Comments to FSC: Feedback on Legislative Proposals to Increase Investor Access and Facilitate Capital Formation

By SBE Council at 31 March, 2025, 3:52 pm

The Honorable Ann Wagner

Chairwoman

Subcommittee on Capital Markets

Committee on Financial Services

United States House of Representatives

Washington, D.C. 20515

The Honorable Brad Sherman

Ranking Member

Subcommittee on Capital Markets

Committee on Financial Services

United States House of Representatives

Washington, D.C. 20515

Re: Comments following on the February 26, 2025, hearing "The Future of American Capital: Strengthening Public and Private Markets by Increasing Investor Access and Facilitating Capital Formation"

Dear Chairman Wagner and Ranking Member Sherman:

The Small Business & Entrepreneurship Council (SBE Council) appreciates this opportunity to file comments with the House Subcommittee on Capital Markets following the hearing "The Future of American Capital: Strengthening Public and Private Markets by Increasing Investor Access and Facilitating Capital Formation." Indeed, investors and capital formation are vital to entrepreneurship - i.e., starting up, owning and operating a business - the essential ingredient in free enterprise that drives innovation, and economic, productivity, income and employment growth.

SBE Council is an advocacy, research, and education organization that works to advance policies and initiatives that encourage startup activity and small business growth. Our network of more than 100,000 member supporters, including entrepreneurs and small business owners, state and local business organizations, corporate partners and associations, work with us to strengthen the environment for entrepreneurship, investment, and innovation. Since our founding in 1994, SBE Council has helped to strengthen the ecosystem for small business and entrepreneurial success in the U.S. and around the world.

Capital formation and access to capital have been core SBE Council issues since our founding. We have played a key role advancing various legislative and regulatory initiatives over the years to strengthen U.S. capital markets and capital access.

Thinking about the economy, capital markets and public policy, it's important to keep in mind that the word "capital" really has two meanings, and they are related. One of the "10 C's" of capitalism that I explained in my book The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist was "capital" and its two related meanings.

The first, traditional economics definition of capital is "the man-made resources - such as technology, tools, machinery and equipment, facilities, and so on - used to produce, or make, other products. So, capital investment is the creation and increase in these productive assets that, again, help human beings make other goods and services, now and in the future. To get a bit more expansive, investments in other types of capital, that is, investments in human capital - such as education and training; and expanding human knowledge, ingenuity, skills, abilities and strength - mean that resources, including land and other natural assets, can be used more efficiently and effectively."

The second meaning of capital "has to do with financial capital or capital markets. In this case, capital refers to stocks, bonds and other financial assets. How are these related to productive capital? Financial capital markets allow individuals and businesses to gain access to the funds that finance the creation, expansion and improvement of productive capital. Quite simply, the entrepreneur with the next great idea, or the business seeking to expand or innovate, needs investors or creditors - that is, financial capital - to turn their ideas into realities."

Financial capital then is foundational to fund the creation and building of productive capital. And capital markets directly impact business growth and the broader economy as businesses are able to gain access to financial capital that fund innovation, productivity, product development and growth. That is, capital markets bring individuals, institutions and enterprises with money together with entrepreneurs and businesses in need of funding to startup and expand businesses. So, the various ways that businesses are able to raise financial capital - from venture capital and angel investors to initial public offerings to banks to investment (regulated) crowdfunding, and more - need to be healthy, deep, and robust.

As the Federal Reserve Bank of St. Louis simply and accurately summed up : "Without markets for stocks and bonds, business owners would have fewer options to bring their ideas to life or to expand their businesses; they would have to save up enough cash to re-invest. With healthy capital markets, business owners can obtain the needed financial capital to build successful companies. They can also expand existing businesses to create new jobs and strengthen the economy. Capital markets also reduce the cost of doing business by providing the global economy with a reliable source of cash or liquidity."

Among the many studies and analyses making clear the importance of robust capital markets for our economy, SIFMA (Securities Industry and Financial Markets Association) has noted: "There is a clear relationship between capital market depth and GDP per capita when expressed as purchasing power parity. Higher GDP per capita means individuals have higher disposable income and the potential to save more. Deeper capital markets may help drive higher GDP per capital through the more efficient allocation of capital. As such, the U.S., with its deep capital markets, accounts for 44% of total global markets activity. Its markets drive high GDP per capita, which in turn provides individuals with economic opportunities."

Therefore, it's important that public policies support the establishment and functioning of strong, deep capital markets. That requires tax and regulatory systems that encourage investment, innovation and growth, including basic regulatory measures, or guard rails, that allow for well-functioning markets, such as property rights enforcement, and protecting against theft, fraud, misinformation and other abuses.

Small business owners often cite access to capital as being an impediment. As noted in a recent survey by Goldman Sachs, 80 percent of small businesses reported that "it was difficult to access affordable capital." SBE Council surveys over the past year have tracked the deterioration of this critical issue for small business owners. In our 2024 election issues report (October 2024), our Small Business Check Up Survey revealed that 57 percent of small business owners reported that the lack of capital and credit was hampering their operating capacity.

