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A Start-Up Within the Government: Introducing the SEC’s Office of the Advocate for Small Business Capital Formation

Martha Miller, Advocate for Small Business Capital Formation

Martha Miller
Advocate for Small Business Capital Formation

Remarks at PlexPod in Kansas City, Missouri

March 20, 2019

Thank you, Melissa [Miller] for that kind introduction.  I am delighted to be meeting with you today.  I plan to speak for 15 minutes about the U.S. Securities and Exchange Commission’s (“SEC’s”) newest office, after which we will begin a town hall discussion to learn from you and your experiences with capital formation.  Before beginning, I want to note that the remarks I share today represent my own views and not necessarily those of the Commission, the Commissioners, or other members of the staff.[1]

It is fitting that my first speech as the SEC’s new Advocate for Small Business Capital Formation is here in Kansas City, a city built almost 200 years ago as a fur trading post by entrepreneurs on the frontier.[2]  That entrepreneurial spirit continued a century later with 18-year-old Joyce Hall, who arrived at the Kansas City YMCA with two boxes of postcards that he grew into the greeting card company Hallmark.[3]  It is embodied by Ewing Kauffman, who started Marion Laboratories, selling calcium pills by day and filling orders by night from his Kansas City basement, leaving behind a philanthropic legacy with the Kauffman Foundation that now works to empower entrepreneurs.[4]  As a metropolitan area comprised of two cities split with a state border down the middle, Kansas City uniquely embraces collaboration and cooperation in fostering economic development in this region, which is reflected in the successes of entrepreneurs today who call this city home.

Today I look forward to introducing you to the newest office within the SEC—the Office of the Advocate for Small Business Capital Formation—and to let you know how this Office can champion capital formation for smaller companies like the ones you represent.  I’ll start with an overview of why this Office was created, what Congress charged this Office with doing, and how we will approach our mission and the Commission’s mission.

Before I dive in, I wanted to share with you a little bit about who I am and why I am passionate about supporting small businesses.  Growing up in Alabama, I have been surrounded by small businesses and was raised listening to the stories of the owners who built something to provide for themselves, their families, and their communities.  When my grandmother found herself a newly single parent in a small town in Alabama, she built a business from the ground up to provide for her three young children while filling a market void in her community.  My father vividly recounts buffing the floors of her store, or running food to her on his bicycle when she stayed open late with a customer.  The entrepreneurial spirit comes through from my mother as well, who founded a design business of her own.  My sister has followed in these family footsteps by turning her love of jewelry into a thriving business that reaches coast to coast.  And then there is me: the lawyer in the family.

In law school I found myself gravitating towards serving as a counselor to businesses as they undertook achieving their goals, whether through capital raises, joint ventures or acquisitions.  Working hand in hand with companies and their investors, I loved delving into problems, finding solutions, and supporting businesses looking to achieve their objectives.  My personal and professional experience has given me a keen understanding of the all-encompassing nature of building a business—of the intense focus required to ideate, scale, and commercialize—and the people-centric focus of businesses as providers for employees and families.

My experience also leads to the following observation: across every small business I have known or worked with, when its founders and leaders wake up in the middle of the night, it is not because they are debating whether to conduct a Rule 506(b) private offering or use Regulation Crowdfunding.  Rather, they are focused on business operations, growth strategies, and managing their team.  Few small business owners have a background in securities laws or are paying professional advisors to understand and speak up about where our regulatory framework may be unnecessarily impeding their capital formation efforts.  This new Office hopefully will help bridge the gap between business leaders throughout the country, on the one hand, and regulators in Washington, D.C., on the other.

Start with Why

To quote author Simon Sinek[5], in discussing the creation of the Office, it is important to “start with why” we were needed.  It is almost cliché now to extol that small businesses are job creators, generators of economic opportunity, and fundamental to the growth of the country—but the frequency of such statements is undergirded by the reality that small businesses account for the majority of net new jobs since the recession ended and are critical to the health and vitality of our country.[6]  In the absence of access to funding, small businesses cannot create new jobs, foster innovation, and develop into the next generation of publicly-traded companies whose growth fuels Main Street investors’ retirement accounts.  Following the recession and the tightening of credit,[7] equity financing has become an even more important means for small businesses to obtain the capital needed to grow and scale.[8]  While not every business does or should aspire to grow operations or pursue an IPO, those capital decisions should be choices driven by the business leaders, not by regulation.

