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TheNeedforGreaterSecondaryMarketLiquidityfor
SmallBusinesses

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission*
March4,2015

Advisory Committee on Small and Emerging Companies

Washington, DC
Thankyouandgoodmorning.IwanttostartbywelcomingthemembersoftheAdvisory
CommitteeonSmallandEmergingCompanies.Iappreciateyoureffortsandlookforwardto
todaysdiscussions.IwouldalsoliketothankthestaffoftheDivisionofCorporationFinances
OfficeofSmallBusinessPolicyfororganizingthismeeting.
Iamdelightedtoseethattodaysmeetingwilldiscussthesecondarytradingenvironmentfor
thesecuritiesofsmallbusinesses.Thelackofafair,liquid,andtransparentsecondarymarket
forthesesecuritiesisalongstandingproblemthatneedsaneffectivesolution.Indeed,I've
spokenpubliclyaboutthisveryissueonanumberofoccasions,mostrecentlylessthantwo
weeksagoattheannualSECSpeaksconference.[1]Thistopicisincreasinglyurgentinlightof
certainnew,oranticipated,CommissionrulesrequiredbytheJOBSActthatwouldresultina
farwiderrangeofsmallbusinesssecuritiesneedingtofindliquidityinthesecondarymarkets.
Specifically,proposedrulesunderRegulationAplusandCrowdfunding,andfinalrulesunder
Rule506(c)ofRegulationD,wouldpermitwidedistributionsofsecuritiesandalsoallowsuch
securitiestobefreelytradedbysecurityholdersimmediatelyuponissuance,orafteraone
yearholdingperiod.[2]Theseregistrationexemptionsalsoprovideorareexpectedtoprovide
forlesserongoingreportingrequirementsthanisrequiredforlistedsecurities.
Moreover,undertheCommissionsrecentlyproposedrulestoamendSection12(g)ofthe
SecuritiesExchangeActof1934(theExchangeAct),asrequiredbytheJOBSAct,the
numberofrecordholdersacompanymayhavebeforeitisrequiredtopublishannualand
quarterlyreportswouldgreatlyincrease.[3]Inaddition,theCrowdfundingproposal,asrequired
bytheJOBSAct,wouldpermanentlyexcludeanypurchaserofthesharesfromcountingasa
recordholderforpurposesofSection12(g)andanyfuturesecondarypurchasersofthose
shareswouldalsobeexcluded.[4]Thus,regardlessoftheresultingnumberofrecordholdersof
suchshares,theSection12(g)provisionswouldneverbetriggered.
Thecombinedresultsoftheseexistingandpendingrulesisthatcompanieswillbeabletosell
theirsecuritiestoawiderswathofthepublicandremainoutsideoftheprotectionsofthe
registrationprovisionsoftheExchangeActforlongerperiodsoftimeperhapseven
permanently.Asaresult,investorswhoacquirethesesharesmanywhoareexpectedtobe
lessfinanciallysophisticatedandneednotbesocalledaccreditedinvestorsmaybeleft
holdingsharesthattheyareunabletosell.

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Viability of Venture Exchanges

