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Empowering Entrepreneurs: Removing Barriers to Capital Access for Small Businesses

House Committee on Financial Services

Subcommittee on Capital Markets

Empowering Entrepreneurs: Removing Barriers to Capital Access for Small Businesses

Wednesday, February 8, 2023

Topline

  • Members focused in the differences between public and private markets and small and rural business issues.

Witnesses

Opening Statements

Chairwoman Ann Wagner (R-Mo.)

In her opening statement, Wagner said the need for capital access is critical and today’s legislation will increase competitiveness and opportunities for companies. Wagner also said healthy private and public markets can coexist and that the JOBS Act of 2021 was a step in the right direction but more remains.

Ranking Member Brad Sherman (D-Calif.)

In his opening statement, Sherman said they should be helping actual small businesses, not those like FTX. Sherman also said banks used to lend to small businesses that had the possibility of failing and that banks should have loans with some risk of loss.

Testimony

Mac Conwell, Founder and Managing Partner, RareBreed Ventures

In his testimony, Conwell said he fully supports the legislation proposed today and that there is a lack of capital particularly for founders of color. He said there has also been a lack of cultural competency when it comes to investing in founders who do not look like the investor. Conwell concluded by saying current rules limit the amount of capital and hinder innovation and economic growth.

Deborah Gladney, Co-Founder, WorkTorch

In her testimony, Gladney said she and her sister had to access their 401(k)s to start their business. Gladney said access to capital has stunted the success of many people of color and that it is in America’s interest to provide the capital.

Doug Ellenoff, Partner, Ellenoff Grossman & Schole LLP

In his testimony, Ellenoff said he supports all the bills presented today and that regulators are very uncomfortable with the idea of crowdsourcing. He pointed out 55% of small business owners who benefitted from crowdsourcing are people of color.

Darcy Howe, Founder and Managing Director, KCRise Fund

In her testimony, Howe said 70% of new jobs in Kansas City are from entrepreneurs and small business owners. She said she found that many women and people of color were not receiving any money to help jump start a business, which is why she created her fund. She concluded by saying passing today’s bills would allow for more participants and inclusivity.

Alexandra Thornton, Senior Director, Center for American Progress

In her testimony, she said a problem is that companies that already have high valuations can raise more through private markets. She said those companies do not have to provide basic audits to ensure accuracy of financial information. Thornton said Congress and the Securities and Exchange Commission (SEC) can take many steps to rebalance the public and private markets and make room for small businesses.

Question & Answer

Private vs Public

Wagner asked how private businesses would be affected if the SEC increased burdens. Ellenoff said it would be problematic and we should not focus on increased regulation. Wagner also asked how today’s bills would help small businesses. Ellenoff said fewer investors would be turned away and that many of those turned away now are women and people of color.

Sherman said not every business idea should be funded, but a few private companies should become public. He also asked if the witnesses could propose an idea that would liberalize or make the role for private placements tighter. Ellenoff said he likes the idea of what the JOBS Act of 2012 did. Thornton said the holder of record definition should be changed because a holder of record can mean something different than it used to.

Rep. Frank Lucas (R-Okla.) asked Ellenoff to discuss the disadvantages to company investors having access to both public and private markets. Ellenoff said access to both is equally important for learning how to invest and that crowd sourcing increases the exposure retail investors have.

Rep. Juan Vargas (D-Cal.) asked how the private market should be rebalanced, and Thornton said the holder of record definition needs to be clarified.

Small Businesses

Rep. French Hill (R-Ark.) asked how today’s ideas would help start-ups, and Howe said their networks are too small, and the legislation would expand that for them, helping them get more capital. Rep. Wiley Nickel (D-N.C.) asked how removing disclosures would impact small businesses, and Thornton said the disclosures are good for them and investors. She continued it would hurt them if there were less.

Rep. Dan Meuser (R-Penna.) asked Howe if the DEAL Act is a good bill, and she said it would help greatly with capital and funding.

Ranking Member of the full Committee Maxine Waters (D-Calif.) asked the witnesses to provide examples of how certain changes have affected small businesses trying to raise capital. Thornton said investors and companies need adequate information and that the SEC needs to be aware of the potential for systemic problems. Waters then asked Thornton her view on the exemptions originally meant for small businesses, and Thornton said only small businesses should have access to these exemptions.

Rep. Sean Casten (D-Ill.) asked if information should be provided to new investors, and Thornton said information should be required if access to capital is being expanded.

Rep. Andrew Garbarino (R-N.Y.) asked why Regulation A has been underutilized and how amendments to it would help small businesses raise capital. Ellenoff said in the last five years, it has raised $5 billion and that it has helped small businesses gain traction.

Rep. Emmanuel Cleaver (D-Mo.) asked what the challenges are for start-ups fundraising, and Gladney said the pre-revenue stage is the most difficult.

Rural Businesses

Rep. Alex Mooney (R-W.V.) asked why there is such a large discrepancy between small fund trends in rural and urban America. Howe said they all have different experiences and many are leaving rural America because it is not easy to raise funds there. Mooney then asked about the unique challenges they face. Gladney said networking in rural America is not easy, which is disadvantageous because it is a relationship-based business.

Rep. Zach Nunn (R-Iowa) asked how rural small businesses would benefit from these bills, and Conwell pointed out the bills allow for angel investors to be more active, so they could support businesses outside of hubs.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.