SEC Small Business Capital Formation Advisory Committee Meeting

Securities and Exchange Commission

Small Business Capital Formation Advisory Committee Meeting

Friday, May 8, 2020

Key Topics & Takeaways

Opening Statements & Introduction

Carla Garrett, Corporate Partner, Potomac Law Group PLLC

In her welcome remarks, Garrett noted the importance of access to capital for small businesses, especially in the current environment. She highlighted the hard work of the committee and the Securities and Exchange Commission (SEC) for soliciting their recommendations.

Chairman Jay Clayton

Clayton thanked the committee for their most recent meeting, saying it spurred the Commission into action regarding Regulation Crowdfunding. He concluded with the sentiment that this is exactly how these committees should work.

Commissioner Hester M. Peirce

In her opening remarks, Peirce expressed the importance of continuing the dialogue about how the SEC can help small businesses address their capital needs during the COVID-19 pandemic, saying there may be more the SEC can do to aid small businesses with urgent funding needs. She noted that temporary adjustments to Regulation A may warrant consideration, as would increasing crowdfunding limits and other proposed rules to improve access to capital in private markets. She concluded that bold action will be necessary to facilitate capital formation in the coming months.

Commissioner Elad L. Roisman

Roisman said that he was happy to see the agenda continue the discussion from the last meeting and provide the opportunity to look towards the future to help the country’s small businesses.

Commissioner Allison Herren Lee

Lee said the work of the committee has taken on an even greater significance as the country wrestles with the pandemic, noting that the SEC took the committee’s suggestions from the previous meeting and was able to provide short-term relief regarding crowdfunding. She said she looks forward to the discussion on the exempt offering proposal, saying it is important to find a balance with investor protection.

COVID-19 Updates, Observations, and Discussion

Committee members took the opportunity to give various updates related to the pandemic. Garrett noted that the SEC is providing temporary relief for companies using Regulation Crowdfunding. Jennifer Zepralka, Chief, Office of Small Business Policy, SEC, explained that the relief does not change the essential framework of the regulation, but addresses areas of friction to assist small businesses trying to raise capital right away. She continued that companies will be allowed to post their offering before their financial statements are filed, although no investment commitments can be accepted until all required financial statements are provided. She also noted that the package includes changes to the process and timing requirements so companies can receive funds more quickly. In response to a question from the committee, Zepralka explained that the relief will only apply to new offerings from May 4 to August 31, 2020. Youngro Lee, CEO and Co-Founder, NextSeed, said that small businesses need different sources of capital right now and he thinks this change can help.

William Manger, U.S. Small Business Administration (SBA), then gave a presentation on the SBA’s various lending programs, including the Paycheck Protection Program (PPP) that was established under the CARES Act. He explained that banks and nonbank lenders are making PPP loans with a 100 percent guarantee from SBA, meaning there is no risk to the lender making these loans. He continued that after eight weeks, borrowers can ask for forgiveness for the portion of the loan that was used for payroll, utilities, rent, and other approved expenses. He said that the loans are intended to make payroll possible for businesses, many of which are currently closed, in order to get money in employees’ pockets immediately. He said that $349 billion was loaned in the first tranche and an additional $310 billion has been authorized. Manger added that 4.1 million small businesses have received loans through the program so far and many of the loans in the second wave have been smaller, saying it is encouraging that small businesses are accessing the capital they need to pay their employees. Jason Seats, Chief Investment Officer, Techstars, noted that while the PPP has helped many businesses, venture-backed companies spent a significant amount of time and energy to understand the eligibility criteria with the net result that receiving capital from the program would not be appropriate for them. Catherine Mott, Founder and CEO, BlueTree Catpial Group, BlueTreeAllied Angels, and BlueTree Venture Fund, said that businesses without an existing relationship with a banker were “pretty much left out,” saying it is advisable for small businesses to establish a relationship with a bank on day one to build a business relationship.

Staff Presentation & Discussion: SEC Proposal – Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets


  • Jennifer Zepralka, Chief, Office of Small Business Policy, SEC

Following an introduction from Julie Zelman Davis, Office of the Advocate for Small Business Capital Formation, Zepralka summarized the proposed set of amendments to the exemptive framework under the Securities Act of 1933 that would serve to simplify, harmonize, and improve certain aspects of the framework to promote capital formation while at the same time preserving or enhancing important investor protections. Zepralka stated that generally, the proposed amendments would: 1) address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital; 2) increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits based on the Commission’s experience with the rules, marketplace practices, capital raising trends, and comments received; 3) provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitations; and 4) harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections.

The committee structured their discussion of the proposal into five subtopics: 1) Increases to Annual Offering Limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings; 2) General Solicitation, “Demo Days” and “Test-the-Water” Communications; 3) Financial Disclosure Requirement for Non-Accredited Investors; 4) Crowdfunding Eligible Securities; and 5) Integration.

Various committee members spoke in support of raising the annual offering limits to make these offerings more cost effective and attractive to a broader group of issuers and parties who wish to act as intermediaries. Lee specifically noted that the increased flexibility as a result of these amendments facilitates movement towards a decentralized funding structure, a shift he posited as extremely important in light of the COVID-19 pandemic environment. The committee voted unanimously in favor of recommending these changes to the Commission.

The committee then turned to a discussion of amendments relating to “Test-the-Waters” and “Demo Day” offering communications. Mott spoke in support of these amendments stating that this modernization provides a significant amount of clarification for entrepreneurs and allows them to pitch investors without “one arm behind their back.” Various other committee members also spoke in support of the amendments noting that they increase flexibility and benefits for both entrepreneurs and investors while also preserving investor and anti-fraud protections. While some committee members advocated for even less regulation of offers, all agreed that these amendments represent a positive step in the right direction. The committee voted unanimously in favor of recommending these changes to the Commission.

After a very brief discussion regarding the financial disclosure requirement for non-accredited investors, the committee voted unanimously in favor of recommending these changes to the Commission.

Regarding crowdfunding eligible securities, staff explained that the proposed rule would align Regulation Crowdfunding with Regulation A. Lee noted that the SEC should clarify how they will verify accredited investors. He added that Regulation Crowdfunding is most often used by startups while Regulation A is most often used by growth companies, not Main Street businesses, so there is a question as to what kind of eligible securities Main Street companies would utilize versus growth companies. He and others also highlighted the need to consider how special purpose vehicles (SPVs) would be utilized. The committee voted unanimously in favor of recommending these changes to the Commission.

The final matter discussed by the committee was that of integration. Staff explained that there would be no integration if the issuer established that each offering either complies with an exemption from registration or is registered, saying this is important when planning fundraising. There are also four non-exclusive safe harbors. Brian Levey, Chief Business Affairs and Legal Officer, Upwork, Inc., said the more the SEC can do to clarify the move from private to public offers and encourage the use of public registration statements, the better. He added that in the wake of the pandemic, privately-issued convertible notes are likely to be more commonplace, saying that the use of convertible notes are a critical financing bridge to an IPO, so clarity regarding convertible instruments would facilitate capital raising. The committee voted unanimously in favor of the proposal, and recommended adding clarity regarding integration.

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