Results of the SEC’s 2024 Small Business Forum

Led by the Office of the Advocate for Small Business Capital Formation, every year, the Securities and Exchange Commission (SEC) hosts a Small Business Forum where members of both the public and private sectors get together to discuss how the SEC might improve its policies affecting how small businesses raise capital for investors.

This year’s forum took place over three virtual sessions on April 16-18, 2024. On September 19, 2024, the SEC released a report to Congress summarizing the recommendations made at the forum. Below, we will touch on the highlights of that report — the 43rd Annual Small Business Forum (“Forum” or “Small Business Forum”) Report (“Report” or “SEC Report”). However, before we do that, we should note that the recommendations in the SEC’s Report reflect the recommendations developed at the Forum by the participants. They are not necessarily recommendations that the SEC endorses.

Each Forum session focused on a different stage of the capital-raising lifecycle. As noted, participants were from both the public and private sectors. Participants in the Forum had varying small business experience, expertise, concerns, and opinions. Participants included (were not limited to):

• small business leaders

• entrepreneurs

• thought leaders

• advocacy and trade association members

• attorneys, and

• government officials.

Participants in the Forum shared their unique points of view and insights and made a number of recommendations to the SEC regarding its capital-raising policies applicable to small businesses.

Forum Day 1 — Amplifying Early-Stage Stories: Founders and Funders Share their Successes and Challenges.

Responding to SEC questions, participants indicated that the number one barrier to accessing capital at the early stages of building a business was a lack of connections to investors. The next biggest barriers included a lack of education, information, assets, and wealth.  

Participants recommended that the SEC:

1. Support entrepreneurs, including underrepresented founders, with modernized educational resources to allow businesses to better understand how to access capital, including capital from investors

SEC Report response: The SEC pointed out that it fully supports improving accessibility of educational and technical resources for small businesses and noted that in 2021, the Commission launched a centralized hub of Resources for Small Businesses which “serves as a portal for educational resources for entrepreneurs and their investors on how to comply with securities laws when raising capital.” 

Participants recommended that the SEC:

1. Expand the accredited investor definition to include additional measures of sophistication, including through an investor certification course or test.

SEC Report response: The SEC noted that in 2020 it adopted amendments to the definition of “accredited investor” under Regulation D of the Securities Act of 1933 (Securities Act) to increase the ways individuals might qualify as accredited investors. The amendments included an expanded list of credentials that might qualify an individual as an accredited investor. The SEC also pointed out that in related orders (for the most part pertaining to Securities Representatives and Investment Advisers) it allows certain licenses to qualify an individual for accredited investor status. The SEC went on to note that in 2023 it again reviewed the definition of “accredited investor” under the Dodd Frank Wall Street Reform and Consumer Protection Act, (the “Dodd-Frank Act”), and that its Staff report following that review considered recommendations of prior Small Business Forums on this issue. Finally, the SEC stated that in upcoming meetings in 2024, the Division of Corporation Finance is considering recommending amendments to the accredited investor definition.

Participants recommended that the SEC:

1. Establish a regulatory framework for finders that includes an exemption from broker-dealer registration and helps facilitate small business capital formation.

SEC Report response: The SEC stated that in October 2020 it had proposed an order that would allow natural persons to engage in limited activities without having to register as a broker-dealer, but that the order was never finalized. Further, that order is not on the Commission’s upcoming agenda for consideration.

Participants recommended that the SEC:

1. Expand regional, federal, and state options available for non-dilutive funding to support the earliest stages of entrepreneurship.

SEC Report response: Essentially, the SEC pointed out that it provides information on non-dilutive funding on its centralized hub of Resources for Small Businesses, and stated that this endeavor is not just up to the SEC. Making these types of changes would require the participation of a number of federal, state, and local governments, as well as other institutions and organizations.

Participants recommended that the SEC:

1. Ensure capital raising rules provide equitable access to capital for underrepresented founders and investors.

SEC Report response: The SEC responded to this suggestion by saying that it regularly evaluates ways of improving its capital-raising rules and that its Spring 2024 agenda includes considering amendments to Regulation D. 

Forum Day 2 — Opening the Dialogue on Investing: Investing in Early-Stage Companies and Building Ecosystems

This day centered on issues related to private investments. According to participants, their greatest challenge in this area is regulatory barriers to entry. The lack of a track record and lack of access to investors were their next greatest challenges. 

Participants recommended that the SEC:

1. Bolster and expand tax incentives that promote equity ownership and drive investment in the startup and small business ecosystem.

 SEC Report response: The SEC responded to this concern by saying that it will consider the Forum’s suggestions, but that any changes to the Tax Code would require Congressional action.

Participants recommended that the SEC:

1. Focus SEC rulemaking efforts on reducing administrative and regulatory burdens on small business and their investors to improve capital allocation efficiency.

SEC Report response: Again, the SEC noted that it is dedicated to facilitating capital formation, but that changes to the Tax Code (i.e., Title 6 of the Internal Revenue Code) require Congressional action.

