Good afternoon. It is my pleasure to participate in this year’s Small Business Forum (“Forum”). I recall attending my first Forum nineteen years ago in San Francisco,[1] when I was serving as Chief Advisor to the California Corporations Commissioner. The year was 2005, and it was held in a hotel near Fisherman’s Wharf. I hope that we can soon return to having in-person Forums held throughout the country.

Our capital markets and the regulatory environment have changed significantly since that time. Public companies have more disclosure obligations and private companies have more ways to raise capital. The number of public companies, though, has declined significantly over the last couple of decades.[2] Smaller companies have accounted for the vast majority of this decline.[3] The retreat by smaller companies from the public markets highlights the importance of the private markets as a source of capital. For early-stage start-up companies, these sources might be angel investors and individuals who have a pre-existing relationship with the founders.

Given the increasing role of angel investors, and others who might invest in the “friends and family” round, the Commission should create an ecosystem where founders can be easily connected with knowledgeable individuals who have the ability to assess the risks and rewards of making investments in start-up companies.

One way to create this environment is to make the Commission’s capital raising rules for early-stage companies more understandable and reduce the need for lawyers charging $1,000 or more per hour. The Office of the Advocate for Small Business Capital Formation has an online resource[4] to aid entrepreneurs. The Commission’s staff has also participated in events to help founders and others at start-up companies better understand the Commission’s rules and educational resources. However, the complexity of our regulatory regime remains a challenge,[5] and this is a concern that should be addressed. Not only is capital formation part of the Commission’s mission, but Congress has specifically directed the Commission to advance the interests of small business through the SEC Small Business Advocate Act of 2016.[6]

Another way that the Commission can build a vibrant ecosystem for raising start-up capital is by ensuring that its rules focus on opportunity. Paternalistic rules issued in the name of investor protection can limit individuals from investing in early-stage companies, but such rules often fail to consider the risk tolerance of prospective investors and their ability to analyze such investment. That type of a regulatory regime can make it more difficult for entrepreneurs to raise capital without the attendant investor protections. Instead, regulations should focus on creating opportunities and avoiding a broad, paternalistic approach.

Finally, a third way that the Commission can create a healthy ecosystem for entrepreneurs and investors is to encourage a growing private market for capital. Promoting economic growth, innovation, and jobs creation requires the side-by-side existence of vibrant public and private markets. The Commission’s rules should not discourage companies from remaining private, especially if the rationale for such rules is that less disclosure equates to more fraud. Bad actors appear in both public and private companies and the Commission has anti-fraud rules and enforcement authority to address such behavior. The Commission’s regulatory regime should not lose sight of its purpose of encouraging good actors to start businesses and allowing them to receive capital from willing investors.

These are three approaches for building an ecosystem to better serve entrepreneurs and investors. I know there are many more. I look forward to the ideas that will come from this afternoon’s fireside chat with Professor Angela Lee and the later panel with Trish Costello and Beto Pallares. Thank you.