Remarks to the Small Business Capital Formation Advisory Committee

Good morning. First, I would like to echo Erica and my fellow Commissioners in extending a warm welcome to the newest members of the Committee. I appreciate your commitment to public service and look forward to your contributions to the Committee's work, which has included recommendations on the accredited investor definition and Regulation Crowdfunding, and looking at changes to the Small Business Investment Company (SBIC) Program. Today, the Committee continues to discuss important issues, including how venture capital funds raise capital, the section 3(c)(1) exception under the Investment Company Act of 1940, and the challenges that emerging managers face in raising capital and finding investment opportunities.

As you will hear about in more detail from Commission staff, section 3(c)(1) permits a private fund to raise capital without registration, provided that there are 100 or fewer beneficial owners and the fund is not making a public offering. Section 3(c)(1) also provides under certain conditions that certain venture capital funds with less than $12 million in aggregate capital contributions and uncalled committed capital are not required to register, so long as there are 250 or fewer beneficial owners.

Private and venture capital funds can provide nontraditional funding to small startups to help them innovate and grow. I wonder, however, if section 3(c)(1)'s 100 investor limit for private funds remains appropriate. This limitation dates back to 1940, while the venture capital exception was promulgated by Congress as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.

Much has changed since 1940. In some ways, it may be easier for smaller funds to raise capital, considering that they may engage in general solicitation by using the internet or other means if all of the purchasers are accredited, among other things. However, the 100 investor limit may be too small to effectively contribute capital to small businesses or to be successful as an ongoing fund. I look forward to hearing about the Committee and guests' insights about smaller private and venture capital funds, emerging managers, and how to facilitate capital raising for smaller businesses.

I have been particularly concerned about the lack of appropriately tailored and therefore disproportionate compliance burdens on small advisers starting out. This can be a significant barrier to entry and a hurdle for emerging fund managers.

Thanks again to the Committee for their continued commitment to small business and I hope you have a successful and productive meeting.