SEC Small Business Advocacy Office Issues Annual Capital Raising Report

In a 2023 Capital Raising Annual Report, the SEC Small Business Advocacy Office ("Office") reviewed data analysis and policy recommendations in support of small businesses and investors.

The Office provided data on the state of U.S. small business capital formation in each stage of the lifecycle of small and emerging businesses, mature and later stage businesses and small public companies. The Office said that it uses the data to evaluate the current flow of capital between investors and small businesses and to "better identify what tools, strategies, and approaches would be most helpful in crafting policy solutions." The data was derived from public filings with the SEC, as analyzed by the SEC Division of Economic and Risk Analysis ("DERA"), supplemented with data and analysis from third parties.

Key findings include the following:

• an increasing percentage of small businesses continue to experience financial challenges, access to capital remains a barrier to entry and growth for entrepreneurs and small businesses continue to struggle to shore up their capital needs;
• angel investors remain a significant source of early-stage capital, despite a drop in deal volume and size, first round funding (seed activity) slowed in both overall deal value and count and micro funding ($50 million or less) fell below pre-pandemic levels;
• regulated small business funding "pathways" showed mixed results: crowdfunding continues to increase, pooled funds account for the majority of funds raised under Regulation D and Reg A offerings (so called "mini-IPO" averaging $20 million) declined since 2021;
• venture capital fundraising (for later stage businesses) "slowed from the record highs of 2021 and 2022 and is on pace to set a 6-year low," but "over the past five years, the amount of capital that VCs have ready to invest . . . has continued to increase";
• the volume and number of initial public offerings has fallen significantly since its peak in the first half of 2021; and
• small public companies and new public companies face high regulatory costs as a percentage of their size and profit. "The regulatory costs for small public companies are disproportionate relative to their size because many costs are fixed."

The Office provided further data and analysis on capital raising in communities and across the country including on women business owners and investors, minority business owners and investors, natural disaster areas and rural communities.

The Office also reviewed its policy recommendations for regulators and legislators. These include recommendations to: (i) enhance tools for entrepreneurs and their investors to navigate complex securities laws; (ii) target regulatory changes to improve exempt offering pathways for small business capital raising; (iii) enhance ways to connect founders with investors; (iv) increase support for emerging fund managers; and (v) scale disclosures and harmonize requirements for small public companies to help them stay public.