Small businesses are regarded as the engine that drives economic growth. Success generally requires that early stage companies be fed with sufficient infusions of capital often. It is therefore imperative that a national policy of economic growth provide adequate capital-formation opportunities for developing companies. The principal federal statute regulating the offer and sale of securities is the Securities Act of 1933 (“1933 Act” or “Act”). The 1933 Act mandates a formal registration process for all offers and sales of securities unless an exemption from registration exists. Unfortunately, start-ups and developing companies cannot, as a practical matter, raise capital under the expensive, time-consuming process of registration. After having tapped out the founders’ and their families’ resources, the only capital-raising alternative for most companies not blessed with venture capital or angel financing is to utilize registration exemptions that fit the company’s condition and needs.
In light of the desire to foster small business growth, it might be thought that registration exemptions would readily facilitate small business capital financing. That is not the case. Every registration exemption imposes substantial conditions upon a small company’s ability to raise capital on an as-needed basis. A growing recognition of the capital-formation problems has led to several statutory and regulatory reforms in recent years. Those reforms, however, have not touched one of the principal impediments to effective financing—namely the so-called “integration doctrine,” a concept created by the Securities and Exchange Commission (“SEC” or “Commission”) that may thwart or invalidate efforts by companies to raise capital through successive securities offerings. This agency-created doctrine is both contrary and anachronistic to reform efforts to ease capital-formation capacities. The reform efforts to date will not bear fruit in the manner intended unless the integration doctrine is eliminated or significantly modified.