# ABOUT THIS REPORT + ACKNOWLEDGEMENTS

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A7a7038be1ca9a56d

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Annual
Report
FISCAL YEAR 2022

ABOUT THIS REPORT + ACKNOWLEDGEMENTS
This annual report of the Office of the Advocate for Small Business Capital Formation
for Fiscal Year 2022 is being delivered to the Committee on Banking, Housing, and
Urban Affairs of the U.S. Senate and the Committee on Financial Services of the U.S.
House of Representatives in accordance with Section 4(j) of the Securities Exchange Act
of 1934 (the Exchange Act), as amended by the SEC Small Business Advocate Act of
2016, 15 U.S.C. § 78d(j)(6).
Pursuant to Section 4(j)(6)(D) of the Exchange Act, this Report is provided directly to
the committees of Congress without any prior review or comment from the Commission,
any Commissioner, any other officer or employee of the Commission, or the Office of
Management and Budget. It does not necessarily reflect the views of the Commission, the
Commissioners, or staff of the Commission.
The work of the Office is possible only through the support of our talented and
passionate colleagues across the agency. The Office owes special thanks to our colleagues
who provided resources for this Report, including the Division of Economic and Risk
Analysis for providing data to quantify the state of small business capital formation and
contextualize issues, and the Office of Public Affairs for making our written product for
this report visually engaging. We particularly thank the following individuals: [Names to
be provided].

Message from the
Small Business Advocacy Team

I

t has been another challenging year for small businesses. While the most significant hardships
brought by COVID-19 appeared to lessen, many small businesses were simultaneously forced to
confront a host of new issues. This year has brought an acute awareness of disruptions to supply
chains, rising interest rates, inflationary pressures, a constrained labor market, and heightened
geopolitical conflicts.
For small businesses looking to raise capital, the “banner year” we discussed in our 2021 annual report
quickly faded away. Raising investment capital became harder at every stage of the capital raising cycle.
The challenges for underrepresented founders were even further magnified.
Now, more than ever, it is important to focus on the need for strong connections between founders and
the investors looking to support them, as reflected in the visual theme of this year’s annual report: building
bridges. We call on Congress, the Commission, and our partners to support small businesses and their
investors, with a particular focus on underrepresented founders and their investors.
On a more personal note, this year brought the departure from the SEC of Martha Legg Miller, the
inaugural Director of the Office. Martha brought wisdom, vision, and creativity, all of which have come
to define the work of the Office. Each of our annual reports has endeavored to embody those qualities.
Martha’s legacy is extensive and wide ranging—from our novel and interactive educational resources
that break down the securities laws and empower entrepreneurs and their investors, to behind-the-scenes
advocacy for policy changes that gave a voice within the Commission to entrepreneurs and investors
alike. Thank you, Martha, for your public service. We hope this year’s report shows that we are proud to
continue passionate advocacy for small businesses and their investors!

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i

Breaking Down Our Long Title

An independent office housed
within the U.S. Securities
and Exchange Commission,
created by Congress

One called to use your
voice for others, derived
from Medieval Latin

Office of the Advocate for
Small Business Capital Formation

From startups to small cap,
“small” is relative for the Office,
which supports emerging,
privately-held companies up to
small public companies

The deployment of
productive capital by
informed investors to
create economic growth

Contents
ABOUT THE OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
HIGHLIGHTS FROM FISCAL YEAR 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . .114
STATE OF SMALL BUSINESS CAPITAL FORMATION . . . . . . . . . . . . . . . . . . . . 13
Small and Emerging Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Mature and Later-Stage Businesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Small Public Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Women Business Owners and Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Minority Business Owners and Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
Natural Disaster Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Rural Communities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
POLICY RECOMMENDATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Entrepreneurs and their investors need accessible tools and educational
resources to navigate complex securities laws. . . . . . . . . . . . . . . . . . . . . . . . .70
Targeted regulatory changes can improve access to capital . . . . . . . . . . . . . . . . 72
Connecting founders with savvy investors is essential to capital raising. . . . . . . . . . 76
Emerging fund managers play a key role in small business capital formation and
need support.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Scaled disclosures for small public companies help them stay public.. . . . . . . . . . . 81
SMALL BUSINESS CAPITAL FORMATION ADVISORY COMMITTEE
FY2022 SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
ENDNOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

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iii

About the Office

T

he Office advocates for solutions to address challenges faced by small businesses and their
investors raising and deploying capital. “Small business” for the Office spans from early-stage
startups raising seed capital, to later-stage private companies whose founders and investors
are seeking liquidity in the public markets, all the way to smaller public companies. Congress
established the Office via the bipartisan SEC Small Business Advocate Act of 2016 as an independent
office within the U.S. Securities and Exchange Commission (SEC) that reports to the entire
Commission as well as to multiple committees of Congress.
The Office approaches its advocacy mission by:
§ Engaging with small businesses and their investors to understand their most pressing capital
raising issues;
§ Identifying unique capital raising challenges faced by minority-owned, women-owned, rural, and
natural disaster-affected small businesses and their investors;
§ Analyzing the potential impact of policy changes likely to significantly affect small businesses and
their investors; and
§ Advocating to Congress and the Commission for policy changes.

Mission
We champion pragmatic solutions so that small businesses—from startups to smaller public
companies—and their investors can build great companies together using our capital markets.

Core Values
§ ACCESSIBILITY — We engage with both small businesses and their investors, as well as with
the SEC, SROs, Congress, and other agencies on a regular basis through a variety of channels.
§ INCLUSIVITY — We encourage people to speak openly and contribute authentically to
facilitate greater trust and collaboration.
§ PRAGMATISM — We approach problems with a solution-oriented mindset to make
practical recommendations.
§ EFFICIENCY — We operate like a lean startup, maximizing resources and focusing activities
where the Office can have a meaningful impact.

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Our Advocacy Team

SEBASTIAN GOMEZ
ABERO
Deputy Director

JENNY J. CHOI
Special Counsel

KIM DINWOODIE
Engagement Specialist

SARAH R. KENYON
Capital Formation Analyst

VIKKI PORTER

JOHN CAVANAGH
Special Counsel

JULIE ZELMAN
DAVIS
Senior Special Counsel

COURTNEY
HASELEY
Special Counsel

JEPHTE LANTHIA
Special Counsel

AMY REISCHAUER

Visual Design Strategist

Strategic Engagement
Advisor

JENNY RIEGEL

MALIKA SULLIVAN

Policy Manager

Executive Assistant

TODD VANLAERE
Law Clerk

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S E C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

FY2022 at a Glance
We engage with small businesses and their investors from around the country to hear their perspectives
on issues facing the small business ecosystem, from policy, to changing trends in capital raising, to
the complexities of the capital raising regulatory framework, to unique challenges and opportunities
of different demographic groups and geographic regions. The insight we gain from our events and
conversations with small business ecosystem participants provides timely, practical feedback to inform
the Commission’s policymaking as well as the Office’s further outreach and educational efforts.
Our reach extends coast to coast, across media platforms, and to a range of partners and organizations.

32
68

36

SPEAKERS

85+

EVENTS
1/3 in person

HOURS
of content

@SECGov TWEETS
and 2MM+ IMPRESSIONS
across our social media platforms

2K+

24+

ATTENDEES

PARTNERS
collaborated
on events

52

U.S. STATES and territories,
10 TRIBAL NATIONS, and
25 COUNTRIES represented
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3

Our educational resources cover a range of topics, are easily accessible, and are expanding.

24K+

VISITS
to the
CAPITAL RAISING HUB

1

CAPITAL
RAISING HUB
for all SEC
small business
resources

1

119K+

views of our
EDUCATIONAL TOOLS and
SMALL BUSINESS RESOURCES

NAVIGATOR TOOL
to explore many pathways to capital

10

BUILDING
BLOCKS

3

YEARS
OF DATA
in our interactive
CAPITAL TRENDS MAPS

4

|

68

TERMS
in our expanded
CUTTING THROUGH
THE JARGON glossary

8 new

EDUCATIONAL
VIDEOS

SE C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Outreach and Engagement
This year, we had opportunities to connect in person at outreach events and in small group gatherings.
We also continued to leverage the benefits of remote engagement by reaching diverse audiences across
the small business ecosystem and across the country through virtual events and speaking engagements.
We found opportunities to share information about our Office’s resources, programs, and services and
to hear from small businesses, their investors, and other thought leaders in the market.
Entrepreneurs shared their challenges and successes building and funding their businesses.

[Starting a business] is very tough. You have to have a passion for it. You have to
believe in yourself and never accept no for an answer.
— DOKMAI WEBSTER, Founder and CEO,
Pivotal Point LLC

We heard from women and minority entrepreneurs about the unique challenges they face and
how obstacles to capital raising are heightened for underrepresented groups.
One struggle for a lot of underrepresented founders is that many don’t have
mentors. If only two percent of venture dollars are going to Black and minority
founders, then there aren’t that many to get advice from. Without that network and
the advice of people who have been there before, [new founders] can’t get there.

— DAVE LU, Founder and Managing Partner,
Hyphen Capital

Founders and investors across the country shared insights about the challenges and opportunities
of raising capital outside of the traditional hubs.
As [local entrepreneurial ecosystems] develop and the number of firms increase over
time in an area, you develop a critical mass that then makes it easier to attract
subsequent investment.

— MARYANN FELDMAN, Watts Endowed Professor,

Arizona State University

We engaged with fund managers, investors, and entrepreneurs on how to increase diversity among
capital allocators and the impact it could have on underrepresented founders.
As a woman who has had success and came from very humble beginnings, it’s
my responsibility to recruit more women and people of color to invest. Because
research shows that if you have more women and people of color investing,
more women and people of color get funded.

— CAROLINE CUMMINGS, CEO,
Regional Accelerator & Innovation Network (RAIN)

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Highlights from FY2022
Some of the events in which we have engaged this year include:

Joined Wyoming
founders, investors,
and small business
leaders for an engaging
conversation hosted by
gBETA about capital
raising for early-stage
Wyoming companies.

Joined UNC’s Black
Technology Ecosystem
Investors Certificate
Program to discuss
rules on early-stage
investing, focusing on
building ecosystem
capacity through the
equitable inclusion of
Black investors.

Showcased our
Office’s Capital
Raising Navigator
tool and other
educational resources
on a podcast with Dave
Lynn of TheCorporate
Counsel.net.

Discussed the SEC’s
role in expanding DE&I
in capital formation
and equity ownership
with investors and
entrepreneurs at the
Carta Equity Summit.

Q1 FY2022

6

|

Hosted our third annual
Capital Call, styled
after public companies’
earnings release calls
and giving the public
opportunities to ask
live questions.

Joined the U.S. Small
Business Administration
and the Department
of Treasury for
#NatlEshipWeek’s
Funding & Financing
Friday event highlighting
the wide array of
government programs
and resources available
to entrepreneurs
seeking to launch and
grow a business.

Discussed diversity
among capital allocators
and entrepreneurs and
bridging the divides at
Kenan’s Frontiers of
Entrepreneurship Series.

Engaged in discussion
on challenges women
face when raising
capital, especially
women of color, at
Phoenix, AZ event
hosted by Prestamos
CDFI Women’s
Business Center.

Q2 FY2022

S E C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Shared challenges
and insights on how
historically underfinanced entrepreneurs
may seek to build
investor networks and
access capital raising
resources at event
hosted by William
Factory Small Business
Incubator.

Shared an overview
of the SEC and capital
raising pathways
with cohort of
Florida International
University MBA
students interested
in entrepreneurial
ventures.

Hosted the SEC’s 41st
annual Small Business
Forum.

Engaged with
students from
University of
Missouri-Kansas
City’s executive MBA
program on the
SEC’s rulemaking and
regulatory processes.

Delivered the keynote
presentation at the
Michigan Celebrates
Angels annual event
celebrating the success
of angel investors in
Michigan startups and
early-stage technologybased companies.

Joined the Department
of Treasury and
state and tribal
representatives for
an overview of how
federal securities laws
apply to investment
capital raising—
specifically for State
Small Business Credit
Initiative equity
program investments.

Q3 FY2022

Featured in the
National Diversity
Coalition’s town
hall panel discussion
highlighting the need
to bridge access
to educational and
legal resources for
minority-owned small
businesses—with
specific focus on
empowering the AAPI
community.

Participated in a
roundtable hosted
by Engine during
#StartupAdvocacyWeek
on innovative endeavors
by entrepreneurs across
the country.

Joined the Capital
Region Minority
Supplier Development
Council for a panel
discussion on the
challenges facing
minority business
owners.

Led a webinar on equity
capital raising hosted by
Small Business Majority
on challenges facing
women and minority
business owners and
demonstrated SEC
tools to empower
entrepreneurs.

Joined the University
of Houston C.T. Bauer
College of Business for
a series of discussions
on entrepreneurship,
capital raising, and the
importance of diversity,
equity, and inclusion.

Shared SEC tools
and resources for
empowering business
owners to learn more
about capital raising at
a workshop hosted by
KiwiTech.