In recent years, the amount of equity capital raised in the U.S. through securities offerings that are exempt from registration has outpaced the level of capital formation through registered securities offerings and IPOs, totaling over $1.8 trillion annually through offerings conducted in reliance on Regulation D of the Securities Act, the exemption most commonly associated with private placements.[9]  As originally intended, Regulation D is consistently utilized by small businesses, with the median size of offerings by non-financial issuers at less than $1 million.[10]

While large amounts of capital are raised in the private markets, your location in the country dramatically impacts how and from whom you access capital.  For example, venture-backed companies in the United States raised over $99 billion across over 5,000 deals in 2018, the highest dollar amount since 2000, yet companies in just three states took home over three-quarters of that funding.[11]  While innovation and talent is dispersed across this country, access to funding is not—a fact well known by those of you here today who seek capital away from the coasts.  It is also well reported that women-owned and minority-owned businesses face significant barriers in capital formation, starting businesses with significantly less capital and raising fractions of that raised by all-male and non-minority-owned founding teams.[12]

Recognizing that supporting small business is not a partisan issue, legislation to create this new Office - the “SEC Small Business Advocate Act of 2016” - was unanimously passed by the House and Senate.[13] 

What Does The Office Do?

The new Office of the Advocate for Small Business Capital Formation was created to give an independent voice to small businesses in D.C., and I am keenly aware that most of them do not have paid lobbyists and advisors championing their causes within the beltway.  Our mission is to advocate for small businesses and their investors, and to help these companies access capital markets, strengthening their voice within the SEC and the broader regulatory landscape.  We will do this by:

  • Working with small businesses to understand their capital formation issues through education and outreach;
  • Helping small businesses resolve issues with the SEC and self-regulatory organizations, including by recommending policy changes; and
  • Analyzing the potential impact of proposed rules and regulations likely to significantly affect small businesses.

The Office is also charged with proactively working to identify any unique challenges faced by minority-owned small businesses, women-owned small businesses, and small businesses affected by natural disasters.  In accomplishing our mission, we are committed to our Office’s values of accessibility, transparency, pragmatism, and efficiency—values equally applicable in government and in business.

Who Qualifies As A Small Business?

At this point, you may be asking, what exactly do you mean by “small business”?  Congress broadly defined “small business” to pick up a number of categories of companies, from emerging, privately-held startups to publicly-traded companies with less than $250 million in public market capitalization.[14]  One size does not fit all by lumping privately-held and publicly-traded companies together, nor does it fit all across the spectrum of small businesses we serve.  While the Office will focus efforts on giving a voice to companies and their investors who are not regularly heard in Washington, D.C. and at the SEC, the Office is committed to being accessible to all small businesses and their investors.

The creation of this new Office significantly amplifies the voices of small businesses and their investors on capital formation matters.  Our Office will annually submit a report to Congress analyzing the issues you have expressed and outlining our recommendations to improve the regulatory framework for capital formation.  I look forward to developing solutions that are practical and serve the needs of small businesses.

Which Policy Issues Will You Take Up First?

Over dozens of meetings during the first few weeks of operationalizing this Office, the question that comes up is “Which policy issues will you take up first?”  As an advocate for you, our small businesses, we need you to weigh in on where you encounter unnecessary regulatory obstacles that are preventing the efficient flow of capital to your business.  So here is my request: engage with us.  Reach out to us.  Share your experiences with us.  Help us tell your story.  Join us in improving the securities regulatory framework so that when it comes time to raise capital, your primary focus can remain on your business and your employees.

We hope to be visible and accessible to you regardless of your location by hosting town halls like today’s and convening roundtables around the country.  I invite you to participate in our annual Government-Business Forum on Small Business Capital Formation, which takes place in the second half of the year, and to join us when we are in your home state.  To quote Jerry Maguire: “Help me help you” by collaborating with us to help make our securities laws work better.

