Securities and Exchange Commission (SEC) Acting Chair Mark Uyeda on February 25, 2025, told members of the Small Business Capital Formation Advisory Committee (SBCFAC) that he has asked the staff to explore ways to improve capital raising opportunities for entrepreneurs and small businesses.
While he did not elaborate how the SEC will help small businesses raise capital during the advisory panel meeting, he shared some of his thinking in a speech the day before, including changes to Regulation Crowdfunding, emerging growth companies (EGCs), and smaller reporting companies (SRCs).
Reg CF
Mandated by the JOBS Act in 2012, the SEC adopted Reg CF in 2015. Sec. 1 of pl112-106
Now almost 10 years later, Uyeda said that Reg CF probably did not work as intended in making it less costly for startup companies and small businesses to raise capital through low-dollar offerings of exempt securities.
“Notwithstanding the availability of Regulation CF, along with other rules available to entrepreneurs to raise capital without registration, 77% of small business owners reported being concerned about their ability to access capital,” Uyeda said at a conference in Tampa, Florida on February 24. “Accordingly, it is not surprising that for the past three years, the Commission’s Office of the Advocate for Small Business Capital Formation has recommended ‘targeted regulatory changes’ to the exempt offerings regime, including Regulation CF.”
He blamed the previous leadership when Gary Gensler was SEC chair for not acting on the recommendations during the Biden administration. Now with the Trump administration that promises a deregulatory agenda, Uyeda signaled that changes to the regulations will come.
“To ensure that entrepreneurs have access to the capital needed to fund their ideas and grow their startups, I have requested Commission staff to begin the process of exploring ways to implement these recommendations,” he said. “The changes can take several forms, and some proposals may require legislative action to amend the governing statutes.”
In his view, the SEC should follow a guiding principle that the regulations must be relatively straightforward, not impose undue burden while still protecting investors.
He explained that a company raising $5 million through Reg CF may need to pay over $500,000 in fees to the funding portal lawyers and accountants.
“Should more than 10% of the funds raised by an entrepreneur who may still be working out of his garage go towards paying compliance and legal fees?” Uyeda asked. “Or is a portion of that money better spent executing the business plan to build a product or provide a service?”
Reg CF permits a company to raise up to $5 million through crowdfunding offerings in a 12-month period. It requires companies to raise funds online through an intermediary or a funding portal. And companies must file disclosures on Form C.
There are three tiers of disclosure, based on the size of the offering.
Those raising less than $124,000 must show investors their federal income tax returns certified by the chief executive.
If a company is raising between $124,000 and $680,000, it must have its financial statements reviewed by an independent public accountant. But if the company already has audited financial statements, those audited financials must be provided.
For offerings above $680,000, the company must provide audited financial statements, unless the offering is the first time the company is raising capital using the crowdfunding process, in which case it needs only to have the financials reviewed by an independent accountant.
There is an exception if it is the first time that the issuer is raising money via Reg CF, and the company is not raising more than $1.235 million. In this instance, the company can provide audited or non-audited but reviewed financial statements.
Then companies have ongoing reporting obligations to file an annual report, which must be filed within 120 days of their fiscal year-end. And similar to Form C filings, these companies must provide certified financial statements unless they have reviewed or audited financial statements.
And the SEC’s small business advocate office urged the commission to revise Reg CF to provide flexibility in the type of accounting a company uses to raise up to $500,000.
It recommended increases to the offering threshold under which a company may meet its reporting requirements by providing financial statements and income tax return information certified by the principal executive officer.
“For example, the requirements to have financial statements reviewed by an independent public accountant delay the ability to commence an offering and impose an upfront cost without a guarantee that the offering will be successful,” the small business office said in December 2023. “Finding ways to reduce the costs associated with smaller offering sizes would help make Regulation Crowdfunding more attractive to small businesses looking to meet funding needs to grow and expand.”
IPOs and Scaled Disclosures for Smaller Companies
For public markets, Uyeda said the SEC should make initial public offerings (IPOs) attractive again. To this end, he said he’s asked the staff to recommend changes regarding EGCs, including how a company qualifies and the duration for which it retains the status.
“As part of its review, I have also requested the Commission staff to consider how EGCs could benefit from having an on-ramp to comply with certain existing disclosure obligations,” he said.
A company qualifies as an EGC if it has total annual gross revenues of less than $1.235 billion and had not sold common equity securities under a registration statement. A company continues to be an EGC for the first five fiscal years after it completes an IPO, unless its total annual gross revenues are $1.235 billion or more, it has issued more than $1 billion in non-convertible debt in the past three years, or it becomes a large accelerated filer.
An EGC can provide audited financial statements for two fiscal years, instead of three. It does not have to get an auditor attestation of internal control over financial reporting (ICFR) under Section 404(b) of the Sarbanes-Oxley Act of 2002. It can defer complying with certain changes in the FASB’s accounting standards.
This class of company can also include less extensive narrative disclosure than required, particularly in the description of executive compensation.
“Appropriately tailoring the Commission’s wide-reaching disclosure requirements for newly public companies may, on the margin, incentivize more companies to go public,” Uyeda said.
In addition, he said that the SEC’s rule on smaller reporting companies (SRCs) is too complex.
In general, a company qualifies as an SRC if it has public float of less than $250 million; or it has less than $100 million in annual revenues and no public float or public float of less than $700 million.
“Depending on a company’s public float and revenue, it can qualify as both a smaller reporting company and either an accelerated filer or a non-accelerated filer,” he said. “This distinction has real-world cost implications as non-accelerated filers do not need to provide an auditor attestation of the company’s evaluation of its internal control over financial reporting. Does it make sense that some smaller reporting companies need to continue to pay for this annual attestation?”
Crenshaw: Need to Look at Entire Ecosystem
During the small business panel meeting, Democratic Commissioner Caroline Crenshaw, who believes robust regulations are necessary to protect investors, said that small businesses have been impacted by changes to grant distribution and federal funding under President Trump and Elon Musk’s cost cutting measure. Musk runs the newly created Department of Government Efficiency (DOGE).
“I want to hear about those changes,” Crenshaw said. “Small businesses do not rely solely on debt and equity raised in capital markets. Rather, their funds come from a variety of sources, including grants.”
“As we think about the policies here today, it’s critically important we understand and acknowledge the whole landscape of challenges that face small businesses, and we need to ensure that in the changing landscape, our policies are the right ones to help meaningfully solve capital formation issues,” she added. “We need a complete view of small business capital formation challenges that currently includes, among other things, consideration of the impact little or no traditional grants or federal funding has with that in mind.”
This article originally appeared in the February 26, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