Q4 FY2022

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41st Small Business Forum
The SEC’s annual Small Business Forum is a unique event where members of the public and private sectors
gather to provide feedback to improve capital raising policy.11 The Forum covers a broad range of issues
affecting small businesses and their investors, from early-stage entrepreneurial ventures to smaller public
companies.
This year marked the 41st Forum, which the Office hosted virtually over four days from April 4-7, 2022.
Each day featured speakers with in-depth knowledge of the issues facing small businesses across the
country, spotlighting the following topics:

A G E N DA

l4
Monday, Apri

preneurs
e
r
t
n
E
g
in
r
e
Empow
g
capital raisin
ate
Tools to navig

ril 5
Tuesday, Ap

eneurship
r
p
e
r
t
n
E
n
w
Hometo
tside of
can thrive ou
neurs
How entrepre hubs
g
capital raisin

April 6
Wednesday,

r Voices
o
t
s
e
v
In
w
e
N
rs are
fund manage
g
How emergin pital
a
c
g
diversifyin

ril 7
Thursday, Ap

orld
Small Cap W
ink ahead
nd how to th
wa
What to kno

At the end of each day’s session, participants prioritized policy recommendations on that topic to be submitted
to the SEC and to Congress. Video archives of each day’s events are available in the Forum video gallery.
On July 28, 2022, the Commission delivered the 2022 Forum Report to Congress, which summarizes the
Forum proceedings, including the recommendations developed by participants for changes to the capital raising
framework and the Commission’s responses to those recommendations.
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SE C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Educational Tools and Resources
In the fall of 2021, in partnership with other SEC offices and divisions, we
launched our Capital Raising Hub,2 a centralized portal for educational
tools and resources for entrepreneurs and their investors. We have continued
to expand and update the Capital Raising Hub in response to feedback
from small businesses and investors to make it easier to find all of our small
business resources. In addition, the Capital Raising Hub is now directly
accessible under the “Education” tab on the SEC’s homepage. Visitors to the
Hub will find resources to support each phase of the capital raising journey.

CAPITAL
RAISING
HUB

Getting Started:
Understanding the Fundamentals
Navigate Your Options
We have continued to improve our interactive tool that
explores regulatory pathways to raise capital, identifying
the most relevant options based on the user's answers
to a series of questions about their business.

Cutting Through the Jargon
We also have expanded our curated glossary of key
terminology that makes the language of capital raising
more accessible to small businesses and their investors.

Building Blocks
This year, we launched the first of several installments of our suite of educational
materials that break down fundamental securities law concepts into plain language.
We have continued to expand this collection of resources based on feedback
received directly from prospective users through our outreach efforts.

Capital Raising Video Gallery
As part of the expansion of our Capital Raising Hub,
we launched our new Capital Raising Video Gallery,
where users can find a number of educational videos,
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including our A
Capital
101 FI
series
other
videos
highlighting pertinent capital raising topics and data.

Continuing the Journey:
Exploring Pathways to Raise Capital

Exempt Offerings
Through the more comprehensive Capital Raising
Hub, users can find our resources on common capital
raising pathways—like how to raise capital from
investors without registering the offer and sale of
those securities with the SEC.

Going Public
The expanded Capital Raising Hub also directs
users to resources on how to prepare for and raise
capital through a registered public offering.

Rulemaking Video Gallery
In our efforts to monitor the potential impact of policy
changes on small businesses and their investors, we
launched several videos that provide a high-level
summary of relevant policies or rulemaking initiatives
that the Commission is considering.

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SE C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

The Landscape:
Data, Research, and Other Resources

Capital Trends Maps
We regularly update the data available through our
interactive maps to allow users to stay informed about
how and where capital is being raised across the country.

Research Reports
Reports and studies on capital raising issues and
trends from around the country are also available.

Small Business Compliance Guides
Our comprehensive Capital Raising Hub affords
easy access to the SEC's small business compliance
guides, which provide valuable information on SEC
rules on offering and selling securities and financial
and other reporting by public companies and how
they may affect smaller businesses.

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SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

State of Small Business
Capital Formation

T

he data provided in this Report is derived from public filings with the SEC, as analyzed by the
SEC’s Division of Economic and Risk Analysis (DERA), and is supplemented with figures and
findings from third parties. We hope this approach provides a comprehensive snapshot of the
state of U.S. small business capital formation, amalgamating many important pieces of the capital
formation story into one resource to aid in evaluating the current flow of capital between investors
and small businesses. The data supplements anecdotal evidence and helps quantify the successes and
challenges in small business capital formation nationwide. Unless otherwise indicated, the data period
for DERA data is July 1, 2021 to June 30, 2022. Using data, we can better identify what tools, strategies,
and approaches would be most helpful in crafting policy solutions.

What regulatory pathways are companies using to raise capital?3

Rule 506(c)
$148B
($800,000 median)

Rule 506(b)

Regulation A
$1.8B

Private Placements

$2.3T
($1.3M median)

Rule 504
$624M
($250,000 median)

Initial Public
Offerings
$126B
($150M median)

($2.2M median)

Crowdfunding
$368M
($100,000 median)

Other Exempt
Offerings4
$2.0T

Other Registered
Offerings
$1.1T
($450M median)
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What pathways are available to raise capital from investors?
EXEMPT OFFERINGS
Offerings conducted pursuant to an exemption from registration are often referred to as exempt offerings.
There are multiple exemptions available for small businesses looking to raise capital from investors.

Rule 506(b) Private Placements allow companies to raise
unlimited capital from investors with whom the company has a
relationship and who meet certain wealth thresholds or have certain
professional credentials. A company cannot use general solicitation
in a 506(b) private placement.5

Rule 506(c) General Solicitation Offerings allow companies to
raise unlimited capital by broadly soliciting investors who meet
certain wealth thresholds or have certain professional credentials.6

Rule 504 Limited Offerings allow companies to raise up to $10
million in a 12-month period, in many cases from investors with
whom the company has a relationship.7

Regulation Crowdfunding Offerings allow eligible companies

to raise up to $5 million in investment capital in a 12-month period
from investors online via a registered funding portal.8

Intrastate Offerings allow companies to raise capital within a

single state according to state law. Many states limit the offering
to between $1 million to $5 million in a 12-month period.9

Regulation A Offerings (sometimes called a “mini-IPO”) allow

eligible companies to raise up to $20 million in a 12-month period in
a Tier 1 offering and up to $75 million in a 12-month period in a Tier
2 offering through a process similar to, but less extensive than, a
registered offering.10

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SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

REGISTERED PUBLIC OFFERINGS
A registered public offering is commonly used to describe an offer and sale of securities that has
been registered under the Securities Act. Companies must file a registration statement with the SEC
and may not sell the securities until the SEC declares the registration statement effective.

Initial Public Offerings (IPOs) provide an initial pathway for
companies to raise unlimited capital from the general public
through a registered offering. After its IPO, the company will be a
public company with ongoing public reporting requirements.11

Secondary Registered Offerings allow companies to raise
unlimited capital through secondary offerings using a registration
statement filed with the SEC.12

How are different industries using the top 3 offering pathways
to raise capital (excluding pooled funds)?13
Banking and
Financial Services

$576B

Technology

$155B

Real Estate

$64B

Energy

$108B

Health Care

$67B

$34B
$89M

Manufacturing

$99B

$143M

$42B
$84B
$76B

$89M

$755M
$10B
$33M

$2B

Hospitality, Retailing,
Restaurants

$3B
$40B
$2B

Business Services

$33M
$233M

$39B

REGISTERED OFFERINGS

REGULATION D

REGULATION A

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15

$375M

Where are companies raising capital?14
The following maps illustrate the concentration of estimated total capital raised under various offering
types by issuers that report a primary location in the U.S., with the number of offerings conducted
indicated on each state.
WA
7,490

Regulation D
MT
67

OR
310

ID
125

NV
341

ND
46

MN
377

SD
46

WY
207

IA
123

NE
84

UT
1,947

CO
1,057

CA
6,340
AZ
516

WI
180

OK
138

NM
59

GU
0

NONE

MS
34

LA
78

MT
1

MN
9

SD
0

AZ
13

OK
2

TX
59

GU
0

NONE

AK
0

OH
13
KY
4

MS
0

AL
4

OVER $20 BILLION

VT
3 NH
10

ME
3

PA
33
WV
0

VA
20

MD
12

MA
50

RI
1

CT
NJ 16
10
DE
DC 11
4

NC
12

TN
11

AR
1

GA
24

SC
10

FL
61

HI
2

LESS THAN $500,000

IN
2

IL
14

LA
2

NY
71

MI
10

MO
10

KS
1

NM
4

WI
6

IA
3

NE
0
CO
19

VI
1

Regulation
Crowdfunding

ND
1

WY
1

CA
194

SC
187

$5 BILLION - $20 BILLION

$1 BILLION - $5 BILLION

UT
15

MD
426

PR
79

WA
14

NV
8

CT

NC
601

GA
676

AL
208

VA
617

RI
51

FL
2,028

LESS THAN $1 BILLION

ID
11

WV
8

MA
1,695
NJ 615
587
DE
DC 1,215
285

PA
803

TN
365

HI
36

OR
10

OH
497
KY
118

AR
137

TX
3,434
AK
9

IN
249

MO
206

KS
152

NY
5,688

MI
357

IL
1,129

ME
61
VT
300
NH
67

PR
1

$500,000 - $1 MILLION

$1 MILLION - $5 MILLION

VI
0

OVER $5 MILLION

Regulation A

WA
7
MT
0

OR
2

ID
1

NV
15

ME
1

ND
1

WY
1

SD
0

CO
4

CA
53
AZ
8

WI
0

IA
0

NE
0

UT
4

VT
0 NH

MN
3

OK
2

GU
0

NONE

MS
0

LA
0

MT
0

NV
25

CO
31

AZ
28

SD
2

GU
0

NONE

LESS THAN $1 BILLION

WI
9

IA
4

OK
5

NM
2

IL
74

IN
20

OH
59
KY
9

MS
3

AL
5

OVER $75 MILLION

VT
0 NH
2

ME
12

PA
55
WV
0

VA
60

MD
22

MA
127

RI
4

CT
NJ 35
50
DE
DC 14
10

NC
54

TN
20

AR
9

LA
2

NY
442

MI
107

MO
22

KS
2

TX
173
AK
4

VI
0

$20 MILLION - $75 MILLION

MN
34

NE
18

CA
349

SC
1

Registered
Offerings

ND
1

WY
1
UT
19

MD
3

CT
NJ 1
6
DE
DC 2
6

NC
5

GA
11

AL
0

VA
3

PR
1

$5 MILLION - $20 MILLION

ID
5

WV
0

RI
0

FL
38

WA
35
OR
9

OH
2

PA
2

TN
0

HI
0

LESS THAN $5 MILLION

IN
2

KY
1

AR
0

TX
6
AK
0

IL
4

MO
0

KS
0

NM
0

MI
0

MA
3

0

NY
101

GA
42

SC
6

FL
89

HI
2

PR
0

$1 BILLION - $5 BILLION

$5 BILLION - $20 BILLION

VI
0

OVER $20 BILLION

What is happening with Regulation Crowdfunding offerings?
The number and amount of crowdfunding offerings continue to
increase, supporting more women-founded, minority-founded, and
geographically diverse companies across the U.S.15

160,000

41%

of crowdfunded
issuers that raised
$1 million or more
had minority
founders

employees were
supported by
crowdfunded
businesses

46%

of crowdfunded
issuers that raised
$1 million or more
had women
founders

70%

66%

of capital
is distributed
outside the top 10
traditional
capital hubs

of investments
supported traditional
smaller businesses
vs. tech startups

$1,057

1,488

offerings in
2021, up 29%
from 2020

is the average
investor check size,
regardless of the
size of the raise

$442.6M

in 2021 capital
commitments, up
41% from 2020

U.S. Counties with Crowdfunded
Companies16

Quarterly New Crowdfunding
Offerings17
433 446

2020
2019
121
Counties

333

137
Counties

227

367

350

238

357

132

169

175

Q3

Q4

128

134

Q1

Q2

41

Q1

Q2

Q3

2020

Q4

Q1

Q2

2021

New Form C Filings
New Form C Filings with Max Offering
from $1.07M to $5M
|

382

2021
216 Counties

18

396

S E C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

2022

What is happening with Regulation D offerings?
Pooled funds continue to account for over 85 percent of the funds
raised under Regulation D.18
8,060

5,420
4,585
3,912

3,465

5,263

5,333

6,361

6,233

5,777

6,178

5,713
5,173

5,149

5,195

$699B

$406B

$648B

$411B

$619B

$394B

$92B

$85B

$97B

$76B

$73B

Q2

Q3

Q4

Q1

Q2

4,783
3,371

2,829

2,595

2,456

$418B

$263B

$344B

$305B

$47B

$39B

$46B

$61B

$89B

Q1

Q2

Q3

Q4

Q1

2020

2021

2022

Amounts Raised by Other Issuers

Amounts Raised by Pooled Funds

New Offerings by Other Issuers

New Offerings by Pooled Funds

What are the top industries raising capital through Regulation D
(excluding pooled funds)?19

$84B
$49B

Banking and Financial Services

$42B
$41B

Health Care

$34B
$1.2B $38B

Real Estate

Energy

$92B

$2.6B

Technology

$76B
$6B
$10B

July 2020 - June 2021

July 2021 - June 2022

A N N UA L R EPORT: FI SCA L YEA R 2022

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19

What is happening with Regulation A offerings?
The amounts sought have declined following the peak in the third
quarter of 2021.20
Following the Commission’s increase
of the maximum amount from $50M to
$75M, over 80% of offerings continue to
seek to raise $50M or less.

