A committee that advises federal security regulators says it needs to be easier for women and minority-owned small businesses to get funding for their young companies.
The SEC Small Business Capital Formation Advisory Committee approved a recommendation Tuesday that calls on the U.S. Securities and Exchange Commission to take a lead role in increasing diversity among both entrepreneurs and investors.
The recommendation was crafted by Greg Yadley, a partner at Shumaker Loop & Kendrick in Tampa. The recommendation said:
“Access to capital is a powerful tool for wealth creation and racial justice for all Americans. Regulatory action to improve the current system in which women and people of color are underrepresented and not adequately supported by the system requires immediate attention. We need regulatory revisions to the capital raising ecosystem that promote and increase diversity of both entrepreneurs and investors, particularly women and minorities, and we ask the SEC to take leadership in the area.”
The final wording could change after committee members review the draft language. A couple of committee members suggested using the term “racial and economic equity” instead of racial justice. Another committee member said the resolution should more specifically focus on improving “capital markets and support systems for entrepreneurs and small business owners.”
Prior to adopting the recommendation, commissioners offered some ideas for the SEC to consider, including incentives to bolster investments in companies with minority founders, improved ways to connect investors with founders and companies they otherwise might not meet, and exemptions in venture fund rules to allow for a more diverse group of investors.
The most important thing to emerge from Tuesday’s committee meeting was a strong statement about equity and equal opportunity in the financial markets, Yadley said.
“A unanimous recommendation of this citizen’s group that speaks with one voice gives us the best chance of a level playing field when it gets to the commissioners and the staff writing the rules,” he said.
While the committee is advisory, its recommendations bear more weight than previous advisory panels because it was established by Congress. SEC commissioners do not have to accept the recommendations but if they don’t, they must say why they are not accepting them in a report to Congress.
“It gives us a little more authority,” Yadley said. “The SEC can’t just simply say, ‘Thank you very much, we’ll study it,’ and then it goes nowhere. They ultimately could still do that, but now there’s a little bit of political pressure not to do that.”
During the committee meeting, several women and minority entrepreneurs and investors told their own personal stories about struggles with funding.
Martha Miller, the SEC’s Advocate for Small Business Capital Formation, highlighted data showing the disparities in Black-owned and women-owned businesses. Those companies generally start with less capital than businesses with white founders, and face an uphill battle for funding, in part because there are many fewer minorities and women at venture capital firms.
“There is substantial minority business ownership and we’ve seen significant growth over the years,” Miller said. “That growth in minority owned businesses is critical and has been a quite a boon for many local communities and our economy as a whole. However, we also know that small businesses, particularly those owned by minorities, have less access to capital.”
Covid-19 presents a substantial threat to small businesses, Miller said, citing a study by Robert Fairlie, an economics professor at the University of California Santa Cruz and researcher at the National Bureau of Economic Research.
“Between February and April, 22 percent of small businesses shut their doors,” Miller said. “The most stark closure rates were among African American-owned businesses, 41 percent of which closed their doors in response to Covid-19, with very uncertain long term impacts of when and if they will open again.”
That’s concerning because most new jobs come from small businesses, Yadley said.
The SEC committee has been trying to look at ways to foster capital formation and help businesses grow. “Access to capital is powerful tool to achieve racial and economic equality and there’s not equal access. We can improve the current system,” Yadley said.