SEC Advocate for Small Business Offers Policy Recommendations on Capital Formation
Commentary by Steven Lofchie
In its annual report, the SEC Office of the Advocate for Small Business Capital Formation offered recommendations to improve capital raising for entrepreneurs and investors.
For 2022, the Office found that almost all forms of crowdfunding for start-ups and small businesses continued to grow, with increasing support for women-founded, minority-founded and geographically diverse businesses. The Office highlighted the following trends during the year: (i) a decrease in IPO activity and (ii) a decline in Regulation A (re: small businesses) offerings after a peak in the third quarter of 2021. Additionally, the Office said that access to capital remains a persistent barrier to growth for all entrepreneurs and many small businesses have not recovered to pre-pandemic levels.
Based on feedback from small businesses and investors affected by the SEC's capital-raising rules, the Office put forth several policy recommendations, including:
-
improving access to tools and educational resources for investors and engaging with small businesses and investors to improve future materials;
-
modifying the definition of an "accredited investor" to allow for alternative methods to demonstrate financial sophistication; increasing the offering size threshold under which an issuer may meet its financial statement requirements under Regulation Crowdfunding, and prohibiting investment companies from using the exemption; easing the requirements associated with Regulation D ("Reserve Requirements of Depository Institutions") for small businesses;
-
clarifying the regulatory and legal obligations when engaging in certain "finders" activities involving accredited investors without registering with the SEC as a broker; and
-
scaling disclosure requirements to the size of the business.
Additionally, the Office reaffirmed the recommendations put forth in its 2021 Annual Report (see previous coverage).
Commentary
The Small Business Committee can produce recommendations, but they are not meaningful unless the SEC Commissioners are committed to regulations that will benefit small business. This means deregulation, because the most meaningful action the SEC can take is to reduce the regulatory burdens on small business. As illustrated by an exchange among the Commissioners (covered here), the current SEC Chair does not seem amenable. The most small businesses can hope for is that someone at the SEC is keeping a record of the recommendations for future use.