The Jumpstart Our Business Startups Act (the “JOBS Act”), enacted on April 5, 2012, established a regulatory structure for startups and small businesses to raise capital through securities offerings through ,crowdfunding. On October 30, 2015, the SEC adopted the rules to implement Title III of the JOBS Act (“Title III ”). Title III added Section 4(a)(6), to the Securities Act of 1933 for certain crowdfunding transactions (“Regulation Crowdfunding or Reg CF”).
Some Diversity Aspects of Reg CF?
Reg CF is an exemption from the registration requirements in Section 12(g) of the Security Exchange Act of 1934, which was granted by the JOBs Act enacted in 2012 by the Obama administration. Read ,Reg CF : 101 What is Regulation Crowdfunding? for an introduction to the main features of Reg CF.
On March 15, 2021, amendments to Section 4(a)(6) were adopted which included temporary relief for some Reg CF issuers. This temporary relief was created to help small businesses during COVID-19. In this article, we discuss whether this relief helped to increase access to underrepresented business owners, including Black and Latinx women; other measures by the SEC remedy underrepresentation within the capital raising market, and recommendations for increasing access to capital for Black and Latinx owned businesses.
Until August 28, 2022, the temporary relief rules will allow Reg CF ,issuers offering more than $107,000 but no more than $250,000 to file financial statements certified by the principal executive officer.Without this relief, the issuer would need an accountant to review and certify its financials instead which requires more time and money.As such, the temporary relief is intended to expedite the Reg CF offering process for companies that have been impacted by Covid-19. In order to qualify, the business must provide prompt disclosure to investors about its reliance on the relief and must have been organized and in operation six months prior to the temporary relief. This relief should help some underrepresented businesses since 41% of Black owned businesses and 32% of Latinx owned businesses had to permanently close their doors due to the pandemic. Still, studies have shown that Black and Latinx participation in crowdfunding is still too low.
Other Diversity aspects of Reg CF.
Participation within crowdfunding by underrepresented businesses is low despite the fact that businesses owned by people of color and women tend to raise more than their White male counterparts.. The Small Business Capital Formation Advisory Committee of the SEC (“CFAC”) expressed interest in, improving securities regulations in order to make it more inclusive. As a result, the SEC introduced its newest office —the Office of the Advocate for Small Business Capital Formation (“OASB”) — on June 18th, 2020, at the Annual Small Business forum, to help improve these regulations.
On April 30, 2021, the OASB — led a ,presentation highlighting data that showed differential access to capital across demographic and ethnic groups. To ensure diverse voices were heard at SEC’s 40th Annual Small Business Forum, OASB also created a new initiative where they solicited policy recommendations in advance of the event so that underrepresented businesses and investors could actively participate in the rule-making process. The final report which includes the solicited policy recommendations has not been released yet.
Following the April 30, 2021 presentation, a couple of commissioners and a chairperson publicly wrote their remarks on the topic, including recommendations for the SEC to specifically tailor policy changes to impact diverse issuers and investors. The OASB reported that from 2014-2019, there was a 21% increase in business growth among Women-owned businesses. Specifically, Black women-owned businesses grew at an astounding 50% during this period, with Latinas not that far behind at 40%. With these statistics, it is clear that more diversity voices in the rule-making room could help change securities policies.
Commissioner Hester Peirce also proposed that the SEC consider expanding the accredited investor definition so that it can include additional certifications, designations, or credentials to help open more doors for small business owners, including women and racial minorities. Under this proposal, investors who are not wealthy enough to meet the accredited investor qualification would still be able to invest if they meet other credentials, such as adequate professional knowledge, experience, or educational background. Fortune reported, only about 10% to 15% of American households qualify as accredited. Of those only 1.3% identify as Black and 2.8% identify as Latinx. Expanding the accredited investor definition will specifically help Black and Latinx women-owned business owners because it will “empower investors to self-certify as accredited,” and allow issuers to solicit a greater pool of their personal and professional connections to help them fundraise in public.
Another recommendation is that the SEC could provide more educational materials for under-resourced start-ups with low financial or human capital on how to maximize their assets to participate in Reg CF. While Reg CF gives non-accredited investors a chance to invest, the requirements to participate can lead to costly legal fees, marketing fees, financial audits, and annual SEC reports. According to the ,SEC Staff’s 2019 Report to the Commission, the campaign disclosure preparation requires an average of 86 hours costing about $6,218 and marketing requires an average of 44 hours costing about $4,468. Providing more educational materials on how under-resourced entrepreneurs can participate in Reg CF will be helpful to Black business owners especially.
These are conversations that continue today as we think of ways to be more diverse and inclusive in all professions, and especially in our economy. For more information on Reg CF inquiries, contact us today to schedule a consultation!
*with contributions and additions by Elizabeth L. Carter, Esq., Managing Attorney