Oneideathatbeensuggestedasawaytofosteranactivesecondarymarketforsmallcompany
stocksisfortheCommissiontoapproveoneormoreventureexchanges.[5]Suchexchanges
wouldbelimitedtosmallercapcompaniesthatareexpectedtomeetlessstringentlisting
standards.[6]Clearly,thecomingtsunamiofunregisteredandunlistedshares[7]requiressome
newsolutionsandventureexchangesmaybeaviablealternative.Ventureexchangesare
hardlyanewidea,however,andprioreffortstoestablishtheminthiscountryhavefared
poorly.[8]Accordingly,weneedathoughtfulandprudentapproachthatcarefullyexamineswhy
thepriorattemptsfailed.Asweallknow,[t]hosewhocannotrememberthepastare
condemnedtorepeatit.[9]
Forexample,weshouldcarefullyexaminethereasonsforthedemiseoftheAmericanStock
ExchangesEmergingCompanyMarketplace,knownastheECM.[10]AlthoughtheECMslower
transactioncostsallowedittothriveforatime,theexchangeeventuallysuccumbedtoa
numberofseriousdesignflaws.[11]Forinstance,theprofitablefirmsthatjoinedtheECM
eventuallygraduatedtotheAmericanStockExchange.Thiscreatedtheimpressionthatthe
ECMwaspopulatedonlybyunsuccessfulcompanies.[12]TheECMsimageproblemwasonly
madeworsebytheexchangesfailuretoproperlyscreencandidatefirms.Scandalsinvolving
someECMcompaniesonlycementedtheexchangesreputationasalawlessWildWest.[13]
Finally,oneacademicstudysuggeststhatthenarrowbid/askspreadsthatprevailedonthe
ECMmayhavedissuadedbrokerdealersfrommakingmarketsforthesestocks,whichmay
havedecreasedliquidity.[14]Itmayalsohavedeterredbrokerdealersfromdistributing
researchonthesecompanies.[15]
TheissuesraisedbyECMsdemisearebothcomplexandinterrelated.But,itisnottheonly
sourceofguidanceavailabletous.Therehavebeenotherattemptstocreateviablemarketsfor
smallercompanies.Forexample,manyEuropeanstockmarketshaveexperimentedwitha
juniorexchangeforcompaniestoosmalltomeetnormallistingrequirements.[16]Theseefforts
generallyprovedunsuccessful,andweshouldtrytounderstandwhy.Moreover,effortsin2011
toestablishanewventureexchangeintheU.S.,theNasdaqBXVentureMarket,appearto
havestalled.[17]Finally,weshouldexaminetherecentstrugglesofCanadasTSXventure
exchange.IthasbeenreportedthatTSXsoverrelianceonminingandenergyfirmshasleft
thatexchangeinthemidstofacrisis,duetotheglobalcollapseincommodityprices.[18]
Inaddition,itsbeenreportedthatventureexchangesbothhereandabroadhavesuffered
fromlowliquidityand,attimes,highvolatility.[19]Thismeansinvestorscouldlosealotof
moneyquickly,andcouldhavetroublesellingtheirsharesinadownturn.TheCommission
shouldattempttodeterminetheunderlyingcausesoftheseproblemsandhowbesttoaddress
them.Inthisregard,wemayneedtoasksomedifficultquestions.Forexample,shouldventure
exchangesbestructuredasdealermarkets,ratherthanauctionmarkets?Also,couldventure
exchangesenhanceliquiditythroughbatchauctions,ratherthancontinuoustrading?Howcan
theCommission,consistentwiththeExchangeAct,encouragetraderstoexecutetransactions
onventureexchanges,ratherthaninoffexchangevenues?[20]And,finally,couldlargerticker
sizesenhanceliquiditybyencouragingmarketmakeractivityandfosteringresearchcoverage?
Inthisregard,theCommissionsproposedticksizepilotprogram[21]mayoffervaluable
insightsontheroleofticksizesinensuringanactivesecondarymarketforsmallercompanies.
Importantly,eachofthesequestionspresentsthepossibilityofatradeoffbetweenwhatisbest

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forinvestors,andwhatisbestfortheexchangeanditsparticipatingbrokerdealers.Wemust
bemindfulofthesetradeoffsaswereviewanyproposalsfornewventureexchanges.Wemust
alsoneverlosesightofourcoreresponsibility,whichistoprotectinvestorsaboveallelse.
Investorswillalsoneedtounderstandwhatventureexchangesareandwhattheyarenot.
InvestorsmaythinkventureexchangeswillbetheplacetofindthenextApple,Google,or
Facebook.Butitsneverthateasy.Infact,onestudyshowedthatLondonsventureexchange,
theAlternativeInvestmentMarket,actuallyhashadfewerhighperformancefirmsthan
traditionalexchanges.[22]Instead,studiesshowthatventureexchangestendtohaveahigh
proportionofsmall,earlystagecompaniesoperatinginhighriskbusinesssectors.[23]This
meansthatcompanieslistedonventureexchangescansignificantlyunderperformand,thus,
tendtopresentafarhigherriskprofilethanfirmsfoundontraditionalexchanges.[24]
Tobesure,ventureexchangescan,anddo,attractreputableandprofitablecompanies.[25]
Butexperiencehasshownthatventureexchangesandthecompaniestheylistmaypresent
morerisksthaninvestorsrealize.TheCommissionneedstounderstandhowbesttoaddress
theserisksbeforeapprovingmoreoftheseexchanges.Italsoneedstomakecertainthat
investorsunderstandtheserisks.
Thosewhohavestudiedventureexchangesbelievethattheyarefarmorelikelytosucceed
whentheyfocusoninvestorprotectionandeducation.Ventureexchangesthatimplement
appropriatelistingstandards,enforcethemconscientiously,andeducateinvestorsaboutthe
higherrisksinvolvedwithsmallcapcompaniesseemtodobetter.[26]Thosethathavenot
havestruggled.
Inaddition,expertshavepointedtootherfactorsthatcanimproveventureexchanges
performance.Forexample,severalacademicshavearguedthatsomelistingstandardsare
moreimportantthanothers.[27]Theseexpertshaveassertedthat,whileitmaybeappropriate
forventureexchangestolowercertainlistingstandards,suchasminimumfirmsize,other
standardsshouldbeinviolate.Inparticular,theseexpertsbelievethateffectivecorporate
governancestandardsandaccountingrequirementsareessentialtotheviabilityofanyventure
exchange.[28]
Insum,ventureexchangesareapossiblesolutiontoaloomingproblemandneedtobe
considered.Weshoulddosoinathoughtfulandmeasuredmannerfullycognizantofbenefits,
costs,andchallengesandalwayswiththeneedsofinvestorsattheforefront.

