For many years, small business owners and entrepreneurs have struggled with arranging and procuring capital for their small business. In spite of being the largest driver of the U.S. economy, small business has been left out in the cold these past 30 years and banks and conventional lenders make it more difficult every year to borrow money to build or grow a business.
Most small businesses cannot qualify for a conventional bank loan, are too small for venture capital or private equity capital sponsors and oftentimes have nowhere to turn for critical business capital.
In recent years, there have been several attempts by Congress and the SEC to facilitate the capital formation needs of small business owners. First, Congress enacted the JOBS Act in 2012, which spawned the crowdfunding industry as well as capital friendly regulations around that act, such as Regulation A+ (see our series on Reg A+). Some of these changes have really helped small business raise needed capital, but these regulatory efforts fell short in providing small business owners a method to use them successfully. The JOB Act gave business owners a framework for raising capital, but did not provide a meaningful sales process to actually go out and procure potential investors.
Then, along can File no. S7-13-20 from the Securities and Exchange Commission. A new rule, that had the potential to finally open the doors to capital, with a meaningful way of actually raising it, was in the works. Help was on the way.
For years, it was illegal for a company to pay a “finder’s fee” to third parties to help the company raise capital. Unless the finder was a licensed securities broker, other with certain limited exceptions, this was a forbidden practice and could subject both the company and the “finder” to serious, potentially criminal consequences.
Rule S7-13-20 created the first ever “Exemption” for a business owner to pay a fee or “commission” to non-licensed third parties for assistance with raising capital. This promised to be a game changer, allowing small business owners to utilize its network of friends and business associates to assist with capital raise and to actually pay those persons for their efforts based on a percentage of money raised. Finally, it looked like small business owners would have not only the tools, but the process to acquire critical business capital.
Then politics happened. In 2020, the country elected a new President and that led to a new SEC Chairman, a chairman who did not share the views of his predecessor. Rule S7-13-20 slid quietly into the dust bin of unconsummated government action, never to be heard from again.
But now…. will the new SEC Chairman, appointed by the new “former” President, reactive this rule? Will small business finally get the help it needs in terms of capital formation. The current administration, if it wishes to reignite the American small business engine, needs to adopt rules to allow those businesses to raise growth capital.
Well… it is sitting right there in one of those bottom drawers Mr. Chairman. Let’s hope you can “find” it.
