A Brief Review of the SEC’s 2024 Office of the Advocate for Small Business Capital Formation Annual Report

In a previous blog post, we reported on the discussions held at the SEC’s 2024 Small Business Forum. Following that forum, the Office of the Advocate for Small Business Capital Formation (“OASB”) submitted its 2024 Small Business Capital Formation Report to Congress (referred to herein as the “2024 Report” or “Report”). In this post, we will look at what is in that 2024 Report.

But first…

What is the SEC Office of the Advocate for Small Business Capital Formation and What Does it Do?

Created in 2019 under the Small Business Advocate Act of 2016, the OASB is an independent office of the SEC dedicated to advancing the interests of small businesses and their investors. The OASB works to identify capital-raising challenges faced by minority-owned, women-owned, rural, and disaster area small businesses, and to assist small businesses in resolving regulatory issues with the SEC.

Every year, the OASB hosts a forum designed to gather information from small business owners regarding capital-raising and provide feedback to the SEC concerning the impact its policies and regulations are having on small businesses.  

As noted above, on April 16-18, 2024, the OASB held its 43rd annual Small Business Forum consisting of several virtual sessions held over three days, to discuss the most pressing issues and regulatory concerns faced by small businesses. In September of that same year, the OASB released its Report summarizing those discussions. 

Summary of the OASB 2024 Small Business Capital Formation Report

Access to Capital is a Major Barrier for Small Business 

From the outset, the OASB 2024 Small Business Capital Formation Report notes that the major challenge repeatedly expressed by small businesses is the lack of access to capital — especially for women, minority owners, and those living in rural areas. It also solidifies with data the importance of small business to our economy. According to the Report, entrepreneurship is an essential driver of economic growth and wealth. Over 80% of all net new jobs were created by small businesses (although only 30% remained at small businesses), and the greatest challenge for these businesses was — and still is — access to capital.

Other major challenges faced by small businesses include:

• rising costs of goods, services, and wages

• operating expenses

• uneven cash flow.

While there are a number of pressures on small companies, access to capital remains the biggest barrier to growth. Over half use their personal funds to finance growth, and most rely on business owners, friends, and family to provide the majority of company investments. 

While angel investors furnish value to entrepreneurs in terms of mentorship and investment, the SEC’s definition of “accredited investor” is the factor that most directly impacts who can be in the investment pool of a small business. 

Investor verification is essential for capital raising — especially when the capital raise is conducted under an SEC regulatory exemption, which, as we will see below, many are. Verifying every single investor, and understanding how to verify accredited investors, can be complex and a time-consuming endeavor for small companies. Luckily, obtaining an accredited investor certificate or assistance from a third-party investor verification service to verify investors is fast, easy, and secure. 

Regulatory Pathways Used to Raise Capital

The OASB 2024 Report details the regulatory pathways used by companies and indicates that they differ depending on whether the funds are pooled funds or not pooled funds.

For those companies raising money — excluding pooled funds — the most common regulatory exemptions used are Regulation D, (506 (b) and (c)), Regulation A, Regulation CF (crowdfunding), and Rule 504. Looking at capital raised using those exemptions, the Report finds that from 2023 to 2024:

• Reg. D 506(b) (does not allow advertising, but a limited number of non-accredited investors may participate) accounted for $170 billion,

• Reg. D 506(c) (which allows advertising, but all investors must be accredited investors) accounted for $12 billion,

• Reg. A accounted for $1.5 billion,

• Reg. CF accounted for $249 million in capital, and

• Rule 504 accounted for $246 million raised. 

Exempt offerings for pooled funds primarily used Reg. D, (Rules 506(b) ($1.7 trillion), and 506(c) ($125 billion)), Reg. S, and Rule 144A ($99 billion) to raise capital.

Public companies raised 66% of all capital, whereas only 34% of all capital was raised by private companies.