98

92

96

86

82

86

72

80

66

63

82

74

68

71

56

46

$2.4B
$1.4B

$1.3B
$901M

$690M
$394M

Q1

Q2

Q3

$1.4B

$1.1B

Q4

6
Q1

12

12

Q2

Q3

2020

$1.5B
$816M

16
Q4

8

11

Q1

Q2

2021

Amounts Sought in Qualified Offerings
New Offerings

2022

New Offerings Seeking $50M or Less
New Offerings Seeking Between >$50M and $75M

What are the top industries seeking capital through Regulation A?21
$2.6B

Real Estate

$755M
$183M

Banking and Financial Services

Business Services

Manufacturing

Technology

Health Care

$375M
$155M
$233M
$82M
$143M
$325M
$89M
$109M
$89M

July 2020 – June 2021

20

|

$755M

July 2021 – June 2022

SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

What is happening with IPO activity?
While 2020 and 2021 were busy years for the IPO market, there has
been a downward trend in the first half of 2022 in terms of both volume
and amount of initial public offerings and other public offerings.22
417

$133B
209

261
193

195

175
$66B

45
$13B
Q1

66

$64B

$56B

$63B

88

$46B

44

$23B
Q2

Q3

Q4

Q1

2020

Q2

Q3

Q4

$13B

$4B

Q1

Q2

2021

2022
Number of IPOs

Total IPO Proceeds

What are the top industries raising capital in IPOs (excluding pooled funds)?23
$62B

Technology

$22B
$12B

Manufacturing

Banking and Financial Services

Business Services

Health Care

Hospitality, Retailing, Restaurant

$18B
$11B
$7B
$23B
$7B
$15B
$3B
$5B
$2B

July 2020 – June 2021

July 2021 – June 2022

A N N UA L R EPORT: FI SCA L YEA R 2022

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21

Small and Emerging Businesses

T

his segment of companies includes both high-growth startups that raise capital to get off the
ground and launch early prototypes, as well as small businesses that create local jobs but may
not fit the high-growth model that is the typical target of venture capital (VC) investments.24

Why is access to capital for small and emerging businesses
so important?
Small businesses have an outsized impact on job creation.

66%

Small businesses
have accounted for 66% of employment
growth over the past 25 years.25

61.7 million Americans
are employed by a small business
(46.4% of U.S. employees).26

Small businesses remain central to our society and the American dream.
For the third year in a row, the public has the most confidence

in small businesses out of 16 categories of major institutions in

American society.27

“

Capital remains among the most impactful ways to strengthen access
to entrepreneurship … When business owners do not have access to
personal funds or quality capital, they are less able to take the risks
necessary to grow their businesses, artificially stifling the marketplace.

22

|

EWING MARION KAUFFMAN FOUNDATION28

SE C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Early-stage entrepreneurs report struggles and need support as
they build new companies
Access to capital remains a persistent barrier to growth for all entrepreneurs.
Access to capital was the number one barrier
to company survival.29

75% of entrepreneurs have experienced
challenges in obtaining capital.30

Access
to Capital
89% of entrepreneurs say access to capital is
limiting their business growth potential.31
78% of entrepreneurs say access to capital is limiting
their day-to-day operations.32

Entrepreneurs need support in accessing capital.

73%

of owners are looking for support in preparing
to apply for and using business financing.33

Bridging gaps between entrepreneurs and investors remains the
biggest challenge for early-stage startups when raising capital.34
Finding a lead investor 40%
Landing a warm intro 38%
Creating a pitch deck 10%
Pitching via Zoom 7%
Negotiating terms 4%

A N N UA L R EPORT: FI SCA L YEA R 2022

|

23

Robust ecosystems add to the success of early-stage startups.
Individuals with a
mentor are 5X more
likely to plan to start a
business than those who
do not have a mentor.35

The introduction of

accelerators to a
region has a significant
impact on the number
of early-stage deals for
new businesses.36

Several metrics of entrepreneurship have improved, but many
small businesses have not recovered to prepandemic levels

In 2021, 5.4 million new
business applications
were filed—more than
20% higher than any
previous year on record.37

74% of all counties
had more business
establishments in Q3
2021 than they did prior
to the pandemic.38

82% of new startups
survived one year after
founding (up from 78% in
2020 and 79% in 2019).39

An increasing percentage of small businesses are experiencing
financial challenges.40

85%

of small businesses experienced financial challenges
in 2021 (up from 81% in 2020 and 66% in 2019).

“

Many small businesses have not recovered to prepandemic levels,
in terms of both revenue and employment, with the effects of the
pandemic hitting disproportionately hard among firms in the leisure and
hospitality sector, smaller firms, and firms owned by people of color.

24 |

FEDERAL RESERVE BANKS41

S E C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

What are common sources of capital for small and emerging
businesses when facing financial challenges?42
Grants or donations (no repayment) 71%
Personal funds 61%
Cash reserves 56%

For those small businesses
that sought external
financing, only 6% sought
equity investments.43

External financing (with repayment) 52%

Loan or line of credit 76%
Credit card 29%
Trade credit 9%
Merchant cash advance 8%
Lease 8%
Equity investment 6%
Factoring receivables 4%

In 2021, fewer small businesses than in prior years received all of their
requested funding or met their financing needs.44
66% did not apply

34% of firms sought financing
Received
None
12%

Received Received
Received All
Some
Most
11%
7%
5%

24%

shortfall

Sufficient Financing
31%

42%

needs
met

Debt Averse
17%

Discouraged
9%

Other
9%

35%

unmet
needs

Zooming in on the 34% of businesses that sought financing,
only 31% of these applicants received all of the funding
they sought (down from 36% in 2020 and 51% in 2019).45

A N N UA L R EPORT: FI SCA L YEA R 2022

|

25

Angel investors continue to be a significant source of
early-stage capital
Angel investors are generally high-net-worth individuals who invest their own money directly in
emerging businesses, typically in early funding rounds. Most angel investors are accredited investors,
and many are current or former entrepreneurs themselves.

363,460 active angel investors46
(8.6% increase from 2020)

69,060 entrepreneurial ventures received angel funding47
(7.1% increase from 2020)

$29.1 billion in total angel investments48
(15.2% increase from 2020)

$421,675 average angel funding round49
(7.6% increase from 2020)

17.7 deals on average per angel group50
Angel
investment
in 2021

(down from 19.5 deals in 2020)

32% of seed capital came from angel investments
(compared to 19% in 2020)51

4.4 jobs are created per angel investment
(up from 3.9 jobs per deal in 2020)52

1 in 4 chance of an entrepreneur securing an angel investment
(in 2021 the yield rate declined to 24.1% from 30.8% in 2020)53

26% of angel deals included an angel seat on the board
of the portfolio company54

Over 80% of angel deals and investments are in seed
and Series A rounds, where angels have the greatest impact55

26

|

SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

What is happening with seed fundraising?
A pre-seed or seed round is typically a company’s first funding round. This round may include funding
from friends and family, angel investors, or early-stage funds. Capital at this stage is often used for product
development and market research.56 Given the early stage, businesses in an angel or seed round are the furthest
from the public market, insulating those companies from challenges arising in later stages of financing.57

In recent years, the number of seed rounds and seed firms have increased.
The number of seed rounds
in 2015-2019 reflected a

The number of seed firms
in the U.S. in 2022 is estimated to exceed

10X increase

2,000

compared to the
five-year period a decade earlier.58

(in 2012, there were 112 active U.S. seed firms).59

Seed activity remained strong, despite a slight drop in deal counts.60
5,436
4,086

3,666

4,152
2,512

$9.3B
2018

$10.0B

$10.5B

$17.2B

$10.0B

2019

2020

2021

2022*
*As of June 30, 2022

Deal Value ($B)

Deal Count

Early-stage businesses seeking pre-seed and seed funding are at
different stages of product readiness.61
Pre-Seed

Seed

Alpha
Prototype
15%

No Product
38.5%

Beta
Prototype
17%

Beta
Prototype
15%

Launched
Product
31.5%

No Product
25%

Alpha
Prototype
15%

Launched
Product
43%

30%

of pre-seed companies raised funding in 2021 and 2022
before launching a product (up from 8% in 2020).62

A N N UA L R EPORT: FI SCA L YEA R 2022

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27

In 2021, how long did it take to fund pre-seed and seed rounds?63

Pre-Seed

Seed

1-6 weeks
36%

1-6 weeks
26%

13-18
weeks
15%

7-12 weeks
26%

7-12 weeks
25%

13-18 weeks
17%

25+
weeks
13%

19-24
weeks
10%

19-24
weeks
15%

25+
weeks
17%

The average pre-seed fundraising time increased to 15 weeks
in the first half of 2022 (compared to 13.5 weeks in 2021).64

Since early 2022, pre-seed fundraising is becoming more competitive for
founders in an investor-friendly market.65

Investors

Founders

23%

30%

Less time engaging
with pitch decks

More pitch decks
sent per week

What are the average costs of seed fundraising?66

28

19.7%

10.1%

$28,800

Average percent of
equity sold to investors

Average amount of the equity
allocated to the employee
options pool

Average closing costs

|

S E C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

While the average angel deal size in 2021 was $421,675,67 the vast
majority of seed deals exceeded $1 million.68
100%
90%
80%
$25M+

70%

$10M-$25M

60%

$5M-$10M

50%

$1M-$5M

40%

$500K-$1M

30%

Under $500K

20%

2022*

2021

2020

2019

2018

2017

2016

2015

2014

2013

0%

2012

10%

*As of June 30, 2022

Micro funds – funds raising $50 million or less – continue to strengthen
seed activity.69
Over 1,600 micro funds have closed since the beginning of 2018, including nearly
200 in the first half of 2022.70
From 2018 to 2021, micro funds raised between $4 and $5 billion annually
(representing 4% of the deal value but 40% of the deal count).71

60+%

of micro funds are raised by emerging managers.72

“

[T]he investment power of these small funds is multiplied by the
networks they bring into new ecosystems. As more companies receive
local investment, the growing cohort of companies will be able to draw
capital from larger funds located in other areas. This itself is a major
reason for needing local capital, as those firms will have a larger network
and reach than many of the founders needing to raise capital.
KYLE STANFORD, PITCHBOOK73

A N N UA L R EPORT: FI SCA L YEA R 2022

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29

Many early-stage investors continue to fund companies within
their region74
The percentage of angel investments remaining within their region
continues to increase.75
Northeast
89.5%

New York
59.8%

Northwest
95.0%

Great Lakes
81.0%
California
75.7%

Mid-Atlantic
79.6%

Great Plains
86.8%
Southwest
91.3%

Southeast
87.3%

Texas
75.6%

Seed funding has expanded into smaller ecosystems, but remains localized.76
The median distance between a company and
a seed lead investor is

94 miles.

77

“

Access to capital is still fairly localized . . . Entrepreneurs and fundraisers
outside of top-tier funding hubs often still face high capital-raising hurdles,
and it becomes increasingly difficult to raise capital the farther you are
from a city hub. Despite their smaller share of total investment dollars,
however, regions outside these top 10 funding hubs accounted for more
than a third of the number of angel and seed deals, representing a broad
base of startup environments and untapped potential.

30

|

KENAN INSTITUTE OF PRIVATE ENTERPRISE78

SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Mature and Later-Stage
Businesses

C

ompanies within this segment of the market are generally growing and looking for larger amounts
of capital that can fund operations of scale, ventures into new product lines, and preparation for
public markets. Most often, their investors are institutional in nature, whether VC funds, private
equity funds, or crossover investors from the public market.

VCs fund growth startups across the country but untapped
markets remain
The below map illustrates the concentration of estimated VC deal value in 2021, with the number of
VC deals indicated on each state.79

WA
578
OR
168

MT
35
ID
42

NV
116

WY
31

MN
198

SD
11

CO
487

CA
5,846
AZ
174

OK
27

TX
891

GU

AK
12

IN
156

WV
9

MS
4

AL
62

CT

MD
209

NC
352

TN
138

AR
33

VA
284

RI
30

NJ 188
249
DE
DC 365
113

PA
385

OH
197
KY
59

MA
1,156

NH
40

GA
273

SC
63

FL
576

HI
16

Less than $100 MILLION

IL
457

LA
30

NY
2,348

MI
166

MO
113

KS
35

NM
42

WI
94

IA
46

NE
51

UT
225

ME
29

VT
34

ND
5

PR
16

$100 MILLION - $500 MILLION

$1.5 BILLION - $20 BILLION

OVER $20 BILLION

VI
3

$500 MILLION - $1.5 BILLION
No data available

A N N UA L R EPORT: FI SCA L YEA R 2022

|

31

While 73% of VC funding remains concentrated in the top three
states,80 VC-backed jobs are more broadly distributed across the US81

63% VC-backed jobs
of
are outside the states of California,
New York, and Massachusetts.
Less than 0.5%

4% - 10%

0.5% - 1.5%

Over 10%

1.5% - 4%

No data available

What is the typical VC cycle?82

Fundraising

Investment

VCs typically raise capital via
capital commitments from their
investors. The median size of a
U.S. venture fund closed in 2021
was $50 million.83 A fund’s closing
is the time when investors commit
to an investment in the fund.

