SEC Small Business Capital Formation Advisory Committee Meeting

Securities and Exchange Commission

Small Business Capital Formation Advisory Committee Meeting

Thursday, April 2, 2020

Opening Statements

Carla Garrett, Corporate Partner, Potomac Law Group PLLC

In her opening statement, Garrett said it is important for the committee to recognize the extreme situation facing small businesses nationwide, as well as for committee members to present their observations from various areas of the marketplace and ideas about how the Securities and Exchange Commission (SEC) can address short-term capital needs. She noted that primary areas for discussion would include the primary operational challenges small businesses are currently facing, the challenges committee members are seeing small businesses face in accessing capital from investors, and any trends, expectations and predictions on changes to raising capital or investing that could arise given the current situation.

Chairman Jay Clayton, Securities and Exchange Commission

In his opening statement, Clayton called the COVID-19 pandemic an unprecedented national challenge that requires everyone to significantly change daily behaviors. He noted that small businesses have been significantly impacted by this, and it is important to explore how the capital markets can be used to assist them and facilitate capital formation for them. He said the SEC is trying to respond to this hardship and uncertainty, including by providing relief to companies regarding certain filing obligations as well as targeted relief in other areas to assist companies in entering the market, raising capital, and communicating with their investors.

Commissioner Hester Peirce, Securities and Exchange Commission

In her opening statement, Peirce said that the economic shutdown due to COVID-19 is particularly difficult for small businesses, adding that cooperation, creativity and flexibility will help us get through the crisis and transition back to normalcy. She said it is important to help businesses address their short-term capital needs so that they are able to maintain their long-term viability, and the SEC aught not tether itself solely to the existing regulatory framework in doing so. She said it is worth exploring whether a micro-offering exemption would “make sense” at a time like this, as well as examining whether recent amendments regarding private offerings “go far enough” in the current environment. Peirce said that the SEC should think in terms of preserving existing businesses, but also fostering entrepreneurial tendencies as opportunities outside the home shrink.

Committee Updates

Carla Garrett, Corporate Partner, Potomac Law Group PLLC

Garrett stated that her small business is applying for the federal assistance programs established under the CARES Act, saying they are designed to enable employers to retain their employees and pay overhead costs. She added that in her role as an attorney who advises small businesses, many of her clients have questions about how to apply for these federal programs and whether venture- and private equity-backed companies are eligible. Garrett noted that some merger and acquisition (M&A) deals have been put on hold. She concluded with a reminder that in addition to federal assistance, many large companies, foundations, state and local agencies and nonprofits also offer many forms of assistance and grants.

Jeffrey M. Solomon, Chief Executive Officer, Cowen, Inc.

Solomon said that his company made the decision early to have employees work remotely following a conference at which some attendees tested positive for COVID-19. He noted that they are mandated by FINRA and the SEC to have robust business continuity plans in place, which has helped the industry function during this difficult time. Regarding capital formation, he said that smaller clients are struggling as they figure out their business models. He added that some M&A deals are near closing but are waiting on regulatory approvals. He said that many family-owned businesses are less price-sensitive now to sell, and there will be many sellers at prices far more attractive than we have seen before.

Karen Mills, President, MMP Group, Inc.

Mills called this an unprecedented crisis for small business owners, noting that small businesses comprise almost half of the American workforce. She explained that millions of small businesses are sole proprietorships, and thanks to the CARES Act they are able to collect benefits and take advantage of other provisions. Mills noted that the millions of Main Street small businesses with employees on average have a 27-day cash buffer and are therefore starting to run out of cash. She said the goal is for these businesses to be able to “stay the course,” pay their employees, and “pick up where they left off” when the crisis is over. She referenced the Small Business Administration (SBA) disaster loans and small business provisions authorized in the CARES Act, though noted that questions remain regarding who is eligible.

Gregory Yadley, Partner, Shumaker, Loop & Kendrick, LLP

Yadley said that the fundamental focus of small businesses now is on worker safety, how to operate virtually, and how to “stretch cash.” He said there are challenges in accessing capital as people delay decisions, adding that if deals were not already close to the finish line they are being postponed and timelines are being stretched. Yadley said that there is skepticism regarding many traditional sectors such as hospitality and retail, but there is increased focus on investing in tech improvements in healthcare and communications as well as startups with minimal supply chain risk. He predicted that valuations would remain low after the crisis, uptake will be slower, and M&A will decrease for a few quarters. Yadley said that for more small businesses the common message is to save cash, extend their cash runway, and that growth is secondary to survival.

Youngro Lee, CEO and Co-Founder, NextSeed

Lee said that this crisis is “very bad” for small businesses and most people do not understand the “actual devastation” small businesses are currently facing as they either shut down or lay off employees and try to survive. He continued that people do not realize that if small businesses fail, the entire economy fails, calling small businesses the “backbone of the economy.” He said the only way the damage will be controlled is via “massive” government intervention, adding that what has been so far is not enough. Lee said the centralized way the SBA loans are being distributed is not efficient for small businesses, adding that some business owners do not want to take on more debt during this time and will choose to shut down instead. Lee continued that businesses also need regulatory relief to make it easier to crowdfund so they can tap private markets for their capital needs, saying the SEC has tremendous power to take emergency actions to enable the private markets to work for these businesses.