Reform the Broker-Dealer Piggy-Back Rule

Anothermeasurethatshouldbeconsideredtofacilitatesecondarytradingofsmallbusiness
securitiesistoreviseandupdateExchangeActRule15c211,anditssocalledpiggyback
exception.Rule15c211iswidelyusedbybrokerdealerstotradeinunlistedsecurities.Infact,
in2014,over10,000oftheseunlistedsecuritiestradedinthesocalledoverthecounter
(OTC)markets,amountingtoatotaldollarvolumeofover$240billion.[29]
InordertouseRule15c211,brokerdealerswhowishtopublishaquoteofunlistedsecurities,
whichwilloftenbesmallerissuers,arerequiredtoreviewandmaintaincertaininformation
aboutthesecurityandtheissuer.Inaddition,Rule15c211requiresbrokerdealers,priorto
publishingquotesoftheseunlistedsecurities,tohaveareasonablebasisforbelievingthatthis
informationisaccurateinallmaterialrespectsandthatitwasobtainedfromreliablesources.

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[30]Inthisway,Rule15c211isabouttrust.Specifically,investorsneedtohaveconfidence
thatthequotesforthesesecuritiesarefairandaccurate.Withoutthisconfidence,afairand
liquidsecondarymarketforthesesecuritieswillnotexist.
Inthisregard,theuseofcurrentRule15c211oftenfailstomeetexpectationsoffairand
accuratepricing,andoftenfailstoresultinreliablequotes.Mostcritically,undertherule's
piggybackexception,brokerdealersarepermittedtopublishquotationsforasecurity
withoutcomplyingwiththerule'sinformationrequirementsifanyotherbrokerdealerhas
publishedregularandfrequentquotationsforthatsecurity.[31]Accordingly,abrokerdealer
canpiggybackoneitheritsownoranotherbrokerdealerspriorquotations.Asaresult,
brokerdealersneednotreviewtheinformationcollectedandreviewedbyotherbrokerdealers
beforepublishingaquote.Moreover,becausetheexceptionallowsbrokerdealerssimplytorely
ontheirownpriorquotations,brokerdealershavenoobligationtoconfirmthattheinformation
theyinitiallyreliedonwhentheyfirstpublishedaquotationisstillvalid,nomatterhowoldthe
initialquotationis.Thisishardlyaneffectivewaytocreateafairandefficientmarketandits
apoorwaytoinstilltrustinthismarket.
TheproblemsofRule15c211havelongbeenrecognized.Infact,in1998,andagainin1999,
theCommissionproposedcomprehensiveamendmentstoRule15c211toaddressconcerns
aboutfraudandmanipulationthathadbecomeincreasinglycommoninmicrocapsecurities
tradedintheOTCmarket.[32]Atthattime,theCommissionacknowledgedthatmicrocapfraud
wasdriven,inpart,bybrokerdealersroutinefailuretoreviewanyissuerinformation
whatsoeverbeforepublishingquotations.TheCommissionhopedthattheproposed
amendmentstoRule15c211wouldaddressabusesinvolvingmicrocapsecurities,andmore
generallyenhancetheintegrityofquotationsforsecuritiesinthismarketsector.Unfortunately,
theseproposedruleswereneverfinalized.
ManyoftheconcernsoriginallyraisedbytheseproposedamendmentstoRule15c211are
equallyapplicabletotodayssecondarymarketforsmallbusinessshares.Infact,someofthose
proposalswouldbeveryhelpfulfordealingwithtodaysexpandingmarketofsmallbusiness
securities,including:
Eliminating(oramending)thebrokerdealerpiggybackexceptionforsmallbusiness
securities.Thiswouldrequirebrokerdealersthatwishtopublishquotationstoconducta
reviewofissuerandsecurityinformation,andnotsimplyrelyonotherbrokerdealersor
theirownstalereview
Requiringbrokerdealersthatpublishquotationstoobtainandreviewcurrentinformation
aboutanissueratleastannually.Thiswouldenhanceaccountabilitybyrequiringbroker
dealerstodomorethansimplycheckabox.Instead,brokerdealerswouldneedto
reviewtheinformationtheyreceivefromissuerseachyearinordertocontinueissuing
quotesand
Enhancinginvestoraccesstotheinformationcollected,reviewed,andmaintainedbythe
brokerdealerabouttheissuer.Thisinformationcouldbemadeeasilyaccessibleto
investorsovertheinternettoreviewthematerialsofsuchissuers.
Inaddition,itwillbecriticaltoupdateRule15c211totakeintoaccountthenewinformation
andfilingrequirementsthatwillberequiredwhentheCommissionadoptstheproposedrules
underRegulationAplusandCrowdfunding.

