{"id":893,"date":"2020-10-29T00:00:00","date_gmt":"2020-10-29T00:00:00","guid":{"rendered":"https:\/\/norrismclaughlin.com\/blb\/2020\/10\/29\/securities-disclosures-pink-amendments-sec-rule-15c-11\/"},"modified":"2020-10-29T00:00:00","modified_gmt":"2020-10-29T00:00:00","slug":"securities-disclosures-pink-amendments-sec-rule-15c-11","status":"publish","type":"post","link":"https:\/\/norrismclaughlin.com\/blb\/corporate-finance-securities\/securities-disclosures-pink-amendments-sec-rule-15c-11\/","title":{"rendered":"Keeping Securities Disclosures in the Pink: Amendments to SEC Rule 15c2-11"},"content":{"rendered":"

On September 16, 2020, the U.S. Securities and Exchange Commission (\u201cSEC\u201d)<\/a> adopted amendments to its existing Rule 15c2-11, which governs the disclosure obligations of market professionals with respect to the so-called \u201cOver-the-Counter\u201d securities. One may see this as a simple update of a Rule that has not been addressed since 1991 (almost 30 years); alternatively one may see this as part of an effort to review and revise the entire U.S. capital market system. I suggest that a lot of it is the latter; and that it reflects a recognition that the U.S. capital markets have materially evolved since 1933 when the Securities Act of 1933, as amended (the \u201c33 Act\u201d) became law. See my prior blog \u201cAccredited Investor: Regulatory Design, Revised Definition, and the Unfinished Result<\/a>.\u201d In the end, I note that the SEC seeks to learn whether its definitional reworking provides the \u201cfoundation for the SEC\u2019s ongoing efforts to assess whether the exempt offering framework\u201d promotes capital formation and expands investment opportunity. These recent amendments to Rule 15c2-11 follow the same path, albeit in a different arena. It has become increasingly apparent that the processes for raising risk capital in the U.S. market has become sclerotic so that far more money is raised in private placements than in public offerings. According to the SEC in 2019 (the most recent figures available), $2.7 trillion was raised in private markets, versus $1.2 trillion in public markets. Even in the \u201cpublic offering\u201d space, more enterprises seek to go public using \u201cDirect Listings,\u201d or what used to be derisively called \u201cblank check\u201d companies (subject, inter alia, to greater regulatory scrutiny, particularly at the state level), Special Purpose Acquisition Companies or (\u201cSPAC\u201d)\u2019s.<\/p>\n

Some History on the Rule<\/strong><\/h2>\n

The U.S. capital markets, for a variety of reasons, embraced the \u201cpublic auction\u201d model for valuation and pricing. This in turn led to the development of stock exchanges; see the brief history in my prior blog \u201c SEC Seeks to Increase the Security of Data on the Consolidated Audit Trail of the National Market System<\/a>.\u201d But not every security was and is traded on an exchange. The capital markets in the U.S. are both broad and deep, consistent with academic surveys finding that the U.S. markets account for between 55% and 60% of the world\u2019s capital markets. In 1913, the National Quotation Bureau (\u201cNQB\u201d) was organized and became the source to learn the prices quoted for stocks and for bonds. The stock quotes were published on pieces of pink-colored paper; quotes for bonds on yellow paper. Hence, pricing for equity securities not traded on an exchange was found in the Pink Sheets. Of course, the information was only as timely and accurate as voluntarily reported by participating broker\/dealers. After the passage of the Securities Exchange Act, as amended, of 1934 (the \u201c34 Act\u201d), much of the developments in the U.S. capital markets for equities focused on exchange-traded securities; pricing and transactions were reported by the exchanges, bringing both greater transparency and timeliness to price-discovery. Efforts to allow for alternative means to access capital were undertaken by, among others, the National Association of Securities Dealers (\u201cNASD\u201d), whose trading activities were frequently \u201cOver-the-Counter,\u201d a term used at least since the 1870\u2019s for securities bought and sold face-to-face between broker\/dealers. The NASD eventually evolved into two separate institutions:<\/p>\n