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Report On The 41st Annual Small Business Forum

The Office of the Advocate for Small Business Capital Formation (“Office”) has delivered a report to Congress following the 41st annual small business forum (“Report”).  The Report includes recommendations of the Office and its annual forum participants.  The forum itself featured panelists and discussions on (i) empowering entrepreneurs, including tools for capital raising; (ii) hometown entrepreneurship including how entrepreneurs can thrive outside of capital raising hubs; (iii) new investor voices including how emerging fund managers are diversifying capital; and (iv) small-cap world including what to know and how to think ahead.

I’ve been writing about the forum for many years and have even attended a few times.  Each year the topics are similar, but the recommendations tend to transform over time.  Last year the topics included (i) navigating ways to raise early rounds; (ii) diligence including how savvy early-stage investors build diversified portfolios; (iii) tools for emerging and smaller funds and their managers; and (iv) perspectives on smaller public companies.  For a review of last year’s recommendations, see HERE.

One thing that has not changed for the last several years is a clear focus on diversity including panel speakers and topics.  A strong message across the board is that women- and minority-owned businesses face the biggest challenges in the capital markets.  Though in its background discussion and statistical analysis on capital raising in general, the Office reported that Regulation Crowdfunding continues to grow and especially for women-founded, minority-founded, and geographically diverse companies across the U.S.  For example, 41% of crowdfunded issuers that raised $1 million or more had minority founders and 46% of crowdfunded issuers that raised $1 million or more had women founders.


The SEC’s Office of the Advocate for Small Business Capital Formation launched in January 2019 after being created by Congress pursuant to the Small Business Advocate Act of 2016 (see HERE).  One of the core tenets of the Office is recognizing that small businesses are job creators, generators of economic opportunity and fundamental to the growth of the country, a drum I often beat.

The Office has the following functions: (i) assist small businesses (privately held or public with a market cap of less than $250 million) and their investors in resolving problems with the SEC or self-regulatory organizations; (ii) identify and propose regulatory changes that would benefit small businesses and their investors; (iii) identify problems small businesses have in securing capital; (iv) analyze the potential impact of regulatory changes on small businesses and their investors; (v) conduct outreach programs; (vi) identify unique challenges for minority-owned businesses; and (vii) consult with the Investor Advocate on regulatory and legislative changes.

The SEC hosts the annual Government-Business Forum on Small Business Capital Formation pursuant to the Small Business Investment Incentive Act of 1980.  The SEC delivers a report to Congress each year following the forum.  Since its formation, the Office of the Advocate for Small Business Capital Formation has been responsible for the report’s preparation and dissemination.

Report on the 41st Annual Small Business Forum

                Empowering Entrepreneurs – Tools for Capital Raising

There are many entrepreneurs with great ideas but who lack knowledge about and experience with raising capital.  Moreover, many entrepreneurs who have a basic understanding of early-stage capital sources such as friends and family, angel investors, venture capital, private equity groups, and crowdfunding, are located in geographical regions without readily available resources.  One of the best resources that an entrepreneur can tap into is mentorship – i.e., connections with other business people that have successfully raised capital – and executed on their business models.

The largest barriers to early-round financings include: (i) networks and finding connections to investors; (ii) navigating laws, policies and regulations; (iii) investor bias; (iv) personal wealth or assets (finding accredited investors); (v) information, education and knowledge; and (vi) valuations or offering terms. In my experience, the biggest barrier to initial capital raising efforts is simply finding investors.  Once a company begins to raise capital, puts the funds to good use, and illustrates execution on its business plan, each round of capital raising becomes relatively easier.   However, businesses and founders should be particular to work with investors with the same goals and management views.

Although not in the Report, some basics on capital raising are worth covering.  Businesses and entrepreneurs should be prepared for capital raising opportunities including by maintaining complete and well-organized corporate records, an up-to-date business plan, executive summary or PowerPoint deck and up-to-date (conservative) projections.  Before a company can package a private placement offering or effectively negotiate with a venture or angel investor, it has to have its proverbial house in order.  See here for a discussion on pre-deal considerations, see HERE.

