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Good afternoon. It is my pleasure to welcome everyone to this year’s Small Business Forum (“Forum”), which is the first Forum held at SEC headquarters since 2016 and the first in-person Forum since 2019. I hope that everyone takes advantage of the in-person interactions and networking opportunities this afternoon.
This year’s Forum groups various issues affecting small business capital formation into three categories, which are reflected in the three main panels: (1) early-stage capital raising, (2) growth-stage companies and smaller funds, and (3) small cap companies and the public markets. This grouping of topics highlights the importance of the securities laws at every stage of a company’s lifecycle. By enabling companies to raise capital through cost-effective regulations without sacrificing investor protection, the Commission has an important role in fostering innovation, creating jobs, and generating economic growth.
Starting with early-stage capital raising, the Commission should design regulations that enable entrepreneurs to raise capital without disproportionate compliance costs, especially in the form of legal fees. These costs usually arise from unnecessarily complex rules. When asked the question “what’s the offering exemption for the friends and family round?” the answer should not be “it depends,” followed by a discussion of seven factors requiring a chart to digest. While cost-effective regulations are always important, they are especially critical for early-stage capital raising by startup companies, whose cash flow and resources are often scarce. One extra dollar spent on legal fees is one fewer dollar available for developing innovative products or services. Accordingly, the Commission’s regulatory regime on this topic should be especially considerate of how the offering exemption will be practically used.
Turning to growth-stage companies and smaller funds, one of the key issues is how to provide retail investors access to these private companies. Such higher-risk, higher reward investments can help complete a diversified portfolio. Discussions of expanding retail access to private companies usually revolve around the accredited investor definition. It has been more than forty years since the Commission adopted the definition and established income and wealth as common ways for individuals to qualify as accredited investors. Consideration should be given to whether additional ways to qualify as an accredited investor are appropriate. Alternatively, is the “all or nothing” approach of the definition a sensible way of regulating investor participation? Or, should every individual be permitted to invest at least a small amount every year in private companies? These issues are worthy of further discussion and consideration.
Finally, for companies that have accessed the public markets, the Commission should ensure that their ongoing reporting obligations are proportionate to their size and resources. Under the Commission’s current rules, a company with a $250 million public float is subject to the same disclosure requirements as a company with a $250 billion public float. The Commission has not updated its thresholds for how companies qualify as an accelerated filer or large accelerated filer since those thresholds were established in 2005. While the Commission has made changes, as recently as 2020, to its “smaller reporting company” definition, the different filer categories are now complex and sometimes overlap. The result is that some smaller reporting companies must provide an auditor attestation of the company’s evaluation of its internal control over financial reporting, while others do not. A more harmonized regulatory regime for who qualifies as a large, mid-sized, and small company, together with scaled disclosure requirements, can help ensure that the Commission’s rules are tailored to a company’s sizes and resources, while still maintaining appropriate levels of investor protection.
I look forward to receiving a read out of the discussions from each of the panels and reviewing the policy recommendations. Thank you to Stacey [Bowers] and her team in the Office of the Advocate for Small Business Capital Formation for planning this event. Enjoy the Forum.
