A Crowd of Angels: Remarks before the Small Business Capital Formation Advisory Committee

Thank you, Erica. Thank you all for your continued willingness to serve. I look forward to today's discussions on crowd funding and angel investing, both of which are invaluable to capital formation at early-stage companies. I also look forward to hearing your discussion with Val Szczepanik, head of our Strategic Hub for Innovation and Financial Technology ("FinHub").

A recent conversation, one of many such conversations over the past six years, reminded me of just how important an appropriately empowered FinHub could be for small businesses. The story always runs something like the following: An entrepreneur who has built a small company with promising commercial prospects would like to introduce a crypto token. This entrepreneur has had numerous conversations with lawyers, but he would like confirmation that what his company wants to do can be done in a manner consistent with the securities laws. With whom should he speak? I would like to be able to tell him to approach FinHub to discuss the possibility of a no-action letter or exemptive relief to provide the necessary legal comfort to move the business forward. For that to be feasible, the SEC has to empower FinHub to grant such relief after consulting with the relevant staff across the Commission and to do so on a timeline that recognizes the urgency of the question for the requesting company. The SEC as a whole, however, is showing a reluctance to work productively with the public through difficult legal, regulatory, economic, and accounting questions.[1] FinHub cannot be a one-way door into a building that only views crypto through an enforcement lens. FinHub has a knowledgeable, energetic, and highly engaged staff, but it needs the institutional backing to work with startups to facilitate commercially viable and legally compliant innovation. I therefore urge the Committee in your discussion with Val this afternoon to discuss how FinHub can be empowered to foster an environment of collaborative experimentation with new technologies.

I welcome the Committee's discussion of crowdfunding, including how to improve its regulatory framework. As law professor Andrew Schwarz explains, crowdfunding can provide early-stage companies with a "simple and inexpensive method" of raising capital, help all stripes of entrepreneurs access capital, and "allow[] ordinary people to make investments that have traditionally been limited to the wealthy and connected."[2] I have some questions for the Committee on this topic.

1. During the COVID-19 pandemic, the Commission temporarily raised the threshold governing reviewed financials from $107,000 to $250,000.[3] That relief lapsed in 2022, and the current threshold is $124,000.[4] Should the Commission raise that threshold to somewhere between $250,000 and $500,000?

1. Would the crowdfunding market improve if state blue sky laws were preempted for secondary market transactions in crowdfunded securities?

1. Should the Commission make it easier for crowdfunding portals to provide impersonal investment advice, so that portals could provide some basic curation?[5]

I also am looking forward to this afternoon's discussion on angel investing, including how to encourage it. Angel investors provide early-stage companies not only with capital, but also with mentorship grounded in years of accumulated business wisdom. This mentorship works best in communities that are crowded with angel investors, so early-stage companies can learn from a wide-range of successful business leaders.

Angel investing is often a team sport. Angel investors not only invest together, but they learn together. More seasoned angels educate newer angels. Because angel investors must be accredited investors, the Committee's recent recommendations on the definition of accredited investor are particularly relevant to today's discussion. Our restrictive accredited investor standard disqualifies 82% of Americans from accessing private investments, including through angel investing.[6] Given cost-of-living based income disparities, it is harder for angel investing to flourish in small, inexpensive cities than in larger, expensive ones. By one estimate, a woman making $250,000 a year in New York City needs only $96,000 annually in Cleveland, Ohio to maintain the same standard of living.[7] The lower cost of living in Cleveland means that her dollars go much further, but existing accredited investor thresholds do not recognize that fact.

The Committee made two recommendations that could mitigate the arbitrariness of the definition. First, the Committee recommended that the Commission not adjust the financial thresholds, even prospectively for inflation.[8] As Committee members know, inflation adjustments would empty the angel ranks in the cities that need them the most. Not raising them will keep angel groups intact and allow them to invite more members of the community to participate over time. Second, the Committee recommended allowing individuals who successfully complete an educational program to "invest up to 5% in total of the greater of their income or net worth over a 12-month rolling period."[9] If this recommendation were adopted, our New York transplant now relishing life in Cleveland, although only making approximately $100,000, could invest almost $5,000 as an accredited investor. She would no longer be prohibited from being an angel simply for having relocated to a lower cost city. I would prefer allowing education to unlock full accredited investor eligibility, but this step is positive. In your angel investing discussion today, you might want to consider whether the low percentage cap will still exclude most investors below the current income and wealth thresholds from participating in many private investment opportunities. Mandatory investment minimums might be higher than the permitted investment amounts.

The Committee's third recommendation, which calls for new Regulation D disclosures about "key investment risks,"[10] could be useful if it is a simple "BEWARE-NEW SMALL COMPANIES = BIG RISKS" type disclosure. But we must be careful. Last year alone, issuers relied upon Regulation D to raise around $3 trillion- including from many angel investors.[11] Beyond a basic buyer beware type requirement, mandated disclosures could undermine the freedom to craft disclosure in response to demands by investors, not regulators, that is so essential to the private markets.

Thank you for your consideration and enjoy the discussion.