Supporting Small And Minority Owned Businesses Through The Pandemic Ho Fc9190c7
Summary
The printed record of a virtual hearing, Supporting Small and Minority-Owned Businesses Through the Pandemic, held February 4, 2021 by the Subcommittee on National Security, International Development and Monetary Policy of the House Committee on Financial Services, Serial No. 117–2, printed in 2021. The subcommittee was chaired by Jim A. Himes with French Hill as Ranking Member. Five witnesses testified: Nneka Brown-Massey, Founder and CEO of Innovative Supplies Worldwide, Inc., for the Main Street Alliance; Gary L. Cunningham, President and CEO of Prosperity Now; Clifton G. Kellogg, Executive Director of the C-Pace Alliance; Everett K. Sands, CEO of Lendistry; and Holly Wade, Executive Director of the NFIB Research Center. The appendix carries their prepared statements and a Reimagine Main Street survey of small businesses by race and ethnicity.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Cite this document
“Supporting Small And Minority Owned Businesses Through The Pandemic Ho Fc9190c7.”
Original at www.govinfo.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/supporting-small-and-minority-owned-businesses-through-the-pandemic-ho-0d5ec44e49/
, SHA-256 fc9190c7e7d8cb0425c05346ad4cb2fd73da30b39904bf982bfb7e810a4acc27.Full text
SUPPORTING SMALL AND MINORITY-OWNED
BUSINESSES THROUGH THE PANDEMIC
VIRTUAL HEARING
BEFORE THE
SUBCOMMITTEE ON NATIONAL SECURITY,
INTERNATIONAL DEVELOPMENT
AND MONETARY POLICY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
FEBRUARY 4, 2021
Printed for the use of the Committee on Financial Services
Serial No. 117–2
(
U.S. GOVERNMENT PUBLISHING OFFICE
43–965 PDF WASHINGTON : 2021
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\HBA035.100 TERRI
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK MCHENRY, North Carolina,
NYDIA M. VELÁZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANN WAGNER, Missouri
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa TED BUDD, North Carolina
SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas
JESÚS ‘‘CHUY’’ GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
CHARLA OUERTATANI, Staff Director
(II)
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\HBA035.100 TERRI
SUBCOMMITTEE ON NATIONAL SECURITY, INTERNATIONAL
DEVELOPMENT AND MONETARY POLICY
JIM A. HIMES, Connecticut, Chairman
JOSH GOTTHEIMER, New Jersey FRENCH HILL, Arkansas, Ranking Member
MICHAEL SAN NICOLAS, Guam LEE M. ZELDIN, New York
RITCHIE TORRES, New York ROGER WILLIAMS, Texas
STEPHEN F. LYNCH, Massachusetts TOM EMMER, Minnesota
MADELEINE DEAN, Pennsylvania WARREN DAVIDSON, Ohio
ALEXANDRIA OCASIO-CORTEZ, New York ANTHONY GONZALEZ, Ohio
JESÚS ‘‘CHUY’’ GARCIA, Illinois VAN TAYLOR, Texas, Vice Ranking Member
JAKE AUCHINCLOSS, Massachusetts
(III)
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\HBA035.100 TERRI
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\HBA035.100 TERRI
CONTENTS
Page
Hearing held on:
February 4, 2021 .............................................................................................. 1
Appendix:
February 4, 2021 .............................................................................................. 31
WITNESSES
THURSDAY, FEBRUARY 4, 2021
Brown-Massey, Nneka, Founder and CEO, Innovative Supplies Worldwide,
Inc., on behalf of Main Street Alliance (MSL) ................................................... 6
Cunningham, Gary L., President and CEO, Prosperity Now .............................. 8
Kellogg, Clifton G., Executive Director, C-Pace Alliance ..................................... 9
Sands, Everett K., CEO, Lendistry ........................................................................ 11
Wade, Holly., Executive Director, Research Center, National Federation of
Independent Business (NFIB) ............................................................................. 13
APPENDIX
Prepared statements:
Brown-Massey, Nneka ..................................................................................... 32
Cunningham, Gary L. ...................................................................................... 38
Kellogg, Clifton G. ............................................................................................ 40
Sands, Everett K. ............................................................................................. 42
Wade, Holly ....................................................................................................... 55
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Himes, Hon. Jim A.:
Written statement of the Brookings Institution’s Metropolitan Policy Pro-
gram ............................................................................................................... 60
Written statement of the Center for Indian Country Development at
the Federal Reserve Bank of Minneapolis .................................................. 66
Written statement of the Center for Responsible Lending ........................... 70
Op-Ed co-authored by Chairman Himes entitled, ‘‘Opinion: small business
owners face inequality during coronavirus,’’ dated April 18, 2020 ........... 97
Written statement of the Opportunity Fund .................................................. 99
SEC’s Annual Report for Fiscal Year 2020 of the Office of the Advocate
for Small Business Capital Formation ........................................................ 100
Written statement of the Small Business Majority ....................................... 208
Joint written statement of the Asian/Pacific Islander American Chamber
of Commerce (National ACE), the United States Hispanic Chamber
of Commerce (USHCC), and the U.S. Black Chambers, Inc. (USBC) ...... 209
(V)
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 K:\DOCS\HBA035.100 TERRI
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 K:\DOCS\HBA035.100 TERRI
SUPPORTING SMALL AND MINORITY-OWNED
BUSINESSES THROUGH THE PANDEMIC
Thursday, February 4, 2021
U.S. HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON NATIONAL SECURITY,
INTERNATIONAL DEVELOPMENT
AND MONETARY POLICY,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The subcommittee met, pursuant to notice, at 3:06 p.m., via
Webex, Hon. Jim A. Himes [chairman of the subcommittee] pre-
siding.
Members present: Representatives Himes, San Nicolas, Torres,
Lynch, Auchincloss; Hill, Zeldin, Williams of Texas, Emmer, David-
son, and Taylor.
Ex officio present: Representative Waters.
Also present: Representatives Green and Huizenga,
Chairman HIMES. The Subcommittee on National Security, Inter-
national Development and Monetary Policy will come to order.
Without objection, the Chair is authorized to declare a recess of the
subcommittee at any time. Also, without objection, members of the
full Financial Services Committee, who are not members of this
subcommittee, are authorized to participate in today’s hearing. If
you are participating today, please keep your camera on, and if you
choose to attend a different remote proceeding, please turn your
camera off.
Members are also reminded that they are responsible for muting
and unmuting themselves, and to mute themselves after they are
finished speaking. Consistent with the regulations related to re-
mote proceedings, staff will only mute Members and witnesses as
appropriate, when not being recognized by the Chair, to avoid inad-
vertent background noise. Members are further reminded that all
House rules relating to order and decorum apply to this remote
hearing.
Before I kick us off, I want to just spend a couple of minutes,
since this is the maiden voyage of the National Security, Inter-
national Development and Monetary Policy Subcommittee. I am
just delighted to be joined by French Hill of Arkansas as the rank-
ing member. I consider French a good friend of many years, and
there are really few Members for whom I have so much respect in
this institution. If you want an example of French’s commitment to
technical policy issues, look no further than his Op-Ed in yester-
day’s Wall Street Journal on IMF Special Drawing Rights. I rec-
ommend you do that right before bedtime.
(1)
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
2
As chairman, I have two objectives for this subcommittee. First,
our subcommittee needs to make progress on, and conduct hard-
hitting oversight on a wide variety of issues, from the financing of
violent extremists, to the economic implications of a massive Fed-
eral Reserve balance sheet. We have a lot of work to do. I invite
every single member of this subcommittee to talk to me or to
French about areas that you would like to pursue.
Second, and just as importantly, I would really like to do this
right. I would like to do this in a way that honors the trust that
lots of our constituents have put in us and which begins to rebuild
this institution. As I look at the subcommittee membership, with
the exception of Mr. Lynch, I think I have been in the House longer
than anyone else on the subcommittee, for 12 years now. So, I am
not one bit naive about the political pressures that we all face, and
frankly, I have never seen it so bad.
As we sit here, many of us are full of anger, suspicion, and anx-
iety. Some of us want revenge for this or that. All of us went
through something on January 6th that we never imagined would
ever happen. So, my second objective for this subcommittee is to
show the Congress and the world that even in these days of white-
hot emotion, we can make progress, model more decent politics,
and maybe even build some bridges.
I have been here for a while, so let me offer just a little bit of
specific guidance. First, let us be forward-looking. The Presidency
of Donald Trump will be scrutinized by historians for generations
to come. We all have views. Hillary Clinton’s emails and Paul
Manafort’s friends are catnip for all of us, but let us keep that stuff
out of a room that is about improving national security and con-
ducting oversight.
Second, let us go after each others’ ideas in a way that improves
them. Let us stay away from motives from personalities and from
hidden agendas. I will be far more grateful to the Republican who
changes my thinking with a good argument and good facts than I
will be to a Democrat who simply agrees with me. If you think my
ideas are bad, change my mind with facts and a good argument.