While the above findings have a great deal to do with the inflation and interest rate environment, the history of such survey responses point to a broader and enduring challenge. Therefore, SBE Council appreciates the Committee's efforts to expand access to financial capital and to promote capital formation.

Among the proposed legislation that SBE Council supports are the following that were covered in the recent Subcommittee hearing focused on "strengthening public and private markets by increasing investor access and facilitating capital formation."

● Proposed legislation that would expand the definition of an accredited investor, such as the Fair Investment Opportunities for Professional Experts Act sponsored by Chairman French Hill (AR-02), the Investment Opportunity Expansion Act, sponsored by Rep. Marlin Stutzman (IN-03), and the Accredited Investor Definition Review Act sponsored by Rep. Bill Huizenga (MI-04). It is positive that, among other steps, the Fair Investment Opportunities for Professional Experts Act includes as an accredited investor "any natural person the [U.S. Securities and Exchange Commission] determines, by regulation, to have demonstrable education or job experience to qualify such person as having professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by a self-regulatory organization…" The modernization of the definition will allow entrepreneurs to tap into a pool of capital beyond wealthy investors.

● Proposed legislation that would ease the various burdens and costs of small businesses being able to raise funds for growth and innovation by going public would be highly beneficial, including the Encouraging Public Offerings Act of 2025 sponsored by Rep. Ann Wagner (MO-02), the Improving Disclosures for Investors Act of 2025 sponsored by Rep. Bill Huizenga (MI-04), the Unlocking Capital for Small Businesses Act of 2025 sponsored by Rep. Maria Salazar (FL-27), and Rep. Zach Nunn's (IA-03) proposed bill "to amend the Securities Exchange Act of 1934 to specify certain registration statement contents for emerging growth companies, to permit issuers to file draft registration statements with the Securities and Exchange Commission for confidential review."

● Another piece of legislation that holds potential benefits is the proposed Middle Market IPO Underwriting Cost Act, sponsored by Rep. Jim Himes (CT-04), which calls for a study of the costs associated with small- and medium-sized companies to undertake initial public offerings. By studying the barriers, regulators and legislators can identify effective solutions to reduce costs and lower barriers.

● The Helping Angels Lead Our Startups (HALOS) Act of 2025, sponsored by Rep. Mike Lawler (NY-17), would provide clarity and reassurance for startups, and expand opportunities for businesses to make presentations to potential investors.

● The Helping Startups Continue to Grow Act, sponsored by Rep. Bryan Steil (WI-01), would enhance the ability for small businesses to raise funds by expanding the definition of an "emerging growth company."

● The Small Entrepreneurs Empowerment and Development (SEED) Act of 2025, sponsored by Rep. Andrew Garbarino (NY-02), would boost access to capital markets by providing "small issuers with a microoffering exemption free of mandated disclosures or offering filings, butsubject to the antifraud provisions of the Federal securities laws."

● Also, the Risk Disclosure and Investor Attestation Act, sponsored by Rep. Warren Davidson (OH-08), would expand access for entrepreneurs and smaller businesses to investment capital by permitting "an individual to invest in private issuers upon acknowledging the investment risks."

● The friction associated with investment crowdfunding for entrepreneurs who seek much-needed capital would be eased with the Regulation A+ Improvement Act of 2025, sponsored by Rep. Marlin Stutzman (IN-03), the Improving Crowdfunding Opportunities Act, the Amendment for Crowdfunding Capital Enhancement and Small-business Support (ACCESS) Act of 2025, sponsored by Rep. Dan Meuser (PA-09). These are important measures given the importance of crowdfunding for entrepreneurs. As Sherwood Neiss, a principal of Crowdfund Capital Advisors, SBE Council member, and one of the three key players in introducing the idea of regulated crowdfunding to Congress and the White House and subsequent passage of the JOBS Act of 2012, reported last year:

"In the decade since the JOBS Act of 2012 introduced Regulation Crowdfunding (Reg CF), we've witnessed a transformative shift in startup financing. This innovative funding mechanism has democratized access to capital, empowering a diverse array of entrepreneurs and invigorating the American economy. The success stories are numerous, with over $2 billion invested across thousands of companies, nurturing innovation, fostering job creation, and driving economic growth."

Indeed, the legislative proposals considered by the Committee at its February 26, 2025, hearing would be welcome measures that would, to varying degrees, expand access to capital for entrepreneurs, and their small- and medium-sized businesses that remain vital to U.S. economic growth. The cumulative effect for startups and small businesses would be significant, as would be the impact for innovation, quality job creation, and strong economic growth for our nation.

SBE Council appreciates the opportunity to submit our views for the committee hearing record.

Sincerely,

Raymond J. Keating, Chief Economist

SBE Council