America’s public markets were built on the promise that companies of all sizes could access capital to grow and that ordinary investors could participate in that growth on equal footing.
For the first time in a generation, the Securities and Exchange Commission has recently proposed sweeping reforms to modernize public markets and fulfill that promise, and Congress is moving to reinforce them.
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These reforms would make capital formation more accessible for companies of all sizes, while ensuring investors have the information they need to make sound investment decisions.
Leveling the playing field
The SEC’s proposal to reform registered offerings, including its proposals to expand federal preemption over individual state laws, shares a common principle. The recognition that SEC-registered securities offerings are inherently national, must be fair and accessible, and give every investor the information needed to make informed decisions.
Companies that maintain rigorous disclosure standards, provide audited financials, and meet established market quality benchmarks deserve equal access to capital-raising tools, regardless of their size, where their stock trades, or where their investors live. This is why the SEC’s proposal specifically recognizing the OTCQX and OTCQB markets under Rule 415(a)(4) matters, and why we support it.
Today, smaller public companies are routinely locked out of capital-raising mechanisms their larger peers take for granted, pushing them toward private transactions that favor institutional investors and leave retail shareholders on the outside. A patchwork of state rules governing “over the counter” securities compounds the problem. These rules ignore the fact that these securities meet the same federal disclosure standards as their exchange-listed counterparts.
The result: a retail investor buying shares in a well-known company on one trading venue gets a materially different experience from one buying shares in a comparable company on another. That is not a well-functioning market. It is an artifact of outdated rules that tilt the playing field against the very participants public markets were designed to serve.
Overcoming skepticism
Critics of expanded preemption raise a fair concern. State securities regulators have historically served a valuable role in policing fraud in securities offerings. Loosening state oversight, in their view, risks weakening the protections those rules were designed to provide. SEC-registered OTCQX and OTCQB issuers already meet federal disclosure standards equivalent to those required of exchange-listed companies. Preemption tied to those standards does not remove oversight. It shifts enforcement to the same federal framework that already governs NYSE and Nasdaq companies.
What disappears is not investor protection. It is the duplicate paperwork required to prove the same disclosure twice.
Advocating more
The SEC deserves credit for taking this on. So does the growing, bipartisan coalition in Congress that recognizes what is at stake: the health, liquidity, and integrity of markets that underpin U.S. prosperity.
Our goal is to work with the SEC to maximize the impact of these important reforms. We continue to advocate to expand federal preemption to secondary trading in securities offered pursuant to Regulation A “Tier 2” offerings and those that qualify for the OTCQX market. This would capture securities with a national market reach akin to registered offerings.
The path forward
There is a once-in-a-generation opportunity to reinvigorate the on-ramp to our public markets, making it easier for companies to grow in public view and easier for ordinary investors to participate in that growth.
Healthy public markets are how people build wealth. They are also the mechanism through which small companies become large ones; and they facilitate the flow of capital to its most productive uses. The opportunity to strengthen our modern capital markets system is one we cannot afford to miss.
Dan Zinn is General Counsel and chief of staff at OTC Markets Group.