Protecting Private Job Creators Act

— 840 — Mandate for Leadership: The Conservative Promise ENDNOTES 1. H.R. 5480, Securities Act of 1933, Public Law No. 73-22, 73rd Congress, May 27, 1933, https://govtrackus. s3.amazonaws.com/legislink/pdf/stat/48/STATUTE-48-Pg74.pdf (accessed February 20, 2023). 2. H.R. 9323, Securities Exchange Act of 1934, Public Law No. 73-291, 73rd Congress, June 6, 1934, https:// govtrackus.s3.amazonaws.com/legislink/pdf/stat/48/STATUTE-48-Pg881a.pdf (accessed February 20, 2023). 3. Mark T. Uyeda, Commissioner, U.S. Securities and Exchange Commission, “Remarks at the 2022 Cato Summit on Financial Regulation,” November 17, 2022, https://www.sec.gov/news/speech/uyeda-remarks- cato-summit-financial-regulation-111722 (accessed February 20, 2023); Hester M. Peirce, Commissioner, U.S. Securities and Exchange Commission, “It’s Not Just Scope 3: Remarks at the American Enterprise Institute,” December 7, 2022, https://www.sec.gov/news/speech/peirce-remarks-american-enterprise-institute-120722 (accessed February 20, 2023); comment letter from David R. Burton to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, “Re: The Enhancement and Standardization of Climate-Related Disclosures for Investors [File No. S7-10-2; Release No. 33-11042; RIN 3235-AM87],” June 17, 2022, https://www. sec.gov/comments/s7-10-22/s71022-20131980-302443.pdf (accessed February 20, 2023). 4. Size would probably be measured best by public float or the number of beneficial owners. 5. See David R. Burton, “Securities Disclosure Reform,” Heritage Foundation Backgrounder No. 3178, February 13, 2017, https://www.heritage.org/sites/default/files/2017-02/BG3178.pdf; David R. Burton, “Offering and Disclosure Reform,” Chapter 11 in Reframing Financial Regulation: Enhancing Stability and Protecting Consumers, ed. Hester Peirce and Benjamin Klutsey (Arlington, VA: Mercatus Center at George Mason University, 2016), pp. 277–315, https://www.mercatus.org/research/books/reframing-financial-regulation (accessed February 20, 2023); Andrew N. Vollmer, “Investor-Friendly Securities Reform to Increase Economic Growth,” Securities Regulation & Law Report, Bloomberg BNA, Vol. 49, June 5, 2017. 6. See, for example, David R. Burton, “Reforming the Securities and Exchange Commission,” Heritage Foundation Backgrounder No. 3378, January 30, 2019, https://www.heritage.org/sites/default/files/2019-01/ BG3378.pdf; Andrew N. Vollmer, “Testimony on Workforce Management Disclosures and Other SEC Issues,” submitted to the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, Committee on Financial Services, U.S. House of Representatives, December 6, 2022, https://www.congress.gov/117/ meeting/house/115227/witnesses/HHRG-117-BA16-Wstate-VollmerA-20221208.pdf (accessed February 20, 2023); David R. Burton, “Reforming FINRA,” Heritage Foundation Backgrounder No. 3181, February 1, 2017, https://www.heritage.org/sites/default/files/2017-02/BG3181.pdf; Hester Peirce, “The Financial Industry Regulatory Authority: Not Self-Regulation After All,” Mercatus Center at George Mason University Working Paper, January 2015, https://www.mercatus.org/research/working-papers/financial-industry-regulatory- authority-not-self-regulation-after-all (accessed February 20, 2023); Thaya Brook Knight, “Transparency and Accountability at the SEC and at FINRA,” Chapter 11 in Prosperity Unleashed: Smarter Financial Regulation, ed. Norbert J. Michel, (Washington: The Heritage Foundation, 2017) https://www.heritage.org/sites/default/ files/2017-02/11_ProsperityUnleashed_Chapter11.pdf. 7. Reorganization Plan No. 10 of 1950, U.S. Code Title 5—Appendix, Reorganization Plans, http://uscode.house. gov/view.xhtml?req=granuleid:USC-prelim-title5a-node84-leaf114&num=0&edition=prelim (accessed February 20, 2023). 