Empowering Small Businesses and Startups

A Deep Dive into the SEC 2024 Small Business Capital Formation Report

Small businesses are the backbone of the economy, driving innovation, creating jobs, and fueling economic growth. However, their path to securing the capital needed to thrive remains challenging.

The 2024 Annual Report from the SEC Office of the Advocate for Small Business Capital Formation shines a spotlight on the data, trends, and barriers affecting small businesses—including startups—and provides a roadmap for addressing these challenges.

In this blog post, we'll explore the key findings from the United States Securities and Exchange Commission (SEC) 2024 Small Business Report, analyze the trends impacting small businesses, and discuss how FinTech Law can assist small businesses that need to raise capital.

Understanding the Role of the SEC Office for Small Businesses

Established under the bipartisan SEC Small Business Advocate Act of 2016, the Office of the Advocate for Small Business Capital Formation works to support small and emerging companies.

It focuses on improving access to capital for early-stage startups, small public companies, and private businesses. Particularly those led by underrepresented founders, including women, minorities, and entrepreneurs in rural areas.

The 2024 report highlights critical trends in capital markets and provides recommendations to foster a more inclusive and equitable capital-raising environment.

Key Data and Trends from the 2024 Report

1. A Challenging Landscape for Small Businesses in Need of Capital
Despite their critical contributions to the economy, small businesses face significant hurdles in accessing funding. According to the 2024 OASB Annual Report:

• Women- and minority-owned businesses remain underrepresented in capital markets. Barriers include limited access to accredited investors and institutional funding.
• Rural entrepreneurs struggle with geographic disparities that limit their access to angel investors and venture capital networks.
  

These challenges highlight the need for tailored legal and regulatory support to help small businesses navigate the complexities of fundraising.

2. Startup Early-Stage Funding Constraints

The report notes that many startups rely heavily on self-funding or funding from friends and family.

While angel investors play a critical role in early-stage financing, emerging fund managers—who could diversify the sources of seed capital—face difficulties in attracting investors themselves.

• Startups in traditionally underserved sectors, such as manufacturing and clean energy, are particularly affected by the lack of accessible capital.
• Women and minority founders often face additional scrutiny when pitching to investors, compounding the challenge of raising early-stage capital.

3. The Initial Public Offering (IPO) Market: Limited Recovery

The IPO (Initial Public Offering) market remains vital to startups and small businesses to access public markets and achieve liquidity. However, the report reveals:

• IPO activity in 2024 has improved slightly from historic lows during 2022–2023 but remains well below that of 2021.
• Small companies accounted for 40% of IPOs but only 4% of the total deal value , underscoring their limited market impact.

The high cost of going public and maintaining compliance, discourages many small businesses from pursuing IPOs.

4. Underrepresentation in Public Markets

The decline in market capitalization of small public companies continues to be a worrying trend:

• The median age of IPO issuers is approximately10 years , indicating that businesses are staying private longer.
• Emerging fund managers and small companies struggle to attract institutional investment in public markets, further exacerbating this issue.

5. Regulatory Compliance Burdens

Many small businesses cite the high costs of regulatory compliance as a major barrier to entering and succeeding in public markets.

The U.S. Securities and Exchange Commission (SEC) has taken steps to mitigate these costs, including:

• Scaled disclosures and compliance accommodations for small issuers.
• Initiatives to clarify the obligations and rights of small business founders when interacting with sophisticated investors.

How Trends Impact Startups

The trends identified in the 2024 OASB Annual Report present unique challenges for startups.

As early-stage companies typically lack the financial history and collateral investors seek, they are particularly vulnerable to funding gaps.

Moreover, startups led by women and minority founders face additional biases that limit their access to capital and networks of accredited investors.

Demographic Disparities

The report highlights the ongoing underrepresentation of diverse founders in capital markets.

Women and minority entrepreneurs often lack access to critical networks and mentorship opportunities for securing funding.

Sectoral Concentrations

Startups in technology and healthcare continue to dominate the capital-raising landscape, leaving other sectors—such as clean energy and manufacturing—underserved. This imbalance limits the diversity of innovation across industries.

How We At FinTech Law Assist Small Businesses

At FinTech Law, we specialize in guiding small businesses and startups through the legal and regulatory hurdles of raising capital. Our expertise ensures that companies are well-prepared to access the funding they need to grow.

1. We Help Your Small Businesses Navigate Exempt Offerings
   The SEC's exempt offering framework provides valuable opportunities for small businesses to raise capital without the costs associated with public offerings. However, understanding and leveraging these exemptions requires a nuanced understanding of small business securities laws.
   • Regulation Crowdfunding : We assist your company in structuring and managing crowdfunding campaigns, ensuring compliance with the SEC's rules.
   • Regulation D Offerings : FinTech Law helps small businesses with the preparation and filing of Form D to raise funds from accredited investors.
   • Regulation A+ Offerings : We help businesses access this 'mini-IPO' option, which allows them to raise up to $75 million annually with fewer compliance burdens.
2. We Help Your Startup / Small Business Comply with Public Market Requirements
   Navigating the regulatory landscape is critical for small businesses and startups considering IPOs or direct listings. FinTech Law provides:
   • Prospectus drafting : Ensuring the compliance of your startup or small business with the SEC's disclosure requirements.
   • Corporate governance advice : Helping you establish robust governance structures to attract institutional investors.
   • Ongoing reporting : Assistance with quarterly and annual filings and compliance with insider trading laws.
3. Supporting Emerging Fund Managers
   Emerging fund managers are vital to the capital ecosystem but often face regulatory hurdles in raising funds. FinTech Law provides:
   • Fund formation services : Assisting with establishing venture capital and private equity funds.
   • Accredited investor compliance : Guiding fund managers in meeting SEC requirements for investor verification.
4. Strategic Legal Guidance for Small Businesses & Startups
   Startups often need to manage relationships with investors, protect intellectual property, and structure deals to minimize risk. FinTech Law offers:
   • Contract negotiation : Helping your small business and startup secure favorable funding terms with investors.
   • IP protection : Ensuring that your company's core innovations are safeguarded.
   • Legal risk assessments : Identifying and mitigating potential liabilities in fundraising.

Building a More Inclusive Capital Ecosystem

The 2024 SEC report emphasizes creating a more inclusive and equitable capital-raising environment. Recommendations include:

• Expanding the accredited investor definition : To include individuals with relevant knowledge or experience, not just those meeting income thresholds.
• Promoting mentorship programs : Connect diverse founders with seasoned investors and advisors.
• Encouraging regulatory reforms : To reduce compliance burdens for small issuers while maintaining investor protections.

FinTech Law is committed to supporting these efforts by providing the legal expertise that small businesses and startups need to thrive.

Conclusion

The data and trends from the SEC's 2024 Small Business Report reveal a complex landscape for small businesses and startups seeking to raise capital. From early-stage funding constraints to the challenges of public market compliance, these businesses face significant barriers that require tailored solutions.

At FinTech Law, we are dedicated to helping small businesses overcome these challenges by providing comprehensive legal support and guidance. Whether you're a startup navigating your first fundraising round or a small public company seeking to expand, our team is here to help you succeed.

If your business is ready to take the next step in its growth journey, contact FinTech Law today for expert legal advice tailored to your needs. Together, we can empower your success in the fast-evolving world of capital markets.

CONTACT: FinTech Law

Resources

• 2024-oasb-annual-report.pdf
• Small Business Advocate Act of 2016
• SEC Office of the Advocate for Small Business Capital Formation