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Conclusion
BeforeIconclude,Ialsonotethattodayyouwillbeconsideringrecommendationsonthe
accreditedinvestordefinition.ThisisatopicthatIdiscussedwiththisCommitteebackin
December2014,andmyviewsremainthesame.[33]
IalsonoteanothertopictobediscussedtodayiswhethertoformalizethesocalledRule4(a)
(1)exemption.Shareholdersoftenrelyonthisexemptiontoselltheirrestrictedsecuritiesin
aprivatetransactionwithoutbeingconsideredanissueroranunderwriter.WhileIwelcomethe
CommitteesviewsonformalizingRule4(a)(1),itdoesntsolvethebasicproblemofwhether
asellerwillbeabletofindawillingbuyeroraccessasecondarytradingmarketthatwillbefair,
transparent,andliquid.Forthelattertooccur,wewillneedmuchmorethansimplyclarifying
thecontoursoftheRule4(a)(1)exemption.
Ultimately,thegoalistodevelopaviablesecondarytradingenvironmentthatpromotesafair,
transparent,andliquidmarketforthesecuritiesofsmallbusinessesamarketinwhich
investorscanhaveconfidencethattheyarebeingtreatedfairly.Thereisnobetterwayto
protectinvestorsinterests,whilepromotingthesuccessfulexpansionofsmallbusinesses.
Ilookforwardtoarobustdiscussiononanyandallviablesuggestionsastohowtoimprovethe
secondarytradingenvironmentforsharesofsmallbusinesssecurities.Thankyou.

[*]TheviewsIexpresstodayaremyown,anddonotnecessarilyreflecttheviewsoftheU.S.
SecuritiesandExchangeCommission(theSECorCommission),myfellowCommissioners,
ormembersofthestaff.

[1]SeeCommissionerAguilar,SettingforthGoalsfor2015:AddresstoPractisingLaw
InstitutesSECSpeaksin2015Program(Feb.20,2015),availableat
http://www.sec.gov/news/speech/022015spchclaa.html.
[2]SeeSecuritiesAct3(b)(2)(C),asaddedbyJOBSAct401(a),andSecuritiesAct4(a)(6),
asaddedbyJOBSAct302(e),andSecuritiesActRule506(c),asaddedbyJOBSAct201.
SecuritiesActRule144allowspublicresaleofrestrictedandcontrolledsecuritiesifanumberof
conditionsaremet,including,forexample,meetingtheholdingperiodrequirementofoneyear
(assumingthesellerisnotanaffiliateoftheissuer).SeeRule144undertheSecuritiesAct.
[3]SeeChangestoExchangeActRegistrationRequirementstoImplementTitleVandTitleVI
oftheJOBSAct,SECReleaseNo.339693(Dec.18,2014),availableat
http://www.sec.gov/rules/proposed/2014/339693.pdf.Currently,companieswithmorethan
500shareholdersofrecordarerequiredtoberegisteredwiththeSECunderExchangeAct
Section12(g),whiletheseproposedruleswouldexpandthattriggerto2,000recordholders(or
500holderswhoarenotaccreditedinvestors).Inaddition,theseproposedruleswouldexclude
fromthecountofrecordholdersthosewhoacquiredthesecuritiespursuanttoanemployee
compensationplan.Moreover,theCommissionsproposedrulesunderCrowdfunding,as
requiredbytheJOBSAct,wouldalsoexemptsecuritiessoldunderthoseprovisionsfromthe
registrationrequirementsofExchangeActSection12(g).SeeCrowdfunding,SECReleaseNo.
339470(Oct.23,2013),availableathttp://www.sec.gov/rules/proposed/2013/339470.pdf.
Asaresult,acompanycouldhaveanenormousnumberofrecordholderswithoutbeing