8. The board or commission should evaluate the regulatory functions of the National Securities Exchanges, Registered Securities Future Product Exchanges, Registered Clearing Agencies (such as the Depository Trust Company (DTC), the National Securities Clearing Corporation (NSCC) and the Options Clearing Corporation (OCC)), the Municipal Securities Rulemaking Board (MSRB) and the National Futures Association (NFA). This board or commission should have a broad composition and permit minority reports. 9. Boyden Gray & Associates, Comments Submitted on Behalf of Alliance for Fair Board Recruitment Concerning the Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change to Adopt Listing Rules Related to Board Diversity, Amendment No. 1, File No. SR-NASDAQ-2020-081, April 6, 2021 https://www.sec.gov/ comments/sr-nasdaq-2020-081/srnasdaq2020081-8639478-230941.pdf (accessed February 20, 2023); David R. Burton, “Nasdaq’s Proposed Board-Diversity Rule Is Immoral and Has No Basis in Economics,” Heritage Foundation Backgrounder No. 3591, March 9, 2021, https://www.heritage.org/sites/default/ files/2021-03/BG3591_0.pdf. The SEC is contemplating at least two rules that can be expected to require differential treatment based on race, sex, ethnicity, and so on. See Executive Office of the President, Office — 841 — Financial Regulatory Agencies of Management and Budget, Office of Information and Regulatory Affairs, “Fall 2022 Unified Agenda of Regulatory and Deregulatory Actions: Active Regulatory Actions Listed by Agency,” https://www.reginfo.gov/ public/do/eAgendaMain (accessed February 20, 2023); “Human Capital Management Disclosure,” RIN: 3235- AM88, https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202204&RIN=3235-AM88 (accessed February 20, 2023); “Corporate Board Diversity,” RIN: 3235-AL91, https://www.reginfo.gov/public/do/ eAgendaViewRule?pubId=202204&RIN=3235-AL91 (accessed February 20, 2023). 10. 15 U.S. Code § 77z–3, https://www.law.cornell.edu/uscode/text/15/77z-3 (accessed February 20, 2023); 15 U.S. Code § 78mm, https://www.law.cornell.edu/uscode/text/15/78mm (accessed February 20, 2023). 11. S. ___, Jumpstart Our Business Startups Act of 2022, discussion draft, 117th Congress, 2nd Session, https:// www.banking.senate.gov/imo/media/doc/the_jobs_act_4.0discussiondraft.pdf (accessed February 20, 2023); David R. Burton, “Entrepreneurial Capital Formation,” Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 5, 2022, https://www.heritage.org/testimony/entrepreneurial- capital-formation; “Removing Barriers to Small Business Capital Formation and Expanding Investor Opportunities,” Section 6 in Nicholas Anthony, Norbert J. Michel, Jennifer J. Schulp, George Selgin, and Jack Solowey, “Sound Financial Policy: Principled Recommendations for the 118th Congress,” ed. Norbert J. Michel and Ann Rulon, Cato Institute, 2022, pp. 22–27, https://www.cato.org/sites/cato.org/files/2022-10/sound- financial-policy-118th-congress.pdf (accessed February 20, 2023); David R. Burton and Norbert