The Car Talk of Capital Raising
Oct. 9, 2020
Remarks at SEC Speaks 2020
Good morning and welcome to the virtual audience. Thank you Steph [Avakian] and Dalia [Blass] for chairing this year’s program, and to the Practicing Law Institute for the invitation to participate.
Last April, I stood before this audience and introduced our Office of the Advocate for Small Business Capital Formation. At that time, our Office was only 68 days old. As the first time most of you had heard from our Office, the focus of my remarks was on the “what” and “why” behind the creation of the SEC’s newest office. We introduced our foundational business plan, setting forth a roadmap for our first year of operations. Since then, our team has grown, and we have accomplished quite a lot in just over a year and a half.
If you have taken away one thing during the past two days of the conference, it is that each of us are speaking for ourselves and not on behalf of the Commission. The first few times I gave the SEC’s disclaimer, it felt awkward. Surely people knew I was speaking only for myself? Since then, I have come to embrace the upside of the disclaimer. Introducing a new Office with the longest title in the agency hundreds of times over the past year and a half, I have test-driven more analogies to explain what we do, many of them bad, from megaphones to baseball to cards. If anything, the disclaimer is a nice buffer for our team—the bad analogies I use are of my own making and are not blessed as apropos by anyone. Today, I will indulge in another analogy focused on the “how” of what our team does day to day.
For as long as I can remember, I have been a bad sleeper, but I happened to marry someone who adores sleeping in on weekends. Before moving to D.C. last January, one of my favorite Saturday morning routines after waking up early was to hop in the car with our dog, roll down the windows, and drive to one of my favorite local coffee shops while my husband slept in. The radio in my car was always set to my local NPR station: 90.3 WBHM. Unlike the weekday commute to work that was occupied by the news, the weekend morning drives included a healthy dose of Car Talk with Tom and Ray Magliozzi, brothers better known to listeners as “Click and Clack.” For those who are not familiar with this show, which ran for decades out of WBUR in Boston, it was a call-in radio show starring two mechanic brothers providing car advice with plenty of color commentary and self-deprecating humor.
Callers loved the show. They would dial in and describe their car—which often seemed to have passed from one generation to the next—before attempting to describe the automotive issue they faced. Tom and Ray would listen, crack jokes, and draw out pertinent details to help diagnose car problems by phone (a service that no mechanic shop I have found will entertain). Importantly, the show was not a forum for experts; no one started by describing in specificity the parts needing replacing. Instead, callers explained the symptoms, imitating the sound of the engine, often repeatedly at the request of Tom and Ray, or even describing the smells. It was Tom and Ray’s job to connect the dots to the underlying issue.
Listeners like me loved the show as well, as demonstrated by its over 30 years on air, despite that most of them were likely not car buffs. People voluntarily spent time listening to two guys talk about what most people otherwise love to loathe: a visit to the auto shop, where one often worries about being upsold. Listeners learned something, laughed, and felt they knew the brothers personally.
While I love my new Saturday morning routine on foot in the city, I have missed Saturday mornings with Click and Clack. So besides my clear fondness for public radio, you may be wondering what is the connection between Car Talk and capital raising?
Our Office is the Car Talk of Capital Raising
Much like the Magliozzi brothers, our Office exists to demystify securities compliance and also to listen, diagnose, and help address capital raising issues. We do this by purposefully reaching out to small businesses and their investors to bring in their perspectives and to identify and diagnose challenges they face. We are not providing legal services, just like the brothers were not actually providing mechanic services, but instead we are working to elevate the most pressing issues and recommend potential fixes.
When people reach out to our Office for help, they are often doing something very similar to Car Talk callers: describing the sounds and the symptoms of the issue. Thankfully for us all, very few people speak in regulatory citations, acronyms, and legalese. They instead speak in practical terms about roadblocks they face when raising capital. It is our job to pinpoint any securities issue at fault under the hood.
Through hundreds of meetings, phone calls, speaking engagements, video conferences, virtual coffees, and outreach events, we have gathered meaningful feedback about what is and what is not working well for small businesses and their investors, from the smallest startups raising seed capital to larger private companies looking to go public, all the way to small public companies navigating reporting and investor relations. We deliberately and proactively reach out to hear from minority and women founders and their investors, as well as rural and natural disaster-area businesses and their investors, as they have often been underrepresented in, and inadequately supported by, the current capital-raising system. In addition to helping diagnose problems, we also seek to highlight and celebrate capital raising successes.