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requiredtoprovidethesamelevelofdisclosuresasthoseapplicabletopubliccompanies.The
concernisthatwithoutthedisclosureroutinelyprovidedbypubliccompanies,smallerbusiness
sharesthatarecarvedoutfromtheSection12(g)registrationrequirementswouldbeharderto
valuebecauseofthislessertransparency.
[4]SeeCrowdfunding,SECReleaseNo.339470(Oct.23,2013),availableat
http://www.sec.gov/rules/proposed/2013/339470.pdf(theCommissionsproposedrulesunder
Crowdfunding,asrequiredbytheJOBSAct,wouldexemptsecuritiessoldunderthose
provisionsfromtheregistrationrequirementsofExchangeActSection12(g),andthis
exemptionrunspermanentlywiththesecurities).TheJOBSActrequiresthattheCommission
promulgaterulesthat,conditionallyorunconditionally,excludesecuritiessoldunderthe
Crowdfundingprovisionfromsection12(g)oftheExchangeAct.SeeJOBSActsection303.
[5]SeeSECCommissionerDanielM.Gallagher,WhateverHappenedtoPromotingSmall
BusinessCapitalFormation?(Sept.17,2014),availableat
http://www.sec.gov/News/Speech/Detail/Speech/1370542976550seealsoSarahN.Lynch,
SECmullspromotingCreationofU.S.ventureexchangesWhite,Reuters(Feb.20,2015),
availableathttp://www.reuters.com/article/2015/02/20/secexchanges
idUSL1N0VU1VU20150220.
[6]Myremarkstodaydiscussventureexchangesasonepossiblemeansofpromotinganactive
secondarymarketforsmallbusinessstocks.Buttherearealternatives.Forexample,some
commentershavesuggestedthattheCommissionamendRegulationATStofacilitatethe
orderlysaleofunregisteredsecurities.SeeCommentLetterfromGATEGlobalImpactInc.,
LettertoDirectorHigginsregardingProposaltoAmendRegulationATStoAddresstheSaleof
UnregisteredSecurities(Feb.20,2015),availableathttp://www.sec.gov/comments/s702
10/s70210.shtml.Inaddition,companieslikeSecondMarketandSharesPosthavedeveloped
marketplacestofacilitatetradinginthesharesofunlistedcompanies.See,e.g.,AmanShah,
Nasdaq,SharesPosttosetupmarketforunlistedstocks,Reuters(Mar.6,2013),availableat
http://www.reuters.com/article/2013/03/06/usnasdaqsharespostidUSBRE9250KT20130306.
Thesealternativeapproachesarebeyondthescopeoftheseremarks.
[7]KayKoplovitz,OneYearAfterTitleIIAndEquityCrowdfunding,HuffingtonPost(Oct.10,
2014)(notingthatTitleIIImaycauseafundingtsunamitohitthemarket.),availableat
http://www.huffingtonpost.com/kaykoplovitz/oneyearaftertitleiia_b_5965466.html.
[8]See,e.g.,ReenaAggarwalandJamesAngel,TheRiseandFalloftheAmexEmerging
CompanyMarketplace(Apr.1998)(notingthemanyfailedattemptstolaunchpublicequity
marketsforsmallstocksintheUnitedStatesandEurope),availableat
http://faculty.msb.edu/aggarwal/jfe51.PDF.
[9]GeorgeSantayana,TheLifeofReason,Vol.I,ReasoninCommonSense(190506),
availableathttp://www.gutenberg.org/files/15000/15000
h/vol1.html#CHAPTER_XII_FLUX_AND_CONSTANCY_IN_HUMAN_NATURE.
[10]See,e.g.,ReenaAggarwalandJamesAngel,TheRiseandFalloftheAmexEmerging
CompanyMarketplace(Apr.1998)(notingthemanyfailedattemptstolaunchpublicequity
marketsforsmallstocksintheUnitedStatesandEurope),availableat
http://faculty.msb.edu/aggarwal/jfe51.PDF.

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[11]See,e.g.,id.
[12]See,e.g.,id.at11ReenaAggarwalandJamesAngel,TheRiseandFalloftheAmex
EmergingCompanyMarketplace,11(Apr.1998)(notingthemanyfailedattemptstolaunch
publicequitymarketsforsmallstocksintheUnitedStatesandEurope),availableat
http://faculty.msb.edu/aggarwal/jfe51.PDF.
[13]See,e.g.,id.at57.
[14]See,e.g.,id.at1415.Inaddition,AmexRule190directlyprohibitedmarketspecialists
frompromotingtheirstocks.Id.at15.
[15]Id.
[16]Id.at23.
[17]TheCommissionapprovedTheBXVentureMarketonMay6,2011,butthatmarkethas
yettolaunch.SeeSelfRegulatoryOrganizationsNASDAQOMXBX,Inc.OrderGranting
ApprovalofProposedRuleChangeandAmendmentNo.1TheretoandNoticeofFilingand
OrderGrantingAcceleratedApprovaltoAmendmentNo.2TheretoToCreateaListingMarket
ontheExchange,SECReleaseNo.64437(May6,2011),availableat
http://www.gpo.gov/fdsys/pkg/FR20110512/html/201111610.htm.
[18]PeterKoven,CantheoncemightyTSXVentureExchangebesaved?,FinancialPost(Dec.
27,2014)(notingthatCanadasjuniorstockmarketisincrisis),availableat
http://business.financialpost.com/2014/12/27/cantheoncemightytsxventureexchangebe
saved/Dr.VolkmarHable,WillCanadianregulatorsbeabletoavoidthefinalfatalcrashofthe
TSXVentureExchange?,Mining.com(Sept.2,2014)(notingthatCanadasTSXhassuffered
anunprecedentedhistoricalannihilationinshareholdervaluethathasnotbeenseeninthis
formonanyotherstockexchangeintheworld,followedbytheworstfundraisingcrisisin
history.ThelackoffundinghasreachedsuchacriticalstagethattheTSXVinitscurrent
constitutionappearstobeindangerofbecomingamemoryinCanadianhistorybooksinthe
notsodistantfuture.),availableathttp://www.mining.com/web/willcanadianregulatorsbe
abletoavoidthefinalfatalcrashofthetsxventureexchangetsxv/.
[19]SeeAaronHoddinott,TSXVentureExchange...BuyorSell?,PinnacleDigest(Apr.29,
2012)(notingthatTSXVentureExchange,theCanadianventureexchangehasalwaysbeena
boom/bustexchange.It'sextremelyvolatile.Theexchangehasexistedfor11yearsandduring
thattime,ithasgonethrough7bearmarketsofitsown(marketdownturnsof20%or
more).),availableathttp://www.pinnacledigest.com/blog/aaronhoddinott/tsxventure
exchangebuyorsellPeterKoven,CantheoncemightyTSXVentureExchangebesaved?,
FinancialPost(Dec.27,2014)(notingthatliquidityonmost[TSX]stocksisverypoor,which
makesitdifficultforthemtobebidanywherebutdown.),availableat
http://business.financialpost.com/2014/12/27/cantheoncemightytsxventureexchangebe
saved/SridharArcot,JuliaBlack,andGeoffreyOwen,Fromlocaltoglobal:TheriseofAIMas
astockmarketforgrowingcompanies,4(Sept.2007)(notingthat[l]iquidityamongAIM
stocksvarieswidelystockswiththehighestcapitalisationandthelargestfreefloatshow
liquiditylevelsthatarecomparabletotheMainMarket,butatthelowerendofthemarket
thereisalargenumberofilliquidstocks),availableat
http://www.lse.ac.uk/intranet/LSEServices/communications/pressAndInformationOffice/PDF/FU

