In its annual report, the SEC Office of the Advocate for Small Business Capital Formation (the "Office") identified trends in how entrepreneurs and investors raised capital in fiscal year 2021.
The Office found increases from 2020 to 2021 in almost all forms of crowdfunding for startups and small businesses, identifying COVID-19 pandemic relief as the primary cause, despite numbers fluctuating quarterly. In addition, the Office highlighted an increase in IPO activity, with almost four times as many offerings and triple the amount of capital raised.
Based on feedback from small businesses and investors affected by the SEC's capital raising rules, the Office put forth several policy recommendations, including:
- overhauling the "qualifying venture capital fund" exemption in Section 3(c)(1) of the Investment Company Act, including (i) increasing the current $10 million limit on the aggregate amount of capital contributions and uncalled committed capital to $150 million and (ii) increasing the number of permitted beneficial owners from 250 to 600;
- amending the "venture capital fund" definition under Rule 203(l)-1 ("Venture capital fund defined") of the Investment Advisers Act to permit venture capital "funds of funds" investments by treating an investment in another venture capital fund as a qualifying investment; and
- proposing a new limited, conditional exemption from broker registration requirements for "Finders" who assist companies with raising capital in private markets from accredited investors.
Commentary Steven Lofchie
Notably, the Office suggests that the way to help small businesses raise capital is to provide them with some lessening of regulation.
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