SEC Small Business Capital Formation Capital Call

Securities and Exchange Commission

Small Business Capital Formation Capital Call

Thursday, January 23, 2020

Discussion

Martha L. Miller, Director, Office of the Advocate for Small Business Capital Formation

In her opening statement, Miller focused on the Office of the Advocate for Small Business (OASB) Capital Formation 2019 annual report, saying that the report provides context for the Office’s engagement with small businesses across the U.S. She also highlighted the OASB’s initiative to upload short videos about capital formation rulemaking to their website for companies to understand securities laws and rulemakings. Miller encouraged participants to review the report’s capital formation data and trends. Miller concluded by highlighting the five recommendations made by the OASB report. These recommendations are: 1) harmonize of the framework of the exempt offerings; 2) investor participation in private offerings; 3) engage investors via finders; 4) updates to crowdfunding rules; and 5) scale obligations for smaller, less complex reporting requirements for companies. She also encouraged participants to provide the OASB and the Securities and Exchange Commission (SEC) with any further feedback to improve capital formation.

Jennifer Riegel, Office of the Advocate for Small Business Capital Formation

In her opening statement, Riegel highlighted that the report provides additional data on private placement offerings, as well as initial public offerings (IPOs) and other registered public secondary offerings. Riegel said that significant capital formation comes from registered public offerings, followed by Regulation D and A offerings, according to data about the top six industries in the U.S. She continued that it is essential to understand the successes and difficulties of small businesses across regions in the U.S.

Riegel noted that when observing investment capital in a “vacuum,” personal funds and retained business earnings are typically offered to high net worth and high-income individuals. Riegel highlighted the decline of community banking and challenges in rural communities, which has led to the importance of angel investors to early-stage companies seeking equity in these communities. Riegel explained that angel investors are often accredited investors, mentioning that the SEC has made amendments to the definition of accredited investors and welcomed public feedback on the proposal. Riegel noted the emerging role of venture capitalists (VC) and private equity for companies that aim to go public and need assistance in maturation. She added that analysts expect late-stage VC and private equity-backed companies will be the next stage of IPOs.

Riegel also shared that there are current challenges for women and minority-owned companies in attracting investors and that women and minorities are underrepresented in the investor community. She stated that when minority entrepreneurs actively seek capital, they tend to find more success than women-owned businesses. Riegel concluded by highlighting the challenges rural areas confront when working to raise capital and the importance of crowdfunding in those communities.

Question and Answer

Miller was asked about the OASB’s plans for reducing crowdfunding costs for small businesses. There was a suggestion that she consider working with law schools in each state to offset costs, especially for minority and underserved communities. She responded that the OASB has discussed raising the cap on the amount that a small business can raise. Miller said that the hope is that a higher cap will help companies avoid using most of their proceeds to cover the fixed costs of crowdfunding. She added that many crowdfunding portals have agreed to negotiations to keep costs low to assist small businesses.

There was an inquiry about the timeline for the accredited investor definition changes. Miller was also asked how 506-c offerings would be impacted by changing the definition of accredited investors. Miller answered that the SEC passed the proposal in December, and it is currently open for public comment. She encouraged participants to provide their feedback on the proposal.

There was a question about potential investments in small banks. Miller said that making sure pathways for capital formation work well for banks is an area of focus for the OASB. Miller added that it is also critical to understand what gaps are left when community banks are not there to provide communities small-dollar loans.

Miller was asked about the impact of the Markets in Financial Instruments Directive (MiFID II) on small issuers. She stated that MiFID II could potentially change a lot of things, highlighting that 61 percent of exchange-related companies, with less than $100 million in market cap, are lacking in research coverage. Miller said this could decrease trading, which would reduce liquidity and increase the number of challenges for companies.

Miller was questioned about the OASB’s plans for 2020. She highlighted that the OASB implemented a 2019 intent and expectation blueprint, stating that the OASB met all of the metrics. She said the OASB would look for more opportunities to engage new, diverse voices, as well as provide educational opportunities for small businesses to understand securities laws and the available tools for capital raising.

Miller was asked for insight on plans to improve secondary private market trading. She responded that a lot of questions during the SEC’s harmonization proposal focused on private security offerings. Miller added that the SEC is actively analyzing secondary liquidity issues by looking through the current private market frameworks. She noted that the length of time a company remains private and an investor holds onto illiquid securities is increasing.

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