2018 Policy Agenda for Entrepreneurs and Small Businesses – Issue Two: Access to Capital

By at 10 January, 2018, 3:37 pm

(This post was updated on January 30, 2018 to reflect new data about the total amount raised through Title III crowdfunding.)

by Karen Kerrigan-

Entrepreneurs are entering 2018 with high confidence and a strengthening economy.  The keys to small business growth and healthy entrepreneurship hinge on strong and sustainable economic growth and the continuance of policies that lift government imposed barriers, encourage capital formation and investment. To that end, entrepreneurs are hopeful that President Trump and Congress will prioritize their agenda to provide small businesses with every opportunity to succeed in 2018.

When entrepreneurs and small businesses are successful, they help create the quality jobs and innovative breakthroughs that are needed for a dynamic economy that benefits everyone.

The big tax relief package that just kicked in will certainly power economic growth this year. Regulatory actions taken by the President and his Administration have already paid dividends for the economy by boosting business optimism, which has fueled more investment and positive economic activity.

Still, there is more to be done to make the U.S. more globally competitive for all U.S. businesses and to revitalize the ecosystem for entrepreneurial activity.  Transforming the outdated regulatory system, improving capital access, lowering health coverage costs and increasing choice and competition, global market access and intellectual property protection, and additional tax code fixes are some of the key areas for action.

Regarding infrastructure, and other priorities of the Trump Administration and Congress, the voice of small businesses will be vital to ensuring that changes in these areas are beneficial to our sector.

In this blog post, I address access to capital and the reforms still needed to encourage capital formation and greater capital flow within the economy.

Review the details of other issues on SBE Council’s 2018 Policy Agenda here:

Regulatory System Transformation and Reform.

Broadband Access and Deployment

Tax System Modernization

Health Care Affordability and Innovation

Growth via Global Trade and Strengthening IP  

Access to Capital Will Fuel Small Business Growth and Entrepreneurship

Capital is the fuel that drives entrepreneurship and economic growth. It’s no secret that small businesses and startups need a continuous flow of capital to launch, compete and grow.

During the depths of the financial crises and in the immediate aftermath of the Great Recession, the inability to access capital was a massive crises for our economy. Conditions have improved since then; lending is on the rise (but still not back to pre-recession levels) and as previously noted, the capital provided by the “Tax Cuts and Jobs Act” will certainly help many entrepreneurs self-finance expansion, new projects and provide employees with raises and perhaps new benefits. Still, on the policy front there is much that can be done to encourage capital formation and improve business lending and financing.

Here is a top-line policy review of what SBE Council will be focusing on in 2018 to improve financing opportunities and access to capital for startups, small businesses and entrepreneurs:

Improvements that Fully Unleash Regulation (Title III) Crowdfunding

It took four long years for the Securities and Exchange Commission (SEC) to finalize Regulation CF (Title III) Crowdfunding, which was a key feature of the Jumpstart Our Business Startups Act (JOBS Act).  The Act included a host of other important reforms to unleash capital access in general. Now, with about eighteen months of Title III crowdfunding under our belt, we are seeing how this method of financing is delivering positive and promising results for entrepreneurs and their businesses ($100 million in total committed investments to date, raised by more than 731 businesses, with an average raise of approximately $360,691, from 100,901 investors according to Crowdfund Capital Advisors). A few smart and needed reforms will allow regulated crowdfunding to impact many more startups and small businesses and fulfill its original purpose of “democratizing access to capital” as envisioned by its lead advocates and supporters in the Congress.

These reforms include:

● Increasing the amount that can be raised from $1 million to $20 million. (See: 10 Reasons the $1 Million Crowdfunding Cap Should Be $20 Million, Venture Beat, by Sherwood Neiss.)

● Allowing issuers to “test the waters.”

● Clarity for funding portals, making it clear that portals are not liable for the misstatement of issuers.

● Repealing restrictions on “curation” by portals. (Prohibited from offering “investment advice,” thus such vetting issuers may be interpreted as investment advice.)

● Repealing requirement from audited financials for issuers raising $500,000 or more.

● Reducing the complex initial and ongoing mandatory disclosure requirements on issuers (25 currently).

● Simplify Reg CF Form C. Currently a 25 page document.

● Allowing for single purpose vehicles, which may mitigate issuers concerns about a potentially large number of shareholders.

● Allowing for lead investors or syndicates to help guide investors.

● Making adjustments to how much non-accredited investors can invest on Title III campaigns.

