Generally Soliciting Comments without Checking Accreditation: Remarks before the Small Business Capital Formation Advisory Committee

Thank you, Erica. I would like to extend my congratulations to the new members of this Committee, Jennifer Newton, Rose Standifer, Wendy Stevens, and Emily Underwood. I look forward to your individual contributions to this Committee and thank you for your willingness to serve. Thanks to the rest of the Committee and our guest panelists for being here today.[1]

A belated thank you for your recommendation that the Commission "increase the [Crowdfunding] offering threshold at which reviewed financial statements are required from $124,000 to $350,000."[2] Such a change could help make crowdfunding a viable fundraising avenue for more small companies. Thank you also for your observations at the Committee's last meeting on the state of small business capital raising, which I found illuminating. At future meetings, I would welcome similar reflections on your own on-the-ground experiences.

To be effective, capital markets must be able to get money into the hands of good managers, regardless of whether they have rich friends and family. Only then will investors' funds find their way to the companies that can put those funds to their best use. Today's panels about emerging fund managers will help us explore ways we can lower barriers to entry for such managers and thus ensure that their expertise is being drawn upon to deploy capital.

The first panel will discuss the underutilization of Rule 506(c) under Reg. D, which allows issuers, including funds, to publicly advertise a private offering provided that each purchaser is accredited and that the issuer takes "reasonable steps to verify" the purchaser's accredited investor status.[3] Most recently, issuers raised around $169 billion annually under Rule 506(c) compared to $2.7 trillion under 506(b), which does not permit general solicitation.[4] I have some questions for your consideration during today's meeting:

1. According to Professor Sabrina Howell's paper, an average of only 8.4% of venture capital funds have used general solicitation since 2013.[5] Based on her paper, one of the reasons for the lack of interest in 506(c) seems to be the cost and legal risk associated with the "reasonable steps to verify" requirement.[6] How could the Commission mitigate these costs and legal risk? Should we allow an investor to self-certify her accredited investor status?
2. Professor Howell's paper suggests that use of 506(c) may send a "negative signal to investors" that the fund is incurring the cost of 506(c) only because it "does not have the requisite personal network to fundraise without general solicitation."[7] Would reducing the cost of verification sufficiently address this negative signal?
3. The paper posits that reforming Section 3(c)(1) of the Investment Company Act could expand the use of Rule 506(c) because "a 100-investor cap for 3(c)(1) private funds creates a regulatory barrier to 506(c) managers' access to small-time retail [accredited] investors."[8] Where should the cap be set to address this regulatory barrier?
4. Congress in the Economic Growth, Regulatory Relief, and Consumer Protection Act created a new exemption for "qualified venture capital funds" under Section 3(c)(1) of the Investment Company Act, which can raise capital from up to 250 investors and $12 million of aggregate capital contributions and uncalled committed capital.[9] What types of businesses and investors do qualified venture capital funds typically serve? Would a higher cap on investors or capital raise increase the usefulness of Rule 506(c), expand access to investing opportunities for smaller or less connected investors, or help fund managers access the capital they need? If so, what should the caps be?
5. What else can the SEC do to create a regulatory environment in which talented emerging fund managers, including those who do not have wealthy networks, can get a competitive toehold?

Thank you. I look forward to listening to today's discussion.