Recap: House Subcommittee on Capital Markets Hearing on Empowering Entrepreneurs

February 20, 2023 @ 4:54 pm By JD Alois

Earlier this month, the House Subcommittee on Capital Markets, part of the House Financial Services Committee, held a hearing on Empowering Entrepreneurs. The specific topic was “Removing Barriers to Capital Access for Small Businesses.”

As everyone should understand, small businesses create around half of the jobs in the country, and this sector of economic activity is vital to fostering innovation, driving wealth, and creating jobs. All policymakers should do everything in their power to support smaller firms. The hearing memo stated that “committee Republicans believe that entrepreneurs and founders should raise money with as little friction as possible.” The hearing arrived near the anniversary of the JOBS Act of 2012, with some believing there is more work to be done. A long list of draft legislation was included with the expectation that some of the bills will receive bipartisan support, thus improving the chance the bills will become law.

The hearing witnesses included:

Mac Conwell, Founder and Managing Partner, RareBreed Ventures
Deborah Gladney, Co-Founder, WorkTorch
Doug Ellenoff, Partner, Ellenoff Grossman & Schole LLP
Darcy Howe, Founder and Managing Director, KCRise Fund
Alexandra Thornton, Senior Director, Center for American Progress

Ellenoff, well-known in the investment crowdfunding sector, advocated on behalf of expanding private markets “in a controlled and responsible manner.”

Ellenoff said the cost of being a public company is too burdensome, and compliance costs are compelling firms to remain private for as long as possible.

“Unquestionably, the current regulatory environment is unkind to being either a public company or a private company. There is a culture of regulation by enforcement, as well as, the convenient re-interpretation of rules and regulations that have been on the books for years and years.”

He added:

“Compliance is unquestionably complex and, in many cases, unclear. While regulators generally are available to provide guidance on how to proceed in a manner that they are comfortable with, there is inconsistency at times, even subjectivity to prohibit activity that it would appear they are uncomfortable with … At this time, I would however note that in our experience, much of the confusion seems by institutional intention and not by individual choice.”

McKeever E. Conwell, II, Managing Partner of RareBreed Ventures, said he was in full support of all seven bills being addressed today as they all address removing barriers to capital access for small businesses. [the list was later updated to 10 by the subcommittee] .Conwell launched Rarebreed due to the lack of access to capital for minority founders and those located outside of traditional capital hubs.

Deborah Gladney, CEO and co-founder of Worktorch, criticized the lack of access to capital as “stunting the growth of businesses.”

“Last year, startups with all-women founding teams like ours received just 1.9% of all venture dollars. And for black founders, we received just a mere 1%. As if the odds aren’t stacked up against us enough – 75% of all venture capital investments go to just three metro areas. And I can promise you, Wichita isn’t one of them.”

Noting that 75% of venture capital comes from three states: California, New York, and Massachusetts, Darcy A. Howe of the KCRise Fund, said the ICAN legislation would unlock the most access to capital for small venture funds. ICAN increases the amount of funding for certain VC funds as well as the number of eligible investors in the fund.

Alexandra Thornton, Senior Director at the Center for American Progress, was the lone witness taking a stance that seemed to be opposed to the hearing’s mission. She said the lack of funding is not what is holding entrepreneurs and smaller businesses back it is “the rules today allow companies with billion-dollar valuations, billions in revenues, and thousands of investors to never provide basic information to investors, regulators, or the public, and private funds to raise billions of dollars from underlying investors without basic expectations like timely, comprehensive, and reliable disclosures about their finances, governance, or operations.”

Thornton believes that Reg D, the most successful exemption that is a market valued at over $2 trillion, is being used to skirt disclosure requirements.

There is growing concern that the Securities and Exchange Commission will alter Reg D to the detriment of capital markets while cloaking the move as an act of virtue. An update to Reg D remains as one of the top items on the SEC”s regulatory agenda, including a higher hurdle for accredited investors and requirements for greater disclosure. Participants in the securities crowdfunding industry and capital markets are perplexed as to why the Commission would pursue such a radical and detrimental move.

Affiliated Legislation is below.

H.R. ___, the “Improving Crowdfunding Opportunities Act” (Rep. McHenry)

H.R. ___, the “Small Entrepreneurs Empowerment and Development (SEED) Act of 2023” (Rep. McHenry)

H.R. ___, to preempt blue sky laws for off-exchange secondary trading in companies who make available current public information, including information required by Regulation A or Rule 15c2-11.

H.R. ___, to direct the SEC to update its definitions of “small entities” under the Regulatory Flexibility Act to ensure that the SEC more carefully accounts for impacts on small businesses when pursuing rulemakings.