. THIS IS NOT A RADICAL DEPARTURE FROM PRIORREGULATORY APPROACHES~ BUT RATHER A MEASURED RESPONSE TONEWLY PERCEIVED NEEDS. WHILE WE ARE TRYING TO REVISE OURREGULATORY SCHEME~ TO MAKE IT LESS BURDENSOME~ PARTICULARLYFOR SMALL BUSINESS ISSUERS~ MORE FUNDAMENTAL CHANGE WOULDREQUIRE CONGRESSIONAL ACTION.

WHILE THE COMMISSION HAS BEEN SENSITIVE TO CERTAINVERY VALID CRITICISMS RAISED ABOUT ITS DISCLOSURE REQUIRE-MENTS~ THE FACT IS THAT THE SEC HAS ONE BASIC OVERRIDINGMANDATE: THE PROTECTION OF INVESTORS THROUGH THE PROVISIONOF PROPER AND ADEQUATE CORPORATE DISCLOSURE. BUTINVESTORS RARELY TELL US HOW MUCH DISCLOSURE THEY WANT ORHOW MUCH THEY ARE WILLING TO PAY FOR PROTECTION. UNLESSTHE CONGRESS IS READY TO CHANGE THE COMMISSION'S CHARGE~ IBELIEVE THAT THE BEST THAT CAN BE EXPECTED FROM OUR OWNHOUSEKEEPING IS SOME FOUNDATION FOR A BETTER RELATIONSHIPBETWEEN BUSINESS AND GOVERNMENT~ BASED UPON A BETTERUNDERSTANDING OF EACH OTHER'S PROBLEMS AND MORE COOPERATIONIN SOLVING THE VERY REAL ECONOMIC PROBLEMS OF TODAY.

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15.REAL REFORM REQUIRES LEADERSHIP IN BOTH THE PRIVATE

AND PUBLIC SECTORS WHICH SURMOUNTS THE DAILY STRUGGLEFOR POWER AND ATTENTION AND REACHES OUT TO MEET THE NEEDSOF A PUBLIC WHICH IS ALIENATED AND SILENT ON MANY IMPORTANTISSUES. IT IS MUCH EASIER TO WORK UP POLITICAL SYMPATHYFOR SMALL BUSINESS THAN BIG BUSINESS. BUT IF GOVERNMENTREGULATION OF SMALL BUSINESS DEFEATS THE OBJECTIVE OFFACILITATING CAPITAL FORMATION~ SO DOES THAT SAME REGULATIONOF BIG BUSINESS. I DO NOT BELIEVE THAT THE ECONOMIC ORSOCIAL EXPECTATIONS OF THE PUBLIC CAN BE MET UNLESS THEREIS A MARKED IMPROVEMENT IN THE PRODUCTIVITY OF THE ENTIREPRIVATE SECTOR AND SUCH IMPROVEMENT REQUIRES FINANCING INSTRONG AND HEALTHY CAPITAL MARKETS. FOR BETTER OR WORSE~THE PROMOTIONAL MANDATES OF THE SEC ARE FEW. I AM NOTCONVINCED THEY SHOULD BE INCREASED. BUT I AM CONVINCEDTHAT THE CAPITAL MARKETS ARE TOO CRUCIAL TO THE NATIONALWELFARE TO BE DAMAGED BY POLITICAL BATTLES BETWEEN BUSINESSAND GOVERNMENT IN THE NAME OF A PUBLIC INTEREST WHICH IS,

ONLY A CONVENIENT BANNER.