VCs tend to invest in early-stage,
high-growth companies. VC
funds will often reserve three or
four times the initial round of
funding for follow-on financing.84

How Venture
Capital Works
Re-investment
Company Growth

The fund ends when proceeds
from all investments have been
distributed to fund investors.
Many investors reinvest in new
funds. New fundraises for US VC
managers occur on average less
than two and a half years apart.88

VCs are often engaged advisors,
receiving a board seat 44% of the
time. The probability of receiving a
board seat is higher in earlier rounds.85

Exit
The life span of a VC fund is
typically 10 years.86 VCs generally
exit their positions through an
IPO or a merger or acquisition.
From 2014-2020, there were
approximately 1,100 exits per year.87

32

|

SE C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

How do VCs fund businesses across their lifecycle?

one in a thousand

Only
businesses receives VC funding.89

For any business that receives VC funding, the business’s development will generally progress with its
funding rounds.90
Company
Development
Average Deal
Size ($M)

Idea/Start up
Angel
$1.43

Seed
$4.36

Product
Concept,
business development
planning

Development

Growth

Mature

Early-Stage VC
$24.84

Later-Stage VC
$43.40

Exit
$77.10

Operational
rollout

Growth

Expansion

Time

Cash Flow

How is VC investment activity changing?
VC funding reached record highs in 2021. 2022 has brought a variety of changes and challenges
affecting companies and investors in the U.S. VC ecosystem, including concerns about inflation,
rising interest rates, and a slowdown in the U.S. public markets.91

2022 VC deal value and deal count are historically high, even as they
may fall short of record-breaking highs reached in 2021.92
17,322

9,932

10,866

11,543

10,389

11,303

11,900

12,899

12,578

8,061

$341B

$42B

$50B

2012

2013

$73B

$86B

$83B

$89B

2014

2015

2016

2017

Deal Value ($B)

$145B

$146B

$167B

2018

2019

2020

Deal Count

7,841

$144B

2021

2022*

*As of June 30, 2022

A N N UA L R EPORT: FI SCA L YEA R 2022

|

33

Later-stage investment volume peaked in 2021 but remains at
heightened levels through the first half of 2022.93
VC investments in later-stage businesses over the first half of 2022 are approximately equal to
investments made over the course of the full year in each of 2018 and 2019.
$236B

Angel & Seed
Early-Stage (Series A and B)
Later-Stage (Series C and Up)
$113B
$93B

$11B

$93B

$94B

$87B

$41B

$11B $42B

$11B $43B

2018

2019

2020

$19B

$10B $40B
2021

2022*

*As of June 30, 2022

Later-stage pre-money valuations may have plateaued after a
rapid rise in 2021.94

Median Deal Value in Millions

$16
$14
$12
$10

Early-Stage

$8

2020

$6

2021

2021
2022*

2022*
2019

2020

Later-Stage

2019

$4
$2
$0
$0

$20

$40
$60
$80
Median Pre-Money Valuation in Millions

$100

$120

*As of June 30, 2022

“

[M]any companies are buying time with bridge rounds, allowing them to extend
their runways without a down round (a primary round at a lower valuation).
These companies are waiting until their fundamentals or wider market
conditions improve enough to have their valuation expectations met in an IPO
or primary financing round.

34

|

LIAN CHANG, CARTA95

SE C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

How is VC fundraising activity changing?
Billion dollar funds account for almost two-thirds of capital raised so far
in 2022—already the second highest year on record for VC fundraising.96
The below graph illustrates the amounts raised by VC funds of various sizes.

$12B

$20B

$25B

$47B

$11B
$12B
$14B

$77B
$21B

$500M-$1B Funds

$30B

$250M-$500M Funds

$12B

$100M-$250M Funds
$14B

$13B

$1B (or larger) Funds

$50M-$100M Funds

$25B
$16B

$15B

Under $50M Funds

$15B

$23B

$12B
$10B
$3B $2B
2022*

$5B

$6B

$5B

$5B

$5B
$5B

$7B
$6B

2018

2019

2020

2021

*As of June 30, 2022

“

We expect emerging managers to have a more difficult time raising new funds
over the near term as LPs rebalance their portfolio and allocate to known, or
more established, investors and managers.
PITCHBOOK97

The percentage of capital going to emerging managers has declined to
a new decade low.98
100%

80%
$12B
60%

$16B

$27B

$32B

$23B

$36B

$40B
$58B

$27B

$91B
$95B

Through the first
six months of 2022,
there has been nearly
an 80/20 split in
the capital going to
established versus
emerging managers.99

40%

$7B
0%

$21B

$10B

20%

2012

$11B
2013

2014

$16B

$20B

Emerging Firm
Fund Value ($B)
$24B

$31B
$27B

Experienced Firm
Fund Value ($B)

$48B
$27B

2015

2016

2017

2018

2019

2020

2021 2022*

*As of June 30, 2022

A N N UA L R EPORT: FI SCA L YEA R 2022

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35

How are LPs considering, meeting, and evaluating new fund managers?

83%

of LPs are open to or actively seeking new manager relationships.100

While many LPs are seeking new manager relationships, network connections
remain the dominant pathway LPs use to meet new fund managers.101
Peers in network 79%
Self-generated 67%
Placement agents 52%
Cold outreach 27%
Consultants 17%

Emerging managers by nature tend to have less
extensive networks and often come from more diverse
backgrounds than established managers. This can make
it difficult for LPs to find new emerging managers when
many rely on their networks.102

What are the top factors LPs consider in evaluating new fund managers?103
Strategy and process 83%
Background and reputation 77%
Prior fund performance 60%
Fund size 23%
References from peers 21%

Attributes such as
background, reputation
and prior fund performance
typically benefit established
managers, as compared to
emerging managers.104

GP and fund economics 15%

Emerging managers often differentiate themselves through in-demand strategies or a particular
focus on a region or demographic. As more managers enter the ecosystem, finding out-of-network
connections may become increasingly challenging.105

36

|

SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

What is the impact of nontraditional investors on mature and
later-stage fundraising?
Over the last few years, nontraditional investors—generally firms and institutions not labeled as
VCs—have increasingly crossed over from the public markets to invest in VC-backed companies.106

In recent years, the VC landscape has seen growth in deal sizes,
valuations, and the number of mega-deals in which nontraditional
investors participated.107
11,165
8,863

8,170

8,447
6,157

4,036

3,730

5,288

4,131

2,553

$273B

$107B

$110B

$110B

$129B

$34B

$37B

$38B

$69B

$37B

2018

2019

2020

2021

2022*
*As of June 30, 2022

Traditional VC Investor Deal Value ($B)

Nontraditional VC Investor Deal Value ($B)

Traditional VC Investor Deal Count

Nontraditional VC Investor Deal Count

Nontraditional investor participation in later-stage VC deals remains high.108
2,762

Deal Count with Nontraditional Investor Participation
2,073
1,702

842

1,511

1,377 1,396 1,357

1,322
938 923

1,851

1,183

In 2021, later-stage deals
with nontraditional
investor participation
reached a median
valuation of $200
million, representing a
2x growth over 2020.109

801
569

Angel & Seed

Early-Stage VC
2018

2019

2020

Later-Stage VC
2021

2022*
*As of June 30, 2022

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37

Portfolio company exits fuel reinvestments by LPs into new VC funds
Reduced distributions to LPs as a result of the slowdown in the IPO market may disproportionately affect
emerging fund managers, as LPs may be more inclined to allocate a now smaller pool of available capital
to established managers.110 Likewise, lower public market valuations could lead to an overweighting in the
portfolios of LPs to private market investments.111

Venture-backed exit activity in the first half of 2022 has seen a significant
decline in valuations as well as deal counts from 2021—reverting to 2017 and
2018 levels—with public listings leading the downturn.112
In the first half of 2022,
there were
22 VC-backed IPOs

1,806

1,215

In 2021, there were
183 VC-backed IPOs

1,250
1,200

1,049

In 2021, Series B and earlier
companies accounted for

84%

633

of acquisition targets.113
A
29%
$667B
$14B

$54B
$8B

$198B
$7B

$244B
$12B

$41B

$62B

$64B

$69B

$96B

2017

2018

2019

2020

2021

$51B
$10B

$28B
$68B

|

C
9%

$20B
2022*

*As of June 30, 2022

38

B
16%

$500M

Acquisitions

Buyouts

Public Listings

Deal Count

Seed
38%

D+
7%
Angel
1%

S E C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Small Public Companies

C

ompanies can access broad pools of investors when they conduct public offerings. This allows
them to raise large amounts of capital to fund activities, such as research and development,
capital expenditures, or debt service. Public offerings also provide liquidity to early-stage
investors and employees.

How have U.S. exchange-listed companies changed over time?
The number of small exchange-listed companies114 has drastically declined over the
last several decades, while the number of large exchange-listed companies continues to increase.115

897
Companies

1,520
Companies

2,034
Companies

2,209
Companies

2,647
Companies

Large Exchange-Listed
Companies

Small Exchange-Listed
Companies

4,144
Companies

4,313
Companies

3,140
Companies

1,415
Companies

1,587
Companies

1982

1992

2002

2012

2022*
*As of June 30, 2022

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39

The aggregate market capitalization of small exchange-listed companies has faced an even
steeper decline as a proportion of the overall market—with the percentage falling by half or more
each decade.116
100%

$1,228B

$3,876B

$9,647B

$15,594B

$37,572B

2.1%

0.8%

0.4%

$211B
2002

2012

2022*

95%
20%

13%

15%
10%

5.9%

5%
$184B
1982

0%

$243B
1992

$127B

$149B
*As of June 30, 2022

Large Exchange-Listed Companies

Small Exchange-Listed Companies

How are the dynamics changing for companies going public?
Much of the IPO market growth in 2020-2021 and decline in 2022 related to IPOs by large
companies and SPAC offerings. The proceeds raised in an IPO by U.S. small companies consistently
remain a very small fraction of the IPO market.117

$86B

$45B

$43B

$34B
$31B

$31B

$29B

$34B

$31B
$29B

$16B

$12B

$190M

$6B
$3B
$512M

Q3

Q4

$3B

2019

$10B
$3B
$115M
Q1

$170M

|

$220M $596M

Q2

Q3

Q4

$638M

$355M

Q1

Q2

2020
IPOs by Small Companies

40

$16B

$12B

$7B

$9B

$683M

$732M

Q3

Q4

2021
SPAC Offerings

$4B
$238M
Q1

$2B
$2B
$217M

2022
IPOs by Large Companies

S EC O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Q2

The significant decline in the number of IPOs by large companies and
SPAC offerings has increased how much U.S. small companies account
for in the overall IPO market.118
610

33%

456

384

32%
59%

35%

11%

7%

11%

121
58%

55%

5%

14%

132

56%

111

27%

56%

26%

33%

H2
2019

H1

53%
11%
H2

H1

2020
IPOs by Small Companies

H2
2021

SPAC Offerings

H1
2022

IPOs by Large Companies

How has venture capital affected the public markets?119

50%

93% of patent value/
81% of the number of

of IPOs

patents

On average, public
companies that received VC
funding are more research
and development (R&D)
intensive and grow faster—
by 4.9 percentage points in
employment—than public
companies that were not
VC-backed.120

92%
of R&D
spending

Among public
companies that had
an IPO after 1978,
VC-backed
companies
account for:

85%income
of net

77%

by market cap

50%
of revenues

A N N UA L R EPORT: FI SCA L YEA R 2022

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41

Deeper Dive into Small Public Companies
While it is easy to group all public companies together, their experiences and challenges in the public
markets differ considerably. The unique challenges that small public companies face tend to receive
less coverage than those faced by larger companies.

How has the number of smaller reporting companies changed since 2011?
Despite the SEC’s 2018 expanded definition of smaller reporting companies (SRCs),121 the number
of SRCs has declined, although that number as a percentage of all reporting companies has risen
slightly.122

2011

In
,
SRCs filed

2021

In
,
SRCs filed

42%

of all
annual filers

3,750

46%

of all
annual filers

3,289

annual reports

annual reports

How are mergers and acquisitions affecting the number of small public
companies?123
Small-cap and
micro-cap companies
are often easy targets
for large companies
to acquire.

of public company
acquisitions involved
small-cap and
micro-cap companies.

