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SEC's Gallagher calls for exchanges to list small start-ups

Sarah N. Lynch
Wednesday, 6 Nov 2013 | 12:15 PM ET

WASHINGTON, Nov 6 (Reuters) - A top U.S. regulator on Wednesday called for the creation of new "venture exchanges" that would be exempt from certain costly regulatory rules so that small start-ups could more easily list and raise capital.

"The key to establishing venture exchanges is to create a platform which could encourage smaller companies to enter our public markets while at the same time providing adequate protection for investors," said Daniel Gallagher, a Republican member of the Securities and Exchange Commission, in prepared remarks at a futures industry conference in Chicago.

"The hope is that companies would be able to get public financing through listing on these exchanges and then be able to move onto more robust and liquid markets in the future."

Gallagher's comments in support of new venture exchanges come as the SEC continues working to implement provisions of the 2012 Jumpstart Our Business Startups (JOBS) Act.

The JOBS Act loosened a variety of federal securities regulations to help make it easier for small businesses to raise money and go public.

Its provisions include a so-called IPO "on-ramp" which lets companies of a certain size file draft registration statements confidentially with the SEC, disclose less information about pay for executives and directors, and gauge the interest of sophisticated investors prior to filing IPO documents with regulators.

But some have said these measures still fall short and more needs to be done to encourage smaller companies to list.

Earlier this year, a panel of experts convened by the SEC urged the agency to help foster the growth of new venture exchanges that would only focus on listing small companies.

Whether these exchanges would be operated by new companies or by existing players in the space such as NYSE Euronext or Nasdaq OMX remains to be seen.

But Gallagher said in order for them to work, the agency would need to tailor the disclosure requirements to small startups and exempt the exchanges from many of the current regulatory requirements.

On the disclosure provisions, Gallagher said that small start-up companies should be governed by a framework of rules that is "geared towards more basic, clearly material information" and which also would permit them to be excused from some of the periodic financial reporting requirements other public companies face.

"The goal would be to require less disclosure overall while focusing on the most important, material information in order to reassure investors that companies are not acting inappropriately or fraudulently," he said.

As for the rules governing the exchanges themselves, Gallagher said the SEC should consider scaling back certain requirements such as Regulation NMS, a set of rules that govern pricing and access to market data.

In addition, he suggested letting smaller companies choose their trading tick size and limiting the liability on boards and management so that they can make their tick size decisions without the fear of "second guessing" by plaintiffs' lawyers.

"Through well-designed venture exchanges governed by scaled, sensible regulation, small companies would be provided with a proper runway for them to grow while at the same time providing investors with the material disclosures they need to make informed decisions," Gallagher said.