Third, and finally, let us respect each other. Whatever else we
think of each other, a whole lot of people sent each and every one
of us here to represent them. We have to respect that. Like I said,
I have been here for a long time. I understand why Democrats need
to repeat the word, ‘‘QAnon,’’ and why Republicans need to call me
a, ‘‘radical socialist.’’ Just please, do that in a different room. The
chairman does not have immense power, but he has discretion in
determining when language becomes unbecoming, and I really
would like to model something better than what we have been
showing these last couple of weeks. I think we have a real chance
to lead here, to show that there is a better way, and so, let us do
it.
Today’s hearing is entitled, ‘‘Supporting Small and Minority-
Owned Businesses Through the Pandemic.’’ I now recognize myself
for 4 minutes to give an opening statement.
Welcome to the first hearing of the Subcommittee on National
Security, International Development and Monetary Policy. I am
eager to delve into the many subject matters under the jurisdiction
of the subcommittee. Our purview is broad and cuts across a range
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
3
of issues important to the American people, whether it be keeping
terrorists from accessing our financial system, ensuring that we are
leading on the global stage through international institutions, or
overseeing the Federal Reserve’s efforts to rescue the economy,
these issues have never been so important.
I look forward to working with all of you on those issues. As I
said before, I am also just delighted to be joined by Ranking Mem-
ber French Hill. I want to, as I said before, continue the history
of bipartisan work on the subcommittee.
The issue before us affects all Americans, and I am confident
that this subcommittee will serve as a model for what can be
achieved. Today’s hearing focuses on an issue that I can say for
certain every member on this subcommittee has dedicated a tre-
mendous amount of time to since the onset of the pandemic: Sup-
port for small and minority-owned businesses. I see the challenges
every single day in my very, very diverse district. In March, as the
sheer scale of the economic challenges before us became clear, Con-
gress acted to pass the largest stimulus bill ever, the Coronavirus
Aid, Relief, and Economic Security (CARES) Act, to deliver the des-
perately-needed aid across the economy.
In December, we again came together to continue that support.
However, as the stimulus made its way into the economy, many of
us became concerned about the undeniable fact that not all commu-
nities were equal beneficiaries of that aid. In April, I co-authored
an Op-Ed with Connecticut’s Treasurer Sean Wooden, arguing that
more needed to be done to ensure that aid was making its way to
minority-owned businesses as well as businesses in traditionally
underserved and underbanked communities. And without objection,
I will enter that Op-Ed into the record.
In this hearing, the subcommittee will explore the successes and
the failures of the systems we set up to help small and minority-
owned businesses weather this pandemic. It is vital that we under-
stand why aid to minority-owned businesses was delayed, while
other well-connected businesses that were hurting the least made
their way to the front of the line. Our efforts today are not focused
on laying blame, but on helping lay the groundwork for how we can
do better going forward, because the issues we are addressing here
today will not simply disappear after we defeat this virus.
I would like to profoundly thank our witnesses for being here. I
am sorry we could not welcome you more formally and in person,
but we are going to really enjoy your testimony as we wrestle with
these questions. At this point, I would like to yield to Ranking
Member French Hill.
And, Ranking Member Hill, since I took more than my fair share
of time up-front, you will get the same discretion.
[laughter]
Mr. HILL. I thank my friend from Connecticut, and I want to say
what a treat it is to refer to Jim Himes as, ‘‘chairman’’ of the sub-
committee. Not that those of us on the Republican side of the aisle
do not want the word, ‘‘chairman’’ as a prefix to our names, but we
look forward to working with you and we appreciate the attitude
which you have and the critical support you delivered as a member
of the Intelligence Committee, and a long-time supporter of Amer-
ica’s national security. Representative Steve Lynch will certainly
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
4
report that this subcommittee was transformed from a task force
into a subcommittee the year that Mr. Emmer, Mr. Zeldin, and I
came into the House. And I, actually for all 6 years, have been very
impressed with the original Terrorism Task Force, that is now the
National Security Subcommittee, and, as you pointed out, the bi-
partisan nature of the subcommittee.
And I want to thank the Republicans in the last Congress for
being creative and collaborative with their Democratic colleagues.
We got a number of good bills out of this subcommittee, through
the Full Committee, and across the House Floor, that countered
China’s debt trap, lack of transparency, and their accreditor status
in the Third World. It is very important to a lot of Members on
both sides of the aisle to shine a light on that, as well as holding
them accountable in a number of ways. So, I thank all of my col-
leagues on both sides of the aisle for their work on this sub-
committee.
I also would say that Mr. Himes and I share this interest in
international affairs, and we know that this subcommittee is a
major partner in America’s strategy, both in sanctions and identi-
fying ways to cut off terrorism finance, and collaboration on com-
bating transnational crime around the world. And that issue has
not gone away, even though the subcommittee, in the last Con-
gress, was more focused in the international finance arena and in
China’s emerging rival status with the United States.
So again, let me echo what the chairman said, which is to en-
courage Members on both sides of the aisle to visit with me on the
best ideas you have for both hearings and for legislative priorities.
Today, we will be discussing the State Small Business Credit Ini-
tiative (SSBCI), which would reintroduce a program that was cre-
ated back in 2010 after the financial crisis. It is aimed at providing
additional funding to assist small businesses. It seems to me that
this is a similar hearing to the one this subcommittee held last
summer on H.R. 6918, the Paycheck Recovery Act, that would re-
quire the U.S. Treasury to provide grants to small businesses.
As I mentioned last summer, and it bears repeating now, these
types of programs, in my view, should not be moving through this
subcommittee. Instead, the House Small Business Committee
should be analyzing the state of all aspects of financing for small
businesses, including the State Small Business Credit Initiative.
As a long-time supporter of small business, and as someone who
previously spent a part of 4 decades starting businesses, I am not
denying the importance of ensuring that small businesses remain
operational. I am simply stating that our subcommittee is better
suited to discussing the issues squarely in our jurisdiction, such as
items just mentioned by Chairman Himes and myself: threats from
China; the annual oversight of the Committee on Foreign Invest-
ment in the United States (CFIUS), which we were supposed to do,
and even in the last Congress, whenever accomplished, it, and obvi-
ously, the importance of monetary policy oversight, just to name a
few. Instead, we’re using our very limited hearing time to discuss
this program.
As of today, the Federal Government has authorized nearly $3.8
trillion in COVID-19 relief. Of that, about a trillion dollars is aimed
at business relief. Specifically, the Paycheck Protection Program
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
5
(PPP), the largest of the Federal small business programs, has allo-
cated $650 billion, $100 billion of which is still available, including
for first-time users and second-chance PPP users.
I was reviewing the State Small Business Credit Program that
was set up during the Obama Administration. It was about $1.5
billion, and not all of the funds ended up being allocated over the
years of the program. It had very limited oversight and did not
seem to achieve its proposed goals, based on looking at the Govern-
ment Accountability Office’s (GAO’s) summary of this program.
In my home State of Arkansas, I contacted the Arkansas Devel-
opment Finance Authority, which oversaw this program. I spoke to
the individuals who were responsible for implementing it, and was
told, ‘‘It was not a pleasant experience.’’ And as they noted to me,
it did not save or create a single job during the term of them at-
tempting to use it in my home State.
As many of us know, the success of the PPP program from last
year’s CARES Act had kinks and faults, as does any start-up pro-
gram that the government has. Something was created, and imme-
diately, in 2 weeks, it began extending loans to small businesses.
However, over the last 10 months, many of those flaws have been
corrected and businesses are receiving the benefits of the Paycheck
Protection Program.
So another thing I am very cautious about today, as we start this
hearing, is trying to initiate another program with a start-up
phase, and changes, and notices of rulemaking, and frequently
asked questions that would potentially complicate things, and
delay our small businesses’ further access to funds, particularly
when we have so much at stake, now that we have advanced in the
Economic Injury Disaster Loans (EIDL) in the Paycheck Protection
program, two big, well-funded successful programs as a part of the
CARES Act, that are in the jurisdiction of the Small Business Com-
mittee.
And with that, Mr. Chairman, I yield back, and I look forward
to the discussion today.
Chairman HIMES. Thank you, Mr. Hill.
The Chair now recognizes the Chair of the Full Committee, the
gentlewoman from California, Chairwoman Waters, for one minute.
Chairwoman WATERS. Thank you, Chairman Himes. I wanted to
be here to congratulate you on hosting your first subcommittee
hearing this Congress, and on such an important and urgent topic.
Small and minority-owned businesses are the heart of our economy.
Unfortunately, the COVID-19 pandemic has caused heavy financial
and public-health pressures upon them, so reviving programs like
the State Small Business Credit Initiative, which provides specific
programs for the hardest-hit businesses like restaurants, could pro-
vide targeted relief. This hearing must also focus our attention on
minority-owned businesses, whose historical challenges with ac-
cessing capital and assistance programs have been exacerbated by
this pandemic. Thank you for the minute. I yield back the balance
of my time.
Chairman HIMES. Thank you, Chairwoman Waters.
Chairwoman WATERS. You are welcome.
Chairman HIMES. Today, we welcome the testimony of our distin-
guished witnesses. In order, Nneka Brown-Massey, founder and
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
6
CEO of Innovative Supplies Worldwide, Inc., testifying on behalf of
the Main Street Alliance; Gary Cunningham, president and CEO of
Prosperity Now; Cliff Kellogg, executive director of the C-PACE Al-
liance; Everett Sands, CEO of Lendistry; and Holly Wade, execu-
tive director of the Research Center at the National Federation of
Independent Business (NFIB).