68%

How are U.S. small public companies raising capital through registered
equity offerings?124
348 offering
average proceeds $28M

507 offering
average proceeds $51M

333 offering
average proceeds $65M

181

116
86

113

134

130
102

85

83

61

62
35

$1.9B

$3.1B

$1.8B

$2.9B

$4.3B

$7.1B

$10.2B

$4.2B

$6.4B

$10.6B

$3.2B

$1.4B

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

2019

2020

Total Proceeds
42

|

2021

Number of Offerings

S E C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

2022

Several industries had significant changes among equity offerings by
U.S. small public companies.125
$3.0B
Health Care

$1.5B
$2.4B

Business Services

$1.2B
$1.3B

Technology

$0.5B
$0.3B

Real Estate

$0.4B
$0.1B

Banking and Financial Services

$0.3B
$0.5B

Manufacturing

$0.2B

July 2021–June 2022

July 2020–June 2021

How are compliance costs affecting small public companies?
Compliance with regulatory requirements often include fixed costs that are not scalable for small
public companies.126 Some of those costs have disproportionally increased for smaller reporting
companies. 127
Average Internal Annual Sarbanes-Oxley Act Compliance Costs128

Year-over-year
trend

Percent
change

2021

2022

Large accelerated filer

$1,328,300

$1,450,800

9%

Accelerated filer (excluding SRCs)

$1,221,900

$1,232,400

1%

Emerging growth company

$1,408,300

$1,370,200

-3%

Smaller reporting company

$1,126,000

$1,433,600

27%

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43

The amount of research coverage and the number of analysts covering
a company often correlate with a company’s market capitalization.129

60%

of small public
companies received
research coverage.

Small public companies are only covered by
an average of two analyst firms.

90%

of large public
companies received
research coverage.

Large public companies are covered by an
average of nine analyst firms.130

Less research coverage equates to additional liquidity challenges for smaller companies.

Small public companies and companies that are not able to obtain
research coverage have lower levels of institutional ownership.131

47%

44

|

of small public
companies are held by
institutional investors
(up from 45% in 2020).

66%

of large public
companies are held by
institutional investors
(consistent with 2020).132

SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Women Businesses Owners
and Their Investors
Women-Owned Business Formation and Ownership
The portion of businesses owned by women decreases as the businesses move through the life cycle stages.

43.2%

36.4%

26.4%

14%

of small businesses
are women-owned,
representing 13.5 million
businesses.133

of employer small
businesses are womenowned, representing
2 million businesses.134

of VC deals in 2021 were
with women-founded
companies, representing
4,430 deals.135

of new founders that
created businesses and
received VC funding in
2021 were women.136

By share of employer firms, women owners are underrepresented in
every demographic group.137

64.7%

56.6%

8.2%

63.6%

57.5%

2.8%

13.7%

14.7%
35.2%

33.6%

African American/
Black
Women-owned

11.6%

28.8%

25.9%

Native American and
Alaska Native

Asian American/
Pacific Islander

Hispanic/Latino

Equally-owned

Men-owned

20.5%
White

62.5%

The gender gap in new entrepreneurs has been persistent over the past
25 years and continued in 2021.138

28

out of 10,000 women became
new entrepreneurs, compared
to 45 out of 10,000 men.

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45

Women founders remain resilient but feel less supported than ever.
The percentage of women founders that feel supported by the entrepreneurial community has
drastically declined.139

50%

in 2020

48%
in 2019

36%
in 2021

60% of female founders

feel held back by their gender.

4% of male founders feel

held back by their gender.140

“

During the pandemic there were a number of women who left the
workforce to start their own businesses—some out of necessity, some
for the need of flexibility, being able to do remote work from home…
what’s going to be important are the resources that support that
continued growth.
TENE DOLPHIN, EXECUTIVE DIRECTOR OF THE NATIONAL WOMEN’S BUSINESS COUNCIL141

46

|

S E C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Capital Raising Trends for Women-Owned Businesses
Both the number of women entrepreneurs seeking angel capital and
their investment yield rate declined year over year.

Women constituted

Angel investors invested in

of entrepreneurs seeking angel capital in 2021
(down from 33.6% in 2020).142

of those investment opportunities brought to
their attention (notably down from 28.1% in
2020, but mirroring the overall market decline
from 30.8% in 2020 to 24.1% in 2021).143

28.6%

19.7%

While the amount of VC investment has risen significantly, the share of
funding to women founders continues to lag.
In 2021, women founders and co-founders raised a record.

$64.6 billion in venture funding.

144

Funding in the first half of 2022 remained historically high at $26.3 billion.145

VC deal values and deal counts have trended up in recent years—peaking in 2021.146

Deal Value

Deal Count
$276.9B
632

713

764

500

1,077
12,030

$121.5B

$117.9B

9,152

8,588

$140.4B

8,803

$117.9B

5,518

$56.8B
$20.0B

$24.4B

$3.2B

$3.8B

$3.4B

2018

2019

2020

$23.3B

4,215

$23.5B
$7.8B

$2.8B

2021

2022*

2,680

3,034

2018

3,011
1,823

2019

2020

2021

2022*

*As of June 30, 2022

Deals with women-only founders

Deals with men and women
co-founders

Deals with men-only founders

A N N UA L R EPORT: FI SCA L YEA R 2022

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47

Despite the record amount raised in 2021, women founders’ share of VC funding remains a fraction
of the overall capital raised.147
1.7%

2.6%

18.5%

2017

2.1%

17.4%

14.3%

13.3%

2016

2.7%

2.3%

2018

2.4%

17.2%

14.6%

2019

2020

2.0%

16.9%

2021

2022*
*As of June 30, 2022

Deals with women-only founders

Deals with women and men founders

In 2021, women-only led teams received a declining percentage of overall invested capital in each
progressive funding round.148

11%
5%

10%

Seed
84%

4%

Series
A

8%
5%

86%

Deals with women-only founders

Series
B

5%
4%

Series
C

87%

91%

Deals with women and men founders

4%
6%

Series
D
90%

Deals with men-only founders

Some major metro areas have seen significant surges in capital raising
for women founders.
Amounts raised since 2020 as a percentage of aggregate amounts raised 2008–2019.149

Minneapolis
125%

San
Francisco
102%

Denver
100%

St. Louis
187%

Santa
Barbara
129%

Ann Arbor
118%

Washington,
DC
133%

DallasFort Worth
158%

Phoenix
164%
Austin
161%

48

|

SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Despite more investor meetings for all-women teams, all-men and
mixed teams continue to get more funding.150
However, all-women teams
raised less per meeting
($32,600) than all-men
($46,500) or mixed ($39,500)
teams.

All-women teams had the
most investor meetings in
2021 after averaging the
fewest in 2020.

All-women teams with minority members had 57% more
meetings with VC investors in 2021 than in 2020, but
raised less money than any other demographic.151

VC investors more heavily scrutinized the team, traction, and business
model in pitch decks by all-women teams, compared to all-men teams.
All-women teams experienced:152

130% more time spent
on the team slide. For
all-men teams, this
was one of the least
important slides.

76% more time
spent on the business
traction section.

43% more time spent
on the business model.

Less time spent
on the product slide.
For all-men teams, the
most time was spent on
this slide.

“

I hope a statistic like this prompts investors to examine their own
biases more closely. For many investors, this extra scrutiny on the
team slide is coming from a place of skepticism. They’re wondering if a
particular all-female team can really build a product and whether they
have the right experience to do so. Female founders face a higher bar
for questions like these, especially in male-dominated sectors.
ADRIANNA SAMANIEGO, FEMALE FOUNDERS FUND153

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49

Executive teams with women produce better financial returns, exhibit
more innovation, and outperform on time to exit.154
Executive teams with women:
correlated with increased
innovation. Diverse women-led
teams are more likely to capture
new market share.

are 21% more likely to be
profitable than all-men
teams, and

For example, women-led technology companies were
more capital-efficient, achieving 35% higher ROI and,
when venture-backed, achieved 12% higher revenues than
startups run by men.155

2022 is on pace to be the 12th straight year that women-founded companies are exiting and
returning capital to investors faster than the overall market:156

YEARS

7.2

YEARS

for women-founded
companies

VS.

8.1

for all VC-backed
companies.

“

Firms that retain female managers by introducing policies that balance
work and family, and that actively hire more female executives have
superior performances than those firms that do not.
CHENGWEI LIU, ET AL157

50

|

S E C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Women in Leadership Roles
Women remain underrepresented in leadership roles among VC-backed
companies.158
Percent of women employees, 2016-2021
Entry-level

Mid-level

Senior

VP

C-suite

60%

40%

37%

39%

24%

While underrepresented, the share of women in board roles at
VC-backed companies continues to increase.159

Women-held board seats

2020

2019

7%

2021

11%
14%
40%
51%

At least one woman on board

61%
19%
Independent seats held by women

20%
27%

Women-led IPOs increased in 2021, but remain a small share of the
overall market.160
IPOs with a woman founder or co-founder
more than doubled to 48 in 2021 (up from 22 in 2020),
but represented only 16% of all public listings last year.

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51

Board gender diversity among small public companies continues to
improve, but progress is slowing.161

Women held

28%

of the Russell 3000
board seats
(up from 18% in
2018).

40%

of new directors
in the first half of
2022 were women.

The number
of women-held
seats increased

2.4%

from 2021
(down from 3%
in 2020).

In the first half
of 2022, the share
of new seats going
to women declined

17%.

Trends in Women Investors in Small Businesses
2021 was a record high for active women angel investors.162

33.6% of angel investors in 2021 were

women (an increase from 29.5% in 2020).163

of women angel investors were active investors, compared to
just 43.7% of angels in the overall market.164

61.4%

Fundraising by women-founded VC and micro funds in 2021 outpaced
prior years.165
92

67
63

42

46
38

37

46

28
12
$0.4B

$1.3B

$2.5B

$3.8B

$3.3B

$4.8B

$4.7B

$6.1B

$4.4B

$7.0B

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021*

Total Funds Raised

52 |

Number of Firms

*As of Sept. 30, 2021

SE C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

Women remain underrepresented among VC and micro fund
checkwriters.166
Breakdown of Checkwriters at VC Firms
All women 3.8%
Majority women 7.5%

Majority men 29.1%

40% of VC firms
have a woman
checkwriter

All men

59.6%

Women Checkwriters

12%

13%

New Checkwriters

9%

2018

2019

2020

Women

15%

2021

Men

51%

57%

66%

70%

49%

43%

34%

30%

2018

2019

2020

2021

Women-led funds facilitate greater funding of diverse founders.
Women VC partners were
3x more likely to invest
in startups with women
CEOs and often yielded
superior returns.167

Promoting and recruiting
women checkwriters
can open doors for more
women founders and
diversify portfolios.168

“

When women and minorities are underrepresented as investment
partners, our economy reaps just a fraction of the full potential that
could be gained from companies founded by these communities.
IMANI AUGUSTUS, DIRECTOR OF THE ALLIANCE FOR ENTREPRENEURIAL EQUITY169

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53

Minority-Owned Businesses
and Their Investors
Precursors to Accessing Capital
Inequalities across demographic groups impact the starting line for
many entrepreneurs.170
Entrepreneurs who are African American/Black or Hispanic/Latino face additional barriers to entry
because the increasing wealth gap affects their ability to tap personal assets as a funding source.171

Average Household Net Worth (in thousands)

$1,039
$961
$953

$835
$705

$532
$463

$743

$747
$752
$638

$608
$505

$424

$371

$345

$81

$99

$104

$82

$89

$73

1989

1992

1995

White

$710

$551

$424

$404
$361

$756

$138

$135

$100

$110

1998

2001

Other (including multi-race, Asian
American/Pacific Islander, and
Native American /Alaska Native)

$231

$171

$166

$149
2004

2007

$129

$123

$114

$104

2010

$194

$192

$149

$141

2013

2016

2019

African American/Black

Hispanic/Latino

Disparities in income distribution add additional hurdles to overcome.172
19%

5%

5%

19%

15%

11%
25%

30%

$50,000–$100,000
Under $50,000

25%
25%
Asian American

54

|

27%

29%

Over $200,000
$100,000–$200,000

32%

35%

White

44%

Hispanic/Latino

SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

54%

African American/
Black

Minority entrepreneurs are less likely to have access to credit.
Hispanic/Latino and African American/Black households are more likely to be unbanked, meaning
that no one in the household has a checking or savings account at a bank or credit union.173
2%
Asian American/Pacific Islander

92%

6%
3%

White

10%

87%

18%

Hispanic/Latino

11%

African American/Black

13%

71%

27%

Unbanked

59%

Underbanked

Fully Banked

Less access to traditional financial institutions means greater reliance on alternative financial
services, like check cashing counters and payday lenders, which can adversely affect financial health
and ability to build a credit history.174 A person with limited credit history or a lower credit score is
less likely to qualify for personal and business loans.
Average credit score in the U.S.175

Average Credit Score by Race and Ethnicity176

714

734

745

Good
Fair
(580-669)

(670-739)

Very Good

Asian American/Pacific Islander

White

701

677

Hispanic/Latino

African American/Black

(740-799)

Poor

Exceptional

(<580)

(800+)

Minority entrepreneurs are less likely than White entrepreneurs to receive all the financing they seek,
even when comparing applicants with similarly low-credit-risk.177

White

Asian American

43%

31%

19%

27%

53%

28%

African American/Black

27%

32%

41%

Hispanic/Latino

24%

35%

41%

All

Most/Some

None

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Business Formation and Ownership Trends
Entrepreneurial activity remains high across minority groups.178
17.5%

African American/Black

27.9%
15.7%

Hispanic/Latino

24.8%
13.0%

White

12.5%
12.4%

Asian American

17.7%
17.6%

Other

22.6%
Current Entrepreneurship

Entrepreneurship Planning

Minority entrepreneurs perceive entrepreneurship positively, but further
resources are needed to support minority businesses’ growth.179

African American/Black
and Hispanic/Latino adults intend
to create new businesses
at

2X the rate of White adults.