The Sounds We Hear from the Capital Raising Ecosystem
Bringing the analogy full circle, I want to share with you a few of the sounds reported from the capital raising engine.
Like callers to Car Talk who care for their cars but lack a mechanic’s expertise, we often hear from people who are operating fantastic companies and investment operations, but are overwhelmed by the complexity of our securities laws. Just like the maze of wires and hoses under the hood of a car, the different paths to raising capital can be daunting for those unfamiliar with the lingo lawyers and regulators use. They are often looking for educational resources and help demystifying compliance, and many of them offer up ideas for how to improve the rules to better address how capital is raised in the market.
Connecting Founders with Investors
The Magliozzi brothers ran their own mechanic shop in the Boston area, but for those callers who were not lucky enough to live close by, the show equipped callers with the tools they needed to navigate automotive repairs at their local mechanic shop. We often hear from small businesses who struggle with how to connect to investors with the right risk tolerance, industry experience, and investing objectives for their company. On the typically earlier-stage end of the spectrum, we often hear from entrepreneurs and founding teams who explain that they want to raise capital, but that their personal network lacks deep pockets. Connecting those founders with investors is challenging, often exacerbated by demographic or geographic hurdles. Their issues often involve a combination of rules, from the role of “finders” introducing potential investors to companies, to who can invest as accredited investors, to how companies can connect with potential investors outside of their network through general solicitation or using the internet.
In one of the shows, the brothers received a call about a rare $400 million vehicle, a highly unusual call for the show. It turned out to be a prank from one of the engineers at the Jet Propulsion Laboratory working on the Mars rover. Much of early stage capital raising occurs with the analogous four-wheel vehicles, which are far more common than the analogous half-billion-dollar space explorer. In our context, entrepreneurs typically start out locally raising from angel investors or friends and family. Only later do they have the size and scale that fits larger fund complexes’ investment objectives. Savvy early-stage investors appreciate the impact of diversified portfolios on their investment returns, but often lack opportunities to invest through funds to achieve those objectives. We also often hear from small and emerging fund sponsors that the current regulatory constructs make early-stage investing more challenging, pushing activity upstream into larger deals. They also report that the impacts are felt more strongly within geographies, industry sectors, and demographic groups underrepresented by traditional venture capital.
Small businesses or our Office’s purposes include larger private companies developing plans for the future who debate the benefits of liquidity and access to our public markets against perceived challenges with research coverage and expenses of going and staying public. Statutory accommodations for emerging growth companies and scaled disclosure obligations put in place by Congress and the Commission are frequently balanced with the realization that smaller public companies often struggle to get liquidity in our public markets. It is important that becoming a public company remain an attractive goal for companies.
Demographic Inequities and COVID-19
If you’ve taken a look at the data, you know that capital raising is more challenging outside of traditional investing hubs, as well as for women and minority founders, whose networks are less likely to be high net worth. As was highlighted at our Small Business Forum in June, many women and minority founders find themselves pitching to investors and fund managers but do not “pattern match” with those investors’ notions of successful entrepreneurs.
The COVID-19 pandemic adds additional dimensions to what we hear, decimating many small businesses and making many existing capital raising challenges all the more acute. COVID-19 has also had a disproportionate impact on minority and women-owned small businesses. Our team is focused on collaboratively developing solutions to these challenges.
After enough miles, a car needs routine maintenance or repair work; there is always more work to be done. The same is true for our capital raising framework. As our markets evolve and the needs of companies and investors take new shapes, so does our need to take a fresh look at whether the vehicles for capital raising are tuned to meet the needs of their various passengers, especially when those passengers deviate from the “norm.”
In our inaugural report to Congress delivered last December, we distilled the top five most pressing capital raising issues expressed by small businesses and their investors and our proposed solutions. Since then, the Commission has taken action in those areas, from proposals to harmonize the exempt offering framework, to a framework for finders, to scaling public company reporting obligations. We will continue to seek input on opportunities for improvement.
The current COVID-19 challenges are testing much of the capital raising ecosystem and are highlighting both its strengths and vulnerabilities. We are continuing to focus not only on longstanding capital raising issues, but also on timely issues presented by 2020’s curveballs. Our 2020 report to be delivered in December will paint a picture with illuminating data on how capital is being raised and the challenges faced, as well as presenting our policy recommendations for Congress and the Commission to take action.
For this audience of attorneys at SEC Speaks, I encourage you to reach out to our team and talk to us—securities mechanic to securities mechanic—to help develop solutions to these challenges together. As the Magliozzi brothers used to end each episode with a laugh: “Well, it’s happened again: you’ve wasted another perfectly good hour listening to Car Talk.” Thank you for spending perfectly good time with me today and going under the hood to explore how we advocate for our vital small businesses and their investors.
