The SEC’s Office of the Advocate for Small Business Capital Formation, formed in 2019 under the Small Business Advocate Act of 2016, has taken significant strides in supporting small businesses and their investors. Recognizing small businesses as essential economic engines, the office provides assistance on regulatory matters, analyzes the impact of rule changes, and conducts outreach programs. Additionally, it focuses on the unique challenges of minority-owned businesses and collaborates with the Investor Advocate on necessary legislative updates.

Each year, the office hosts the Government-Business Forum on Small Business Capital Formation, which generates a report for Congress. The 41st Annual Forum’s report addresses critical issues faced by entrepreneurs, particularly those in emerging markets, and provides actionable recommendations for the SEC to improve regulatory frameworks.

Key Recommendations and SEC Responses

1. Empowering Entrepreneurs in Capital Raising

The forum focused on enhancing resources and equitable capital access for entrepreneurs, offering several recommendations:

• Equitable Capital Access for Underrepresented Founders: The SEC was noncommittal, stating only that it would consider the recommendation. Ongoing rule changes, such as those in the exempt offering rules, are on the SEC's regulatory agenda.
• Educational Support for Entrepreneurs: The SEC noted existing resources like the Capital Raising Hub and Cutting Through the Jargon glossary to help business owners navigate funding options.
• Decentralizing Capital Markets: The SEC reiterated its support for educational tools but offered limited concrete actions toward broader decentralization of capital markets.

2. Hometown Entrepreneurship Outside Traditional Hubs

With remote work expanding geographic flexibility for entrepreneurs and investors, the forum made recommendations for improving capital access in diverse locations. Key proposals included:

• Broadening the Accredited Investor Definition: This change, intended to diversify capital sources and increase investor access, was met with vague support from the SEC, with no immediate plans for action.
• Finalizing the Finder’s Order: The SEC previously proposed an exemption for individuals engaging in certain accredited investor activities without broker-dealer registration. However, this proposal remains inactive, and the SEC did not indicate it would revisit it.

3. Supporting Emerging Fund Managers

To aid underrepresented fund managers, the forum proposed measures for more inclusive access to institutional funds. Among these:

• Creating State-Driven Fund Exemptions: The SEC agreed to consider this suggestion to support community-focused, intrastate funds that include non-accredited investors.
• Increasing 3(c)(1) Fund Thresholds: These funds, which limit investor numbers, face restrictions under the Investment Company Act. The SEC noted that changing this would require congressional action.

4. Modernizing Capital Market Rules for Small Public Companies

The forum highlighted the importance of regulation updates that address current technological and market demands. Proposals included:

• Enhanced Transparency in Short Selling: Responding to this, the SEC proposed a new rule in February 2022 that would increase disclosure on short positions for certain institutional investors, aiming to enhance market transparency.
• Improving the Clearing and Settlement Process: The forum called for collaboration with clearinghouses and broker-dealers to enhance small company liquidity, though the SEC response remained non-specific on actionable steps.

Looking Ahead for Small Businesses

The forum’s recommendations reflect the growing demand for regulatory changes that support small businesses, particularly minority-owned and regionally based companies, in navigating capital markets. While the SEC’s responses varied from open consideration to noncommittal, these discussions will continue to shape policies for entrepreneurs in the coming years.