1/3 of working age

African American/Black
adults are starting or running
a new business.

White adults own
established businesses180

2X

the rate as
at almost
African American/Black
and Hispanic/Latino adults.

“

Achieving equity in entrepreneurship has the potential to unleash a new
era of businesses, hiring, and generational wealth.”
MARC H. MORIAL, PRESIDENT AND CEO OF THE NATIONAL URBAN LEAGUE
AND JON COWAN, PRESIDENT OF THIRD WAY181

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Capital Raising Trends
VC investors more heavily scrutinized particular deck slides of teams
with minority members compared to all-White teams.
Teams with minority members experienced:182

78% more time
spent on the
competition slide.
For all-White teams,
this was one of the least
important slides.

67% more time
spent on the
market size section.

20% more time
spent on the
product slide.

Less time
spent on the
business model.
For all-White teams,
this was the most
important slide.

“

The discrepancies in viewing times that correlate with less funding
suggest to me that investors have a harder time believing facts and
statements from underrepresented founders within their pitch decks.
The pre-seed round is where we’re seeing these biases emerge strongly
and where founders are being overlooked the most.”
DARREL FRATER, THECLUB APP AND VISIBLE HAND VC183

At the pre-seed stage, the funding process often requires more effort
and more meetings for teams with minority members.
Average number of investor meetings per pre-seed fundraising:184

All-White teams

Teams with Minority Members

All men

Women and men

All women

All men

Women and men

All women

MEETINGS

MEETINGS

MEETINGS

MEETINGS

MEETINGS

MEETINGS

37

37

35

45

71

74

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The number of minority entrepreneurs seeking angel capital is up, but
underrepresentation persists.

Minorities constituted

Angel investors invested in

of entrepreneurs seeking angel capital in 2021
(a robust increase from 5.3% in 2020
and 9.3% in 2019).185

of those investment opportunities
brought to their attention
(down slightly from 33.0% in 2020).186

12.8%

30.5%

Funding for seed and early-stage funding remains inequitably
distributed as reflected in average amounts raised in 2021, broken
down by race and ethnicity.187
Series A Average Amount Raised

35%

Pre-seed and Seed Average Amount Raised

23%

Percent of Pre-Seed, Seed,
and Series A Deal Count

24%

$0.4M

$0.6M
$19.3M

$15.6M
$5.1M

$3.0M

$4.7M

White

Other

$14.9M

2%

5%
$4.1M

$1.4M
Asian American

11%

$2.1M
$1.7M

Native American/
Hawaiian/Pacific
Islander

African
American/Black

Hispanic/Latino

The inequitable distribution can also be seen across the share of seed
and early-stage funding in 2021, broken down by race and ethnicity.188

46.6%

26.4%

23.2%

White

Other

Asian American

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|

1.9%

1.2%

0.7%

Hispanic/Latino African American/ Native American/
Black
Hawaiian/Pacific
Islander

SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

LGBTQ+ founders similarly report challenges accessing capital.

Nearly 3 out of 4
entrepreneurs say

93% of LGBTQ+
entrepreneurs say

LGBTQ+ entrepreneurs
face more challenges
than non-LGBTQ+
owned businesses.189

access to capital
is limiting their
growth potential.190

46% of LGBTQ+
entrepreneurs received

none of the financing
that they applied for
compared to 34% of
non-LGBTQ+ businesses.191

Entrepreneurs with disabilities also face obstacles accessing capital.192

15%

OPEN
of the adult population
has a disability
(about 40 million
people).193

1.8 million of them
own a small business.194

About 1 out of 4 of those
entrepreneurs did not apply
for credit because they did
not think they would be
approved.195

“

A massive obstacle disabled founders face is access to capital, as is the
case for all underestimated entrepreneurs. Women, Black, and Latino
entrepreneurs each receive less than 3% of venture capital funding…
However, when it comes to disabled entrepreneurs, the data on funding
doesn’t even exist.”
DIEGO MARISCAL, FOUNDER AND CEO OF 2GETHER-INTERNATIONAL196

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Minority Investors and Allies
Minorities among angel investors have decreased for the last three years.

4.1%

of angel investors in 2021 were minorities
(down from 5.3% in 2020 and 7% in 2019).197

Minorities remain vastly underrepresented among asset managers, but
they are more likely to fund minority founders.

of the total assets under management in the U.S. are in

1.4%

minority-owned funds, but they are
3x to 4x more likely than non-minority-owned funds to
fund minority entrepreneurs.198

The representation of minority partners in the VC industry has remained
steadily low—although the number of emerging funds launched by African
American/Black partners has grown by record amounts in recent years.199

53%
2%
59%
3X

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of the decision-making roles at
the top U.S. VC firms are held by
White men (down from nearly
64% of such roles in 2018).200
of VC investment partners are
Hispanic/Latino.202

27%
3.5X

of Hispanic/Latino VC investment
professionals work at smaller VC
funds.204
Follow-on funds raised by African
American/Black-led and Hispanic/
Latino-led funds are 3X more
sensitive to past performance—with
investors more harshly punishing
poor performance.206

1/2

of African American/Black VC
partners launched funds within
the past two years barely keeping
pace with the overall growth. 201
Since 2018, the number of African
American/Black partners who
make investment decisions and
lead deals at top U.S. VC firms
increased 3.5 times (to over two
dozen from 7).203
African American/Black-led
first-time funds were nearly half the
size of the first-time funds raised by
everyone else (averaging $30.5 million
compared to $57 million).205

SE C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

In addition to investing in minority entrepreneurs at a higher rate, minorityled VC funds can create ripple effects within the investor community.

56%
25.3% of funds that allocate part of their
capital to diversity, equity and inclusion (DEI) or
minority investments had a minority VC partner,
compared to 5.9% of funds that don’t have a DEI
or minority investment allocation.208

of African American/Black
VC partners are actively

mentoring other investors
in the Black VC community.207

Public Company Board Leadership
Diversity has increased on public company boards.209
Percentage of board seats
held by minority directors
Two or more minority directors

At least one minority director

2020

11%
16%

2022
29%
55%
62%
90%

Minority representation on public company boards still lags behind the
overall population.

16%

of small public company board members in 2022 are Hispanic/Latino (3%),
African American/Black (6%), or Asian American/Pacific Islander (7%), an
aggregate increase from 11% in 2020.210

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Natural Disaster Areas
How do natural disasters affect small businesses?

12%

OPEN

CLOSED
of small businesses were
affected by natural disasters.211

CLOSED

2/3 of small businesses that

had disaster-related losses
were forced to close, at least
temporarily.212

$$
The share of small businesses
experiencing disaster-related
losses doubled (from 7% in
2019 to 14% in 2021).213

Natural disasters affect communities and their small businesses
across the country.
Between October 1, 2021 and September 30, 2022, there were 18 natural disaster events with
losses exceeding $1 billion.214 The total estimated natural disaster-related losses in the U.S. exceeded
$55 billion.215

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Capital from investors remains a small portion of funding
Similar to all small and emerging businesses, those affected by natural disasters used personal funds
(66%), grants and other funds that do not need to be repaid (64%), and cash reserves (57%) before
seeking external capital (with repayment) (53%).216 Of those that applied for external capital:

7%

sought

equity financing
(compared to 6% of small businesses
not affected).217

How does the percentage of the population affected by natural
disasters compare to the amount of capital being raised?

37%

of the U.S. population218 lives in an area that was affected by a
natural disaster during the three years ending June 30, 2022.219

As a percentage of capital raised nationwide, capital raised by
businesses in areas affected by natural disasters varied under different
offering pathways.220
50%

Percentage of Capital Raised Over 3 Years

45%
40%
$280M
total

35%
30%

$57B
total

25%

U.S.
population in
areas affected
by natural
disasters

20%
15%
10%

$1.4T
total

$1.3B
total

5%
0%
Regulation D

Regulation A

Regulation
Crowdfunding

Registered
Equity Offerings
by Small Public
Companies

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Rural Communities
Small businesses drive employment in rural areas, despite the
declining number of new small businesses
Small businesses are critical to rural communities, employing well over half of workers in rural
areas.221

Workers
employed
in small
businesses

62%

Rural Areas

47%

Urban Areas

Since 2008, rural small business creation has fallen below the
replacement level.222
Net Difference between Firm Starts and Closures in Nonmetropolitan Areas223

10,000

5,000

0

-5,000

-10,000
1978

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1981

1984

1987

1990

1999

1996

1999

2002 2005 2008

2011

SE C O FFICE O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

2014

2017

2020

“

One element that is at the heart of virtually every development
strategy that works well in rural communities is entrepreneurship.
Every entrepreneur matters in rural communities—from the creative,
home-based business, to the owner of a small Main Street business,
to the larger potential growth company.”
DEB MARTIN, GREAT LAKES COMMUNITY ACTION PARTNERSHIP224

Rural small businesses are located coast to coast, with the majority
in the middle of the country.225 The below map illustrates the distribution of rural
businesses across the U.S. by region, as well as the percentage of businesses within each region that
are rural.
West North Central
17% of U.S. Rural Small Businesses
36% of Small Businesses in the Region
Mountain
13% of U.S. Rural Small Businesses
23% of Small Businesses in the Region

New England
2% of U.S. Rural Small Businesses
5% of Small Businesses in the Region

East North Central
18% of U.S. Rural Small Businesses
18% of Small Businesses in the Region

Middle Atlantic
4% of U.S. Rural
Small Businesses
4% of Small Businesses
in the Region

Pacific
12% of U.S. Rural Small Businesses
10% of Small Businesses in the Region

East South Central
7% of U.S. Rural Small Businesses
19% of Small Businesses in the Region

South Atlantic
13% of U.S. Rural
Small Businesses
9% of Small Businesses
in the Region

West South Central
14% of U.S. Rural Small Businesses
19% of Small Businesses in the Region

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Access to capital is a direct driver in building rural
entrepreneurial ecosystems226
Access to Capital

Inclusive Tech
Culture-Building

Access to
Digital Jobs

Scalable Tech
Entrepreneurship
Support and Incubation

Digital Workforce
Development and Support

Rural Entrepreneurial
Ecosystems

Small banks remain the primary source of capital for rural small
businesses, despite the decline in small banks and small business
lending

59%

of rural
small businesses use

small banks as their
primary source of
funding.227

The smallest banks
(up to $300M in assets) are
the only banking segment

that is smaller than it was
in 1988.228

The number of small business
loans declined 23%
from 2008 to 2020
(despite an 11% increase from
2019 to 2020).229

Capital from investors remains a very small portion of funding

4%
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of rural small businesses seeking
external capital sought

equity financing

(compared to 7% of urban small businesses).230

SE C O FFIC E O F TH E ADVO CATE FOR SMA LL B USI N ESS CA PI TA L FOR MATI ON

How does the rural population compare to the amount of capital
being raised?

16%

18%
of the U.S. population
lives in rural areas.231

of small employer firms are
located in rural areas.232

However, businesses in rural areas233 raised a notably smaller portion of overall capital relative to the
rural share of population during the three years ending June 30, 2022:

Percentage of Capital Raised Over 3 Years

18%

U.S.
population in
rural areas

16%
14%
12%
10%
8%
$29M
total

6%
4%
2%

$21B
total

$810M
total

$80M
total

0%
Regulation D

Regulation A

Regulation
Crowdfunding

Registered
Equity Offerings
by Small Public
Companies

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Policy Recommendations

T

he Office developed the following policy recommendations for Congress and the Commission
based on feedback from small businesses and their investors about our capital raising rules. We
have distilled their feedback into five key areas for action to address the most significant issues
raised.

We recognize that for any complex issue, including challenges surrounding capital formation, there
are a multitude of potential approaches, and indeed we may need to combine multiple approaches
to arrive at an effective solution. For each recommendation, we include background context,
particular impact on demographic groups, notes on related developments, and our proposed
solution.
We welcome further engagement by Congress and the Commission to implement these solutions so
that entrepreneurs and their investors together can bring innovations to market.

On August 27, 2022, our Office and the Fort Worth Regional Office joined the University of Houston C.T. Bauer College
of Business for a series of discussions with entrepreneurs on their successes and challenges in starting and growing
their businesses and accessing funding.