Witnesses are reminded that your oral testimony will be limited
to 5 minutes. You should be able to see a timer on your screen that
will indicate how much time you have left, and a chime will go off
at the end of your time. I would ask that you be mindful of the
timer, and quickly wrap up your testimony if you hear the chime,
so that we can be respectful of both the witnesses’ and the com-
mittee members’ time. And without objection, your written state-
ments will be made a part of the record.
Ms. Brown-Massey, you are now recognized for 5 minutes to give
an oral presentation of your testimony.
STATEMENT OF NNEKA BROWN-MASSEY, FOUNDER AND CEO,
INNOVATIVE SUPPLIES WORLDWIDE, INC., ON BEHALF OF
MAIN STREET ALLIANCE (MSA)
Ms. BROWN-MASSEY. Chairman Himes, Ranking Member Hill,
and members of the subcommittee, thank you for the opportunity
to testify today on the need to better support minority-owned and
smaller businesses like mine. I am honored and humbled to speak
before your esteemed panel and to be alongside my distinguished
fellow witnesses. And more importantly, thank you for putting this
hearing topic front and center at the start of the 117th Congress,
and demonstrating your strong commitment to helping the small
business community.
My name is Nneka Brown-Massey, and I am the founder and
CEO of Innovative Supplies Worldwide, a school supplies design
company based in Tulsa, Oklahoma. I am also speaking today as
a member of the Main Street Alliance, a national network of more
than 30,000 small business owners who, like me, are eager to share
their perspectives on critical public policy issues, especially as we
try to find a way out of this once-in-a-lifetime pandemic.
In July of 2016, less than 2 months after finishing my 9-year ca-
reer as a human resources specialist in the United States Army,
I launched Innovative Supplies Worldwide, a stationery manufac-
turing company. In the first 24 hours of my e-commerce launch, my
brand-new business had sold more than 8,000 stationery notebooks
globally. I received numerous awards and was accepted into entre-
preneurship programs. The future could not have looked better or
brighter for my start-up company.
Then, COVID-19 hit us all last spring, and in my case, caused
consumers to shift to online classes. With the transition to remote
and digital learning, demand for my physical product dipped and
my sales dropped more than 60 percent. When relief programs
opened last April following the passage of the CARES Act, I imme-
diately applied for the Economic Injury Disaster Loan (EIDL) ad-
vance grant. However, after months of radio silence, I was finally
told in June by a Small Business Administration (SBA) representa-
tive that I had been denied for vague credit reasons. I was forced
to establish a new relationship with a new bank when I tried to
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
7
apply for the PPP, because the bank I previously worked with
closed their only branch in my town, only to be told by the new
bank once I had opened my account, that they would not accept
new PPP applications at the time.
To compound matters, I am a service-disabled veteran with con-
cussion complications from airborne missions with the 82nd Air-
borne Division. The injuries I sustained have impacted my ability
to manage and process large amounts of paperwork without dis-
ability accommodations or support. The extensive and complicated
loan application process required to access credit and capital be-
came overwhelming for me.
As profits dissipated and capital dried up for my struggling busi-
ness, I resorted to using disability benefits from the Department of
Veterans Affairs for my traumatic brain injuries and PTSD. It was
not too long before my car was repossessed by Fifth Third Bank.
With what little faith I had left, I applied for and was accepted into
the Tulsa Remote Program, which pays remote workers $10,000 to
move to Tulsa, Oklahoma, for a year. However, just to pay for the
move, I had to use my tax refund and my stimulus check.
What my experience underscores are the very real barriers that
exist when it comes to accessing capital and credit. As a person of
color, living in a rural area, who was not well-connected to the
banking industry, I am here today not just to share my story, but
to advocate for other small business owners who could just as eas-
ily be sitting on this panel. What would have helped me the most,
and could still help me now, is a flexible, responsive, direct grants
program. Even just a $5,000 or $10,000 grant could change the
course of my business and my life.
In closing, I am grateful to appear before this committee today.
Despite experiencing the highest of highs and the lowest of lows,
at the end of the day, I am an entrepreneur trying my hardest and
doing my best to succeed. I have proudly and dutifully served my
country, sought the same opportunities that others have been af-
forded, and done whatever was necessary to achieve financial free-
dom, including packing my bags, moving to a foreign place, and se-
curing my daughter’s well-being by making the incredibly painful
decision to send her to be with her father in another State rather
than force her to share the same sacrifices I am making.
Despite the setbacks I have been dealt, I look forward to resum-
ing the business mentorship I was providing to my employees,
many of whom are at-risk youth, training them on inventory soft-
ware, social media marketing, resume building, and other skill
sets. Despite everything I have been through, I still believe in my-
self and the potential of future entrepreneurs.
I hope that you and your colleagues in Congress will make the
most of this uniquely challenging yet historical moment in time to
learn from the past and rethink entrepreneurship in this country.
There are a number of lessons from 2020 and the uneven imple-
mentation of COVID relief programs for small businesses. My expe-
rience is one data point that could be built into a more intentional
and systematic effort to collect quality disaggregated data about
minority-owned small businesses.
There should be a thorough examination of SBA lending, tech-
nical assistance, and other programs to assess their effectiveness
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
8
for supporting very small businesses. Consumer protections should
be expanded to small business borrowers—
Chairman HIMES. Ms. Brown-Massey? Your time has expired.
Ms. BROWN-MASSEY. Thank you.
[The prepared statement of Ms. Brown-Massey can be found on
page 32 of the appendix.]
Chairman HIMES. We will have an opportunity to finish up dur-
ing the period of questioning. But thank you for your testimony,
Ms. Brown-Massey.
Mr. Cunningham, you are now recognized for 5 minutes to give
an oral presentation of your testimony.
STATEMENT OF GARY L. CUNNINGHAM, PRESIDENT AND CEO,
PROSPERITY NOW
Mr. CUNNINGHAM. Chairman Himes, Ranking Member Hill,
Chairwoman Waters, and members of the subcommittee, thank you
for inviting me here today. It is such an honor. I really appreciate
it.
My name is Gary Cunningham. I am the president and CEO of
Prosperity Now, a national nonprofit that creates, identifies, tests,
and scales new and existing solutions that address the root causes
of the racial economic injustice in America. I came to Prosperity
Now after serving as the president and CEO of a Community De-
velopment Financial Institution (CDFI) and a Minority Business
Development Agency (MBDA) in Minnesota. Therefore, I have had
experience working hands-on to help entrepreneurs of color suc-
ceed.
I would like to start today by just setting the stage. According
to the data from the U.S. Senate Committee on Small Business and
Entrepreneurship, over the last 10 years, minority businesses ac-
counted for more than 50 percent of all new business starts in the
United States and created more than 4.7 million jobs. There are
more than 4 million minority-owned companies in the United
States with annual sales of close to $7 billion. That is a sizable
footprint. Ensuring their financial health as employers and eco-
nomic contributors, therefore, is critical.
It is critical that we develop specific approaches to help minority
businesses grow and scale. This will require targeted programs de-
signed to serve those who have historically been left out.
For instance, the Paycheck Protection Program, a universal pro-
gram with outstanding goals, did not reach all businesses equally.
Many minority business owners were left out of the process be-
cause the universal program was not targeted to their specific
needs. For example, many minority-owned businesses do not have
relationships with commercial banks and other mainstream finan-
cial institutions. We are losing economic productivity and trillions
of dollars in GDP when we do not fortify and support for a strong
ecosystem of minority business enterprises.
In fact, Black-owned businesses were the fastest-growing busi-
ness segment in our economy before COVID-19 hit. Between Feb-
ruary and May of last year, however, a whopping 41 percent of
Black-owned businesses were shuttered. The impact of COVID on
minority businesses is dire and threatens to undo the growth we
have seen in the last decade.
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
9
I must be clear: I am not here to argue for handouts. I am here
to argue that targeted, strategic investments to minority busi-
nesses will yield significant returns in the form of increased home
ownership, jobs, and tax revenue. From my experience in working
with minority entrepreneurs, access to technical assistance is the
secret sauce of success. Trusted guidance in the form of technical
assistance is needed to grow and scale these businesses. Many need
investments in infrastructures, simple things like bookkeeping and
accounting support, or help filling out a loan application. The cur-
rent system with MBDA and SBA is needed, but we need more. We
need to increase the level of technical support and assistance and
capital going to minority businesses.
Despite all of these barriers, entrepreneurs of color are making
a difference in this country. They are at the forefront of closing the
racial wealth gap. We are facing a moment of true reckoning. There
is so much at stake at this moment. Giving minority businesses the
tools to survive can result in stronger employment and economic
outcomes, a healthier trajectory for communities across the coun-
try, and a chance to truly close the growing racial wealth gap. Clos-
ing this gap, this racial wealth gap, is not just a moral argument.
It is vital to establishing a sound economic future for this country,
and it could increase the GDP by $1 trillion to $1.5 trillion over the
next decade.
Thank you for giving me the opportunity to speak today. I look
forward to your questions. Thank you, Mr. Chairman.