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LLREPORTAIM.pdfReenaAggarwalandJamesAngel,TheRiseandFalloftheAmexEmerging
CompanyMarketplace,6,23(Apr.1998),availableat
http://faculty.msb.edu/aggarwal/jfe51.PDF.ProfessorsAggarwalandAngelnotethatmost
ventureexchangesinEuropesufferedfromsevereilliquidity,andthattwooftheECMs
originalfirmsvoluntarilywithdrewfromtheexchangebecausetheywerealmostilliquidonthe
[ECM],andwouldsometimesgoanentireweekwithouttrading.Id.at6,23.Buttheanalysis
performedbyProfessorsAggarwalandAngelfoundthattheECMsresultsweremixed.
Specifically,theyfoundthatbeinglistedontheECMincreasedaveragedailytradingvolume,
onemeasureofliquidity,for21firms,andthatitdecreaseddailytradingvolumefor14firms.
Id.at17.
[20]Inthisregard,certainExchangeActprovisionsmaylimittheCommissionsabilityto
approverulesproposedbyventureexchangestocentralizetradingontheirplatforms.For
example,whileExchangeActSection11A(c)(3)allowstheCommissiontoprohibitbroker
dealersfromexecutingcertaintransactionsoffofanexchange,theCommissioncaninvokethis
authorityonlyifcertaincriteriaaremet,suchasthattherestrictionistheonlylawfulmeansof
maintainingorrestoringfairororderlymarkets.See15USC78k1(A)(c)(iii).Anotherprovision
implicatedbyventureexchangesisExchangeActSection12(f),whichlimitstheamountoftime
thattheCommissionmayprohibitunlistedtradingofaninitialpublicoffering.See15USC78(l)
(f).
[21]JointIndustryPlanBATSExchange,Inc.,BATSYExchange,Inc.,ChicagoStock
Exchange,Inc.,EDGAExchange,Inc.,EDGXExchange,Inc.,FinancialIndustryRegulatory
Authority,Inc.,NASDAQOMXBX,Inc.,NASDAQOMXPHLXLLC,TheNasdaqStockMarketLLC,
NewYorkStockExchangeLLC,NYSEMKTLLC,andNYSEArca,Inc.NoticeofFilingof
ProposedNationalMarketSystemPlantoImplementaTickSizePilotProgramOnaOneYear
PilotBasis,SECReleaseNo.3473511(Nov.3,2014),availableat
http://www.sec.gov/rules/sro/nms/2014/3473511.pdf.
[22]JosephGerakos,MarkLang,andMarkMaffett,ListingChoicesandSelfRegulation:The
ExperienceoftheAIM,7(May2011)(notingthat,[c]omparedwithfirmsonotherexchanges
andcontrollingforavarietyoffactors,AIMfirmsperformpoorlyonalmosteverydimension.
Perhapsmosttellingly,AIMfirmpostlistingreturnssignificantlyunderperformpostlisting
returnsonothermarkets.),availableat
https://www.kellogg.northwestern.edu/accounting/papers/Lang.pdf.
[23]SridharArcot,JuliaBlack,andGeoffreyOwen,Fromlocaltoglobal:TheriseofAIMasa
stockmarketforgrowingcompanies,4(Sept.2007)(notingthatalargeproportionofAIM
companiesareearlystagebusinessesand/oroperatinginhighrisksectors....),availableat
http://www.lse.ac.uk/intranet/LSEServices/communications/pressAndInformationOffice/PDF/FU
LLREPORTAIM.pdfInvestopedia,TSXVentureExchange(notingthatCanadasTSXVenture
Exchangeishometoalotofhighriskpennystocks),availableat
http://www.investopedia.com/terms/t/tsxventureexchange.aspReenaAggarwalandJames
Angel,TheRiseandFalloftheAmexEmergingCompanyMarketplace,24(Apr.1998)(noting
thatthecompaniesthatfirstjoinedtheECMwererelativelysmall,havingamedianmarket
capitalizationof$18millionandamedianmarketpriceof$3.00pershare,andthatmostof
thecompaniesthatsubsequentlyjoinedtheECMcamefromthePinkSheetsor...were
privatefirmswhichhadnopublicmarketfortheirstocks),availableat
http://faculty.msb.edu/aggarwal/jfe51.PDFHeatherConnon,ShouldyouinvestintheAIM