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Entrepreneurs and their investors need accessible tools and
educational resources to navigate complex securities laws.
Background Context
All businesses need capital to create jobs, grow, and innovate. Many entrepreneurs
need support to access that essential capital.234
Throughout the last fiscal year, we met in-person and virtually with entrepreneurs
and investors from across the country. We heard countless examples of hard work
and perseverance that allowed small businesses and their investors to overcome the
challenges brought by the COVID-19 pandemic. We met with many founders who
have been able to fund their operations using personal savings, credit cards, retained
business earnings, or grants. We also talked with many small businesses owners for
whom those non-dilutive funding sources were unavailable or insufficient and who
were looking to investors to help finance their operations and development.
Many of the entrepreneurs we met—no matter how business savvy or
technologically sophisticated—noted that the capital raising rules are complex and
expressed the need for accessible resources at every stage to help them navigate the
capital raising process.

Demographic Impacts
Even as the regulatory pathways to raising capital have expanded in recent years, the
complexity of our regulatory framework remains. In particular, women and minority
entrepreneurs face an uneven playing field when navigating that complexity, as they
do not have access to the same networks, experienced mentors and advisors, or
supportive entrepreneurial communities as their counterparts.235

Related Developments
Over the last year, the Commission has supported our partnership with other SEC
offices and divisions to launch the Capital Raising Hub, a centralized portal of
educational resources for small businesses and their investors. The Capital Raising
Hub provides resources for each phase of the capital raising journey, and we
continue to expand and update the resources based on feedback we receive through
our outreach efforts.
One of the most popular resources within the Capital Raising Hub is our Building
Blocks suite of educational materials, akin to “one-pagers” that break down
fundamental securities law concepts into plain language. Also popular are the
Cutting through the Jargon glossary, which demystifies common terminology, and

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the Navigate your Options tool, a “choose-your-own-adventure” style resource
to help users navigate through the capital raising options.

Proposed Solution
Looking forward, we will continue to engage with diverse audiences of small
businesses, investors, and other thought leaders in the market to promote and
improve our educational resources. We also will continue to seek feedback and
welcome suggestions for future materials.
The Commission’s continued support of our efforts in this area is critical to
ensuring that entrepreneurs and their investors, at every stage, have access to
tools and educational resources to understand and comply with the securities
laws in order to access our capital markets effectively.

In October 2021, the Office joined Wyoming founders, investors, and other small business leaders for an engaging
conversation about capital raising for early-stage companies. One participant noted the importance of accessible
resources: “Entrepreneurs just want to run their business. We need to make the process simpler by using normal
language that people use in their living rooms.”

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Targeted regulatory changes can improve access to capital.
Background Context
As we engage with small businesses, investors, and other thought leaders, many
share details about successes in the capital raising process as well as areas of
challenges. Overwhelmingly, small businesses and investors alike tell us that
Regulation D works well for businesses that have access to accredited investors.
Many small businesses across the country, however, do not have pre-existing
accredited investor networks—often resulting in additional layers of challenges and
hurdles when seeking to capital raise. Market participants have identified a number
of targeted regulatory changes to improve the capital raising process.

“

[Y]ou find that when you have a thriving capital market, you’ve got
jobs."
ARMEER KENCHEN, SMALL BUSINESS CREDIT INITIATIVE AND
CORNERSQUARE COMMUNITY CAPITAL236

Demographic Impacts
Data highlighted in this report shows the dismal proportion of capital raised by
small businesses founded by women and minority entrepreneurs. This is the case
at all lifecycle stages—from startups through later-stage businesses seeking venture
capital—leaving these businesses financially constrained and unable to reach their
full potential.
Diversifying the pool of investors and capital allocators facilitates greater funding
of diverse founders. Women VC partners were three times more likely than men
VC partners to invest in women entrepreneurs.237 Minority-owned funds were three
to four times more likely than non-minority-owned funds to invest in businesses
founded by minority entrepreneurs.238 Therefore, policies that have a negative impact
on underrepresented investors further impede investment in the next generation of
diverse innovators working to grow their companies.239

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For example, the accredited investor definition largely determines whether an
individual is eligible to invest in many early-stage companies.240 However, African
American/Black and Hispanic/Latino investors are excluded from the accredited
investor definition at higher rates than White and Asian American/Pacific Islander
investors due, in large part, to historic wealth inequality.241
One area where data has shown progress has been Regulation Crowdfunding, where
women and minority founders are finding more success raising capital than through
other capital raising options.242

Related Developments
The Commission’s most recent rulemaking agenda indicates that it will consider
amendments to Regulation D, including updates to the accredited investor definition
and Form D.243

Proposed Solution
Based on the feedback we have received, we recommend the following changes to the
accredited investor definition and Regulation Crowdfunding. We also recommend
proceeding with caution on any potential changes to Regulation D or Form D.
ACCREDITED INVESTOR DEFINITION:
The Commission should expand the definition to include additional
qualitative professional criteria and offer more opportunities to
demonstrate financial sophistication as an alternative to the income and
net worth thresholds.
The Commission also should consider the impact any change to
the income and net worth thresholds would have on minorities and
populations located in rural areas.
Rationale:
• As reflected in the data244 on net worth and income inequality
across demographic groups, raising the wealth thresholds
would have a disparate impact on minorities, adding additional
barriers to entry for minority entrepreneurs.
•

In addition, increased thresholds would have a disparate impact
on geographic areas with a lower cost of living, including rural
areas. These regions already have less capital raising activity
than urban areas.245

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REGULATION CROWDFUNDING:
The Commission or Congress should amend Regulation
Crowdfunding246 to increase the offering size threshold under which
an issuer may meet its financial statement requirements by providing
financial statements and income tax return information certified by the
principal executive officer.
Rationale:
• Crowdfunding offerings have been a successful source of
funding for many women-founded, minority-founded, and
geographically diverse companies.247
•

However, the requirement to have financial statements
reviewed by an independent public accountant248 delays the
ability to commence an offering and imposes an upfront cost
without a guarantee that the offering will be successful. Under
the Commission’s COVID-19 relief in effect from May 4,
2020 through August 28, 2022, issuers offering $250,000
or less in a 12-month period could meet the Regulation
Crowdfunding financial statement requirements by providing
financial statements of the issuer and certain information
from the issuer’s Federal income tax returns, both certified by
the principal executive officer.249 The relief was available to
companies that had been operating for six months or more
prior to the commencement of the offering. A permanent
extension of this relief would benefit small businesses that
may look to meet urgent funding needs through a Regulation
Crowdfunding offering.

Congress should amend Section 4A(f)(3) of the Securities Act to
modify the provision that prohibits investment companies (or excluded
companies under Section 3(b) or 3(c) of the Investment Company Act)
from using the Regulation Crowdfunding exemption.250
Rationale:
• In 2020, in response to feedback, the Commission adopted
Rule 3a-9 under the Investment Company Act to allow special
purpose vehicles (SPVs) to conduct Regulation Crowdfunding
offerings as co-issuers to a traditional issuer, provided that the
SPV meets certain requirements.251 Entrepreneurs and other
thought leaders report that this SPV model has not worked as
intended due to the prescriptive requirements and the statutory
prohibition on investment companies.

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REGULATION D AND FORM D:
When considering changes to Regulation D, we urge the Commission
not to make the Form D notice and associated requirements more
burdensome, particularly for small businesses.
Rationale:
• The Rule 506(b) safe harbor to the statutory exemption
provided by Section 4(a)(2) is the most commonly used pathway
to raise capital.252 Any changes that deter businesses from
relying on this safe harbor are likely to have a chilling effect
on access to capital. In addition, such changes would be most
pronounced on small businesses and those owned by women
and minorities that are already facing some of the greatest
challenges accessing capital.

On May 5, 2022, the Office joined National Diversity Council’s Asian Love Town Hall, which focused on empowering the
Asian American/Pacific Islander community and the need to bridge network gaps.

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Connecting founders with savvy investors is essential
to capital raising.
Background Context
Connecting with early-stage investors who bring relevant industry experience can
have a significant and positive impact on a small business’s trajectory through
mentorship, business connections, strategic guidance, and follow-on financial
support. Yet not all entrepreneurs have personal connections to sophisticated,
early-stage investors with deep pockets and the right risk tolerance.253 Registered
broker-dealers tend to provide their matchmaking services for larger offerings,254 but
a company’s need to connect with savvy investors applies regardless of the dollar-size
of its offering.
Since our first Annual Report in 2019, our Office has been advocating for regulatory
clarity on the role of finders in facilitating introductions between founders and
investors.255 This issue remains as timely today as ever.

Demographic Impacts
Women, minority, and rural founders often start with a smaller network of
accredited, angel, and VC investors.256 The lack of access to networks of potential
investors has an impact that extends well beyond capital raising and into company
survival and growth prospects, diversity among board leadership, and the mentoring
that often comes from savvy investors. These barriers to company success in turn
may affect founders’ ability to build wealth and reinvest capital going forward.

“

Inclusive, collaborative entrepreneurial ecosystems can help bridge
these long-standing gaps and dismantle… the barriers to access—
opportunity, funding, knowledge, and support…. [These barriers] get in
the way of too many people starting businesses and spurring economic
growth.”
PHILIP GASKIN, KAUFFMAN FOUNDATION257

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Related Developments
In October 2020, the Commission proposed an order258 that would permit natural
persons to engage in certain limited “finders” activities involving accredited investors
without registering with the Commission as brokers. The Commission has not taken
further action on the proposal, and providing regulatory clarity for finders is not on
the Commission’s current regulatory agenda.259

Proposed Solution
We hear frequently that the lack of regulatory clarity on the role of finders in
facilitating introductions between investors and founders harms both investors and
the companies those investors are seeking to support. The lack of a clear framework
makes it easier for unscrupulous intermediaries to solicit investors without disclosing
hidden conflicts of interest. Further, to the extent an intermediary engages in
unregistered broker-dealer activity, it could expose the company to rescission
rights, which would require the company to return to investors their investment
plus interest.260 For decades, market participants have asked for clarity about the
legal obligations of finders. We are supportive of those calls and recommend that
Congress or the Commission provide additional regulatory clarity for finders.

On August 16, 2022, the Office joined a roundtable hosted by Engine where we heard about successes and challenges
faced by entrepreneurs.

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Emerging fund managers play a key role in
small business capital formation and need support.
Background Context
Businesses that seek funding beyond friends and family or their local angel network
often turn to private funds of sophisticated pooled capital, such as VC funds. Larger
funds tend to target larger investments so they can maintain a reasonably sized
portfolio of companies that they can actively manage. As a result, earlier-stage,
smaller deals may get pushed aside in favor of later-stage, more mature companies.
Founders looking for seed and early-stage capital often struggle to raise financing
for their smaller, earlier rounds. While micro-funds have strengthened seed activity,
the percentage of total capital going to micro-funds and emerging fund managers
remains just a sliver of the overall pie, with the percentage going to emerging fund
managers declining to a new decade low.261 Founders seeking smaller amounts of
capital—which are typically more regional rounds—are finding less funding before
the large VC funds come to the table.262 For those businesses that do receive earlystage VC funding, that capital tends to be key to meeting developmental milestones,
including rolling out operations, growth, and expansion.263
Emerging fund managers play a key role supporting startups across the country,
particularly for those seeking smaller, early-stage financing. Their funds tend to be
smaller and more likely to invest in a more diverse pool of entrepreneurs as well as
businesses located in geographic areas not traditionally served by more established
fund managers.264 However, emerging fund managers may be disproportionally
affected by the recent slowdown in IPOs, as fewer IPOs mean fewer exits resulting
in distributions to a fund’s LPs, which in turn may result in those LPs allocating the
now smaller pool of available capital to established, larger fund managers.265

Demographic Impacts
Diversity among those who make investment decisions results in more capital
flowing to more diverse founders.266
During outreach events, we repeatedly hear that support from an institutional LP
can significantly enhance a new fund’s ability to attract other investors. While a
number of LPs publicly pledged support for diverse fund managers following the
2020 murder of George Floyd, we hear that the amount of capital earmarked for
diverse fund managers is still a tiny fraction of the total amount that institutional LPs
are allocating to VC investments.267

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“

[W]e can’t believe that we’re all fighting gladiator style or Hunger
Games style to get a small sliver of the pie… Just because [we are]
historically overlooked fund managers doesn’t mean we should be
looked at differently and given different opportunities for smaller slices
of the pie than others.”
BRANDON BROOKS, OVERLOOKED VENTURES268

Related Developments
Last year, our Office recommended that Congress and the Commission explore
regulatory solutions to support smaller, regional funds, including:
§ Amending the “venture capital fund” definition under Rule 203(l)-1 of the
Investment Advisers Act of 1940 to permit VC funds to invest in other VC funds
as a “qualifying investment.”
§ Improving the utility of the “qualifying venture capital fund” exemption in
Section 3(c)(1) of the Investment Company Act of 1940.
The Commission has the authority to amend the “venture capital fund” definition.
Congress would need to act to improve the “qualifying venture capital fund”
exemption.

Proposed Solution
Given the role that emerging fund managers play in supporting startups, we reaffirm,
and expand on, the recommendations in our 2021 Annual Report. Specifically, we
recommend that:
§ The Commission amend the “venture capital fund” definition under Rule
203(l)-1 of the Investment Advisers Act of 1940 to treat VC funds’ investments
in other VC funds to be “qualifying investments.” This would allow these
investments to be excluded from the 20% non-qualifying basket.

