Remarks to the Small Business Capital Formation Advisory Committee

Thank you, Carla [Garrett]. Good morning and welcome. I would like to start by thanking the committee members whose term will be ending. Your commitment to spend time outside of your “day jobs” and your input on the challenges faced by small businesses, emerging companies, and smaller public companies have been greatly appreciated. Your discussion and advice on today’s panels will also be important. On that point, I wanted to share some of my preliminary thoughts on each panel.

First, the committee will discuss alternatives to traditional financing for smaller private companies. These companies likely face challenges in securing funding from venture capital firms because these firms often do not focus on companies below a certain valuation or that seek a relatively smaller investment amount. Revenue-based financing and other alternatives may only partially fill this void for smaller private companies. Without these alternatives, smaller companies may have fewer sources of funding, which can lead to higher costs of capital. I am hopeful that these alternatives will help fund small businesses, including those founded by women and minority entrepreneurs. As detailed in the most recent annual report from the Office of the Advocate for Small Business Capital Formation, those groups have faced significant challenges in receiving venture capital financing.[1] When making recommendations to the Commission for alternatives to traditional financing, the committee should take into account the practical availability of such alternatives to small businesses.

Second, the committee will discuss the Commission’s February 2022 proposal on private fund advisers. The proposal includes, among other things, requiring these advisers to (i) distribute a quarterly statement detailing information about private fund performance, fees, and expenses, (ii) obtain audited financial statements of their advised funds, (iii) obtain a fairness opinion in connection with adviser-led secondary transactions, and (iv) prohibit private fund advisers from engaging in certain kinds of activities and entering into side letters with their investors.[2] I was not a Commissioner at the time of this proposal, and I am concerned whether the proposal’s approach to private fund adviser oversight is consistent with our three-part mission to protect investors, maintain fair and orderly markets, and facilitate capital formation. I think it is very important that the Commission does not adopt a one-size-fits-all rule that treats the $5 billion fund adviser in the same manner as the $50 million fund adviser.  My views on any final rule will be informed by the public’s feedback, including the recommendations and discussions of this committee.

Finally, the committee will discuss the role of equity research for smaller public companies. Nearly 20 years ago, ten sell-side financial firms entered into what is known as the “global settlement” with several securities regulators, including the Commission.[3] The global settlement required these firms to separate their research and investment banking departments. Smaller companies assert that their research coverage has declined, or even been discontinued, due in part to increased regulation and compliance costs caused by the global settlement.[4] While the conflicts of interest from sell-side research are well-known, what is not discussed is the effects when these sell-side firms withdraw from providing research to the market, leaving an information vacuum that begs to be filled by other outlets, like social media and online forums. Are retail investors better off in that environment? A review of the effects of the global settlement is long overdue.

I am confident that the committee’s discussions during these three panels will generate ideas and recommendations for the Commission to consider. Thank you to all committee members for your service and passion to help address the unique challenges facing smaller companies.