[The prepared statement of Mr. Cunningham can be found on
page 38 of the appendix.]
Chairman HIMES. Thank you, Mr. Cunningham.
Mr. Kellogg, you are now recognized for 5 minutes to give an oral
presentation of your testimony.
STATEMENT OF CLIFTON G. KELLOGG, EXECUTIVE DIRECTOR,
C-PACE ALLIANCE
Mr. KELLOGG. Thank you, Chairman Himes.
Good afternoon. My name is Cliff Kellogg. I commend the sub-
committee for holding a hearing on this important topic. I have
worked on these issues in many professional capacities during my
career from South Shore Bank to City First Bank in Washington,
D.C. However, I believe the subcommittee invited my testimony
today due to my experience as the Director of the State Small Busi-
ness Credit Initiative (SSBCI) during the Obama-Biden Adminis-
tration.
My testimony is in two parts: first, I will highlight some of the
most significant outcomes of SSBCI; and second, I will offer a few
ideas on how a reauthorized SSBCI could extend its impact to cre-
ate even more benefit for minority-owned businesses and disadvan-
taged communities.
In 2010, lawmakers designed SSBCI with one overriding goal: To
stimulate more private sector lending and investing. Then, as now,
dire economic conditions made lenders and investors extremely
cautious. Just yesterday, the Federal Reserve Banks released their
Small Business Credit Survey showing that only 13 percent of Afri-
can-American-owned firms received the full amount of financing
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
10
they sought, while their White-owned firm peers met their financ-
ing needs more than 3 times as often.
SSBCI’s strategy is simple: Provide States with funds to share in
the risk of making loans and investments. SSBCI required at least
one dollar of private capital at risk for every Federal dollar, with
the goal of achieving ten-to-one leverage over the life of the pro-
gram.
The specific outcomes were as follows. In 2010, SSBCI awarded
$1.5 billion to programs in all 50 States, Washington, D.C., and the
Territories. The result was over 21,000 new loans and investments
exceeding $10 billion. On average, businesses supported by SSBCI
employed 11 people, though half of the firms employed 3 people or
less. Clearly, the program reached small firms.
Forty-three percent of the loans or investments were located in
low- or moderate-income communities, and 41 percent went to
women-owned or minority-owned businesses. Again, it’s a good sign
that SSBCI reached underserved communities.
So, what makes SSBCI distinct? First, SSBCI gave States the
flexibility to design their program to suit local conditions. States
could fund startups and expansions, manufacturing loans, and
microloans. Some States chose to provide additional collateral.
Other States funded reserve accounts for a portfolio of loans. States
could operate their program directly or they could hire a contractor.
Because local conditions varied from State to State, flexibility in
design made SSBCI successful.
Second, SSBCI enabled lenders to make larger loans or make
loans with more favorable terms than they would have made other-
wise. SSBCI shared in the risk, but the private sector always had
the greatest skin in the game.
SSBCI demonstrated that a well-run program reaches a vast
range of small businesses, including underserved businesses.
Again, the data from version 1 of SSBCI are promising. As the
committee considers reauthorizing SSBCI with higher appropria-
tions, it is clear that the States have the capacity to scale up their
SSBCI programs, and that alone will be a new benefit, a larger
benefit to small businesses. However, more can be done in Version
2 of SSBCI.
First, States should be required to include outreach through
CDFIs and Minority Depository Institutions (MDIs). And they
should be authorized to collect demographic information on the
small businesses they serve.
Second, the committee might consider increasing the amount al-
located to States or run a competitive round for States, provided
they reach an above-average share of minority-owned firms. The
committee might lower the required leverage for these high-per-
forming states.
Third, States should be asked to fund technical assistance to
small businesses from their allocations to ensure equitable access
and optimum use of these resources.
And finally, the committee might consider allowing multi-State
applications, or in the alternative, running a competitive round
that awards funds directly to those lenders with a multi-State foot-
print. A multi-State footprint is especially important for equity in-
vestment programs that target underserved communities.
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
11
In summary, Version 1 of SSBCI clearly supported small busi-
ness economic recovery. Reauthorizing a larger SSBCI with en-
hancements to reach underserved communities would be a valuable
part of helping small and minority-owned firms recover from this
pandemic. I welcome any questions you may have. Thank you very
much.
[The prepared statement of Mr. Kellogg can be found on page 40
of the appendix.]
Chairman HIMES. Thank you, Mr. Kellogg.
Mr. Sands, you are now recognized for 5 minutes to give an oral
presentation of your testimony.
STATEMENT OF EVERETT K. SANDS, CEO, LENDISTRY
Mr. SANDS. Good afternoon, Chairman Himes, Ranking Member
Hill, and Chairwoman Waters. Thank you for your interest in my
perspective on today’s topic, which has been an every-day conversa-
tion for so many of us over the past 10 months.
My name is Everett K. Sands, and I have more than 20 years
of experience in lending. For the past 5 years, as founder and CEO
of Lendistry, my focus has been on responsible lending to under-
served small businesses, particularly those owned by minorities,
women, veterans, and people in rural areas. Lendistry is a minor-
ity-led CDFI, Fintech CDFI, a member of the Federal Home Loan
Bank of San Francisco, and an SBA lender. We are a signatory on
the Small Business Borrowers’ Bill of Rights, and we also have a
nonprofit technical assistance affiliate. Lendistry rates second na-
tionwide in SBA Community Advantage Loans, which range from
$50,000 to $250,000.
Community advantage is the only category of SBA loan in which
Black and Latinx borrowers combined account for more than 10
percent of annual loan buy-in. More than 73 percent of Lendistry’s
total outstanding principal loan balance is with minority- and
women-owned business borrowers.
Lendistry’s focus on small and minority-owned businesses, and
our ability to efficiently process high volumes of applications has
enabled us to make an impact during this period of urgent need.
By the one-year anniversary of COVID lockdowns, Lendistry
wealth has deployed nearly one billion dollars to nearly 70,000
small businesses in PPP loans and government grants.
Prior to the pandemic, Lendistry funded millions in SSBCI-
backed loans. The program gave us flexibility in our underwriting
criteria without sacrificing our credit and risk management. But
we could have originated more and made more impact if certain
barriers were lowered.
Before discussing specific recommendations for the SSBCI legis-
lation, I would like to discuss four urgent objectives and opportuni-
ties for SSBCI that I believe should frame the subcommittee’s work
in this matter.
First, SSBCI must clearly answer the urgent need of small and
minority-owned businesses for capital to help them survive, sta-
bilize, and recover through the pandemic in a way that recognizes
the disparate impact of the pandemic on minorities.
Second, SSBCI should be robust enough to act as an engine for
inclusive national economic expansion. Whenever there are massive
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
12
economic shocks, from Hurricane Katrina to the Great Recession,
the driving force of recovery and job creation comes from new busi-
ness formation. The decisions this subcommittee and your col-
leagues make concerning the size and the design of the program
will make a difference. There is a positive correlation between busi-
nesses that can have a significant multiplier effect on the economy
and businesses that require capital.
I want to emphasize inclusive expansion. Starting and owning a
business is one of the most effective paths for minorities to close
a wage and wealth gap, while minority-owned businesses face well-
known disparities in accessing capital.
The third guiding objective for the SSBCI is the opportunity to
draw more responsible lenders. The program’s size and features
should make it so attractive to banks and community lenders that
they come full-force into the small end of the lending market, pro-
viding businesses with a welcome alternative to predatory lending.
Finally, SSBCI should enable CDFIs to have a maximum impact.
As we have seen during the PPP, CDFIs made efficient access to
capital and to geographies. But in the original program, it was very
difficult for the CDFIs to be where the available funds were, leav-
ing small businesses to suffer as a result.
I will now refer you to the section of my written testimony
Roman Numeral V, for an expanded discussion on six specific rec-
ommendations for the legislation. Here’s a summary. Number one,
the funding level for SSBCI should be at least $10 billion. Number
two, the portion of authorized funds dedicated to minority-owned
businesses should be 60 percent.
Number three, at least 5 percent of authorized funds should be
dedicated to technical assistance and certain specific areas of pro-
nounced need. Number four, the legislation should automatically
authorize CDFIs, SBA-approved Community Development Corpora-
tions, and Business Development Corporations to offer SSBCI-sup-
ported loans nationwide.
Number five, for every program supported by SSBCI, loans to mi-
nority-owned businesses should qualify for an additional 10 percent
of guaranteed coverage. And finally, there should be mechanisms
to rescind funds from States that failed to deploy their allocated
capital expeditiously, and redeploy those funds to States operating
those programs effectively.
To close, a robust reauthorization of SSBCI is necessary to meet
the dual imperatives to stabilization and recovery, and new busi-
ness formation and growth. It is vital that SSBCI is large enough
for both needs. I want to thank the Chair and the subcommittee
members, and I am happy to see Congressman Lynch on this sub-
committee.
[The prepared statement of Mr. Sands can be found on page 42
of the appendix.]
Chairman HIMES. Thank you, Mr. Sands.