 Martha Legg Miller, Bolstering Capital Formation: The Third Leg of the SEC's Mission (Apr. 8, 2019), available at https://www.sec.gov/news/speech/miller-bolstering-capital-formation-040819.
 Office of the Advocate for Small Business Capital Formation, Foundational Business Plan (Apr. 2019), available at https://www.sec.gov/files/2019%20OASB%20Business%20Plan.pdf.
 A special thanks to our growing team who tirelessly advocates for small businesses and their investors: Colin A. Caleb, Julie Zelman Davis, Sebastian Gomez Abero, Jessica W. McKinney, Jenny Riegel, Malika Sullivan, and Todd VanLaere. See https://www.sec.gov/oasb-meet-team. Each of you have made it possible for me to temporarily take a step away from work for parental leave, and I am so proud to cheer you on from the sidelines and celebrate all that you are accomplishing.
 See, e.g., Office of the Advocate for Small Business Capital Formation, Annual Report for Fiscal Year 2019, available at https://www.sec.gov/files/2019_OASB_Annual%20Report.pdf.
 The Securities and Exchange Commission disclaims responsibility for any private publication or statement by any of its employees. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
 See Overview of Exemptions, available at https://www.sec.gov/smallbusiness/exemptofferings/exemptofferingschart.
 For a discussion of some of the challenges raised by small businesses and their investors and the Commission’s proposed exemptive order for finders, see SEC Press Release 2020-248, SEC Proposes Conditional Exemption for Finders Assisting Small Businesses with Capital Raising (Oct. 7, 2020), available at https://www.sec.gov/news/press-release/2020-248; see also supra note 4 at 44-45.
 For a discussion of the Commission’s recent changes to the accredited investor definition, see SEC Press Release 2020-191, SEC Modernizes the Accredited Investor Definition (Aug. 26, 2020), available at https://www.sec.gov/news/press-release/2020-191.
 For a discussion of the Commission’s recent proposed changes to the exempt offering framework, see SEC Press Release 2020-55, SEC Proposes Rule Changes to Harmonize, Simplify and Improve the Exempt Offering Framework (Mar. 4, 2020), available at https://www.sec.gov/news/press-release/2020-55.
 See, e.g., supra note 4 at 26-33; Office of the Advocate for Small Business Capital Formation, Investing in Underrepresented Founders: What We Can Learn from the Data (Aug. 4, 2020), available at https://www.sec.gov/spotlight/sbcfac/sbcfac-learn-from-data.pdf.
 See Robert W. Fairlie, The Impact of Covid-19 on Small Business Owners: Evidence of Early-Stage Losses from the April 2020 Current Population Survey, National Bureau of Economic Research (June 2020 Working Paper), available at https://www.nber.org/papers/w27309.
 See Caroline Criado Perez, Invisible Women: Data Bias in a World Designed for Men (Mar. 12, 2019) at “Chapter 9: A Sea of Dudes” (discussing the dangerous consequences of designing cars around crash test dummies that are based on the 50th percentile male physique without consideration of unique female physical characteristics); see also Keith Barry, ConsumerReports.org, “The Crash Test Bias: How Male-Focused Testing Puts Female Drivers at Risk” (Oct. 23, 2019), available at https://www.consumerreports.org/car-safety/crash-test-bias-how-male-focused-testing-puts-female-drivers-at-risk/.
 See, e.g., supra note 4 at 39-49.
 See supra note 12; SEC Press Release 2020-58, SEC Adopts Amendments to Reduce Unnecessary Burdens on Smaller Issuers by More Appropriately Tailoring the Accelerated and Large Accelerated Filer Definitions (Mar. 12, 2020), available at https://www.sec.gov/news/press-release/2020-58; SEC Press Release 2020-118, SEC Adopts Amendments to Improve Financial Disclosures about Acquisitions and Dispositions of Businesses (May 21, 2020), available at https://www.sec.gov/news/press-release/2020-118; SEC Press Release 2020-192, SEC Adopts Rule Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K (Aug. 26, 2020), available at https://www.sec.gov/news/press-release/2020-192. See also supra notes 10, 11 and 12.
 See, e.g., SEC Press Release 2020-101, SEC Provides Temporary, Conditional Relief to Allow Small Businesses to Pursue Expedited Crowdfunding Offerings (May 4, 2020), available at https://www.sec.gov/news/press-release/2020-101.