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market?,Moneywise(Apr.6,2011)(notingthatsmallcompaniescomprisethebulkofLondons
ventureexchange,AIM,withonly78ofthe1,182companieslistedtherehavingmarket
valuationsofatleastGBP250million),availableat
http://www.moneywise.co.uk/investing/stocksandshares/shouldyouinvesttheaimmarket.
[24]JosephGerakos,MarkLang,andMarkMaffett,ListingChoicesandSelfRegulation:The
ExperienceoftheAIM,6(May2011)(notingthat,[c]omparedwithfirmsonotherexchanges
andcontrollingforavarietyoffactors,AIMfirmsperformpoorlyonalmosteverydimension.
Perhapsmosttellingly,AIMfirmpostlistingreturnssignificantlyunderperformpostlisting
returnsonothermarkets.),availableat
https://www.kellogg.northwestern.edu/accounting/papers/Lang.pdf.SeealsoKyleCaldwell,A
3,500pcriseora96pcfall:thebestandworstAimshares,TheTelegraph(Aug.8,2014)
(notingthatcompanieslistedonLondonsventureexchange,calledAIM,arenormallysmall
businessesandthereforemuchriskierthanthebigbluechipfirmsfoundintheFTSE100.),
availableathttp://www.telegraph.co.uk/finance/personalfinance/investing/isas/11018306/A
3500pcriseora96pcfallthebestandworstAimshares.html.
[25]TelephoneInterviewbyNeilLombardo,CounseltoCommissionerLuisA.Aguilar,with
ProfessorJamesAngel,McDonoughSchoolofBusiness,GeorgetownUniversity(Feb.28,2015)
(notingthattheNasdaqbeganasamarketplaceforsmallandmidsizedcompanies)Joseph
Gerakos,MarkLang,andMarkMaffett,ListingChoicesandSelfRegulation:TheExperienceof
theAIM,2(May2011)(notingAIMsrelativesuccessinattractinglistingsandfurthernoting
thatAIMssuccesshasspawnedthelaunchofsimilarmarketsinavarietyofcountries),
availableathttps://www.kellogg.northwestern.edu/accounting/papers/Lang.pdfSimone
Filippetti,Milans2014IPOs:5newcompanieslisted,but5withdrew,Italy24(Jan.5,2015)
(notingthesuccessofItalysventureexchange,AIMItalia),availableat
http://www.italy24.ilsole24ore.com/art/markets/20150102/milans2014ipowithdouble
signdebutssetbackbywithdrawalsrecordfortheaim141230.php?uuid=ABN8f3XC.
[26]TelephoneInterviewbyNeilLombardo,CounseltoCommissionerLuisA.Aguilar,with
ProfessorReenaAggarwal,RobertE.McDonoughProfessorofFinanceandDirector,
GeorgetownCenterforFinancialMarketsandPolicy,McDonoughSchoolofBusiness,
GeorgetownUniversity(Mar.1,2015)TelephoneInterviewbyNeilLombardo,Counselto
CommissionerLuisA.Aguilar,withProfessorJamesAngel,McDonoughSchoolofBusiness,
GeorgetownUniversity(Feb.28,2015)seealsoReenaAggarwalandJamesAngel,TheRise
andFalloftheAmexEmergingCompanyMarketplace,24(Apr.1998),availableat
http://faculty.msb.edu/aggarwal/jfe51.PDF.Intheir1998paper,ProfessorsAggarwaland
Angelobservedthatsuccessfulventureexchanges,likeJapansversionofNasdaq,whichis
calledJasdaq,sharecertaincharacteristics.Specifically,theynotethattheseexchanges(i)
grewoutofpreexistingoverthecountermarkets(ii)weredealermarkets,ratherthan
auctionmarketsand(iii)areseparateentitiesfromothernationalexchanges,whichallows
themtofocusonservingtheirclientele.ButProfessorsAggarwalandAngelalsonotethat
Londonsventureexchange,AIM,isahybridmarketthatcontainselementsofbothanauction
andadealermarket.Id.
[27]TelephoneInterviewbyNeilLombardo,CounseltoCommissionerLuisA.Aguilar,with
ProfessorReenaAggarwal,RobertE.McDonoughProfessorofFinanceandDirector,
GeorgetownCenterforFinancialMarketsandPolicy,McDonoughSchoolofBusiness,
GeorgetownUniversity(Mar.1,2015)TelephoneInterviewbyNeilLombardo,Counselto

