Securities Law Blog

Kudos to the 2021 SEC Office of the Advocate for Small Business Capital Formation

On December 9, 2021, the SEC Office of the Advocate for Small Business Capital Formation released its 2021 annual report condensing a treasure trove of data related to exempt and registered offerings by small businesses for the period July 1, 2020 to June 30, 2021 and providing related policy recommendations to support such businesses.

I’m not known to give gratuitous compliments, but I have to give credit where credit is due, as they say.

The Annual Report for Fiscal Year 2021, recently released by the Office of the Advocate for Small Business Capital Formation, is a treasure trove. This highly detailed overview is thoughtfully written in plain English accessible to all readers. As a result, it can serve as a highly useful tool for both companies looking to raise capital and investors eager to deploy capital.

 The Office of the Advocate’s report highlights the incredible year for raising capital. From emerging, privately held companies to smaller publicly traded companies with less than $250 million in public market capitalization, companies of all sizes benefited from an active capital raising ecosystem through multiple offering types. The report’s data, analyzed by the SEC’s Division of Economic and Risk Analysis from public filings made from July 1, 2020 to June 30, 2021, tabulated the total capital raised and median offering sizes for the following types of offerings. In almost every case, these figures are at, or close to, all-time highs.

Offering Type	Total Capital Raised	Median Offering Size
Rule 506(b) private placements	$1.9  trillion	$1.8 million
Rule 506(c) general solicitation offerings	$124 billion	$850,000
Rule 504 limited offerings	$313  million	$160,000
Regulation Crowdfunding offerings	$174  million	$130,000
Regulation A offerings	$1.7  billion	$2.3 million
Section 4(a)(2), Regulation S, Rule 144A and other exempt offerings	$1.3  trillion	–
Initial public offerings	$317 billion	$225 million
Other registered offerings	$1.4  trillion	$350 million

The report’s data, broken down by these offering types, shows the primary location of issuers, the number of offerings and range of total amounts raised in each state and the industries in which they operate. While there is a concentration of issuers in tech hubs like California, New York, Washington, Texas, Massachusetts and Florida, companies in the middle of the country also participated in multiple exempt and registered offerings. When grouping the top three offering types – registered offerings, Regulation D and Regulation A – the industries raising the most capital were (1) banking and financial services, (2) technology, (3) health care, (4) energy, (5) manufacturing, (6) real estate, (7) business services and (8) hospitality, retailing and restaurants. For Regulation A offerings, in particular, real estate continued to be the most popular industry utilizing it.

There is little doubt that initial public offerings saw a marked increase in activity from July 1, 2020 to June 30, 2021. Compared with the prior year’s period, there were 3.6 times more offerings raising 2.8 times more capital, according to the report. Due to the thriving IPO market, the rate of increase in publicly traded companies has gone up significantly, reversing a declining trend since the dot-com bubble. From July 1, 2020 to June 30, 2021, there were 1,005 entrants into the public market, consisting of 429 traditional IPOs, 569 SPAC offerings and 7 direct listings. Venture capital backed companies continue to be the majority of exchange-listed IPOs, reflecting the critical nature of pre-IPO capital raised in the private markets as companies prepare for the public markets. While the headlines are often focused on the offerings of large public companies or “unicorn” private companies, smaller public companies also saw growth in equity offering activity over the last year.

The report also collected capital formation data on historically underserved groups and regions including women-owned businesses and minority-owned businesses, as well as natural disaster areas and rural communities. Diverging from the success of other groups, the data in the report paints a different picture and shows that women- and minority-led businesses still struggle to raise capital. Additionally, the data suggests a trend that venture capital funds are getting progressively larger, which led the Office of the Advocate to note in its policy recommendations to Congress and the SEC at the end of the report the need to diversify capital allocators and support emerging fund managers to get small checks into the hands of earlier stage companies.

The Office of the Advocate for Small Business Capital Formation is an independent office housed within the SEC, created by Congress via special legislation. The report is provided directly to various committees of Congress without any prior review or comment from the SEC.

The Office of the Advocate for Small Business Capital Formation will host its third annual “Capital Call” on January 19, 2022. It will be a virtual public event, and participants can ask questions about the report and share perspectives on capital raising. Some of the recent papers and reports from the SEC’s Division of Economic and Risk Analysis may also be of interest to readers, which are available at SEC.gov | Staff Papers and Analyses (sec.gov/dera/staff-papers).