SEC Office of the Advocate for Small Business Capital Formation Submits Annual Report to Congress

The Securities and Exchange Commission (SEC), Office of the Advocate for Small Business Capital Formation, is a relatively new entity at the SEC. The Advocate was created in recognition of the fact that smaller firms in need of growth capital too frequently get ignored by regulators that focus much of their time on larger firms. The Advocate aims to support smaller firms by championing “pragmatic solutions so that small businesses—from startups to smaller public companies—and their investors can build great companies together using our capital markets.” As many people know, smaller firms and entrepreneurs are the engine of economic growth and prosperity and thus need better support from all policymakers.

Under the Advocates mandate, it must submit a report to Congress on annual basis. In an email distributed today along with the annual report, Martha Legg Miller, Director of the Office of the Advocate for Small Business Capital Formation, said the year had been one of challenges, but also “a banner year for capital raising, whether looking at the venture capital dollars invested into growth companies, the exit activity of later-stage companies into the public markets, or the reinvestment of investors’ returns put back into new funds that will support the companies of tomorrow.”

While the Advocate pursues significant outreach initiatives, engaging with smaller firms and underserved demographics, a good amount of energy is dedicated to improving access to capital. More specifically exempt offerings, including the various crowdfunding exemptions, and smaller initial public offerings as well as Angel activity and venture funding.

The report provides data points on the utilization of the various exemptions collected by the SEC’s Division of Economic and Risk Analysis (DERA). For the period from July 1, 2020, to June 30, 2021, this is how the various paths to capital formation break out:

  • Reg D 506b – $1.9 trillion
  • Reg D 506c (general solicitation) – $124 billion
  • Rule 504 – $313 million
  • Reg A+ – $1.7 billion
  • Reg CF – 174 million
  • Initial Public Offerings – $317 billion

Clearly, Reg D 506b is a key exemption that drives significant economic growth and is vital to the economic health of the country. The unfortunate part of Reg D is that only accredited investors may participate in these offerings and thus much of the population is disenfranchised and blocked from a key path to wealth creation.

Angel investors play an important role in the capital formation equation. The report claims that there were 334,680 active angels in the period measured. These individuals provided $25.3 billion in investment – a 6% increase from 2019.

The report also provides specific policy recommendations to the Commission and Congress. Some may gain traction and others may fall through the cracks. One example of a recommendation that has long hovered in regulatory purgatory is the Finder proposal for individuals or entities that help match money with founders. While the Advocate supports a framework that clarifies Finders, the current Commission has not included it on its regulatory agenda indicating it has little interest in moving forward with a helpful proposal.

The report is available below.

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