And Ms. Wade, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
13
STATEMENT OF HOLLY WADE, EXECUTIVE DIRECTOR, RE-
SEARCH CENTER, NATIONAL FEDERATION OF INDE-
PENDENT BUSINESS (NFIB)
Ms. WADE. Good afternoon, Chairman Himes, Ranking Member
Hill, and distinguished members of this subcommittee. Thank you
for the opportunity to testify today on supporting small and minor-
ity-owned businesses through the pandemic. NFIB is the leading
small business advocacy association, founded in 1943 as a non-
profit, nonpartisan organization. NFIB’s mission is to promote and
protect the rights of its members to own, operate, and grow their
business. NFIB proudly represents approximately 300,000 mem-
bers nationwide from every industry and sector.
The NFIB Research Center promotes greater understanding of
small business and the conditions that impact it. The Center pro-
duces and disseminates various surveys and studies on small busi-
ness, focused on areas related to business operations and public
policy effects. The Research Center has conducted a series of sur-
veys over the last 10 months assessing the impact the pandemic
has had on small business owners. These surveys assess economic
conditions in their local area, utilization of Federal and State loan
and grant programs as well as tax credits designed to help small
business owners survive the crisis.
From the onset of the crisis, small business owners have strug-
gled to adjust to rapidly changing economic conditions. The initial
months were particularly damaging to the small business sector as
historically large numbers of small businesses closed temporarily
and permanently. Those businesses that remained open had to
navigate strict business operating restrictions, and dramatic shifts
in consumer spending, which often forced owners to use their own
limited savings to keep their business open while trying to access
funding through the Paycheck Protection Program (PPP).
The PPP has been extremely popular with small business own-
ers, with 76 percent of NFIB members receiving a PPP loan in
2020. However, it is not without significant complications and
stress among small business owners who are desperate for imme-
diate financial assistance. The initial challenges for many were im-
mense. Owners were often confused on eligibility, how to calculate
loan amounts, and how to spend their loan dollars to maximize for-
giveness. NFIB quickly became an educating force for small busi-
ness owners trying to reach as many as possible to help them navi-
gate the program, but also reach those populations of owners, most-
ly non-employers, to let them know that they, too, were likely eligi-
ble to participate.
We also heard from small business owners struggling to find
lenders to accept their PPP application. We know that small banks
and community banks have significantly declined in recent years,
and that became a clear issue in accessing the PPP program. The
initial months were difficult. But as the Paycheck Protection Pro-
gram evolved, and Congress allocated more money to the program,
and more lenders were eligible to accept applications, small busi-
ness owners were generally able to access a loan.
The first round of PPP was very effective in helping small em-
ployers maintain payroll as well as paying other eligible expenses
that were critical in business operations. The reopening of the PPP
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
14
loan program last month appears to be operating much more
smoothly. Lenders and small business owners are far more familiar
with the program, and the allocation of funds was staggered at the
beginning to better serve first those populations of small business
owners who found the program extremely difficult to access during
the initial rollout last year.
Small business owners are eager to get back to business, but it
will be some time before those more public-facing businesses—res-
taurants, retail, and many in the service sector—are able to fully
operate again. These small businesses will likely need additional
support so that when the economy fully reopens, they are in a
strong position to take advantage of returning customers and con-
sumer spending.
Small business owners often have limited time and resources to
find, navigate, and access target-assistance programs. Most small
business owners are familiar with the PPP, and the SBA’s Eco-
nomic Injury Disaster Loans, another program, that despite its
challenges, is often very effective in helping keep small business
owners afloat. I would encourage members of the subcommittee to
keep these programs front and center and focus resources on reach-
ing out to those communities still struggling to access the pro-
grams. The PPP loan program is currently the best way to help
those small business owners who are still negatively impacted by
the pandemic.
In going forward, the SBA’s EIDL and 7(a) loan programs will
be valuable resources for those needing additional financing not
otherwise available to them. Thank you for having me here, and I
yield back. Thank you.
[The prepared statement of Ms. Wade can be found on page 55
of the appendix.]
Chairman HIMES. Thank you very much, Ms. Wade.
I now recognize myself for 5 minutes for questions. And Mr.
Cunningham, I am going to start with you, but I am going to invite
the other witnesses to add on to this. The question of technical as-
sistance has sort of permeated all of your presentations, and I saw
in my own district what happened with less sophisticated busi-
nesses as they were asked to approach banks and did not nec-
essarily have banking relationships.
Mr. Cunningham, what would technical assistance actually look
like on the ground? I remember when the PPP was rolled out,
there was an absolute panic, in the sense that banks were getting
the guidance 24 hours before they had to open for business. So I
would love to have you paint a picture of what effective technical
assistance would look like.
Mr. CUNNINGHAM. Yes. Thank you, Mr. Chairman. I would start
by saying that effective technical assistance really begins with a
trusted relationship between the person or the organization pro-
viding that technical assistance and the business. And we call it
trusted guidance for that reason because many of the minority
businesses do not have that kind of resource to actually buy tech-
nical assistance like many other businesses do.
So by providing that technical assistance, what it looks like on
the ground is, one, going through completely the financial situation
of that business, looking at them from a strategic perspective of
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
15
where they are trying to position their business, and it is also get-
ting down in the nitty-gritty of what are their support structures
such as accounting, such as issues of marketing, such as their abil-
ity to actually seek new markets for their products or services. And
so,technical assistance experts actually help that business figure
out what their current path is, restructure their loans or other fi-
nancing if necessary, engage them with a formal bank in a formal
banking relationship, or a deep relationship with a CDFI or others.
So it can take different forms, but it is all about starting a business
off in one place and then moving them actually to a growth trajec-
tory over time or creating some stability for that business so that
business can survive in this pandemic that we have.
Chairman HIMES. And, Mr. Cunningham, before I open it up to
the other witnesses to opine, I am still not 100 percent clear on
who would actually be providing—are we talking about people in-
side banks? Are we talking about the SBA? SCORE? Who would
actually provide that technical assistance?
Mr. CUNNINGHAM. Yes. Mr. Chairman, there are several different
ways that can happen. One is that the Minority Business Develop-
ment Agency has over 40 centers throughout the country that actu-
ally provide deep and technical assistance. There are also commu-
nity-based organizations that are nonprofits in those communities
that provide technical assistance. CDFIs provide a lot of that tech-
nical assistance.
Most of the time with the larger banks and others, they do not
provide those types of services, and so part of the reason why mi-
nority businesses come to alternative lenders such as Lendistry
and others is because they actually have a trusted relationship,
and that organization is located directly in their community. And
so, it creates a dynamic of, you are not going to open up your books
to everybody. You are going to open it up to folks that you actually
have a relationship with and who are trying to change.
So, those are the institutions that are in community, and it could
be different in Indianapolis than it is in Minneapolis in terms of
the ecosystem of supports, but they all are doing the same thing.
Chairman HIMES. Thank you. Thank you, Mr. Cunningham.
I have just 60 seconds left, so let me invite the other witnesses,
if they have views on how we might be more effective on technical
assistance, to offer their thoughts?
Ms. BROWN-MASSEY. Chairman Himes, I do have one that I
would like to suggest. I know this meeting was held virtually, but
I actually did travel to New York for this meeting. And when I was
meeting with a massage therapist inside of the Tulsa Airport, she
said that she was unable to access the loans as well because she
did not know how to classify her income as a massage therapist in-
side of an airport right now during these times. So, I ended up giv-
ing her extra money, on top of the payment, so that I could help
her in some way to get groceries, because she was not getting the
income that she once would have right now.
Chairman HIMES. Thank you. Thank you, Ms. Brown-Massey. I
am pretty much out of time. The Members are aware of the fact
that we have an unanticipated Floor vote right now, so I am going
to recognize Ranking Member Hill.
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
16
Mr. San Nicholas, before I do that, you are getting the virtual
gavel, so I will recognize Mr. Hill, then you are next, and hopefully,
I can get back and reassume the chair. But if not, you are Chair
pro tempore. Thanks.
And with that, I recognize Ranking Member Hill.
Mr. HILL. Thanks, Mr. Chairman, and what an excellent panel.
I know the Members are delighted to listen to these informed,
knowledgeable panelists. And, of course, you are talking about very
good specifics on how to improve our small business lending pro-
grams like the PPP, EIDL, and the 7(a) program, and those are all
under the jurisdiction of the House Small Business Committee, not
this committee. But I think the discussion has been very inform-
ative.
I represent the fourth-largest CDFI, depository CDFI in the
country, Southern Bancorp in central Arkansas, and they do such
a great job. And I was on the CDFI advisory board during the end
of Bush 43 and the beginning of the Obama Administration. So, I
have seen the good work of the CDFIs and the CDFI loan funds
around the country. And I know how engaged you have been and
that is why Congress, in both the CARES Act and the subsequent
bills, has increased the set-asides that were being discussed.
Mr. Sands talked about $30 billion in PPP for CDFIs and minor-
ity banks. And then in the December bill, $12 billion direct to the
CDFI fund so that they can do direct investment in low- to mod-
erate-income communities. And then, a $15 billion set-aside, if you
want to use that term, for minority banks and CDFIs in the third
round of PPP.
And when you look at the loans in those programs, they really
are for everything from $500, up to 87 percent of the loans were
under $150,000. So, it really was a remarkable program. And I ap-
preciate Ms. Wade talking about how many of her members bene-
fitted, and all of our Members of Congress love doing business with
and visiting with our NFID members in our district.
