The SEC has a Small Business Capital Formation Advisory Committee (“Committee”)  to propose regulation that would make it easier for small business to raise investment capital.  A recent survey found that 89% of small businesses feel capital-limited, but only 6% of small business sought equity investment to meet that shortfall.

With such an unfulfilled need in the small business community, a bedrock of American capitalism and a highly favored cohort in the view of the general public, you would think that the SEC would have taken major steps  to ease capital formation for small business.  But it ain’t so!  Materially similar rules apply to small business capital raises as to larger VC-type raises.  One recent effort to afford easier access to capital has been the SEC system for crowd-funding, and while deals have been done, compliance with that method is formal and requires legal guidance (or the surrender of the small busienss to the crowdfunding platforms established under the SEC Crowdfunding Regulation (with related risk, expense and formalities).

This week, at a meeting of the Committee, two SEC commissioners spoke about the need to make capital formation easier for “underrepresentated” entrepreneurs. They were focusing upon entrepreneurs in rural areas  and others less sophisticated, both without access to knowledgeable lawyers.

But no specific proposals were suggested; that is the task of the Committee.  Will there be success where in the past the capital formation process has remained technical and requires, often, what one commissioner described as “a game of  ‘gotcha’ that requires $1,000 per hour lawyers to navigate”?

Making progress here will be difficult.  The problem fundamentally is the risk of fraud.  Scams abound, we read about them all the time whether through the internet or telephone or in person.  By definition, underrepresented founders are not likely to be attuned to legal formalities which are, indeed, sometimes arcane.  And the fundamental task of the SEC is to prevent fraud, not to engineer social policy for economic justice and growth.  Mechanisms to reach these two goals, as a practical matter, seem inherently contradictory.

The SEC website has posted advice addressing methods of capital formation but it is not enough; I suspect that protection against fraud does require legal assistance (unless AI can be trained to uncover fraud, which I would not count on).  The answer, however impractical it may be, is that the Congress can create an independent agency of lawyers to represent the underrepresented entrepreneur in compliance with SEC (and indeed State) securities regulations, with fees based on ability to pay and upon success.  We have the SBA for general business advice and funding, and free lawyers for the criminally indigent.  I hate to suggest it, but we could use government lawyers to help fund small business through legally compliant capital investment.

Otherwise, I fear that this is a real issue that will not be solved– as it has not been since the SEC was formed almost a century ago….