Preparation also means understanding various fund-raising options and structures.  All securities offerings must either be registered with the SEC or subject to an available exemption.  Generally, very early rounds of financing are completed with friends and family acting as the investor base, but even then, there must be an available securities law exemption.  Most friends and family rounds rely on an intrastate exemption, such as Rule 504 or Rule 147 (see here for more information on intrastate offerings – HERE) or Rule 506 where investors are accredited (see HERE and HERE for more information on Rule 506).  Likewise, when accepting funds from angel and venture capital investors, a company generally relies on Rule 506.

As a company passes the initial friends and family round, crowdfunding is a great option and gives entrepreneurs an opportunity to learn to pitch and present to a larger audience.  For more on crowdfunding, see HERE.  Now that the offering limit for crowdfunding has increased to $5,000,000 and special purpose vehicles can be used to streamline a cap table, crowdfunding has become and will continue to become a great option either concurrently with or before larger angel and VC rounds.  Ultimately a company can move to public Regulation A offerings (see HERE) and IPO.

In addition to understanding the allowable offerings, a business and entrepreneur needs to be prepared to discuss the offering structure.  An equity instrument can take the form of common stock, preferred stock, securities token, LLC membership interest, limited partnership interest, a warrant or option or any other right, title or interest in a company’s ownership, including its profits or revenue streams.  In addition, some equity instruments, such as preferred stock or LLC membership interests, can have numerous different features including dividend rights, voting rights, liquidation preferences, conversion rights, redemption or put rights, anti-dilution provisions and negative covenants, just to name a few.

A debt instrument can take the form of a promissory note, convertible note, or debenture each having the same general meaning.  A debt instrument can either be convertible into equity or not convertible.  Like equity interests, a debt instrument can have a plethora of features and deal terms to best suit the needs of the investor and business.  For a detailed discussion of investment structures, see HERE.

Reverting back to the Report, the forum participants made several recommendations to the SEC related to providing entrepreneurs with the necessary tools for capital raising efforts.  The SEC responses to the recommendations were unfortunately very generic and political, not providing any assurance of forward action.  The recommendations and SEC responses include:

  1. Recommendation – Ensure capital raising rules provide equitable access to capital for underrepresented founders and investors (I note this was the exact same recommendation made last year).

SEC Response – The SEC indicates that it is continuing to review the exempt offering rules and the Spring 2022 Regulatory Agenda lists further rule changes as an action item though such rule amendments have not yet been proposed (see HERE).  The SEC is very aware that minority founders are disproportionately impacted by a lack of capital resources, and several SEC committees have conducted studies on the topic and made recommendations.  Obviously federal rule making around disparate economic communities, including minority communities, poses challenges.  But in my view, the best impact the SEC could offer would be related to the accredited investor definition, by both declining to raise the raise the financial thresholds in the definition and by adding additional categories for qualification.

As an aside, the SEC did overhaul the exempt offering rules in November 2020.  For a summary of those rules, see my five-part blog series – HERE; HERE; HERE; HERE; and HERE,

  1. Recommendation – Support entrepreneurs who lack the technical assistance to understand how to access traditional capital.

SEC Response –The SEC offers the following resources for education and technical support:

  • Capital Raising Hub: a centralized portal for educational resources for entrepreneurs and their investors with tools to assist in raising capital from investors.
  • Cutting Through the Jargon: a glossary of key terms that makes the language of capital raising more accessible to small businesses and their investors.
  • Navigate Your Options: an interactive tool that explores regulatory pathways available to raise capital, through which users answer a series of questions to identify the most relevant pathways to raise capital based on their specific needs.
  • Capital Trends Maps: data on where capital is being raised across the country under various offering pathways.
  • Building Blocks: a suite of educational materials that break down fundamental securities law concepts into plain language.
  • Emerging Fund Managers: a series of virtual events to empower a new generation of investment decision makers and increasing diversity among capital allocators.
  1. Recommendation – Utilize technology and educational resources to help facilitate small business capital markets and decentralize and democratize capital markets.