Ms. Brown-Massey, I really feel your pain. I was a very entrepre-
neurial person, starting businesses and helping others start theirs
for over 3 decades before I came to Congress. And I really could
relate to your story, and Tulsa is 5 hours from Little Rock, so I
urge you to move to Little Rock. We will take better care of you
than those Oklahomans. But you made a really good comment, that
we need support urgently and it cannot be in loans. And, of course,
this program to the States can do other things besides loans, but
it is effectively another loan program.
This is why we are all frustrated, everybody on this call, with
how ineffectual EIDL was. It was a black box. You did not know
if you were going to get $1,000 or $10,000. You did not know if you
were going to be qualified, and you had to wait weeks. That has
been improved, but if I could wave a magic wand, we would have
a significant improvement in the EIDL program and remove it
from this black-box status.
It is designed for a hurricane. It is designed for a tornado. It is
not designed for a permanent—not permanent, but a 50-State crisis
like this pandemic. So, do you still believe that a PPP-type loan
grant program is the better approach to help you, Ms. Brown-
Massey?
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
17
Ms. BROWN-MASSEY. Ranking Member Hill, I think both at this
point are needed.
Mr. HILL. Yes.
Ms. BROWN-MASSEY. I really think this idea of exploring, getting
extra capital to each State to deploy out to the citizens of each
State, is more effective. Like Holly was saying, a lot of the banks
are bigger. Smaller ones have gone, and so there are a lot of chal-
lenges in that relationship-building that a lot of cities and towns
have lost in this day and age. I think that incorporating the States
in some capacity in these times is very much necessary.
Mr. HILL. I agree. And in the technical assistance discussion, the
hand-holding, the mentorship that Mr. Cunningham was address-
ing, this is so key. In Little Rock, we have the conductor, which is
a Kauffman Foundation, a supported organization, a small busi-
ness center at the university, plus our chambers, plus our CDFIs
use their nonprofit arms to do a lot of that mentorship. But I also
saw a lot of community banks bend over backwards to help people
fill forms out just to get them the help, so I agree that mentorship
is very important.
But again, let me thank our panelists for being here. I know we
are going to have a good discussion. I, too, am going to go vote, so
Mr. San Nicholas, I am going to yield back.
Mr. SAN NICHOLAS. [presiding]. Thank you, Mr. Hill.
And let me begin, first, by recognizing myself in the speaking
order, but also by stating for the record, that I was very impressed
by our subcommittee chairman’s introductory statement, and for
sharing his sentiment as well, on the excellence of our ranking
member and his ability to contribute to the dialogue.
I also want to open by saying, Ms. Brown-Massey, that your
story, your circumstances are not unique. But for you to be able to
share them in this subcommittee, it is so important. And what you
have gone through is what so many other Americans have gone
through. And what this Congress needs to do and what it has been
trying to do is to find ways to, of course, support the broad needs
that are presenting themselves in this pandemic, but to now go in
as we do these next rounds and figure out how we can further en-
hance the programs and tweak the programs to make them more
effective.
But I just wanted to say that your story is very, very impressive.
With the sacrifices you are willing to make to be a successful entre-
preneur, you are really the story of every-day Americans here in
this country.
Mr. Sands, I wanted to give you an opportunity to further elabo-
rate on what your recommendations are and how we can improve,
or particularly improve, access to SSBCI support. And I am inter-
ested in your perspective, being from a lender, on how we can fur-
ther enhance the SSBCI program to help those borrowers out there
who are coming to institutions such as yours, seeking support, and
what some of the roadblocks might be on the SSBCI program, or
what some of the components are that we can further support fi-
nancially or with maybe some improved access points?
Mr. SANDS. Thank you, Congressman. I will first say that the
program, as initially designed, was designed well, and I think that
one of the things we have to always recognize is that programs
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
18
need to be tweaked and we need to learn from different programs
whether it be the SSBCI or whether it be PPP or others.
The first thing I think we need to concentrate on when we are
thinking about an intentional focus in terms of where capital flows
is the deployers of capital. One great thing, which has been men-
tioned here, is that Congress has already made the decision to in-
vest in CDFIs, giving more money to the CDFI fund, including the
recent $12 billion in H.R. 7933. And we thank Chairwoman Waters
and other Congress professionals, men and women, for that help.
Now that that resource has been invested, and prior to that re-
source being invested, there were already CDFIs with this
intentionality, whether it be the technical assistance that Mr.
Cunningham mentioned or whether it be the ability to actually
lend to these communities. They do not actually have to build rap-
port. They just need to be empowered to do more. And we have
been able to see this in a couple of the programs that we run.
For example, in the State of Pennsylvania, we ran a program in
which 18 CDFIs collaborated. We took in 62,000 applications, in 20
days, for $1.1 billion of requests. That scenario of what we did, we
have done through nine other programs. I have had admission-
based lenders collaborate together.
And so, I think in this SSBCI 2, what we need to do is just recog-
nize where are the opportunities for these collaborations that have
already been created? You take a company like Lendistry, which
has already built a technical infrastructure or a technology infra-
structure, and again, the intentionality and the capital is now
pouring in. So, I think we have a huge opportunity to do something
fairly significant here with SSBCI Version 2. Thank you.
Mr. SAN NICHOLAS. Mr. Kellogg, please?
Mr. KELLOGG. Representative San Nicolas, thank you. I wanted
to clarify one point that of the SSBCI funds, one-third was used for
equity programs, so two-thirds were used for loan programs. One-
third was for programs that would help launch new programs or
help the growth of small business. And that money for equity is so
scarce, especially for minority-owned firms. And it is critically
needed in areas that are often not thought of as the—where equity
capital is available. So this money for equity did not go to Cali-
fornia, the Boston area, or the New York City area. Instead, it
went to areas like Oklahoma, Tennessee, Michigan, Wisconsin, and
the State of Washington. So, there is an important use of SSBCI
for that kind of investment capital. I just wanted to bring that to
the subcommittee’s attention. Thank you.
Mr. SAN NICHOLAS. Thank you very much. My time has expired,
so I yield back. And I recognize Mr. Williams of Texas for 5 min-
utes.
Mr. WILLIAMS OF TEXAS. Thank you, Mr. Chairman. Aggressive
tax policy allows businesses to make money, create cash flow, and
expand their operations. After we passed the Tax Cuts and Job Act,
we saw more jobs than people, which caused businesses to compete
in order to attract workers. In the auto industry, we saw car wash-
ers making as much as $18 an hour after the tax cuts went into
effect. Competition and a booming economy increased workers’
wages, not government mandates like a $15 minimum wage. This
one-size-fits-all system might be feasible in some cities like New
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
19
York or Los Angeles, but for businesses in Clifton or Coppers Cove,
Texas, this additional cost would be devastating for small busi-
nesses.
Ms. Wade, can you talk about the effects of increasing the Fed-
eral minimum wage to $15 an hour?
Ms. WADE. Certainly. We just actually today released a survey
on the effects of a proposed $15 minimum wage on small employ-
ers. And roughly three-fourths of them said they would be nega-
tively impacted if they had to comply with a $15 minimum wage
increase over 5 years. And this increase of a $15 minimum wage
would most negatively impact those industries that are most nega-
tively impacted, unfortunately, by the pandemic. So, those public-
facing businesses—restaurants retail, and accommodations—would
have the most negative impact of an increase in minimum wage.
But it is not just having the increase to a $15 minimum wage.
It is increasing everybody around that $15 minimum wage level
and adjusting those compensations for experience and the technical
aspects of the position. Business owners, when asked how they
would absorb those costs, said it would primarily go to lower earn-
ings, but also reducing employee hours, reducing the number of
employee, both part time and full time, and not filling open posi-
tions.
Mr. WILLIAMS OF TEXAS. Coming out of the COVID-19 pandemic,
we need to make sure entrepreneurs are able to take a chance on
themselves to pursue the American Dream. If someone lost their
job because of the pandemic and wants to try to start their own
business, and we have some great examples here today, we need
to do all we can to support those efforts. Our economic system is
built on competition, it is built on risk and reward, and we need
to be examining the barriers to entry that are preventing people
from taking that leap of faith and to bet on themselves.
So another question to you, Ms. Wade, can you talk about some
of the barriers to entry that we should be looking to lower in order
to make it easier for someone to start their own business?
Ms. WADE. Sure. Absolutely. For small business owners or people
trying to start a small business, lowering the barrier to entry is a
critical component. The increased costs, not only on the Federal
level, but on the State and local levels, just raised the barrier of
entry for many people who are wanting to start a small business.
The more it costs to hire that next employee, the less likely that
will happen. And the more challenging it is to navigate the regu-
latory system and tax compliance system in operating a business,
you will find less folks likely to open and start a business. Those
are the main challenges. It is a lot, but regulatory and tax compli-
ance are two of the biggest ones.
Mr. WILLIAMS OF TEXAS. That is right. The nation puts more in
the hands of the people and the small business owners than the
government, which gets its return on investment. So lastly, the
Paycheck Protection Program was a success in quickly giving out
money to businesses in need. By partnering with the private sector,
banks and financial institutions were able to distribute hundreds
of millions of dollars in record time. There were some flaws with
the program when it was first implemented, but it seems to be run-
ning smoother now than it has been, this second time around.
