SEC's Gallagher Calls for Small-Cap 'Venture Exchanges'

U.S. regulators are weighing a variety of ways to give smaller companies a leg up, from allowing their stocks to trade in pricing increments greater than one penny to implementing provisions of last year's JOBS Act that cut red tape for startups.

For Dan Gallagher, a Republican member of the Securities and Exchange Commission, these efforts are a good start but don't go far enough.

Mr. Gallagher, in a speech Wednesday, said the best way to reduce regulatory burdens and encourage more startups to go public is to create special "venture exchanges" where small companies would exclusively trade their shares while also adhering to loosened disclosure and other rules.

"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," he said.

Mr. Gallagher's remarks come as the SEC continues to implement provisions of last year's Jumpstart Our Business Startups Act which aims to make it easier for startups to grow into public companies and reduces regulatory burdens on smaller public businesses. The law also requires the SEC to allow privately-held companies to use "crowdfunding" techniques to sell small shares to lots of ordinary investors.

Critics, including state securities regulators and investor advocates, have warned the JOBS Act goes too far in rolling back investor protections and makes it easier for bad actors to pitch fraudulent schemes on unsophisticated investors.

Mr. Gallagher acknowledged the threat of fraud. Yet he said it is "critically important" for the SEC to implement the JOBS Act and "resist the regulatory impulse that so often hinders capital formation in a quest for the nanny state ideal of achieving perfect investor protection through the complete elimination of risk."

Mr. Gallagher said the SEC should also weigh the "venture exchange" idea, backed by one of the agency's advisory committees to create a "distinct marketplace for the securities of small and emerging companies." Canada and the United Kingdom already have specially-designed exchange markets serving as small-company "incubators," he said.

"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," Mr. Gallagher said.