Earlier this week, the Securities and Exchange Commission (SEC) Small Business Capital Formation Advisory Committee met to discuss how capital markets are serving underrepresented segments of entrepreneurship and small businesses. As we all know, every early-stage firm needs to have access to capital to thrive and survive. Yet certain segments, including minorities and women, struggle to gain access to capital due to a plethora of reasons and myopic rules.
A presentation delivered by the Office of the Advocate for Small business Capital Formation, provided some data points highlighting the challenge.
According to the Advocate, since 2007 there has been a dramatic (38%) increase in the number of minority-owned businesses. Yet these same businesses start with far lower funding than white-owned businesses.
Women founded businesses have jumped significantly too. In 2001, just 4% of startups were founded by women. In 2018, 21.6% of startups were founded by women. Yet women gained a fraction of the capital that male founders were able to attract.
Regarding female investors, the Advocate shared that 29.5% of angel investors are women and just 11% of VCs are women. As well, 71% of VC firms have no female partners.
The COVID pandemic has hit underserved segments hard. The Advocate shared the decline of small businesses during the period from February to April 2020:
- Overall – 15 million businesses declined to 11.7 million or 22%
- Women-owned businesses dropped from 5.4 million to 4 million
- African American businesses declined 41% or from 1.1 million to 640,000
- Latin American owned businesses decreased by 32% or from 2.1 million to 1.4 million
- Asian owned businesses went down 26% from 885,000 to 655,000
Obviously, COVID is having a negative impact on all small businesses but underserved segments have been undermined on a disproportionate basis. While government programs have helped, more needs to be done. Access to capital via digital funding portals and participating broker-dealers can supplant these government programs.
During a presentation, Rodney Sampson, a longtime crowdfunding advocate, founder of OHUB, a venture partner at Draper Goren Holm, Senior Fellow at the Brookings Institute, author and much more, advocated on behalf of improvements to the crowdfunding ecosystem including increases to the funding cap of Reg CF and Reg A+ as well as changes to the definition of an accredited investor.
Sampson was there at the beginning of the JOBS Act, working in partnership with others to the legislation passed into law, promoting the democratization of access to capital
Sampson stated at the Committee meeting:
“I support an increase to the Reg CF and Reg A+ limits if we can assure a streamlined process. I support a revision to the definition of an accredited investor to include but isn’t limited to reducing the net worth and annual recurring income.”
He also supports funds that enable broader access to early-stage investments by individuals currently excluded by the system in place:
“I support pooled funds, and special purpose vehicles similar to syndicates or funds, of non-accredited and accredited investors…”
Sampson believes certain improvements to the exempt offering ecosystem can “drive hyperlocal wealth creation and shared prosperity.”
The SEC is in the midst of an exempt offering ecosystem review and has the potential to accomplish exactly what Sampson is advocating and, in fact, has proposed some important improvements to level the playing field a bit more. As well, the Committee is on the record advocating for many of these changes. Expectations are for any updates to be announced before the end of the fiscal year.
The SEC’s proposals are viewable here.
An Overview Chart of SEC Proposed Changes to the Exempt Offering Ecosystem
Do you find the alphabet soup of securities exemptions confusing?
Well, you are not alone.
A more Machiavellian type would posit that exempt securities offerings were designed by lawyers knowing that the Hoi Polloi would be willing to pay top dollar to decipher the jumble of rules and regulations. Law firms make a lot of money translating the legal hieroglyphics while keeping non-lawyer entrepreneurs in good graces with the regulators. When enforcement rolls, they go in hot.
To add to the confusion, the Securities and Exchange Commission has proposed some improvements to this ecosystem. While some may have hoped for some rationalization and consolidation of the rules, it does not look like that will be. Change is hard. It is even harder when you start talking about securities regulations.
But for those of you who confuse the 40 Act with the 33 Act, the SEC has provided some regulatory Cliff Notes.
Courtesy of the Office of the Advocate for Small Business Capital Formation, the Advocate has put together a chart of the existing rules and what has been proposed.
The rule changes are out for comments now and expectations are that many of these changes will make it across the goal line. The document below makes it easier to understand. Give thanks to the Advocate.
Exempt Offering Ecosystem Explained
US Federal Reserve Is Focused on Launching FedNow for Real-Time Digital Payments and Settlements
The US Federal Reserve, which is the central banking system of the country, has reportedly been working on a new real-time payment and settlement system, called FedNow.
Governor Lael Brainard claims that the Fed plans to have FedNow fully operational as soon as possible. Brainard notes that the COVID-19 outbreak and resulting challenges have proven or shown that it’s vital that US residents have immediate and convenient access to funds.
“The COVID-19 pandemic is taking a tremendous toll on communities across America, especially households and small businesses with the least liquid resources to weather the storm. Emergency relief payments authorized in the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, provided a vital lifeline for many households. The rapid expenditure of the COVID emergency relief payments highlights the critical urgency of immediate access to funds for the many households and businesses managing cash-flow constraints.”
It’s been around a year since FedNow was proposed, which will basically serve as a new and improved payment system. The US has reportedly not made major updates to its payments networks since the past four decades.
Brainard reveals that the Fed has made “substantial strides” towards developing the FedNow system. There are more than 100 people actively working on the initiative.
Although the official launch date might not be until a few years from now, the Fed is taking a phased or step-by-step approach to developing the network. This will ensure that important features are properly developed, and make it to the market “expeditiously” with extra capabilities being incorporated after the foundation has been established.
Brainard stated that there would be updates made to the US’ core interbank clearing and settlement capabilities. She added that FedNow would incorporate other important features such as tools to detect potentially fraudulent transactions or activity.
The FedNow service will also adhere to the ISO 20022 message standard, in order to ensure interoperability with the Clearing House’s RTP network, which is a private sector alternative to the payments network.
There will also be features that allow people to use their email addresses and phone numbers to conduct digital payments. These add-ons will be made at a later time, due to certain legal and security issues.
Brainard said that the Coronavirus crisis shows how important it is to be able to make instant payments. The Federal Reserve led processing of payments to US households was quite slow, because it relied mostly on using traditional methods such as issuing cheques, direct debits, and prepaid cards.
“By contrast, the ability to disburse funds via instant payments could have helped reduce the strain for those who needed the funds quickly in order to meet financial obligations.”
She emphasized the importance of the role that the Fed can play in supporting innovations in the payments sector, which may include the responsible adoption of appropriate Fintech solutions.
However, the governor expressed doubts or reservations about the controversial, Facebook-led Libra project. She said that Libra gives rise to “fundamental questions about legal and regulatory safeguards, financial stability, and the appropriate role of private money.”
“The promise of the FedNow Service is that it will provide a modern payment infrastructure for the future, bringing the benefits of instant payments to communities across America and improving the way households, businesses, and government agencies make payments for many years to come.”