While equity crowdfunding, created by the JOBS Act, provided a somewhat streamlined method for entrepreneurs seeking to raise small amounts of equity capital, that process remains burdensome for the smallest entrepreneurs, who must meet a host of regulatory requirements and ongoing reporting obligations to take advantage of this exemption. The average equity crowdfunding capital raised in 2020 was approximately $309,000, and 40 percent of the entrepreneurs using crowdfunding were women or minorities.3 There is little sense—and there should be little regulatory interest—in imposing the SEC’s oversight where entrepreneurs seek to raise exceedingly small amounts of capital. This regulatory burden places a drag on small business development that may not be justified by any sort of investor protection interest.
Moreover, small offerings—for instance, in which an aspiring restaurateur or a couple of friends building an app ask their parents, family, and friends to get in on the enterprise with the hope of getting a cut of the profits down the road—still happen outside of regulated crowdfunding, without securities registration, and not pursuant to any existing exemption to registration. The issuer is often unaware of the need for securities registration, and the failure to follow the securities laws only complicates the process when an issuer grows and moves on to more formal methods of raising capital, often resulting in having to unwind those early investments.
The Securities Act of 1933 already recognizes that “the small amount involved or limited character of the public offering” may be an appropriate reason for the SEC to exempt such securities offerings from registration as “not necessary in the public interest.”4 But the SEC has not promulgated such an exemption. A statutory exemption would ensure that the smallest entrepreneurs would be unencumbered by securities regulations that are unnecessary for the protection of investors.
Where entrepreneurs seek to raise larger amounts of capital (i.e., those who typically look to raise money under the exemptions provided by Rule 506 of Regulation D), the general requirement that their investors be “accredited” harms both small business and investors. Regulation D offerings are popular; more than $1.9 trillion was raised through Regulation D offerings between July 1, 2020, and June 30, 2021, which exceeds the $317 billion raised in initial public offerings.5 But, currently, individual investment in these private offerings is limited to those with more than $200,000 in annual income or assets in excess of $1 million, along with a limited number of individuals who hold certain securities licenses. The SEC is considering recommending updates to the accredited investor definition and is expected to increase the wealth thresholds that an investor must meet to qualify.6
The accredited investor definition dampens small business growth by limiting the pool of investors available to entrepreneurs; that effect is borne disproportionately by would-be entrepreneurs in less wealthy communities, both minority and rural, who have fewer opportunities to recruit investors from the people closest to them.
This limitation on entrepreneurs is not offset by an investor protection benefit. Indeed, the focus on wealth does not protect investors from fraud, and it arbitrarily bars investors from certain offerings. Making the SEC the judge of who is and is not fit to invest subverts the federal securities laws’ disclosure regime that permits any offering to be made to the public if the issuer provides the right disclosures. In addition, these restrictions—especially when paired with reduced initial public offering volume and longer waits for companies to tap the public markets—can exacerbate wealth inequalities by limiting investment opportunities in potentially higher growth enterprises.