Middle-Market Public Policy Roundup

In this week’s policy roundup, we recap the SEC’s Government-Business Forum, an annual gathering of business leaders and government officials. This year, the event was hosted by the National Center for the Middle Market and attendees discussed issues related to business capital formation. Then, we’ll take a look at an executive order signed by President Donald Trump that directs additional federal funding to support opportunity zones. Lastly, legislators voiced concern over leveraged loans during the Senate Banking Committee’s oversight hearing with SEC leaders.

SEC Holds Government-Business Forum on Small Business Capital Formation

The SEC held an annual event Wednesday where business leaders and government officials gathered to discuss how to improve small business capital formation.

The Government-Business Forum took place Dec. 12 and was hosted by the National Center for the Middle Market at the Ohio State University in Columbus. Topics included facilitating access to capital for small businesses, accredited investor status, crowdfunding, and enabling capital formation for traditionally underserved communities.

In the first of two panel discussions, “How Capital Formation Options Are Working for Small Businesses, Including Small Businesses in the Midwest,” SEC Chairman Jay Clayton said while investors and entrepreneurs across the country want to invest in small businesses, much of the capital and expertise for such investments only exists on the coasts.

Clayton also spoke about the complex patchwork of regulatory exemptions that facilitate various investment opportunities, which the SEC is examining to harmonize. He also spoke of how the SEC-driven “Main Street” investor participation in capital markets has traditionally been focused on public markets.

Other panelists emphasized the need to expand the definition of an accredited investor (and thus individuals who can participate in various private offerings) to include expertise-based qualifications, rather than the current income-driven definition. Panelists also pointed out the current $200,000 income-based definition is subject to high levels of variance across the country. For example, the same salary has substantially different purchasing power in San Francisco than it does in Idaho.

The second panel discussion, “Capital Formation and Diversity,” had wide consensus among participants over the need to increase education surrounding the process of raising capital. They agreed the complex process of raising capital intimidates entrepreneurs, leading to a lack of access to capital markets. Additionally, Falon Donahue, CEO of VentureOhio, said the Volcker Rule has created a bottleneck for venture capital investment in underdeveloped communities. The Volcker Rule broadly prohibits banks from investing in private equity and hedge funds. ACG submitted comments on the subject in a recent rulemaking.

SEC Commissioners Robert Jackson, Hester Peirce and Elad Roisman, as well as Chairman Clayton, used the forum to hear from a wide variety of those involved in the capital formation process across the United States.

ACG is pleased the SEC held the forum to better understand issues related to raising capital. ACG also applauds the agency for expressing interest in hearing recommendations from business leaders about how it can improve capital formation. The costs of going public and often being precluded from small business incentives are challenges faced by middle market firms—particularly those in the lower end—when it comes to raising capital. ACG will continue to advocate for capital formation policies that reflect the realities of the middle market and promote its growth.

Federal Government to Direct Spending Toward Opportunity Zones

President Donald Trump signed an executive order this week targeting federal agency efforts to support designated “opportunity zones” through various improvement projects.

Signed Dec. 12, the order directs more federal dollars towards opportunity zones, a program created as part of the 2017 tax reform legislation and designed to steer capital gains dollars towards traditionally underserved communities.

The New York Times reports that these efforts could focus on water infrastructure projects, Small Business Administration loan programs, anti-crime efforts and mentoring programs. The executive order also aims to synchronize the agencies involved in such programs by creating the White House Revitalization Opportunity Council, as well as to create a streamlined process for applying for federal resources.

Rep. Warren Davidson, R-Ohio, a member of the House Congressional Caucus for Middle Market Growth, applauded the action in a press release. “I look forward to this new Council expediting dollars to low-income communities to spark business growth and create jobs,” he said.

The order follows on the heels of a proposed rule issued by the IRS to implement the opportunity zones program. Comments on the IRS’s proposal are due on Dec. 28.

Senate Banking Committee Holds SEC Oversight Hearing, Talks Leverage

On Tuesday, SEC Chairman Jay Clayton delivered testimony to the Senate Banking Committee as part of its annual SEC oversight hearing. Though mostly centered around Regulation Best Interest, Proxy Reforms and other issues related to public securities, the hearing briefly touched on the issues of corporate leverage and private markets.

Ranking Member Sherrod Brown, D-Ohio, specifically raised concern over leveraged loans in his opening statement. “The Fed and the OCC are looking at banks’ exposure to leverage loans, but they say the risks are manageable and they’re not worried. We’ve heard that one before, it was a little over 10 years ago, before the economy came crashing down,” he said.

Speaking directly to Clayton, Brown said, “As the shadow banking market plays a larger role in leveraged lending, watchdogs can’t just focus on the big banks. It’s your job to worry when it seems like there’s nothing to worry about.”

Later in the hearing, Clayton said the SEC was beginning to look into collateralized loan obligations, yet another example of the growing focus that corporate leverage has received in recent months.

While the hearing served as a reminder of the SEC’s continued focus on retail investors, it likely foreshadows the increased attention that leveraged lending will receive in the coming year.

Interested in public policy issues that affect the middle market? Email Maria Wolvin, senior counsel and vice president of public policy, at mwolvin@acg.org to sign up for ACG’s Public Policy Interest Group and be the first to hear about relevant congressional, regulatory and policy-related developments.