SEC: Companies are turning to private financing

By Sarah N. Lynch

The Securities and Exchange Commission study found that these private offerings surpassed debt offerings in 2010 and continued to do so through the first quarter of this year.

The study also found that the spike in private offerings came as public issuances fell by 11 percent from 2009 to 2010.

"To me, it is similar to other types of financial innovations," SEC Chief Economist Craig Lewis told Reuters on the sidelines of the SEC's first-ever small business advisory committee meeting.

"Once people understand this is another path for obtaining equity capital, firms will consider it as another choice to make at the time they need capital."

The agency released the study as part of its review to determine whether it should pursue less restrictive capital-raising securities regulations.

The SEC has said it is looking at whether its rules are outdated. Lawmakers are also pressuring the SEC to remove hurdles for capital formation, to help create jobs.

The trend toward private offerings comes as Europe's debt crisis and a weak U.S. economic recovery have made it difficult or less desirable for companies to pursue public offerings.

The study by SEC economists looked at various exemptions available for private offerings, including the most popular one known as Regulation D's rule 506.

The Reg D rule 506 allows companies to raise an unlimited amount of capital through unregistered offerings as long as the offerings only go to certain sophisticated investors.

Overall, it found that there has been a shift from public to private capital, with private issuances increasing 42 percent to $1.4 billion from 2009 to 2010.

During that time, public equity offerings rose slightly while public debt offerings decreased.

"Historically, debt offerings have been the dominant source of capital that firms have used," said Lewis, who called the study's findings "surprising."

The study also found that foreign companies are taking advantage of private unregistered securities offerings in the United States, showing that the United States is competing favorably with foreign markets.

For the period in the study, foreign issuers accounted for 25 percent of the capital raised. The total capital raised by foreign companies went up by roughly a third between 2009 and 2010.

"There has been some discussion about U.S. issuers...moving to foreign capital markets to raise money, but what we are finding here is there is significant participation on the part of foreign issuers in U.S. capital markets through this Regulation D exemption process," said Lewis, who also serves as the director of the SEC's Risk Strategy and Financial Innovation Division.

(Reporting by Sarah N. Lynch in Washington, D.C.)