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
20
Ms. Wade, what lessons can we take from the Paycheck Protec-
tion Program that we could try to incorporate in other government
programs to assist small businesses?
Ms. WADE. Using the vast structure of the banking system was
key in getting the money out to small business owners. But many
said that the relationship of small business owners to their bank
was a crucial component that many small business owners lacked,
and that relationship is often occurring at smaller and community
banks, which have those relationship lending experiences that are
important. So the decline in those types of banks, I think is crucial
in supporting that relationship.
Mr. WILLIAMS OF TEXAS. I would just close by saying the banks
did a tremendous job. I do not know another country in the world
that could have done what our banks did, and we need to com-
pliment them.
With that in mind, Mr. Chairman, I yield back.
Chairman HIMES. Thank you, Mr. Williams.
With that, we will go to Mr. Torres of New York.
Mr. TORRES. Thank you, Mr. Chairman. I have a question about
the performance of the Mainstream Lending Program, which is run
by the Federal Reserve before expiring at the end of 2020. Even
though the program had $600 billion in lending capacity, it only
generated $16.5 billion in loans. I am wondering if anyone on the
panel knows why the program appeared to have performed so poor-
ly?
Ms. WADE. I will just jump in here quickly. At NFIB, we sur-
veyed to see how the understanding or just knowing about the pro-
gram for the small business community and it was largely not
heard of. It was not advertised. But also, the big component that
was such a challenge was the 5-year loan term and having to pay
that back in such a quick timeframe. That is why the Economic In-
jury Disaster Loan Program is so helpful, with that 30-year term
loan. The Main Street Lending Program was just too difficult to
navigate, in terms of being comfortable and paying back those
loans, but also even knowing that the program existed was a chal-
lenge.
Mr. TORRES. Thank you. That is helpful.
I have a question for Mr. Kellogg. I know the Obama Administra-
tion regarded SSBCI as a success story in partnership with the
Federal Government. The States leveraged a $1.5 billion to gen-
erate $10.7 billion in loans and investments, and it is said to have
led to the creation and retention of 240,000 jobs. I know you laid
out some of the reforms that could be made to the program. I am
curious to know how you would evaluate the efficacy of the pro-
gram relative to PPP? I do not know if you heard my question, Mr.
Kellogg? I think you are on mute.
Mr. KELLOGG. Thank you. I’m sorry. My connection has not been
reliable, but I can hear you now.
Mr. TORRES. Did you hear my question?
Mr. KELLOGG. No. Would you mind repeating it?
Mr. TORRES. I was just asking if you could compare the merits
of the PPP program to the merits of SSBCI. Which one do you see
as more effective?
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
21
Mr. KELLOGG. I think they are both critical. The PPP was de-
signed to provide 21⁄2 months’ worth of payroll expense on a forgiv-
able basis, which was critical to survival. But it was never designed
to be a program to help businesses grow. And the SSBCI program
was designed to encourage banks and investors to make those kind
of growth investments. So, they serve a different policy service. Is
that helpful?
Mr. TORRES. Fair enough. I have a question about minority-
owned businesses, which were hit the hardest by the pandemic. As
you know, in the early months of the pandemic, 41 percent of
Black-owned businesses, and 32 percent of Latino-owned busi-
nesses were wiped out essentially overnight by the economic impact
of COVID-19. And not only are minority-owned businesses the first
to be hit the hardest, but they are often the last to receive relief,
as we saw with the first round of PPP.
I am wondering, should there be a program that is dedicated spe-
cifically to providing financing to minority-owned businesses? It
seems to me that whenever we create a race-neutral, generally-ap-
plicable program, it almost invariably leaves behind minority-
owned businesses. I know the MBDA is a dedicated facilitator for
minority-owned businesses, but I am wondering if there should be
a dedicated lender for minority-owned businesses? Any thoughts on
that?
Mr. SANDS. Mr. Torres, can I—
Mr. TORRES. Sure. Thank you. Whomever has thoughts.
Mr. KELLOGG. I have two thoughts. I think we have—
Mr. SANDS. I’m sorry. I am just going to jump in. I think what
we have, and you have seen this through a couple of programs,
PPP, Main Street, and also in SSBCI, we do not necessarily have
a programmatic issue. We have a deployment-of-capital issue. And
so, we are not giving the capital to those who understand where
the capital needs to be deployed. And it is structurally incorrect.
And I would also tell you an unintended consequence of the $4- to
$5- to $6 trillion that will end up here through our multiple
stimuluses, we are about to repeat the process.
We keep assuming that a bank that has excess capital is going
to all of a sudden do smaller loans. It is actually contrary to the
business operations. If they have more capital, they are going to do
larger loans. So what we have to understand is that we have to cre-
ate structures in which the larger institutions capitalize the small-
er institutions, and then the smaller institutions, which are already
in touch with the community, will be the ones who deploy the cap-
ital.
CDFIs represent the new community bank. We used to be in a
structure where there were 30,000 banks, and now we are in a
structure were there are 5,000, and we are saying, why didn’t
things happen the way they used to happen? Well, it is because our
structure is out of line. Once we fix the structure, which is one of
the things that we are recommending to the SSBCI program is
their effort [inaudible] banks when they fund CDFIs. Thank you for
your time.
Chairman HIMES. Thank you. The gentleman from Ohio, Mr. Da-
vidson, is recognized for 5 minutes.
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
22
Mr. DAVIDSON. I thank the chairman, and I thank the witnesses.
I really appreciate this hearing, as a small business owner myself.
Having survived as the owner of manufacturing companies through
the 2008 financial crisis, frankly, I have appreciated watching this
one vicariously. It looks like a pretty tough thing to ride through
as a business owner. So for those of you who are doing it as busi-
ness owners, I hope you make it the full way through it. Far too
many people have lost their lives. We have lost too much freedom.
And a big part of that is the way to operate businesses during this
cycle. So hopefully, we can get back to the great economy we had
around this time last year.
Virtually everyone I spoke with at this time last year would say
the biggest barrier they had was work force. ‘‘Everything is going
great. The only constraint on our growth is work force, the right
skill set, availability, all those kinds of things.’’ And I think our
economy has the potential to get back to that, but it really high-
lights one of the most important things that is not being high-
lighted in this hearing: The most important stimulus check Ameri-
cans can get right now is a paycheck.
We have to keep that paycheck pipeline flowing and that is truly
one of the big successes of the Paycheck Protection Program. It is
artificial. It is clearly not sustainable, and you cannot replace a
centrally planned, centrally distributed, government-printed money
from future generations, a backstop, with a functioning market
economy. So we are dealing with the limitations of that, and I
think the sooner we safely reopen our country, the sooner we are
going to see the market function and we are going to see paychecks
happen.
But I want to highlight the Paycheck Protection Program in the
Eighth District of Ohio. There were just about 9,000 loans made
during 2020 to small businesses in the Eighth District of Ohio. We
have about 730,000 people in our district. We had over 100,000
people stay on payroll because of the PPP. Roughly 80 percent of
those loans were for $150,000 or less.
So I think it is fitting that we are highlighting small business,
jurisdictional highlights, as Mr. Hill has made an aside, it is an in-
credibly substantial part of how this piece worked. And the benefit
was, of course, to the businesses who were able to keep that payroll
function there, but it was very importantly to individuals and fami-
lies who not only stayed on payroll; they kept their benefits in
many of the workplaces that provided their benefits.
And so, when States did respond as situations permitted, some-
times with lots of criticism, but when they did open up and let peo-
ple return to work, we could actually access the real impact of the
pandemic because then people were making rational decisions
based off of their risk-assessment of the pandemic. They really had
political risk, and some places, like Ohio, still have political risk.
You cannot operate your business between 10 p.m. and 5 a.m. in
Ohio, depending on the nature of your business, for example. There
are large restrictions in many parts of the country, especially on
hospitality.
I am thankful that in Washington, D.C., restaurants are at least
able to have in-person dining again. There have been large black-
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
23
outs, and this is real political risk, so this is not a sustainable
thing.
Ms. Wade, I want to highlight the NFIB. This is a strong voice
in the Eighth District of Ohio, and so on behalf of the local folks,
thanks for the work the national chapter does. And I really want
to appreciate the work NFIB did to highlight the Corporate Trans-
parency Act. This is a new requirement, a new burden on small
businesses with 20 or fewer employees, to file a report with
FinCEN once a year. So, thanks for your work on that.
What other burdens have been put on small businesses that you
wish this body would pay more attention to?
Ms. WADE. Thank you for that. Most of the challenges that small
business owners are facing right now outside of the health crisis,
which is overwhelmingly the biggest issue that they are facing, are
related to tax compliance and regulatory burdens. Once they are
back on their feet and the economy largely reopens and consumer
spending resumes, those challenges will remain, and again, on a
Federal, State, and local level, it is becoming increasingly difficult
for small business owners to operate and devote attention to their
operations instead of paperwork and paying more taxes with their
earnings that they can then reinvest in their business. So, those
are the big challenges going forward.