Several improvements to Title III crowdfunding have been included in H.R. 10, the Financial Choice Act, and SBE Council is working with crowdfunding advocates in the Congress to advance the above-noted reforms in separate legislation.

Modernize and Streamline Red Tape Associated with Capital Raises and the Capital Markets

A slate of very powerful bills have passed or are moving through the U.S. House that make a variety of changes to regulations – largely SEC rules – which will improve access to capital for startups and small businesses. Several of these have passed the Senate. The good news is that a significant number of these bills are supported on a wide bipartisan basis, with some passing the House by voice vote or unanimous consent (no opposition) – in all, a total of eleven really solid bills.

Three bills have passed both the House and Senate and now await final procedural action by the House in order move to President Trump’s desk for signature.  These bills include S.444, the Supporting America’s Innovators Act (House version H.R. 1219, passed 417-3); S.416, the Small Business Capital Formation Enhancement Act (House version: H.R. 1312, which passed 406-0); and S.488, Encouraging Employee Ownership Act (House version H.R. 1343, passed 331-17).  

(See SBE Council’s press release of Senate passage of the bills here.)

What the Bills Do

Supporting America’s Innovators Act: This legislation amends an exemption under the Investment Company Act of 1940 by increasing the investor limitation from 100 to 250 people for qualifying venture capital funds. Modernizing this limitation will lower a key barrier facing promising startups and small firms. The change allowed by S. 444/H.R. 1219 will permit more investors to participate in venture capital-type funds, and startups and small businesses everywhere will benefit.

Small Business Capital Formation Enhancement Act: SBE Council and our members have been engaged in the Securities and Exchange Commission (SEC) Government-Business Forum on Small Business Capital Formation for nearly fifteen years. Scores of common sense changes and reforms reached by consensus at these forums have not been acted upon by the SEC. Many of these reforms are needed to improve capital formation for entrepreneurs, and to make smart changes to streamline red tape and compliance. S. 416/H.R. 1312 requires the SEC to take action by acknowledging these recommendations, and how they plan to take action. Entrepreneurs, investors and experts take the time out of their schedules to prepare for, participate and provide input at the forum. The SEC needs to acknowledge and respond to these thoughtful recommendations.

Encouraging Employee Ownership Act:  America’s entrepreneurial firms drive the economy, and many small innovative firms use stock options as part of their compensation packages to attract and retain employees.  The current threshold (under SEC Rule 701), where additional disclosure is required when firms sell more than $5 million in securities for employee compensation over a 12 month period, is a deterrent that prevents firms from offering stock options. Small businesses and their workforce both lose under this arbitrary threshold. The bill would raise the threshold to $10 million and index it every five years thereafter. This reasonable increase provides more flexibility and incentive for firms to leverage this win-win compensation tool, which helps them retain loyal employees and compete for the human capital they need to successfully scale. The bottom-line is that the bill makes it easier and less complex for startups and growing firms to share their financial success with employees. Everyone wins with more capital and financial security!

Here are some of the other bills that SBE Council is supporting:

HALOS Act (H.R. 79) – H.R. 79, the Helping Angels Lead Our Startups (HALOS) Act. Clarifies that startups and entrepreneurs can showcase their ideas and businesses at events designed to connect them with potential investors. H.R. 79 clarifies the rules about “demo days” and similar events hosted by universities, government, accelerators and other entities that help entrepreneurs network, make connections, and identify funding for their enterprises. (Passed House 344-73, January 2017, and previously in March 2016 – H.R. 4498). Referred to Senate Banking Committee.

Fostering Innovation Act (H.R. 1645) – H.R. 1645, the Fostering Innovation Act. Sensibly extends an exemption allowed for in the JOBS Act to growing companies whose business models require more regulatory flexibility, and thus will enable greater success. Extends the JOBS Act’s SOX 404(b) exemption for an additional five years for former emerging growth companies (EGCs) that maintain a public float below $700 million and average annual revenues below $50 million. (Passed House Financial Services Committee, October 2017 and previously by Unanimous Consent by the full House in May 2016 – H.R. 4139).

Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act of 2017 (H.R. 477) – H.R. 477 reduces regulatory costs associated with the sale and purchase of small, privately held companies.  Current law forces broker dealers to register with the Security and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and one or more states at substantial costs. This results in higher transaction costs for many entrepreneurs who want or need to sell their business.  (Passed House on December 7, 2017 by 426-0, and unanimously by the House in 2016.) Referred to Senate Banking Committee.