SEC Response – The SEC referred to its response to the second recommendation above.

  1. Recommendation – In considering any changes to the private capital markets, ensure companies have viable pathways to access capital to allow growth and innovation.

SEC Response – The SEC is considering further amendments to the exempt offering rules. The SEC does not address how those amendments will assist in accessing capital, but rather states that “investor protection and investor confidence in capital markets provide the bedrock for small business capital formation,” which generally means greater and more difficult regulation.

  1. Recommendation – Revise Regulation Crowdfunding to permit investment companies to conduct a Regulation Crowdfunding offering.

SEC Response – As the prohibition originates from the statute (and not implementing rules), any change in this regard would require Congressional action.

Hometown Entrepreneurship – How Entrepreneurs can Thrive Outside of Capital Raising Hubs

The second topic the forum focused on how entrepreneurs can succeed outside of the traditional capital raising hubs such as Silicon Valley, Miami and New York.  This has been a topic, in one reiteration or another, every year but interestingly, this year, the forum speakers noted that investors are now increasingly seeking out opportunities in different locales.  Different regions can have advantages in terms of cost of living and the ability to find unique talent and work more closely with their customers.  Part of this shift comes from the pandemic and the realization that remote work is a viable and productive option.  Other factors include a recent uprising of successful tech hubs across the Midwest and in places like Austin, Texas, as well as a recognition of opportunity within tribal sovereigns and Native American communities, especially in sustainability sectors.

The forum participants made several recommendations to the SEC on this second topic.  The recommendations and SEC responses, include:

  1. Recommendation – Expand the accredited investor definition to achieve greater diversity among startup investors and entrepreneurs (I note that this is a recommendation almost every year).

SEC Response – The SEC is considering further amendments to the accredited investor definition, though I am concerned such amendments will increase the current financial thresholds and otherwise make it more difficult for middle Americans to invest.  The last amendment to the definition was in August, 2020 – see HERE.

  1. Recommendation – Expand the accredited investor definition to include additional measures of sophistication.

SEC Response – The last amendment added qualification based on certain professional certifications, designations, or credentials.  The SEC would consider designating additional qualifying professionals and will consider specific requests to do so.  Any request must address how a particular certification, designation, or credential satisfies the non-exclusive attributes discussed in the rule release.

  1. Recommendation – Expand the accredited investor definition to include any person who invests not more than 10% of the greater of his/her annual income or net assets.

SEC Response – The SEC will consider public comments on this point.

  1. Recommendation – In considering changes that raise the wealth thresholds in the accredited investor definition, consider the unintended consequences on access to capital in under-resourced and underrepresented communities.

SEC Response – The SEC will consider it.

  1. Recommendation – Finalize the Commission’s finder’s order.

SEC Response – This is not on the SEC agenda. Although the SEC proposed a conditional exemption for finders (see HERE), it does not go far enough, and again is not a priority.  I find the lack of attention to this much needed regulatory gap frustrating.

                New Investor Voices – How Emerging Fund Managers Are Diversifying Capital

The third topic of the forum focused on small and emerging fund managers and how they are diversifying capital.  The panel also discussed improvements in the ability of small funds to attract investments and partnerships with institutional funds.  However, significant progress is still needed in this regard.  The forum also noted that accessing venture capital funding remains very difficult for Black, Brown, Asian, Indigenous and other minority founders.

The recommendations and SEC responses on this third topic include:

  1. Recommendation – Create a new private fund exemption to allow states to foster intrastate and regional funds focused on community-based investing that is open to non-accredited investors.

SEC Response – The SEC will consider any recommendations.