Robert Fox, National Managing Partner, Professional Standards Group, Grant Thornton LLP

Fox said that his company has seen a number of clients extend payment terms and seek fee reductions during this economic shock. He continued that deals are being delayed due to a lack of ability to forecast and price uncertainty. He added that many clients are tapping their lines of credit so they have cash in the bank. He said the SEC should think about ways for companies to have a safe harbor to take care of certain paperwork after the crisis so it does not get in the way of accessing much-needed funds, explaining that when companies are scrambling to survive, they may not always “dot I’s and cross T’s.”

Stephen Graham, Co-Chair, Fenwick & West LLP’s Life Sciences Practice

Graham explained his firm’s work with biotech companies focused on developing products and engaging in clinical trails rather than relying on revenue. He stated that things for the biotech industry have not ground to a halt like other industries. He noted that some M&A transactions have been put on a long pause and other deals are being “upended,” but for the most part he sees business in this sector continuing.

Brian Levey, Chief Business Affairs and Legal Officer, Upwork, Inc.

Levey said that small businesses are in survival mode and regulators need to make it as frictionless as possible to raise capital. He noted there is a restriction in the CARES Act on startups affiliated with venture capital and private equity from accessing assistance, saying these restrictions should be removed. Levey noted that it is important to educate small businesses on SBA loans as they decide whether to apply for them or for unemployment insurance.

Sara Hanks, CEO and Co-Founder, CrowdCheck, Inc.

Hanks said that one concrete way the SEC can help right now is to adjust the requirements of Regulation Crowdfunding. She said that historical financial statements are useless and irrelevant right now, so for a limited period companies should be able to disclose their debt positions rather than provide certain financial statements. She also said companies should be able to access those funds as soon as they hit their target, rather than waiting the required 21 days for disbursement, saying most restaurants only have enough cash on hand for 16 days.

Sapna Mehta, General Counsel & Chief Compliance Officer, Rise of the Rest Seed Fund; Associate General Counsel, Revolution

Mehta said that fundraising rounds for companies in retail, hospitality and coworking have fallen apart and such companies are in “desperation mode,” but noted that industries like biotech, healthcare and AI have not been as affected. He noted that some questions remain about the recently authorized assistance programs, including whether utilizing any of them preempts the use of another and whether it is best to use the SBA template form or for a business to speak directly with their home bank.

Catherine Mott, Founder and CEO, BlueTree Capital Group, BlueTreeAllied Angels, and BlueTree Venture Fund

Mott said companies should be thinking 18-24 months out regarding their cash conservation practices. She noted that the venture capital affiliation rule is limiting many companies under 500 employees that will need the support provided under the CARES Act, saying those companies should not be excluded from applying for loans.

Poorvi Patodia, CEO and Founder, Biena Snacks

Patodia said that some parts of her company’s business have been devastated and she expects long-lasting negative effects, particularly with new product launches. Regarding access to capital, she explained that her company had planned to do a fundraising round in the latter half of 2020, which it has put on hold. She said they are looking at ways to conserve the cash they do have in the interim.

Jason Seats, Chief Investment Officer, Techstars

Seats said that his company is seeing impacts in startup portfolios. He noted that the hope for a V-shaped recovery stems from the fact that this is a health crisis rather than primarily an economic crisis. Seats said that his company is focusing on shifting to remote work and their cash runway. He said the most common tactics he is seeing are a combination of reduction in force, salary cuts and furloughs, adding that many startups will fail due to lack of capital. He said he believes the stimulus package will be beneficial, but there is uncertainty about who can access the provisions.

Hank Torbert, President, AltaMax, LLC

Torbert said that his company developed survivability plans early, and as a designated essential business can continue to operate. He explained they are focusing on cash management and production optimization, noting that they have committed to not laying off any employees. He said the CARES Act is a “great lifeline” for small businesses, saying this environment is “dire” for many small businesses. He noted many M&A deals are not occurring due to extensive uncertainty.

Melanie Lubin, Maryland State Securities Commissioner

Lubin said that state securities regulators are working together to provide relief and have already provided such relief for financial professionals so they can handle matters that are difficult to do remotely. She noted that NASAA has a website with recommended relief and which states have adopted them.

Greg Dean, Senior Vice President, Office of Government Affairs, FINRA

Dean explained that FINRA is doing a lot to provide flexibility to small broker dealers and to conduct outreach to the industry., especially with small firms. He also noted they are working with state regulators and others to track shelter in place orders to help small broker dealers ensure they can work with their investors and ensure investors have access to their money as necessary.

Martha Legg Miller, Director, Office of the Advocacy for Small Business Capital Formation, Securities and Exchange Commission

Miller said that these conversations are vital to finding solutions. She said her office is tracking trends as firms move from seeking growth capital to survival capital and trying to provide resources. She noted that the SEC granted emergency relief for Regulation Crowdfunding and Reg A to provide additional time for filing, as well as has extended comment periods and moving to virtual outreach strategies.

Jay Clayton, Chairman, Securities and Exchange Commission

In his closing statement, Clayton said that the SEC recognizes the many issues raised in the meeting. He said he is in regular contact with the SBA and the Treasury Department, saying he would echo the issues raised to them as well. He said it is important to help businesses and workers get through this crisis, noting that people do not invest when they do not visibility into the future.

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