Recently, the annual report distilled from the SEC’s Small Business Forum was published. Once again, it outlined a series of requests for policymakers to enact to support smaller firms. The SEC’s Office of the Advocate for Small Business Capital Formation led the forum.
It is well known that the SEC tends to focus on larger firms, and regulation is not always fit for purpose, as smaller firms can have different needs. Much of the Commission’s effort tends toward investor protection concerns. At times, this leads to a loss of opportunity for smaller firms and retail investors as other demands are ignored.
Opening the document, it touts that 99% of all businesses are small businesses, and 78% of small business owners worry about access to capital. Gaining access to finance to grow a business may come from loans, friends and family, Angels/VCs, individuals, and more. Capital raising may benefit from online capital formation – investment crowdfunding.
Stacey Bowers, Director of the OASB, notes that “small businesses created over 43% of U.S. GDP last year.” This is a fact that everyone should appreciate. Support of smaller firms is vital for innovation, prosperity, and a growing economy.
So what does the Forum recommend of policymakers – including the SEC? Below is the list of requests the Forum participants, some have been requested before.
- Support entrepreneurs, including underrepresented founders, with modernized educational resources to allow businesses to better understand how to access capital, including capital from investors.
- Expand the accredited investor definition to include additional measures of sophistication, including through an investor certification course or test.
- Establish a regulatory framework for finders that includes an exemption from broker-dealer registration and helps facilitate small business capital formation.
- Expand regional, federal, and state options available for non-dilutive funding to support the earliest stages of entrepreneurship.
- Ensure capital raising rules provide equitable access to capital for underrepresented founders and investors.
- Bolster and expand tax incentives that promote equity ownership and drive investment in the startup and small business ecosystem.
- Focus SEC rulemaking efforts on reducing administrative and regulatory burdens on small businesses and their investors to improve capital allocation efficiency.
- Support underrepresented emerging fund managers—specifically diverse and women managers—who are building funds that diversify capital allocation, engage sophisticated investors, and challenge pattern-matching trends.
- Support companies that offer equity ownership to employees and gig workers and support policies that would better enable employee-owners to realize the value of their equity through transparency, appropriate tax policy, and access to secondary liquidity.
- Expand venture capital funds’ qualifying investments to include fund-of-funds investments in other venture capital funds and investments acquired through secondary transactions.
- Increase the $75 million public float threshold in the accelerated filer definition so that only larger filers are required to provide an auditor attestation of management’s assessment of internal control over financial reporting under SOX 404(b).
- Revise the “small entity” definition under the Regulatory Flexibility Act to better assess the regulatory costs of compliance for small and growing businesses.
- Improve public trading for small companies by requiring more disclosures about short selling, institutional holdings, insider and affiliate holdings and transactions, paid stock promotion, and information about the security from transfer agents.
- Revise the public float and revenue thresholds for smaller reporting companies and accelerated filers to be rolling averages instead of thresholds determined on a particular date.
- Revise Exchange Act Section 12(g) to remove the threshold for non-accredited investor holders and increase the asset threshold to $20 million.
Several of the recommendations above have been on the wish list for years.
Since its inception, the definition of an Accredited Investor has been an obtuse rule—disenfranchising most of America and deeming them too silly to make their own investment decisions. The current rule is based on a wealth metric. Meanwhile, everyone understands that having a big bank account does not necessarily indicate sophistication. Even more concerning is that the current leadership at the Commission wants to make it even more exclusionary than more inclusive.
Finders, a person or firm that connects investors with firms in need of capital, has been in need of an SEC for many years. The biggest beneficiary of a Finder’s rule will be individuals who lack wealthy connections. The SEC should have fixed this years ago.
Focusing on lessening regulatory and administrative burdens is the proverbial “no-brainer.” Yet, the Commission has proposed and enacted new rules at a blistering pace, swamping impacted firms and individuals’ ability to respond.
It is unfortunate that the SEC, under current leadership, has emerged as a feckless agency that has pursued political ambitions and sought to regulate digital assets through enforcement while ignoring a top mandate of enabling capital formation. This has led one SEC insider to label the agency the “Anti-Capital Formation Commission.”
As with previous year’s reports, this will be largely ignored by the people it is intended to guide.
You may read or download the report here.