J. Michel, Proposals to Foster Economic Growth and Capital Formation, Submission to Committee on Banking, Housing, and Urban Affairs, U.S. Senate, March 18, 2021, https://www.banking.senate.gov/imo/media/doc/David%20 Burton%20and%20Norbert%20Michel%20-%202021-3-18.pdf (accessed February 20, 2023); David R. Burton, “Improving Entrepreneurs’ Access to Capital: Vital for Economic Growth,” Heritage Foundation Backgrounder No. 3182, February 14, 2017, https://www.heritage.org/sites/default/files/2017-02/BG3182.pdf. 12. The small issues exemptive authority has been in the Securities Act since its initial enactment. 13. The crowdfunding exemption was created by Title III of the 2012 JOBS Act. See H.R. 3606, Jumpstart Our Business Startups Act, Public Law No. 112-106, 112th Congress, April 5, 2021, Title III, § 302, https://www. govinfo.gov/content/pkg/PLAW-112publ106/pdf/PLAW-112publ106.pdf (accessed February 20, 2023). 14. Burton, “Improving Entrepreneurs’ Access to Capital: Vital for Economic Growth”; Rutheford B. Campbell Jr., “The Case for Federal Pre-Emption of State Blue Sky Laws,” Chapter 6 in Prosperity Unleashed: Smarter Financial Regulation, https://www.heritage.org/sites/default/files/2017-02/06_ProsperityUnleashed_ Chapter06.pdf. 15. Andrew N. Vollmer, “Abandon the Concept of Accredited Investors in Private Securities Offerings,” Securities Regulation Law Journal, Vol. 49, No. 5 (Spring 2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=3719280 (accessed February 20, 2023); Thaya Brook Knight, “Your Money’s No Good Here: How Restrictions on Private Securities Offerings Harm Investors,” Cato Institute Policy Analysis No. 833, February 9, 2018, https:// www.cato.org/sites/cato.org/files/pubs/pdf/pa833.pdf (accessed February 20, 2023); David R. Burton, “Congress Should Increase Access to Private Securities Offerings,” Heritage Foundation Issue Brief No. 4899, August 29, 2018, https://www.heritage.org/sites/default/files/2018-08/IB4899.pdf; Andrew N. Vollmer, “Evidence on the Use of Disclosure Documents in Private Securities Offerings to Accredited Investors,” Mercatus Center at George Mason University Working Paper, October 22, 2020, https://www.mercatus.org/publications/financial-regulation/ evidence-use-disclosure-documents-private-securities-offerings-0 (accessed February 20, 2023). 16. For a detailed discussion, see “Micro-Offerings,” Section IId in Burton and Michel, Proposals to Foster Economic Growth and Capital Formation, pp. 15–17. 17. David R. Burton, “Let Entrepreneurs Raise Capital Using Finders and Private Placement Brokers,” Heritage Foundation Backgrounder No. 3328, July 10, 2018, https://www.heritage.org/sites/default/files/2018-07/ BG3328.pdf; Andrew N. Vollmer, “Make It Easy for Startups to Sell Stock,” Mercatus Center at George Mason University Discourse, September 21, 2020, https://www.mercatus.org/bridge/commentary/make-it-easy- startups-sell-stock (accessed February 20, 2023). 18. See H.R. 531, S-Corp Access to Crowdfunding Act, 115th Congress, introduced January 13, 2017, https://www. govinfo.gov/content/pkg/BILLS-115hr531ih/pdf/BILLS-115hr531ih.pdf (accessed February 20, 2023); David Burton, “The Tax Law Makes It Almost Impossible for ‘S Corporations’ to Use Equity Crowdfunding,” The Daily Signal, April 19, 2016, https://www.dailysignal.com/2016/04/19/the-tax-law-makes-it-almost-impossible-for- s-corporations-to-use-equity-crowdfunding/.

