SEC Small Business Capital Formation Office Sends Report to Congress, Provides Policy Recommendations: Will the SEC Pursue the Advice?

Today, the Securities and Exchange (SEC) Office of the Advocate for Small Business Capital Formation delivered a report to Congress on the SEC’s 40th Annual Small Business Forum.

The report, embedded below, recaps several meetings held in the past year (May) that shared front-line experience from individuals in the capital formation sector – including underserved segments.

The Office of the Advocate was created in recognition of the fact that too frequently smaller businesses are ignored as large firms capture the bulk of policy attention.

In the report, multiple policy recommendations are outlined to improve access to capital. Many of these suggestions are not new but the regulatory environment tends to move slowly even while many of these items do not necessitate legislation. Included on the list are the following initiatives:

  • Ensure capital raising rules provide equitable access to capital for underrepresented founders and investors.
  • Establish a micro-offering exemption with minimal disclosure requirements.
  • Revise Regulation Crowdfunding to remove the GAAP financial statement requirement for businesses seeking to raise a small amount.
  • Provide state preemption for secondary transactions for shares issued under Regulation A and Regulation Crowdfunding.
  • Clarify the status of digital assets to make clear when it is a security.
  • Expand the accredited investor definition to include other measures of sophistication, such as specialized industry knowledge or professional credentials.
  • Expand retail investor access to funds that invest in private offerings and support underrepresented entrepreneurs.
  • Expand the accredited investor definition to include an investor certification course or test whose curriculum has been approved by FINRA or the SEC.
  • Create more and better wealth-building opportunities for retail investors to build and support resilient and equitable local economies.
  • Adopt rules and coordinate with the states to allow community investment funds with sufficient regulatory oversight and flexibility to pursue community-based investments.
  • Increase the number of investors allowed in 3(c)(1) funds above 99 investors.
  • Increase the $10 million cap for 3(c)(1) qualified venture capital funds to allow a larger number of investors in smaller funds.
  • Support underrepresented and emerging fund managers and their investors through targeted resources, in collaboration with other federal agencies.
  • Expand venture capital funds’ qualifying investments to include fund-of-funds investment in another venture capital fund, secondary securities acquired from founders and early-stage investors, and follow-on investments in emerging growth companies.
  • Improve research coverage of smaller public companies in light of challenges from the Global Research Settlement, FINRA 2241, MiFID II, and other obligations on broker-dealers.
  • Increase the public float thresholds in the “smaller reporting company” and “accelerated filer” definitions.
  • Increase the transparency of short selling and dark pool activities.
  • Facilitate the creation of venture markets that provide investors with a transparent and regulated environment for trading in stocks of smaller companies.
  • In connection with any new environmental, social, or governance (ESG) disclosure requirements, provide exemptions or scaled requirements for small and medium-sized companies.

The document notes that “the Commission will consider Forum recommendations alongside other public comments for relevant policy initiatives.” Some of these items are currently on the SEC’s regulatory agenda. The goal of broadening the definition of an accredited investor to enable sophisticated individuals to participate in more private securities offerings has been discussed for years and is one of the SEC’s topics it would like to address – but will the Commission take the definition in a better direction?

Each of the above recommendations is followed by a Commission response –  many of which indicate the SEC will “continue to consider” the request and comments received. In the coming months, we will know better if the SEC is inclined to improve access to capital or, perhaps, make it more difficult for smaller firms to raise the growth capital they need to succeed.



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