Remarks by Commissioner Crenshaw at the 44th Annual SEC Small Business Forum

Good afternoon. It’s a pleasure to be here today. And it’s hard to imagine a more important week to focus on small businesses.

It has never been easy to be a small business owner. But, after the whipsawing market events of last week, you could perhaps say there are few times in recent memory when it has been more stressful to be a small business. Even with a reprieve, uncertainty and unpredictability are generally bad for business.

Given current circumstances, it is more important than ever that the Commission is mindful of our mission’s directive to facilitate capital formation – particularly for small business owners who usually bear the brunt of adverse market developments. Small businesses already wobbled more due to the recent market volatility than their larger counterparts. Over the course of the last week, the Russell 2000 index, composed of smaller companies, weathered greater losses than other major indices with larger company constituents.

I firmly believe that facilitating capital formation and protecting investors are not mutually exclusive mandates. Instead, they are co-equal directives between which we should seek careful equilibrium. Markets, including those that support small business growth, function better when investors can participate appropriately, safely, and with confidence. So, today I am here to ask: how can we provide your businesses with greater exposure to investors who are the right match to contribute to your growth and success? How do we balance facilitating capital formation and maintaining meaningful protections designed to ensure that investors can access products that are appropriate for their financial goals?

Today’s agenda will cover an array of issues and regulations that exemplify that balancing act. As you know, many of these topics are already top of mind for the staff and the Commission. Your input is crucial to arriving at policy outcomes that create real opportunities for small business growth and investment.

On the topic of early-stage capital raising, the Accredited Investor standard is a perennial topic of debate. While many agree that the standard needs to be revisited, there is less agreement in how the definition should be updated. For example, last spring, the Commission’s Small Business Capital Formation Advisory Committee discussed the issue of revising the Accredited Investor definition and made recommendations including adding a qualifying educational program while preserving the current financial thresholds. [1] Meanwhile, I have expressed concern with the Commission’s failure to index the thresholds to account for inflation. [2]

I worry that leaving the Accredited Investor definition in its outdated form provides a de facto – and significant – expansion in access to private markets. These investors do not reflect the original intent of the standard: to exclude only those investors who can fend for themselves. [3] We should not passively scope investors out of the protections of the Securities Act purely due to the passage of time and related macroeconomic changes. [4] Is there a way for us to revise the Accredited Investor standard for today’s world that finds a middle ground between providing access to capital and appropriate investor protection? [5]

The decision of whether to pursue becoming a public company is another topic where your experience and input is deeply valuable. Why do companies increasingly choose to stay private? Recent research suggests that the oft-heard explanation – overburdensome regulation and related costs – may not necessarily be to blame. [6] In fact, it is widely known that the U.S. IPO market has declined for decades, but most commentators ignore that this smaller population of public companies account for a share of U.S. GDP that is roughly double that same figure in the 1990s. [7] While it is true that fewer companies go public, the ones that have done so are faring better than ever despite the regulatory regime. [8] So, how do small businesses actually think about the IPO process? Is there more to the story?

Finally, I’d like to leave you with some food for thought on retail access to private funds. This topic has consumed much attention in recent months, and we have started to see ideas for how to remove barriers to private funds for retail investors. Some of these ideas involve exposure through registered funds in various ways. [9] As the public and private markets have roiled and churned in recent days, [10] I am reminded of why some of the restrictions on retail access to these vehicles exist in the first place. How would increased retail exposure to private funds impact investors in times of market stress? How would retail investors fare alongside more sophisticated investors in such vehicles?

As small business owners, you are on the frontlines experiencing many of the ebbs and flows of our markets and overall economy. From this vantage point, you are uniquely able to help us find the balance between facilitating capital formation and our mandate to protect investors. Thank you for participating in today’s forum. I know that your input will make the staff and the Commission more informed and prepared to face the challenges of this week and tomorrow.