According to the 2024 Report, the number of new crowdfunding offerings has remained relatively stable. Meanwhile, while a large majority of the total money raised through Reg. D exemptions (90%) come from “pooled funds,” it is the smaller non-pooled funds (45%) that raise most of the capital through Reg. D offerings. Regulation A offerings, on the other hand, have continued to decline. 

Capital Raising for Mature and Later-Stage Businesses

Venture Capital (VC) Fundraising

Turning to mature and later-stage businesses, the 2024 Report points out that for most mature businesses looking for capital to fund growth, investors tend to be institutional investors, venture capital (VC) funds, private equity funds or crossover investors from the public market.

California, New York and Massachusetts have the most established VC funds, however, it appears that VC funds are growing in other cities as well.

According to the Report, startups are looking for more money than investors want to invest. In addition, the median time between VC funding rounds has increased since 2022 — to 2.5 years (up from 1.5). Further, VC fundraising is currently below 2020 levels. And, as has been noted in other OASB reports (i.e., the “Howell Report”), not many VC fund managers use the Rule 506(c) exemption to raise funds; and those who do, tend to be emerging managers — mostly first-time women, minority, and non-elite VC fund managers.

The Report goes on to detail the barriers and challenges that emerging VC fund managers face. 

On the topic of disparity, the Report details some of the challenges and difficulties facing women business owners overall: including (not limited to) the fact that women-only teams raise less money than men-only teams and that women-owned businesses are less likely to receive loans or lines of credit than men-owned businesses. The report also details the challenges faced by minority and women business owners and founders as well as investors.  

Small Public Companies and IPO Activity 

According to the Report, small public companies represent almost one-half of all public companies, but 33% of them are not listed on a public exchange. In contrast, only 2% of all large public companies are not listed on an exchange.

Since 1980, the aggregate market value of small exchange-listed companies has gradually declined. There has also been a reduction in Initial Public Offering (IPO) activity since 2021— largely driven by mergers and the availability of VC funds which allow small companies to remain private longer.

Some of the major contributors to the overall decline of smaller public companies are:

• mergers and acquisitions (M&A)

• regulatory costs, and 

• private equity.

The two factors that contribute the most to the decline in small public companies are M&A activity and regulatory costs. Because they get acquired before they can go public, M&A activity has contributed to the decline in exchange-listed smaller companies. Regulatory costs can be prohibitive for smaller companies — keeping them from going public. Meanwhile, private equity can help smaller companies stay in business long enough to get to an IPO, keeping them private longer, although not indefinitely.

While still significantly below that of 2021, the Report indicates that small company IPOs did see a slight uptick in the beginning of 2024.

Issue Identification, Proposed Solutions, and Conclusion

After presenting significant detailed data regarding the current state of small businesses, the 2024 Report presents a number of challenges that small businesses face. It then offers potential solutions to each of these problems.

The issues identified in the 2024 Report are based on the feedback received at the 2024 OASB Small Business Forum and include:

• providing user-friendly accessible tools and education for entrepreneurs and investors

• connecting founders to investors

• supporting businesses that rely on regulation crowdfunding to raise capital

• defining a pathway for founders to connect to sophisticated investors

• diversifying access to capital

• creating a regulatory environment that fosters participation in the public market.

The “proposed solutions” given for each issue are not detailed strategies or plans. Rather, each essentially “encourages” the SEC and Congress to explore initiatives or consider expanding/changing policies. For example, the Report encourages Congress and the SEC to expand the definition of “accredited investor” to be more inclusive and to encourage diversification. Similarly, the Report “encourages” Congress and the SEC to consider scaling disclosure requirements for small public companies or to phase in compliance obligations. 

The OASB 2024 Report concludes with a recitation of the OASB’s advocacy efforts and resources. 

Whether a company is large or small, public or private, the securities laws touch on a vast number of financial and investment issues of importance to investors and issuers alike. VerifyInvestor.com makes verifying accredited investors easy, cost-effective, secure, and reliable. Our services, (which also include AML/KYC, qualified purchaser, and qualified client verification), are always code-compliant and confidential. We help companies fully and easily comply with their legal obligations to verify accredited investors.