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CommissionerLuisA.Aguilar,withProfessorJamesAngel,McDonoughSchoolofBusiness,
GeorgetownUniversity(Feb.28,2015)SusanneEspenlaub,ArifKhurshed,andAbdulkadir
Mohamed,IsAIMaCasino?AstudyofthesurvivalofnewlistingsontheUKAlternative
InvestmentMarket(AIM)(Nov.2009)(notingthatfirmageandsize,aswellasthequalityof
thefirmssponsor,significantlyincreasethesurvivaltimesoffirmsadmittedtotheAIM),
availableathttps://research.mbs.ac.uk/accounting
finance/Portals/0/docs/IsAIMaCasinoAstudyofthesurvivalofnewlistings.pdf.
[28]TelephoneInterviewbyNeilLombardo,CounseltoCommissionerLuisA.Aguilar,with
ProfessorReenaAggarwal,RobertE.McDonoughProfessorofFinanceandDirector,
GeorgetownCenterforFinancialMarketsandPolicy,McDonoughSchoolofBusiness,
GeorgetownUniversity(Mar.1,2015)TelephoneInterviewbyNeilLombardo,Counselto
CommissionerAguilar,withProfessorJamesAngel,McDonoughSchoolofBusiness,Georgetown
University(Feb.28,2015).
[29]ThisdatacomesfromaggregatingnumbersfromtheOTCMarketsGroupofficialwebsite
reflecting2014tradingstatisticsfortheOTCQX,OTCAB,andOTCPinkmarketplacesand
FINRAswebsitereflecting2014tradingstatisticsfortheOTCBB.SeeOTCMarketsGroup
Reports2014TradingStatisticsandHighlights,availableat
http://www.otcmarkets.com/stock/OTCM/news/OTCMarketsGroupReports2014Trading
StatisticsandHighlights?id=96163,andFINRAOvertheCounterEquities,MarketStatistics,
HistoricalData,availableathttp://otce.finra.org/MSHistoricalDataAnnual/.
[30]SeeExchangeActRule15c211,17CFR240.15c211.
[31]FINRAimplementsExchangeActRule15c211throughitsRule6432,whichprohibitsa
memberfrominitiatingorresumingthequotationofcertainnonexchangelistedsecuritiesin
aquotationmediumunlessthememberhasdemonstratedcompliancewiththerequirementsof
ExchangeActRule15c211pertainingtothereviewandmaintenanceofinformationaboutthe
securityandtheissuer.Forthesepurposes,FINRAdefinesnonexchangelistedsecurityas
anyequitysecurity,otherthanarestrictedequitysecurity,thatisnottradedonanynational
securitiesexchange.TodemonstratecompliancewithFINRARule6432andExchangeActRule
15c211,amembermustfilewithFINRAaForm211,togetherwiththeinformationrequired
underExchangeActRule15c211(a),atleastthreebusinessdaysbeforethequotationis
publishedordisplayed.OnceabrokerdealerhasfiledaForm211withrespecttoasecurity,
andthatForm211isclearedbyFINRA,thesecuritymaybecomepiggybackeligibleprovided
thequotingactivitymeetstherequirementsofExchangeActRule15c211(f)(3).ExchangeAct
Rule15c211(f)(3)setsforthfrequencyofquotationrequirementswhich,ifmet,allowbroker
dealerstopublishquotationsinthesecuritywithoutmaintainingtheinformationrequiredby
ExchangeActRule15c211orfilinganewForm211.
[32]SeePublicationorSubmissionofQuotationsWithoutSpecifiedInformation,SECRelease
No.3439670,availableathttp://www.sec.gov/rules/proposed/3439670.txt.
[33]SeeCommissionerLuisA.Aguilar,Revisitingthe"AccreditedInvestor"DefinitiontoBetter
ProtectInvestors(Dec.17,2014),availableat
http://www.sec.gov/news/statement/spch121714laa.html.AtthatDecember2014meetingof
theAdvisoryCommitteeonSmallandEmergingCompanies,Inotedthatthereisnothinginthe
accreditedinvestordefinitionthathelpstoidentifywhetherindividualshavethefinancial

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sophisticationand/orinvestmentexperiencetobeabletoassesswhetheranyparticular
investmentisappropriateforthem.Ialsonotedthat[a]saresult,thesingleworkingparent
withthreechildren,thewidowwiththeinheritance,andtheretireealldeservethe
Commissionsattentiontomakesuretheyarenotmademorevulnerablebyanaccredited
investordefinitionthatmayfailtodistinguishbetweenindividualswhocanprotecttheirown
interestsandthosewhocannot.Forthesereasons,itisentirelyappropriatefortheCommission
toreviewwhethertheaccreditedinvestordefinitionisaccomplishingitsintendedgoals.See
id.

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