  1. Recommendation – Increase the thresholds (number of investors and cap on fund size) allowed in 3(c)(1) funds to achieve greater diversity among startup investors and entrepreneurs.

SEC Response – A 3(c)(1) fund is a type of pooled investment vehicle that is excluded from the definition of “investment company” under the Investment Company Act of 1940 because it has no more than 100 beneficial owners and otherwise meets criteria outlined in Section 3(c)(1) of the 1940 Act. Any amendment to this provision would require congressional action.

  1. Recommendation – Support underrepresented emerging fund managers—specifically minorities and women—building funds that diversify capital allocators, engage sophisticated investors, and challenge pattern matching trends.

SEC Response – The SEC clearly believes that it already is making strides in this regard, citing initiatives including educational resources added to its website.  Like the rest of the responses, I’m sure this response did not resonate as a significant effort.

  1. Recommendation – Increase the number of investors allowed in 3(c)(1) funds above 99 investors.

SEC Response – Any amendment to this provision would require congressional action.

  1. Recommendation – Support underrepresented and emerging fund managers and their investors through targeted resources, in collaboration with other federal agencies.

SEC Response – The SEC believes it supports such efforts and indicates that it will consider any specific recommendations.

Small-Cap World –  What to Know and How to Think Ahead

The final topic of the forum focused on smaller public company (small-cap) issues.  Small-cap companies constitute the majority of public companies in the U.S. and are significant cultivators for innovation.

The top issues discussed include market volatility, costs of compliance, the burden of reporting requirements, short-termism or the pressure for short-term results and stock movement, obtaining research coverage and supporting trading volume and liquidity.  Generally, all smaller companies have the same top priorities including understanding their shareholder base, meeting the demands of investors including those focused on ESG issues, attracting more institutional investors, engaging with retail investors and communicating effectively with shareholders.

The recommendations and SEC responses on this final topic include:

  1. Recommendation – Modernize Section 17(b) of the Securities Act to warn against pump-and-dump schemes by requiring additional disclosure about paid stock promotion.

SEC Response – Section 17(b) of the Securities Act requires promoters to disclose certain information about their compensation. Any amendments to Section 17(b) would require Congressional action.

  1. Recommendation – Consider the impact of the proposed environmental, social, or governance (ESG) regulations on small and medium-sized companies, including whether such requirements will discourage companies from going public.

SEC Response – The SEC believes it is doing so already by excluding smaller reporting companies from Scope 3 emissions disclosures in its proposed climate disclosure rules.  On March 21, 2022, the SEC proposed rules that would require publicly reporting companies to include certain climate-related disclosures in their registration statements and periodic reports.  The rules are extremely robust and resulted in my longest blog series to date – eight segments.  The entire series can be read here – Part 1 – HERE; Part 2 – HERE; Part 3 – HERE; Part 4 – HERE; Part 5 – HERE Part 6 – HERE  Part 7 – HERE; and Part 8 – HERE.

  1. Recommendation – Modernize regulation of transfer agents in response to technological and market advancements to increase disclosures made available to broker-dealers to facilitate liquidity for smaller public companies while continuing to protect investors.

SEC Response – In 2015 the SEC published an Advance Notice of Proposed Rulemaking and Concept Release related to transfer agents (see HERE).  The SEC indicates it is still considering a rule change (though I note it is not on the regulatory Agenda).

  1. Recommendation – Increase transparency around short-selling activities and improve short-sale data.

SEC Response – On February 25, 2022, the SEC proposed a new rule and related form designed to provide greater transparency through the publication of short sale-related data to investors and other market participants. Under the rule, institutional investment managers that meet or exceed a specified reporting threshold would be required to report, on a monthly basis using the proposed form, specified short position data and short activity data for equity securities.

  1. Recommendation – Collaborate with NSCC, DTCC, clearing firms, and broker-dealers to improve the clearing and settlement process for small public companies.

SEC Response – The SEC will consider the recommendation.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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