Conclusion

The SEC has an ambitious capital formation agenda.[15]  Among other things, that agenda includes consideration of offering reforms for business development companies, amendments that could reduce the number of companies that need to provide the SOX 404(b) auditor attestation report on internal controls, and harmonization of the private exemptive framework.  Our Office is committed to constructively advancing a regulatory framework that equally serves the start-up formed at the kitchen table, the manufacturer with plans to invest in the next phase of R&D, the healthcare innovator contemplating its IPO, and the listed company traded on our stock markets.  Our securities regulations must equally serve the single mother undertaking a new means to provide for her family (like my grandmother in rural Alabama), the greeting card pioneer here in Kansas City, and the publicly-traded pharmaceutical business that began in a local entrepreneur’s basement.  Good work has been done by the SEC, but we are not done with improving the regulatory framework for small business capital formation.

I am grateful to be surrounded by a talented team of public servants at the SEC who are committed to supporting small businesses.  As a startup office within the government, I have been blown away by the collaboration, efficiency, and sheer talent of the SEC staff dedicated to its important mission. I am also particularly appreciative of the support and enthusiasm with which our new Office has been greeted.  Thank you for spending time with me today, and I look forward to learning more about your individual experiences raising capital for the businesses you have built.

 

[1] 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.

[2] City of Kansas City, Missouri, Kansas City History, at http://kcmo.gov/kansas-city-history/.

[4] Ewing Marion Kauffman Foundation, Celebrate the Legacy, at https://www.kauffman.org/emk/introduction.

[5] Simon Sinek, Start With Why: How Great Leaders Inspire Everyone to Take Action (2009).

[6] Small businesses account for approximately 65% of the net new jobs created from 2000 to 2017.  Source: Small Business Administration, Frequently Asked Questions About Small Business (August 2018), at https://www.sba.gov/sites/default/files/advocacy/Frequently-Asked-Questions-Small-Business-2018.pdf.

[7] A recent study shows that 4 out of 5 entrepreneurs do not access bank loans or venture capital, and almost two-thirds rely on personal or family savings for startup capital.  Ewing Marion Kauffman Foundation, The State of Access to Capital for Entrepreneurs: From Barriers to Potential (February 5, 2019), at https://www.kauffman.org/-/media/kauffman_org/entrepreneurship-landing-page/capital-access/capital_access_lab_exec_summary_final.pdf.

[8] According to one survey, 46% of businesses surveyed with revenues under $5 million indicated the current business financing environment is restricting growth opportunities for their business, and 43% indicated it is restricting their ability to hire new employees.  Craig R. Everett, 2018 Q4 Private Capital Access Index Report, Pepperdine University (October 25, 2018), at https://digitalcommons.pepperdine.edu/gsbm_pcm_pca/17/.

[9] Scott Bauguess, Rachita Gullapalli, and Vladimir Ivanov, U.S. Securities and Exchange Commission, Division of Economic and Risk Analysis (DERA), Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2017 (August 2018), at https://www.sec.gov/files/DERA%20white%20paper_Regulation%20D_082018.pdf.

[10] See note 8 above.

[11] PwC/CB Insights, MoneyTree™ Report Q4 2018, at https://www.pwc.com/us/en/moneytree-report/moneytree-report-q4-2018.pdf.

[12] See note 6 above.

[13] See Public Law 114-284, at https://congress.gov/114/plaws/publ284/PLAW-114publ284.pdf.  Original cosponsors in the U.S. House of Representatives were Representatives Carney (DE), Crenshaw (FL), Duffy (WI), and Quigley (IL), and Senators Heitkamp (ND), Heller (NV), and Peters (MI) in the U.S. Senate.

[14]  The legislation that created our Office also established a Small Business Capital Formation Advisory Committee at the SEC.  See 15 U.S.C. §78qq.  These parameters on the categories of businesses to be included as “small businesses” are enumerated in connection with that Advisory Committee and are what we will use for our Office as well.

[15] See Jay Clayton, SEC Rulemaking Over the Past Year, the Road Ahead and Challenges Posed by Brexit, LIBOR Transition and Cybersecurity Risks (December 6, 2018), at https://www.sec.gov/news/speech/speech-clayton-120618.

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