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Rationale:
• This amendment would allow larger—and often more
geographically concentrated—funds to invest in emerging
fund managers who write smaller checks, increasing both the
diversity of investment decision-makers and access to capital for
founders seeking smaller VC funding rounds. As noted by the
SEC’s Small Business Capital Formation Advisory Committee,
“larger funds tend to invest larger amounts in a handful of
later-stage companies, while smaller funds tend to invest smaller
amounts in a proportionate handful of earlier-stage companies.
A fund-of-funds model—where a larger fund invests in smaller,
regional funds—could unlock capital otherwise competing for
late-stage allocations and benefit smaller companies in emerging
entrepreneurial ecosystems.”269
§ Congress increase the current 100 beneficial owners limit for funds that rely on
the exemption in Section 3(c)(1) of the Investment Company Act of 1940.
Rationale:
• Limiting a fund to 100 beneficial owners can make it more
difficult to raise a sufficient amount of capital. Many managers
tell us that this limitation is particularly challenging for new
managers who may not have the networks, track record, or
access to investors who can write large checks.
§ Congress increase the limit on investors in, and expand the $10 million maximum
size of, the “qualifying venture capital fund” exemption in Section 3(c)(1) of the
Investment Company Act of 1940.
Rationale:
• As noted in our 2021 Annual Report, assuming a “2 and
20” fee structure by a fund, a $10 million (the maximum size
under the definition) qualifying venture capital fund only has
$200,000 per year to operate, inclusive of salaries, compliance,
diligence, and portfolio management costs. Such a low amount
sets these small funds up for failure. If Congress increases the
$10 million cap, the current 250 investor limit may impede the
ability of new managers to successfully raise a sufficient amount
of capital, as we have seen in the case of traditional funds
relying on the exemption in Section 3(c)(1) of the Investment
Company Act of 1940.

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Scaled disclosures for small public companies
help them stay public.
Background Context
“Banner year for IPOs” was the headline last year. Fast forward 12 months,
and we are in a very different environment. A combination of factors, including
macroeconomic conditions, notably tighter monetary policy and inflationary
pressures, geopolitical challenges, disruptions to supply chains, a tight labor
market, the reassessment of company valuations, and recent SEC rulemakings, have
contributed to the significant decline in the number of IPOs.270
Simply put, the vibrancy of our public markets depends on two key factors:
§ Are private companies going public?
§ Are public companies staying public?
Not only must we focus on ways to foster a robust IPO pipeline despite current
macroeconomic headwinds, it is also critical that we address the challenges of
staying public.

Demographic Impacts
The demographic impacts we identify in the four recommendations above have
ripple effects and are some of the leading indicators for the demographic challenges
we see in the public markets. After all, a public company starts its journey as a
private company and needs capital in order to mature to the point that it is ready
to go public. If we are not able to address the challenges that impede women
and minority founders from accessing capital to grow their startups into public
companies, we are not going to see progress in the next generation of public
companies led by women and/or minorities. If savvy women and minority investors
do not have a role in making investment decisions, either because they do not
qualify as accredited investors or because they are not able to launch or lead a fund,
companies will lose out on the guidance and perspective those investors could have
brought to the table. For some companies, that insight and experience could make
the difference in whether they succeed in becoming and remaining a public company.

“

[D]iversity is in the interest of businesses. A diverse board helps that
business be more profitable. A diverse workforce helps that business be
more profitable. The value proposition of diversity is there.”
PETER HOLT, THE JOINT CORPORATION271

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Related Developments
The vibrancy of our capital markets depends on having companies of varying sizes.
Last year, we recommended tailoring the SEC’s disclosure and reporting framework
to the complexity and size of operations of companies. In particular, we highlighted
the need for scaling disclosure obligations or delaying compliance for small public
companies.
Since then, the Commission has embarked on a number of initiatives that will affect
the disclosures that public companies make. In some cases, the Commission has
taken steps to scale obligations or delay compliance for small public companies,272
and in other cases, small public companies will be subject to the same requirements
at the same time as much larger companies.273

Proposed Solution
Small public companies, compared to larger ones, receive less research coverage,
attract lower levels of institutional investors, and are more sensitive to fixed
compliance costs.274 It is imperative that we create an environment that nurtures and
supports those small public companies staying public. Absent this, we will continue
to see a declining number of small public companies,275 which translates into fewer
investment choices for investors.

On March 17, 2022, our Office met with women entrepreneurs in Phoenix, AZ where we heard about challenges they
face raising capital.

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With this in mind, we recommend that the Commission, when considering new
disclosure obligations for public companies, scale those obligations and delay
compliance for small public companies. Scaling disclosure obligations helps to better
balance the costs and benefits of the rules, particularly because the proportional
expense of costs that are not scalable is higher for small public companies. Delaying
compliance for small public companies helps to promote better initial disclosure for
those companies, as they will benefit from seeing the disclosure that large public
companies prepare in response to similar new requirements.

“

[R]ules and exceptions out there for small reporting companies and
emerging growth companies—that is really pivotal to what allowed
SkyWater to become a public company when we did. Without that, we
very likely would not have been able to capitalize on the opportunity to
go to market and become a public company in 2021.”
STEVE MANKO, SKYWATER TECHNOLOGY, INC.276

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Small Business Capital
Formation Advisory
Committee FY2022 Summary

T

he Small Business Advocate Act also established the SEC’s Small Business Capital Formation
Advisory Committee. The Committee is designed to provide a formal mechanism for the

Commission to receive advice and recommendations on Commission rules, regulations, and
policy matters affecting: small businesses, from emerging, privately-held companies to publiclytraded companies with less than $250 million in public market capitalization; trading in securities
of such companies; and public reporting and corporate governance of such companies. The Office
provides administrative support for the Committee, which otherwise functions independently.
The Committee’s membership includes company and investor representatives, and other thought
leaders from across a diverse set of experiences, industries, geographies, and company life cycle
stages. The Commission is grateful for their service and commitment to small businesses and their
investors.
The members of the Committee as of the end of fiscal year 2022 were as follows:
CARLA GARRETT, Chair
Corporate Partner,
Potomac Law Group PLLC
Washington, DC
JEFFREY M. SOLOMON,
Vice Chair
Chief Executive Officer,
Cowen, Inc.
New York, NY
GREGORY YADLEY, Secretary
Partner, Shumaker,
Loop & Kendrick, LLP
Tampa, FL

YOUNGRO LEE,
Assistant Secretary
CEO and Co-Founder,
NextSeed
Houston, TX
DONNEL BAIRD
Founder and CEO,
BlocPower LLC
Brooklyn, NY
WILLIAM M. BEATTY*
Securities Administrator of the
Washington State Securities
Division
Olympia, WA

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KESHA CASH
Founder and General Partner,
Impact America Fund
Oakland, CA
GREG DEAN*
Senior Vice President of the Office
of Government Affairs, FINRA
Washington, DC
BAILEY DEVRIES*
Associate Administrator for the
Office of Investment & Innovation,
U.S Small Business Administration
Washington, DC
ROBERT FOX
National Managing Partner,
Professional Standards Group,
Grant Thornton LLP
Chicago, IL
STEPHEN GRAHAM
Co-Chair, Fenwick & West LLP’s
Life Sciences Practice
Seattle, WA
SARA HANKS
CEO and Co-Founder,
CrowdCheck, Inc.
Alexandria, VA
BRIAN LEVEY
Chief Business Affairs and Legal
Officer, Upwork Inc.
San Francisco, CA

SAPNA MEHTA
General Counsel & Chief
Compliance Officer, Rise of
the Rest Seed Fund; Associate
General Counsel, Revolution
Washington, DC
CATHERINE MOTT
Founder and CEO of
BlueTreeCapital Group,
BlueTree Allied Angels, and
BlueTree Venture Fund
Pittsburgh, PA
JASON SEATS
Chief Investment Officer,
Techstars
Austin, TX
MARC OORLOFF SHARMA*
Chief Counsel of the Office of the
Investor Advocate, U.S. Securities
& Exchange Commission
Washington, DC
HANK TORBERT
President, AltaMax, LLC
New Orleans, LA

SUE WASHER
President and CEO, Applied
Genetic Technologies Corporation
Gainesville, FL

* Committee members include the SEC’s Advocate for Small Business Capital Formation (vacant at
the end of fiscal year 2022) and three non-voting members appointed by each of the SEC’s Investor
Advocate, the North American Securities Administrators Association (NASAA), and the Small Business
Administration, as well as an observer appointed by the Financial Industry Regulatory Authority
(FINRA).

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Summary of Activities
The Committee met virtually four times during FY2022. Materials from the meetings, including
agendas, transcripts, webcasts, and presentations, are available on the Committee’s webpage.

Meeting Date

Agenda Topics

November 16, 2021

Rural Entrepreneurship and the Challenges Accessing Financial
Capital and the U.S. Department of Treasury’s State Small
Business Credit Initiative

February 10, 2022

Accredited Investor Definition

May 6, 2022

Proposed Rules on Climate-Related Disclosures and SPACs,
Shell Companies, and Projections

August 2, 2022

Secondary Market Liquidity for Investors in Regulation A and
Regulation Crowdfunding Companies and Smaller Public
Companies

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Committee Recommendations
During fiscal year 2022, the Committee put forward the following four recommendations to the
Commission:

Accredited Investor Definition
February 10, 2022
According to the Commission’s rulemaking agenda, the Division of Corporation Finance
is considering recommending that the Commission seek public comment on updates to the
financial thresholds in the definition of “accredited investor” as set forth in Securities Act
Rule 501(a) of Regulation D. The definition was most recently amended in 2020, and in
connection with that rulemaking, the Committee made several recommendations in 2019.
The Committee recognizes the complexity of crafting a workable definition of accredited
investor that balances protecting investors with facilitating capital formation and
investment opportunities. As the Commission considers updating the definition’s financial
thresholds for individual investors’ net worth and annual income, the Committee urges the
Commission to avoid unintended consequences. It is also important for the Commission
to recognize that a business’s failure to succeed is not the same thing as fraud. And further,
fraud occurs at the hands of bad actors regardless of regulatory thresholds. The Committee
believes that the SEC should continue its robust enforcement program to root out fraud
across markets of all sizes, while supporting investor education on the importance of
portfolio diversification to mitigate risk of one investment’s failure.
Accredited investors are a critical source of early-stage capital for small businesses in
communities across the country, and changes that would shrink the pool of currently
accredited investors would have a detrimental effect on small business capital formation.
The ripple effects of limiting access to early-stage capital would negatively impact access to
future rounds of financing from funds and other later-stage investors, rippling further into
the companies that will one day go public.
The Committee is also concerned that raising the thresholds could have disproportionate
impacts on various demographic groups, making the definition less inclusive and widening
the nation’s already wide racial wealth gap. The Committee discussed the wealth gap
among different racial and ethnic groups, as well across different geographic communities.
The Commission should be mindful of the disparate impacts that increases to the financial
thresholds could have on the pool of accredited investors. A more homogeneous pool
of accredited investors would negatively impact the diversity of entrepreneurs who raise
capital, decreasing inclusion in capital formation.

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Further, the Committee discussed the additional ripple effects that raised financial
thresholds would have on companies whose shareholders may no longer qualify as
accredited investors, inadvertently triggering the registration thresholds of Section 12(g).
In light of the foregoing and consistent with the Committee’s 2019 recommendations,
the Committee presents the following new recommendations to the Commission for
consideration in connection with potential future rulemaking on the definition of accredited
investor:
1. Do not increase the current financial thresholds for individual investors to qualify as
accredited.
2. Going forward, consider indexing the financial thresholds for inflation on a periodic
basis.
3. Given the imperfect proxy that financial thresholds provide for measuring investor
sophistication, provide alternative methods for investors to qualify as sophisticated,
which could include investment experience, knowledge gained through work experience
or membership in associations, education credentials, additional professional
certifications, or tests to demonstrate sophistication.
Lastly, given the impact of early-stage investors who tend to invest within their local
communities, as well as regional differences in income and wealth, the Committee
recommends that the Commission consider creating a new exemption for local and/or
micro-investments that would not be limited to accredited investors.

Climate-Related Disclosures Proposal
May 6, 2022
On March 21, 2022, the Commission proposed rules on the Enhancement and
Standardization of Climate-Related Disclosures for Investors (Release No. 33-11042).
As the Commission works toward finalizing the proposed rules, while the Committee
recognizes that climate is an important topic, the Committee urges the Commission to
consider:
§ Providing a more detailed cost-benefit analysis, including the impact that the proposed
rules would have on smaller public and private companies;

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§ Scaling and delaying the compliance requirement for emerging growth companies, along
with smaller reporting companies;
§ Expanding the safe harbor for liability for Scope 3 emissions disclosures to include all
climate-related disclosures;
§ Eliminating the attestation requirement, as it would be costly and burdensome, and it
will delay reportin

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A7a7038be1ca9a56d. Public record. Not legal advice.