ACA Shares Angel Perspective as the SEC Proposes Ways to Increase Capital for Founders and Investors

By: Pat Gouhin, Chief Executive Officer

The Angel Capital Association and the broader angel investor community were represented during the recent committee meeting with the Securities and Exchange Commission to discuss vital issues that impact capital funding.  The SEC Small Business Capital Formation Advisory Committee met virtually on Tuesday, August 4 to discuss how to open the doors to US capital markets so that more Americans could participate as investors and entrepreneurs.  The angel perspective was represented by ACA member and former Chair, Catherine Mott, BlueTree Allied Angels, who sits on the advisory committee. 

Chairman Jay Clayton said the pandemic had exacerbated the need for “prompt and efficient” capital access, especially for underrepresented founders. Clayton said that minority-owned small businesses employ more than eight million Americans, but face challenges in accessing bank loans and are more likely to see non-traditional financing. Especially in times of stress, those sources become scarcer and more expensive. He said that COVID-19 has had a disproportionate effect on small businesses, especially minority- and women-owned businesses, and that the failure of small businesses has a major adverse effect on the economy. So this is everyone’s issue.

Clayton also thanked Martha Miller, the SEC’s Small Business Advocate, and her colleagues for their work in constructing the Office of the Advocate and addressing challenges to capital access for minority-and women-owned small businesses. Clayton said that racism, bias, and racial injustice are at the forefront of the national conversation, and the SEC’s focus on diversity and inclusion “is of paramount importance.” 

Martha Miller presented data on “Investing in Underrepresented Founders”. Minority businesses are growing, but have much less access to capital than white-owned businesses, which disproportionately limits their profitability. Investment yield rates of minority-owned businesses are very close to the national average. Gender has a major effect on access to start-up capital. Women got a lot less backing from VC, but women founders generated substantially more revenue per dollar of investment.

29.5% of angel investors are women, but only 11% of VCs are women and 71% of VC firms have no women members. The decline in small businesses during the pandemic has been disproportionately among minority- and women-owned businesses.

A challenge many entrepreneurs face is access to funding.  SEC Commissioner Hester Peirce raised the question of whether the regulatory framework is contributing to those barriers.  Peirce believes that Regulation Crowdfunding has not lived up to its full potential and is recommending that steps are taken to increase access.  Actions previously taken include the proposal of increasing the offering limit to $5M and allowing the use of certain special purpose vehicles. 

Peirce shared ideas during the committee meeting to make crowdfunding more attractive, including:

  • Eliminating or raising individual investment limits for both accredited and non-accredited investors, and/or simplifying the calculation of individual investment limits
  • Reducing current disclosure requirements while preserving investor protection, possibly by raising current threshold requirements for reviewed and audited financial statements and/or scaling reporting obligations based on offering size
  • Eliminating the prohibition on advertising crowdfunding offerings
  • Encouraging the involvement of intermediaries and increasing their alignment with investors by allowing them to receive carried interest or performance-based fees

Micro-offering exemptions for founders and investors to raise funds in their local communities was also offered as a solution.  This would allow fundraising without having to hire an attorney, possibly as an exemption for offerings up to $1M.

Demo days were also noted as an important opportunity for entrepreneurs without pre-existing funding networks.  The SEC has previously proposed a demo days exemption from general solicitation and Peirce posed the question whether that exemption is appropriately designed to let young companies showcase their ideas.

ACA will continue to keep our members informed with new developments.