On August 4, 2020, the Securities and Exchange Commission (SEC) Small Business Capital Formation Advisory Committee (Committee) held a public meeting (Meeting) by video conference. The Meeting was prompted by the Committees recognition that businesses need capital to grow and survive, yet many underrepresented founders, including minorities and women, struggle to access investor capital, which impacts opportunities to grow their businesses. During the Meeting, the Committee heard from five underrepresented founders and investors of small businesses on their experiences and perspectives on capital raising and subsequently discussed ways to enable a more inclusive capital formation ecosystem. In the first in a series of alerts that will discuss diversity and inclusion issues in the investment management space, we take a close look at the Committees discussion and proposed recommendations for the SEC.

The Committee was established by the SEC Small Business Advocate Act of 2016 pursuant to Section 40 of the Securities Exchange Act of 1934. The Committee was designed to provide advice and recommendations on SEC rules, regulations and policy matters relating to small businesses and has adopted seven recommendations to date. The Committee, currently consisting of 20 members of various expertise and backgrounds, holds quarterly meetings which are open to the public.

The Committee began the Meeting by presenting statistics on minority-owned businesses and investors. Since 2007, there has been an increase of almost 40% in the number of minority-owned businesses. However, minority-owned businesses start with almost three times less overall capital when compared with new White-owned businesses, which disproportionately impacts profitability of minority entrepreneurs. Among businesses that are backed by venture capital, 77% are White founders, while there are 1% Black, 2% Latinx, 2% Middle Eastern and 18% Asian founders. On the investor side, only 5.3% of angel investors are minorities while women make up 29.5% of angel investors and 11% of venture capitalists across the industry.

Data on the impact of the COVID-19 pandemic on small business owners show that small businesses owned by minorities were disproportionately impacted. Compared to an overall decline of 22% of small businesses between February and April of 2020, there was a 26% decline in women-owned businesses, 41% decline in Black-owned businesses, 32% decline in Latinx-owned businesses and 26% decline in Asian-owned businesses.

The Committee heard from five underrepresented founders and investors who shared their experiences and perspectives on capital raising and support for underrepresented founders. The speakers included CEOs and founders with experience in software development, wealth creation platforms, the venture capital industry and seed acceleration.

Drawing on the speakers perspectives as well as the Committees expertise, the Committee discussed potential regulatory solutions to enable a more inclusive capital formation ecosystem. The discussion included the need to:

After the discussion, the Committee unanimously voted on a resolution to submit the following observations and recommendation to the SEC:

The Committee recognized that this was just a starting point and that changes to the capital raising ecosystem will require long-term structural changes. The Committee expressed desires to continue discussing ways to improve capital formation participation for underrepresented founders in its future meetings. The next meeting of the Committee is set for August 8, 2020.

We agree with the Committee that in the midst of the recent renewed focus on racial injustice and the economic effects of the COVID-19 pandemic, this is an opportune moment to push for equality in the capital formation ecosystem. We are enthusiastic about the Committees efforts to allow underrepresented founders equal access to capital and to increase diversity among investors and fund managers. We will continue to monitor developments in SEC rules and regulations that would impact capital formation for small businesses and underrepresented founders and would promote a more diverse and inclusive financial industry.

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Diversity & Inclusion in Investment Management: SEC Explores Creating a More Inclusive Capital Formation Ecosystem - JD Supra