Micro Offering Safe Harbor Act (H.R. 2201) – H.R. 2201 would exempt from registration requirements with the Securities and Exchange Commission (SEC) offerings made only to the entrepreneur’s friends and family, to less than 35 purchasers, and when $500,000 or less is raised. The offering would be exempt from state registration and qualification rules, thus reducing costs and complexity. H.R. 2201 would appropriately scale SEC rules and regulatory compliance for our nation’s small businesses, which in turn will provide another practical option for entrepreneurs to raise the capital they need to start or grow their firms. (H.R. 2201 passed the House on November 9, 2017.) Referred to Senate Banking Committee.

SEC Regulatory Accountability Act (H.R. 78) – H.R. 78 requires the SEC to assess the costs and benefits of regulatory actions and the impacts on small businesses, investor choice, and market liquidity. The bill also requires an exploration of regulatory alternatives, including the option of not regulating, to maximize the net benefits of SEC rulemakings.  Having SEC periodically review its regulations is critically important as cumulative and outdated regulation put U.S. capital markets at a competitive disadvantage. (The House passed H.R. 78 in January 2017). Referred to Senate Banking Committee.

Regulation A+ Improvement Act of 2017 (H.R. 4263) – H.R. 4263 increases the amount that companies can offer and sell under SEC Regulation A, Tier II (aka Regulation A+), from $50 million to $75 million, adjusted for inflation by the SEC every 2 years to the nearest $10,000. (H.R. 4263 pass the House Financial Services Committee on November 15, 2017 by a vote of 37-23.)

Small Business Credit Availability Act (H.R. 4267) – H.R. 4267 amends the “Investment Company Act of 1940” to modernize the regulatory regime for business development companies (“BDCs”) for the first time since the 1980s. BDCs are investment vehicles designed to facilitate capital formation for small- and middle-market companies. The legislation requires the SEC to streamline the offering, filing, and registration processes for BDCs to eliminate significant regulatory burdens and increases a BDCs’ ability to deploy capital to businesses by reducing its asset coverage ratio—or required ratio of assets to debt—from 200% to 150% if certain requirements are met. (H.R. 4267 passed the House Financial Services Committee on November 15, 2017 by a vote of 58-2.)

Expanding Access to Capital for Rural Job Creators Act (H.R. 4821) – H.R. 4821 amends the Securities Exchange Act of 1934 to have the SEC’s Advocate for Small Business Capital Formation identify any unique challenges to rural area small businesses when identifying problems that small businesses have with securing access to capital. H.R. 4281 also requires that the annual report made by the SEC’s Small Business Advocate include a summary of any unique issues encountered by rural area small businesses.  (H.R. 4821 passed the House Financial Services Committee on November 15, 2017 by a vote of 60-0.)

Encouraging and Enabling Healthy Bank Lending

As noted above, while bank lending has improved it remains below its pre-recession high.  The regulatory environment has made it much more difficult and costly to lend to small businesses.  Dodd-Frank is a massive law that has held back capital formation and access, as well as innovation in the financial sector.  The bills listed below would bring some common sense to the regulatory framework that banks operate under in the United States.

Systemic Risk Designation Improvement Act of 2017 (H.R. 3312) – H.R. 3312 proposes alternative measures to determine a bank’s risk to the financial system. These institutions include mid-size and regional banks where stringent Dodd-Frank regulations have hampered their ability to lend to small businesses. H.R. 3312 replaces the $50 billion systemically important financial institution (SIFI) asset threshold, which triggers higher levels of regulation, with more appropriate measures to determine a bank’s risk to the financial system.  Mid-sized and regional banks, which many startups and small businesses have counted on for lending, have been negatively affected by this arbitrary trigger. Replacing the random $50 billion threshold with standards that more accurately measure systemic importance is a more reasonable solution that will benefit these lenders, but more importantly their small business customers. (The House passed H.R. 3312 on December 19, 2017 by a vote of 288-130.) Referred to Senate Banking Committee.

The Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) – The bill raises raises the asset threshold for systemic risk regulation of banks from $50 billion to $250 billion, which would provide relief to small businesses and consumers. The bill would also provide a more sensible regulatory framework for community banks, among other changes. (On December 5, the Senate Banking Committee advanced S. 2155.)

SBE Council expects solid progress for advancing bills and regulatory initiatives that improve capital formation and access for startups, entrepreneurs and small businesses.  Thankfully, the issue has become a very bipartisan one, which has withstood even the most partisan political periods.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.  

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