Hearing Entitled: The Future of American Capital

2025-02-26

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Summary

This meeting of the subcommittee on capital markets convened to discuss the future of American capital, focusing on strengthening public and private markets by increasing investor access and facilitating capital formation [ 00:22:44-00:23:09 ] . Participants explored ways to expand investment opportunities and reduce regulatory barriers that hinder businesses and investors alike [ 00:23:40-00:23:44 ]

. The discussion covered a range of topics from the challenges faced by startups to the regulatory environment impacting both private and public markets .

Themes

Challenges in Capital Formation for Startups and Small Businesses

Entrepreneurs and small businesses frequently encounter significant roadblocks when attempting to secure funding [ 00:23:44 ]

. Sam Theodore Liccardo, CEO of Genoscopy, highlighted that fundraising is a constant challenge for founders, with venture capitalists funding less than 1% of pitches received . Regional disparities mean that areas outside traditional financial hubs, like St. Louis or the Midwest, face greater difficulties in raising capital, as early-stage investors often prefer to deploy capital locally [ 00:24:57 ] . McKeever Conwell, founder of Rare Breed Ventures, also noted that founders of color and those outside major investment hubs struggle with capital access, leading to situations like one entrepreneur considering surrogacy to fund her business [ 00:41:58-00:42:29 ] . Ms. Rebecca Kacaba from DealMaker emphasized that removing offering caps for regulations like Reg A and Reg CF would ignite economic growth and job creation, as many companies could raise more than current limits allow [ 00:46:47 ] [ 00:47:00 ] . These challenges can lead to businesses, even those with innovative ideas, struggling to expand and create jobs [ 00:25:05 ] .

The Accredited Investor Definition

A significant point of discussion revolved around the restrictive definition of an accredited investor, which primarily limits private market investments to high-net-worth individuals [ 00:24:02 ]

[ 00:24:07 ] . Many speakers argued that this definition excludes financially knowledgeable Americans who may lack the wealth but possess the expertise to participate [ 00:24:07 ] . Sean Casten pointed out that the current wealth and income thresholds for accredited investors, set in the 1970s, have eroded significantly due to inflation, making it much easier to qualify based on wealth than originally intended . Calls were made to update these numbers and to also account for knowledge rather than just wealth, potentially including individuals with professional qualifications like MBAs or CPAs . Ms. Anna Pinedo suggested that expanding the definition to include financially sophisticated parties, perhaps those advised by registered professionals or passing tests, would align with the original purpose of the rule . Ms. Alexandra Thornton, however, expressed concern that expanding investor access without mandating disclosures could lead to significant investor losses [ 02:30:55-02:30:59 ] .

Public vs. Private Markets and Regulatory Burdens

The meeting addressed the alarming trend of fewer companies entering public markets and the skyrocketing regulatory burdens faced by those that do . Historically, going public allowed companies to raise substantial capital and was seen as an achievement, but current costs and regulatory requirements make it less appealing [ 02:10:45 ]

. Ms. Pinedo highlighted that the average cost of going public can be around $4 million, with annual compliance costs disproportionately affecting smaller businesses, often reaching millions [ 01:10:28-01:10:44 ] [ 01:10:44-01:10:49 ] . Ms. Thornton argued that the decline in public companies is partly due to the proliferation of exemptions that allow companies to remain private even with large valuations and numerous investors . There was a general consensus that efforts should be made to ensure both public and private markets remain viable funding options, rather than viewing them as conflicting [ 00:25:41-00:25:50 ] [ 01:02:47 ] [ 01:38:31 ] .

Role of the SEC and Investor Protection

The Securities and Exchange Commission (SEC) was identified as the primary regulator overseeing capital markets, responsible for protecting investors and ensuring fair disclosures [ 00:29:31-00:29:33 ]

. Concerns were raised by some members about potential efforts to "defang, defund, and defame" the SEC, which could lead to increased risks and fraud in the markets [ 00:29:33-00:29:40 ] . Ms. Thornton warned that without mandated information and strong enforcement, asset prices could detach from intrinsic values, and investors, especially non-professional ones, would face extensive losses and potential fraud . Conversely, Ms. Pinedo noted a shift in tone from the SEC's acting chair towards public engagement and prioritizing capital formation, which was welcomed . The importance of balancing investor protection with the need for capital access was a recurring theme, with calls to avoid overregulation that stifles innovation [ 00:25:21-00:25:41 ] .

Crowdfunding and Alternative Capital Sources

The JOBS Act of 2012 was recognized as a landmark step in making capital more accessible, particularly through provisions like crowdfunding [ 00:23:49 ]

[ 00:46:28 ] . Rebecca Kacaba underscored the success of Regulation Crowdfunding (Reg CF) and Regulation A (Reg A), which have facilitated significant capital raises for American companies [ 00:45:28 ] . She proposed removing offering caps for these regulations and harmonizing their rules to further boost economic growth and job creation, especially for companies outside traditional financial centers . Mr. McKeever Conwell's success in raising capital for Rare Breed Ventures via Rule 506C of Regulation D and amendments allowing more investors in smaller funds demonstrated the positive impact of such policies on access to capital for diverse founders [ 00:42:57-00:43:24 ] [ 00:43:39-00:43:47 ] .

Tone of the Meeting

The tone of the meeting was largely earnest and collaborative, with members and witnesses expressing a shared goal of strengthening American capital markets and facilitating capital formation [ 00:23:31-00:23:40 ]

. While there was broad agreement on the importance of access to capital, there were notable points of contention, particularly regarding the balance between increasing capital access and ensuring investor protection . Republican members often emphasized the need to reduce regulatory burdens and expand private market opportunities [ 00:23:40-00:23:44 ] [ 02:09:30-02:10:14 ] [ 02:24:39-02:24:42 ] , while Democratic members stressed the critical role of investor protection and the SEC, alongside advocating for community-based financial support [ 00:29:31-00:29:40 ] [ 01:17:41-01:17:51 ] . Despite these disagreements, there was a prevailing sense of a common purpose and a willingness to explore legislative solutions [ 02:22:51 ] [ 02:23:25 ] .