The SEC Small Business Forum Provides 20 Recommendations to the Commission. Most will be Ignored.

The SEC’s annual Small Business Forum took place earlier this year, and in recent days, the report from the gathering was published. The Forum has taken place for more than 40 years, and while the participants regularly provide good recommendations to the Commission, few will result in actual policy changes or regulatory improvements.

The SEC’s Office of the Advocate for Small Business Capital Formation led the meeting as it has in recent years. The Advocate is a relatively new entity mandated by Congress with a mission to support smaller firms, which are too frequently ignored by the SEC as the regulator is more geared to dealing with larger firms as well as pursuing enforcement actions. Yet while Congress’ intent was admirable, the reality has been somewhat disappointing as the SEC tends to ignore the Advocate as it pursues its own short-term goals and political ambitions.

So, what are this year’s policy recommendations that emerged from the Forum this past April? The list is below, and you may download the entire report here.

  • Expand the Accredited Investor Definition to achieve greater diversity among startup investors and entprenerues.
  • Expand the Accredited Investor definition to include additional measures of sophistication.
  • Harmonize the annual reporting requirements for issuers that utilize exempt pathways, such as Regulation Crowdfunding (Reg CF) and Regulation A (Reg A+).
  • Expand the Accredited Investor definition to include any person who invests not more than 10% of the greater of their annual income or net assets.
  • Do not revise the Accredited Investor definition to make it more difficult to qualify based on wealth thresholds.
  • Ensure capital raising rules provide equitable access to capital for underrepresented founders and investors.
  • Collaborate with market experts to establish a regulatory framework for finders that includes an exemption from broker-dealer registration and helps facilitate small business capital formation.
  • Support entrepreneurs, including underrepresented founders, who lack the technical assistance to understand how to access capital from investors.
  • Improve the exempt offering framework to reduce the concentration and increase diversity – access to capital should not be practically limited to only rich people the company knows.
  • Create a new private fund exemption to allow states to foster intrastate and regional funds focused on community-based investing that is open to non-accredited investors.
  • Support underrepresented emerging fund managers, specifically minorities and women, building funds that diversify capital allocation, engage sophisticated investors, and challenge pattern-matching trends.
  • Allow non-accredited investors to participate in venture capital funds.
  • Increase the number of investors allowed in 3(c)(1) funds – private funds structured in the traditional manner under Section 3(c)(1) of the Company Act above 100 investors.
  • Increase the number of investors and the capital limit for funds structured under Section 3(c)(1), including traditional 3(c)(1) funds as well as Qualified Venture Capital Funds to achieve greater diversity among startup investors and entrepreneurs.
  • Incentivize investors to invest in funds that support startup founders.
  • Revise Exchange Act Section 12(g) to increase the number of holders that are non-accredited investors and increase the asset threshold.
  • Before Considering any changes that increase the smaller public company requirements, narrowly tie any changes to an identified problem so smaller public companies can have a stable and predictable regulatory environment.
  • Facilitate the creation of venture markets that provide investors with a transparent and regulated environment for trading in stocks of smaller companies.
  • Revise the proposed 2022 Climate-Related Disclosure rules to exempt smaller reporting companies, non-accelerated filers, emerging growth companies and other midsized companies. If any of these issuers are subject to the rules, scale and delay the rules.
  • Improve public trading for small companies by requiring more disclosures about short selling, institutional holders, insider and affiliate holdings and transactions, paid stock promotions, and information about the security from transfer agents.

A good example of SEC failure is crafting rules for Finders. This is an issue that has been discussed and promoted as desperately needed to help smaller firms for many years with little action from the Commission. As for improvements to the Definition of an Accredited Investor, the Commission is actually working on the exact opposite as the above recommendation, as it intends to exclude more people in an upcoming proposal. So, while the list has many great proposals, there is little hope for change as outlined above. The actions of the current Commission, under the leadership of Chair Gary Gensler, have been described by some as the Anti-Capital Formation Commission.

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