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The OASB Annual Report to Congress for Fiscal Year 2020

In January 2019, the Office of the Advocate for Small Business Capital Formation (the “Office”) was formed “to advance the interests of small businesses and their investors at the SEC and in the capital markets.” These small businesses include early-stage start-ups, small public companies, and everything in between. Each year, the Office prepares an annual report to Congress, which among other things, explains issues that small businesses face with respect to raising capital, including a focus on minority- and women-owned businesses. Below is a summary of some of the highlights from this year’s annual report, including a few of the Office’s recommendations to Congress.

COVID-19 and Capital Formation

  • COVID-19 has created a number of unforeseen challenges for business owners, and the negative impact of the pandemic has been most severe on historically underrepresented groups.
  • The number of small businesses across the United States dropped by 27% from January 2020 through September 2020. In particular, leisure and hospitality businesses decreased by 37%. Education and health service businesses and those in the retail and transportation industry both decreased by 19%.
  • Approximately half of small businesses entered the pandemic with only enough cash reserves for about two weeks or less without revenue, according to bank account data.
  • About 58% of small businesses worried about permanent closure.
  • “During July and August of 2020, companies raised the same amount of capital using crowdfunding ($48 million) as the first full year (2016-2017) of online fundraising.” The top ten industries that raised the most capital through crowdfunding included restaurants, household products, beverages, and education and training services.
  • Elements of initial public offerings also adapted to the “new normal” that the pandemic created, including:
    • Shorter roadshows, decreasing from an average of eight days to an average of four days
    • Longer testing-the-waters meetings
    • Access to a larger pool of investors through video conferencing
    • Decreased costs due to limited travel, printing, and employee time and resources spent on roadshows

Small and Emerging Businesses

  • Small businesses that have been established for less than a year account for 20% of all new jobs, while only making up 10% of all businesses.
  • Small emerging businesses use various methods to generate capital, with retained business earnings as the most commonly used resource.
  • “Grants are a non-dilutive source of early funding, but they can be time-intensive and may not provide as much capital as companies need to jumpstart growth. COVID-19 has exacerbated the divide between grant funding available and the capital needs of small business. [For example], 82% of Hispanic and Latino entrepreneurs reported needing $5,000-$50,000 in capital in order for their business to survive the COVID-19 pandemic. [However], $4,360 [is the] average emergency grant to small businesses during COVID-19.”
  • Oftentimes, bank loans are not an option for small businesses because they may not have enough collateral, historical earnings, or performance data to qualify for one.
  • Since March 2020, 72% of start-ups have experienced a decline in revenue, 40% saw a decline of at least 40% in their revenue, and only 12% had significant revenue growth.

Founder Demographics and Capital Formation

  • There has been a lot of growth for women-owned business between 2014 and 2019:
    • A 21% increase in number of companies (compared to a 9% increase overall)
      • Minority women-owned businesses grew at an even faster rate: 50% for black women-owned businesses, 41% for Native Hawaiian/Pacific Islander women-owned, 40% for Latina/Hispanic women-owned, and 37% for Asian American women-owned businesses
    • An 8% increase in total employment (compared to a 1.8% increase overall)
  • However, there is still a lot of room for growth, as evidenced by the data below:
    • Despite revenues increasing since 2014, average revenues for women-owned businesses in 2019 were drastically different when differentiated between racial and ethnic groups. Asian American-owned businesses experienced an increase of about 42.8% ($191,200) in revenue compared to a 34.6% increase ($50,900) for Latina/Hispanic-owned businesses and a 35.1% increase ($24,000) for black-owned businesses.
    • About 27% of entrepreneurs seeking capital in 2019 were women. However, “women-founded companies received only 12% of VC dollars in 2019 for a total of $26.6 billion.” Only 3% of the capital raised went to women-only founded companies, and the remaining 9% went to companies co-founded by men and women.
    • A survey of 200 of the most heavily funded private VC-backed companies revealed that 60% of these companies did not contain a female board member and women made up only 7% of all board seats.
    • Women only make up 12% of all decision makers within VC firms.
  • There are 1.1 million minority-owned businesses, which account for 8.7 million of workers employed. Importantly, 99.99% of these businesses are small businesses.
    • In 2019, 23% of new entrepreneurs identified as Hispanic/Latino, 10% identified as black, and 7% identified as Asian American or Pacific Islander.
    • While 23% of VC-backed founders are minorities, only 1% identify as black and 2% as Hispanic/Latino, compared to 17% who identify as Asian American.
    • In 2019, only 7% of angel investors were minorities.
  •  “The pandemic and resulting economic crisis have highlighted and exacerbated preexisting inequities among historically underrepresented founders, including women and minorities. Data shows that founders in historically underrepresented groups have been disproportionately impacted.”
    • In the first months of the pandemic, black-owned businesses decreased by 41% and Hispanic/Latino-owned businesses decreased by 32% compared to an overall 22% decrease across all businesses.
    • In August and September 2020, 865,000 women left the workforce, which is over 4 times the number of men who did (216,000).

Policy Recommendations

  • Education to ease challenges of securities offering complexity and friction: provide small businesses and their investors with educational resources that will help them identify which capital formation options are best, considering their financial needs, risk tolerance, and long-term goals
  • Regulatory clarity to bridge networks between founders and investors: provide small businesses and their investors with additional clarity related to the legal obligations of finders
  • Diversifying access to capital: support initiatives aimed at increasing diversity among individuals with investment decision-making power
  • Attractiveness of public markets: consider different methods to motivate companies to both go public and remain public

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Amanda Mei


Amanda Y. Mei is a Mintz attorney who focuses her practice on securities transactions, public offerings, and general corporate matters, primarily for life sciences clients.