 Participants recommended that the SEC:

1. Focus SEC rulemaking efforts on reducing administrative and regulatory burdens on small business and their investors to improve capital allocation efficiency

SEC Report response: The SEC points out that it already is mindful of this suggestion and that it tries to reduce compliance costs for small businesses while still maintaining investor protection by, among other things:

• providing small business exemptions, 

• providing scaled disclosure requirements for small businesses, and 

• providing delayed compliance dates for smaller companies.

Participants recommended that the SEC:

1. Support underrepresented emerging fund managers—specifically diverse and women managers—who are building funds that diversify capital allocation, engage sophisticated investors, and challenge pattern-matching trends.

SEC Report response: Pointing to its 2021 Asset Management Advisory Committee report and recommendations which the SEC adopted regarding diversity, the SEC responded to this issue by stating that it supports diversity with respect to the selection of asset managers, and emphasized that it has stated elsewhere that an adviser’s duties do not require it to only recommend advisers with a certain minimum amount of assets under management or long track records.  

Participants recommended that the SEC:

1. Support companies that offer equity ownership to employees and gig workers, and support policies that would better enable employee-owners to realize the value of their equity through transparency, appropriate tax policy, and access to secondary liquidity 

SEC Report response: According to the SEC, its Resources for Small Business already contains resources that address this issue, and Rule 701, which generally affects small businesses, provides exemptions that can be used to compensate employees and consultants. 

Participants recommended that the SEC:

1. Expand venture capital funds’ qualifying investments to include fund-of-fund investments in other venture capital funds and investments acquired through secondary transactions. 

SEC Report response: The SEC notes that in adopting its definition of “qualifying investment,” it discussed expanding the definition to include secondary purchases and investments in other venture capital funds but ultimately decided against it. Instead, the SEC ruled that investments in other venture capital funds should be limited to 20 percent for assets that are not “qualifying investments.” Since that time, however, the Division of Investment Management has issued guidance clarifying whether certain fund structures or actions could jeopardize a venture capital fund adviser’s ability to qualify as an exempt reporting adviser. Based on this, the SEC will consider this recommendation and will consult with the relevant stakeholders on the issue.

Forum Day 3 — Catching up with Small Caps

Day 3 participants told the SEC that the greatest challenge for smaller companies in this part of the lifecycle of a capital raise is the cost of compliance. After that, the burden of reporting requirements and trading volume were their biggest problems, while their main priorities were attracting more institutional investors. 

Participants recommended that the SEC:

1. Increase the $75 million public float threshold in the accelerated filer definition so that only larger filers are required to provide an auditor attestation of management’s assessment of internal control over financial reporting under SOX 404(b).

SEC Report response: Recognizing the costs of financial reporting auditor attestation for smaller companies, the SEC has periodically reviewed and revised its requirements in this regard. Currently, smaller reporting companies that have less than $100 million in annual revenue and a public float of less than $700 million do not have to submit an attestation from an independent auditor attesting to its internal control over financial reporting. The SEC also indicated that it would consider this issue in the future with an eye towards making accommodations for smaller issuers.

Participants recommended that the SEC:

1. Revise the "small entity" definition under the Regulatory Flexibility Act to better assess the regulatory costs of compliance for small and growing businesses.

SEC Report response: In 1980, the Regulatory Flexibility Act (“RFA”; 5 U.S.C. §§ 601-612) was passed, which requires federal agencies to consider the effects of their regulations on small businesses and to minimize the economic effect any regulation may have on small businesses. However, the law left it to each regulator to define “small entity,” and the SEC has adopted its own definition of “small business” for the purposes of rulemaking.

Participants recommended that the SEC:

1. Improve public trading for small companies by requiring more disclosures about short selling, institutional holdings, insider and affiliate holdings and transactions, paid stock promotion, and information about the security from transfer agents.

SEC Report response: Essentially, the SEC says that the securities laws and its own rules already require this and that it addressed this issue when it adopted a new rule in October 2023, requiring the publication of short sale data to investors. The new rule shortens the filing deadline for investors who beneficially own more than 5 percent of public company securities, thereby providing information more quickly to investors and improving transparency. 

Participants recommended that the SEC:

1. Revise the public float and revenue thresholds for smaller reporting companies and accelerated filers to be rolling averages instead of thresholds determined on a particular date.

SEC Report response: The SEC restates the rule that the public float is calculated “on the last business day of the issuer’s most recently completed second fiscal quarter,” and that this date applies to all filers.

Participants recommended that the SEC:

1. Revise Exchange Act Section 12(g) to remove the threshold for non-accredited investor holders and increase the asset threshold to $20 million.

SEC Report response: The reporting requirements in section 12(g) of the Securities Exchange Act (also known as the “Revise Exchange Act”) can only be amended by Congress. However, in the upcoming Spring 2024 Regulatory Agenda, the SEC’s Division of Corporation Finance will consider amending the definition of “held of record” in section 12g5-1, for purposes of 12(g). This may provide exemptions from registration for smaller companies.

For the full text of the SEC’s 2024 Small Business Forum Report, click here. 

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