On November 30, 2017, the Securities and Exchange Commission (SEC) held its 36th annual Government-Business Forum on Small Business Capital Formation at the University of Texas at Austin. This forum, mandated by the Small Business Investment Incentive Act of 1980, provides a platform to address impediments to small business capital formation and to determine whether those impediments can be reduced or eliminated.
This was one of the few times the SEC has held the forum outside of Washington, DC, which brought diverse viewpoints to the discussions. The panel included a local small business owner, the Commissioner of the Vermont Department of Financial Regulation, the Vice President and Head of Strategy and New Markets of the NASDAQ Private Market, and the founders and CEO’s of an electronic investment banking platform, a virtual reality tech startup, a private angel investor network, and the first SEC-registered crowdfunding portal in the US.
An overarching theme of the morning panel was that a one-size-fits-all approach is not possible for all small businesses due to the diversity of companies and investors when it comes to capital formation, especially for businesses located in middle America. In her opening remarks, SEC Commissioner Kara M. Stein stressed the importance of hearing “diverse voices outside the confines of Washington, D.C.,” stating that “we need to continue to hear the views of those outside the Capital Beltway, where the cars that cost the most money, and have the loudest horns, are often the most prized.” The panelists discussed how small businesses have raised capital using recent changes to SEC rules, like the new Rule 147A, which went into effect April 20, 2017, and the Regulation A rules, which were modernized in 2015.
The panel ended with suggestions of possible changes to existing SEC rules. Several panelists gave examples of capital raising successes by local small businesses (including Vermont maple syrup companies and craft breweries) taking advantage of the new SEC Rule 147A. Rule 147A modernized intrastate and smaller private offerings of securities by providing an exemption from SEC registration for intrastate offerings. Rule 147A allows crowdfunding offers by entities incorporated outside of the state in which the entity is selling securities and allows general solicitation outside of the state as long as the ultimate securities purchasers are residents of the state.
Crowdfunding was discussed at length, both in the context of the increasing popularity and limitations of Kickstarter-type campaigns for capital raising and new regulation of crowdfunding portals. Panelists also discussed the importance of the new SEC Regulation A+ rules which became effective in June 2015. Sebastian Abero, the head of the SEC’s Office of Small Business Policy advised that there have been 69 completed Reg A+ offerings through September 2017 raising a total of $611 million. One of those companies was Virtuix, a virtual reality platform which recently raised $7.7 million using the crowdfunding platform SeedInvest. Jan Goetgeluk, CEO of Virtuix, explained how the majority of the $60 million they have raised has come from crowdfunding, and why traditional fundraising was not as successful for them because of the complicated nature of a tech product that not all venture capital firms could conceptualize. Crowdfunding was a natural fit and allowed them to raise funds from their customers and fan base. This is encouraging in that the prior Regulation A rules were rarely used because, among other things, they included a $5 million cap on the offering amount. Others speaking at the forum pushed to increase the maximum that can be offered in Reg A+ deals in any 12-month period from $50 million to $75 million and talked about ways to facilitate trading of Regulation A+ securities in the over-the-counter markets.
Some of the panelists made suggestions for amendments to existing securities regulations, including amending Broker-Dealer registration rules to allow finders to make introductions without registering as Broker-Dealers. The inability to use unregistered finders is seen as an impediment to capital raising by small businesses. Catherine V. Mott, CEO of BlueTree Capital Group, a Pittsburgh, PA suburb-based angel investment group, voiced her opposition to some proposed changes to existing regulations, including the proposed change to the Accredited Investor definition which would increase the minimum net worth requirement from $1 million to $2.5 million and was met with applause from attendees. Her suggestion was to adjust these numbers moderately for cost of living, noting this type of change could greatly disadvantage startups in middle America, especially minority and female-led companies. There is a belief that this proposed change would significantly reduce the number of potential investors able to provide angel and seed stage capital for early stage businesses through the most common type of private placements which rely on Rule 506 for exemption from registration.
The forum participants’ recommendations for action will be summarized in the SEC’s Forum Final Report, which is usually published in the spring or summer following the forum.
Melissa Pang (LAW ’13) is an associate in the Corporate and Securities Group at White and Williams LLP. She concentrates her practice in the areas of general corporate, transactional and securities law matters.