Helping Small Companies Access Capital
Small and medium sized enterprises (SMEs) are the lifeblood of communities across the country and startups (companies less than five years old) are the sole source of net job growth. However, self employment has fallen in recent months and the Wall Street Journal recently reported that new small business creation is at its second lowest point in 18 years.
It attributes those falling startup numbers to lack of funding caused by the drying up of available home equity loans and credit card financing, and a pullback by venture capital and angel investors, who are focusing on later stage companies.
While even more difficult today, the need to raise money has always been the most common problem for small and medium sized companies. Nonetheless, there are things that can be done within the existing regulatory environment, that although far from ideal, represent options that most entrepreneurs and their support professionals are unaware of but can be implemented today.
Beyond those options, it is possible to introduce changes in the regulatory environment that could have a profound positive impact on small business capital markets. Those changes will open up a variety of new pathways that can totally transform the world of small business and the communities they nurture.Below we lay out that broad perspective, beginning with what is possible today, followed by what key step could be taken to enable a major transformation in financing of small businesses and finally, an exploration of the key elements of that transformed environment and what new tools, systems and institutions should be enabled.
a comprehensive solution
Most entrepreneurs and their advisors who attempt to raise capital quickly learn that current securities regulations largely dictate that SMEs are encouraged to seek out wealthy investors (called accredited investors) as their primary source of funds and are warned against seeking funds from non-accredited investors.
The majority of SMEs follow that guidance and concentrate their fundraising with accredited investors, even though that group represents only about 2% of the population. We said that entrepreneurs are “warned” not to seek funds from non-accredited investors (i.e., the other 98% of the population), not that they are prohibited from doing so. There are certainly limitations on pursuing funds from that broader population, but it is still possible.
SMEs historically have been largely constrained to raising funds through private investment rounds with wealthy investors (accredited angel investors et al.) and have assumed that they had to ignore the other 98% of the population. However, it is possible for SMEs to raise funds directly from the general public (called a direct public offering or DPO).
We begin this section by providing guidance to small businesses on how they can legally raise capital from the general population, under current securities laws and regulations. Few entrepreneurs and their advisors know how to do this. Commonwealth Group (CG) understands the process well, and we provide an overview in our downloadable primer “Going Public: How Companies Too Small for the National Stock Exchanges can Access Public Capital” as well as online in the section on the left entitled Going Public.
If entrepreneurs and their advisors learn and apply the options detailed in that primer, they can open up many more options for funding than is common today. Nonetheless, those regulations still represent major barriers.
We explore the nature of those barriers in depth in the next section entitled Securities Regulations. That section contains articles, studies, white papers and other publications that drill deeply into the details of the current regulations, how they impede capital formation for small businesses and what needs to be changed to turn that around.
The problems are many and varied. Taken individually, the task of producing the needed changes one at a time represents a monumental task, especially IF we were to depend on the existing agencies (like the SEC) to determine the needed changes and then implement them.
We lead off the Securities Regulations section with our solution to the problem of counterproductive securities regulations. Our solution, now gaining support nationwide, is described in "Job Creation In America: How Government Regulations Stand In the Way and What Can Be Done About It." It calls for the creation of a new entity (called an SRO) that would be tasked with taking over securities regulations of SMEs. Click here for a more in-depth exploration of our recommendations.
In the next section, Local Stock Exchanges, we explore the benefits of having smaller, more local stock exchanges and what they could mean for local economies (this section contains information also found in the securities regulations section).Lastly the section Changing Corporate Behavior, explores some broader issues with respect to corporations, what drives their behavior and what might be done to modify it to make them less destructive and more responsive to the needs of society.
Our consulting services focus on helping SMEs raise such public capital, including:
1. Specific consulting on what to do, why to do it, and how to complete the steps needed to raise funds through a DPO and other means, and providing direct support (such as government document preparation). CG is also equipped to provide SMEs with the full spectrum of general business advice.
2. Helping SMEs develop or refine their brand, and develop overall brand, marketing and communications strategies, including Internet marketing, web development, etc.
3. Marketing campaigns to promote the sale of stock, including use of a targeted website to attract investors and promote DPOs, as well as other general promotional strategies and tools.
4. Investment banking and brokerage services to legally transact the final step of selling stock and managing the settlement process in full compliance with SEC and state securities laws.
Contact us to discuss your company's individual needs.