— 831 — Financial Regulatory Agencies l Either democratize access to private offerings by broadening the definition of accredited investor for purposes of Regulation D or eliminate the accredited investor restriction altogether.15 l Allow traditional self-certification of accredited investor status for all Regulation D Rule 506 offerings. l Exempt small micro-offerings from registration requirements.16 l Exempt small and intermittent finders from broker–dealer registration requirements and provide a simplified registration process for private placement brokers.17 l Exempt peer-to-peer lending from federal and state securities laws and reduce the regulatory burden on Regulation CF debt securities. l Make the Title I Emerging Growth Company (EGC) exemptions permanent for all EGCs. l Reduce the regulatory burden on small broker–dealers and exempt privately held, non-custodial broker–dealers from the requirements to use a PCAOB- registered firm for their audits. Congress should: l Amend the Internal Revenue Code to disregard crowdfunding and Regulation A shareholders for purposes of the 100-shareholder limit for Subchapter S corporations.18 BETTER CAPITAL MARKETS To improve capital markets, the SEC should: l Preempt blue sky registration, qualification, and continuing reporting requirements for securities traded on established securities markets (including a national securities exchange or an alternative trading system).19 l Terminate the Consolidated Audit Trail (CAT) program.20 l Abolish Rule 144 and other regulations that restrict securities resales and instead require a company that has sold securities to provide sufficient current informa- tion to the market to permit reasonable investment decisions and secondary sales. — 832 — Mandate for Leadership: The Conservative Promise Congress should: l Prohibit the SEC from requiring issuer disclosure of social, ideological, political, or “human capital” information that is not material to investors’ financial, economic, or pecuniary risks or returns. The proposed SEC climate change rule, which would quadruple the costs of being a public company, is particularly problematic.21 l Repeal the Dodd–Frank mandated disclosures relating to conflict minerals, mine safety, resource extraction, and CEO pay ratios.22 l Oppose efforts to redefine the purpose of business in the name of social justice; corporate social responsibility (CSR); stakeholder theory; environmental, social, and governance (ESG) criteria; socially responsible investing (SRI); sustainability; diversity; business ethics; or common- good capitalism. l Prohibit securities regulators, including SROs, from promulgating rules or taking other actions that discriminate, either favorably or unfavorably, on the basis of the race, color, religion, sex, or national origin of such individual or group. SEC ADMINISTRATION To enable it to achieve its core mission more effectively, the SEC should:23 l Publish better data on securities offerings, securities markets, and securities law enforcement and publish an annual data book of time series data on these matters. Specifically, the SEC Division of Economic and Risk Analysis (DERA) needs to do a much better job of collecting and reporting fundamental data regarding offerings, regulatory costs, violations, enforcement, investors, state regulator taxes, fees and activities, and other matters. l Ensure that SEC resources flow toward its core functions and away from ancillary and support functions or from missions that do not fall within the SEC’s statutory charge. l Ensure that any three SEC Commissioners are empowered to place an item on the agenda and to receive adequate staff support to do so even without the Chairman’s support.

— 827 — Section 5: Independent Regulatory Agencies with government.” Under the Biden FTC, he writes, firms try “to get out of anti- trust liability by offering climate, diversity, or other forms of ESG-type offerings.” Candeub says that state AGs “are far more responsive to their constituents” than the federal government generally is, and he recommends that the FTC establish a position in the chairman’s office that is “focused on state AG cooperation and inviting state AGs to Washington, DC, to discuss enforcement policy in key sectors under the FTC’s jurisdiction: Big Tech, hospital mergers, supermarket mergers, and so forth.” — 829 — 27 FINANCIAL REGULATORY AGENCIES SECURITIES AND EXCHANGE COMMISSION AND RELATED AGENCIES David R. Burton The primary purposes of the laws and regulations governing capital markets and of capital market regulators are to deter and punish fraud and other material misstatements to investors; foster reasonable, scaled disclosure of information that is material to investors’ financial outcomes and proxy voting decisions; and maintain fair, orderly, and efficient secondary capital markets. The Securities Act of 19331 and the Securities Exchange Act of 19342 reflect nearly nine decades of rushed and haphazard amendments. The securities laws are now extremely complex and do not constitute a coherent, rational regulatory regime. For example, the current SEC has proposed a climate change reporting rule that would quadruple the costs of being a public company.3 This would have a substantial adverse impact on existing companies. Over time, it would also sub- stantially reduce the number of public companies and therefore the number of investing options available to ordinary Americans. The Securities and Exchange Commission (SEC) should be reducing impediments to capital formation, not rad- ically increasing them. The SEC and Congress should fundamentally reform the securities laws gov- erning issuers, broker–dealers, exchanges, and other market participants. Among other things, they should establish a simplified and rationalized securities disclo- sure system with: