SEC Office of the Advocate for Small Business Capital Formation Releases First Report Examining Access to Finance for SMEs


The Securities and Exchange Commission (SEC), Office of the Advocate for Small Business Capital Formation, released its inaugural report on the ability of small businesses in the United States to access growth capital.

The lawyer is a newly formed sector of the SEC created by legislation enacted in the last days of the Obama administration.

The lawyer should provide assistance to small businesses, conduct outreach activities to better understand the barriers small businesses face when trying to access capital markets and, as required by law, must report of its conclusions to Congress each year. The Advocate’s mission is to give small businesses, the heart of the U.S. economy, a much needed voice in the halls of the SEC – an agency that typically focuses much of its attention on large corporations, sometimes at the bottom. detriment of the smallest. companies. A full description of the defender’s responsibilities is available here.

As the SEC took its time hiring a lawyer, in December 2018, the Commission selected Martha Legg Miller to manage this important position. She began her leadership in January (just in time for the government shutdown).

Legg Miller considers his office to be a “startup in government”. A business plan outlining the objectives has been published to help guide the Lawyer mission.

The report does a good job of outlining the options for all companies to raise capital through exempt and public offerings. It also breaks down historical data, showing Reg D as the most popular path (funding raised) and expected concentrations of capital raising activity on the coasts.

While a good chunk of the press is devoted to venture capital, angel investors, and online capital formation, the truth is that most start-ups are fundraising the old-fashioned way. Using their own money. Access to bank loans has declined and equity financing remains relatively low.

Accredited investors make up 13% of U.S. households, according to the report, a number that could soon change for the better if the SEC is successful.

With regard to venture capital, these companies (or individuals) only finance a small percentage of start-ups (0.5% per year) but where they do so, the impact on the economy is positive:

“The increased availability of venture capital finance in metropolitan areas has been correlated with job growth. “

Private equity is also involved: it finances companies at an advanced stage, “with the prospect of return after restructuring, realized through dividends and / or the sale of the target company, often financed by a combination of investor equity and debt ”.

The report highlights the fact that robust private markets have supplanted public markets to such an extent that fewer companies go public – and when they do, it’s at a later stage than in the past. (maybe due to excessive regulations + cost?).

It is a good report combining a lot of fragmented information that has been mentioned elsewhere in the past, but the Lawyer completes the puzzle of access to capital. The report claims that most small businesses are left out of the capital equation – even when support for small businesses and startups is vital for the health of the economy and overall prosperity. The problem is even worse in underserved markets such as minority businesses or communities outside of metropolitan centers known for innovation and access to venture capital.

So what should be done? The Advocate has compiled a solid list of necessary legislative and regulatory goals.

Top of the list is the SEC’s current consultation on regulatory harmonization:

“In meeting with companies and their investors across the country about capital formation, one of the most consistent criticisms voiced has been that the current framework for providing exemptions is complex and confusing. While the current rules contain a relatively large “menu” of tools for raising capital, the requirements of each differ and, in some cases, conflict. This difficult regulatory puzzle is understandably difficult to navigate, with each piece of the puzzle coming at different times and in response to different political demands, with origins dating back to 1933 with the passage of the Securities Act. A complex path to capital to grow, evolve and mature makes it all the more difficult for companies to meet our collective expectation of new entrants joining the public markets to supplant the roughly 50% drop in listed companies over the past two years. decades. It is imperative that companies and investors have navigable and functional tools for capital exchange in the early stages of pre-IPOs in order to build the pillars of the public procurement markets of tomorrow.

Other measures to improve access to capital for these small businesses include:

  • An update of the definition of qualified investor to expand access to a wider population.
  • Access of retail investors to private pooled funds
  • Clarity around “researchers” who “often bridge the gap between entrepreneurs who need funding and potential investors interested in supporting emerging companies by making introductions, often for a fee”.
  • Correct regulatory crowdfunding (Reg CF) by increasing the funding ceiling, authorizing SPVs, etc.
  • Phased reporting obligations for small businesses.

Crowdfund Insider contacted David Burton, a senior economic policy researcher at the Heritage Foundation who heads a very large task force on securities regulation in Washington, DC, for his comments on the report. Burton had this to say:

“The report provides good information on entrepreneurial capital formation and office activities. It accurately identifies a number of serious regulatory issues and offers solutions. The solutions offered in terms of crowdfunding are specific and exploitable. The proposed broadening of the definition of qualified investor is actionable but rather modest in scope. The solutions proposed concerning “harmonization”, access for retail investors to shared vehicles, research tools and modulated obligations for small reporting companies are very general and not really usable. There is still work to be done. “

This is a commendable first report from the Lawyer. If you are into politics and understand the deep benefits of small business then this is a must-read report. Hopefully Congress will take the time to review this document and take action in the areas that require their attention. The SEC is already moving in the right direction on several of these things, such as an update to the definition of an accredited investor.

The report is integrated below.

2019_OASB_Annual report

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