SEC Officials Debate Approaches to Small Business Capital Formation
Commentary by Steven Lofchie
At an annual Government-Business Forum on Small Business Capital Formation (the "Forum"), SEC officials debated approaches to support the capital needs of small businesses.
Advocate for Small Business Capital Formation Martha Miller emphasized the importance of temporary crowdfunding relief as an example of helpful support to small businesses. The program expedites the offering process provided under Regulation Crowdfunding (see previous coverage). Ms. Miller noted that while Congress has taken legislative measures in response to the economic impact of COVID-19, the "consensus among many is that public assistance will not be enough."
Commissioner Allison Herren Lee encouraged solutions that would (i) leverage the effectiveness of the Small Business Administration's Paycheck Protection Program; (ii) help coordinate efforts with local regulatory authorities to aid small businesses; and (iii) promote educational initiatives. Additionally, she called on the SEC to address barriers to capital formation solutions for women- and minority-owned businesses.
Describing small businesses as "the engine of economic growth," Chair Jay Clayton argued for a "one size regulation doesn't fit all" approach.
Commissioner Hester M. Peirce urged consideration of the discrepancy between issuers who need a small sum of money and accredited investors who are willing to invest. She also highlighted potential measures to address the concentration of capital in coastal cities, such as:
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identifying regulatory factors that contribute to a concentration of capital;
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expanding the scope of the definition of an accredited investor to (i) account for income disparities across various U.S. geographic regions and (ii) include individuals that have completed a college course(s) on investing;
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implementing a micro-offering exemption to allow individuals to provide funding to entrepreneurs that they know; and
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making the temporary crowdfunding relief permanent, in addition to considering other viable options for small businesses.
Commissioner Elad L. Roisman urged small businesses to share their insights on how they raised capital during the period of COVID-19.
Commentary
The question of how to bring private capital from small investors into small businesses is a difficult one. It would likely mean reducing, at least to some degree, the protections provided small investors. There is no consensus among the regulators for allowing small investors to take additional risks.
Commissioner Lee, for example, has very clearly staked out a position in opposition to expanding the private placement exemptions. (See SEC Proposes to Ease Limits on Private Placements.) Likewise, state securities regulators have been generally hostile to any liberalization of the private placement rules. (See, e.g., NASAA President Urges Congress to Be "Skeptical" of Regulatory Liberalization in Response to the Pandemic.) Further, the tougher quasi-fiduciary standards in Regulation BI logically should serve to discourage broker-dealers from any attempts to sell securities in smaller, riskier companies to start-up investors.
Perhaps Commissioner Peirce's suggestions as to broadening the definition of accredited investor to include a knowledge component might gain some traction, but it is difficult to imagine any broad consensus that would facilitate investment by small investors in small businesses. To be fair, there are entirely reasonable arguments why this would be a risky course, as many small businesses fail, and their investors lose a significant amount of their investment.