Mr. DAVIDSON. Thank you. My time has expired, and thanks for
the summary. Thanks to all of our witnesses, and I yield back.
Chairman HIMES. The gentleman from Massachusetts, Mr.
Lynch, is recognized for 5 minutes.
Mr. LYNCH. Thank you, Mr. Chairman, and congratulations, Mr.
Chairman, on your appointment, and congratulations also to my
friend from Arkansas, Mr. Hill. Congratulations to both of you. I
do want to associate myself with the chairman’s opening statement.
I think it is very important to lay that groundwork and also, I
think that the importance of the subcommittee’s jurisdiction is as
important as it has ever been, and I really look forward to working
with all of the members of the subcommittee going forward.
I do agree with French Hill. This is an exceptional panel, so my
congratulations to the staff who puts this stuff together, on both
the Majority and the Minority witnesses.
Ms. Brown-Massey, thank you so much for your service, and for
your family’s service, and for your example. As Mr. San Nicholas
pointed out, you have a great story, and you are a shining example
of what we hope for.
My friend, Mr. Sands, it is good to see you again. Mr. Sands was
kind enough to testify before our FinTech Task Force, and he has
been a wonderful example of the good work that fintechs can do in
banking the unbanked. The first iteration of the CARES Act and
our PPP program sort of misfired, right? We did not get to all of
the minority businesses that we had hoped to get to—I think we
put $130 billion out on the extension and that was very good.
But one of the exceptions was Lendistry. Mr. Sands, it seems like
you had a very good match. A lot of the fintech firms did not have
a pre-existing relationship with the SBA. I do not know, but I get
the sense that the fintechs viewed the SBA as sort of the old
model, kind of stodgy, big on applications, all of that stuff and tra-
dition data. But Lendistry was very good. You seemed to hook up
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
24
right away. When we gave over $400 billion to the SBA, other peo-
ple found them, right? Because they were the conduit, but you had
a pre-existing relationship with the SBA and you also had great
success, much greater success than other fintech lenders in actu-
ally getting the money out the door to minority businesses.
So I am wondering, is there something that you attribute your
success to in being more successful than a lot of other people out
there in the field? For awhile, I have been thinking about that, and
it’s good to have you before the subcommittee. So, I wondered if
you could help me with that?
Mr. SANDS. Yes. Thank you, Congressman Lynch. I think what
makes Lendistry different is the fabric of our team. We are a group
of bankers similar to some of you here on the line. And so, we were
financial people who had to learn technology. And once we were en-
abled to learn the technology and understand the velocity by which
the technology comes, that made us be able to transcend what we
normally do or what we had done in the past.
Again, the intentionality and the community aspect, that was al-
ready borne in us, myself, personally, having worked at two Afri-
can-American banks prior to going to a national bank. And I think
I would be remiss if I did not mention that we started to partner
with banks. Our first important partner was Goldman Sachs. They
linked us up with their 10,000 small businesses. What started as
a $10 million conversation matured into a $200 million conversa-
tion and we worked together and we partnered. I would also be re-
miss if I did not mention some of the CDFIs who worked with us
to help us reach those communities.
Thank you, Ms. Brown-Massey, for your service. We were able to
reach small businesses that look like her, and feel like her, and un-
fortunately, I wish we could have reached her.
But I still think there is work to be done and that is why I am
here today to talk about SSBCI. And even SBA, we still are strug-
gling as responsible lending institutions to be able to extend na-
tionwide, to be able to have automatic approvals even though we
have been through a regulatory process. Lendistry has four regu-
latory bodies that oversee us, but yet when we apply for things like
SSBCI, we have to go on a State-by-State minutia, which I respect
as a former banker.
I definitely believe in regulation. I definitely believe in oversight.
But I also think that it is imperative and urgent that we recognize
what is going on now, because you take someone like Lendistry, we
are going to end up doing a billion dollars [inaudible] 5 billion or
$10 billion. Thank you for your time.
Mr. LYNCH. Thank you, Mr. Chairman. I yield back.
Chairman HIMES. Thank you, Mr. Lynch.
The gentleman from Texas, Mr. Taylor, is recognized for 5 min-
utes.
Mr. TAYLOR. Thank you, Mr. Chairman. I really appreciate this
conversation. I think it is really an important topic, and just to
kind of build on what Mr. Lynch and you were talking about just
in terms of, why are smaller loans not getting done, I think a lot
of the regulatory requirements that have been put on community
banks have really squeezed them. I was the vice chairman of a
community bank for 12 years. In that short 12 years, we went from
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
25
8,000 banks in the United States to 5,000 banks. And fewer banks
mean bigger banks, and bigger banks mean they are not going to
do smaller loans.
I want to say, in reading your written testimony, I am very im-
pressed with some of the numbers, Mr. Sands, about what you are
able to do in terms of doing smaller loans. And so to that, could
you sort of go into some of the more technical aspects of what you
were able to do with fintech, to be able to do smaller loans? Be-
cause that is something that I know at my bank, we wanted to do
smaller loans. We just could not figure out how to underwrite and
manage those loans that were smaller and really have it make
sense. The margin was not really there to support that. So what
have you done, and how did fintech help you do it?
Mr. SANDS. I think it is a two-part process. The first part is the
partnerships and the collaboration on the ground. As a banker, old
school, we would do loan production offices. New school is, you le-
verage technology.
I will give you an example of that. In the State of California, we
are doing a $500 million grant program. In 15 days, we took in
344,000 applications, successful applications. We have 35 partners.
We have 400 co-partners. All of them are mission—
Mr. TAYLOR. Are you chartering branches in California to do
that?
Mr. SANDS. We have two locations in California but we have 500
[inaudible]. And then, this will get to the technology part.
What is important, as you hear from Ms. Brown-Massey, is that
we make sure that we give the user a seamless experience, that we
give them a similar experience. So, we create multiple different
types of applications, multiple different processes. This is where it
gets clunky and these are the things that we need to work on. And
this is what we have learned that technology enables us to do. So
when you add collaboration plus technology, it creates a seamless
user experience.
Then, we have to work on scalability. And scalability is about the
partnerships and it is about the intentionality of what we are fo-
cused on. And what we have been able to do here at Lendistry is,
we have been able to say it does not matter where we are at. So
if you take California, we speak in 30 different languages. We have
webinars in 18 different languages. It does not matter whether it
is rural. It does not matter whether it is Black, White, Asian; it
does not matter because, again, you are leveraging technology, you
are leveraging marketing automation, and you are leveraging part-
nerships in order to meet your need. And that is what we have
learned how to do.
Mr. TAYLOR. Are you underwriting in an automated fashion or
are you using AI to underwrite so that you can expedite that com-
ponent of what you are doing?
Mr. SANDS. Yes. It depends on the loan size. The best way I
would say it is that what technology allows us to do is technology
allows us to create filters and allows us to concentrate on where
the underwriting should be spent. I think that is the most impor-
tant thing. Because what we learn from the technology side is that
you could have scalable infrastructure in terms of sales leads.
What we learned from the technology side is that you can have a
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
26
comprehensive approach to credit. And what I mean by comprehen-
sive approach is that you have to treat a service business dif-
ferently than you treat a restaurant business, differently than you
treat a real estate transaction. But if you can create alignment in-
side of your banking unit, as you know, and generally a bank, it
is an underwriting unit that is kind of A to Z. They know every-
thing, as opposed to somewhat of a streamlined process where they
become experts, whether it is an SBA loan, an SSBCI loan, or oth-
ers.
So the answer to your question is, we leverage the technology to
filter. We still are bankers, hopefully not too old and stodgy as
sometimes we call ourselves, but we still want to have that manual
touch. What we do is we filter the loan and the information before
we get to that manual touch.
Mr. TAYLOR. Are you using credit scores in order to filter? Is that
part of your underwriting process?
Mr. SANDS. That is part of our underwriting process. We have
about 74 different points. Again, we are community-oriented, so we
have no problem picking up the phone and walking through things
with the client.
Mr. TAYLOR. Sure.
Mr. SANDS. But there are certain levels of clients that do not
need that. They just want to get a loan. We have talked about
banks and banks getting larger. Operational efficiency-wise, loan
size has become a big issue for banks, and so sometimes it is—
Mr. TAYLOR. So if I were to get rid of credit scores, would that
be deleterious to your ability to lend? Does that mess up your AI
algorithm to figure out who is creditworthy?
Mr. SANDS. I think you always want the datapoints in lending,
especially when we are talking about small businesses. We have to
remember, when you get the sole proprietors, they are closer to
consumer loans than they are to commercial loans. So, I think the
credit report always plays a role.
Mr. TAYLOR. Thank you.
Mr. Chairman, I yield back.
Chairman HIMES. The gentleman yields back. The gentleman
from Massachusetts, Mr. Auchincloss, is recognized for 5 minutes.
Mr. AUCHINCLOSS. Thank you all for joining us today. I agree
with my colleagues that this is a very impressive and informative
panel. My district is in Massachusetts, and the southeastern por-
tion of it, on the border with Rhode Island, has been particularly
hard-hit by the pandemic. It is just an hour outside of Boston, and
the region is ripe for economic development, especially in life
sciences, manufacturing everything from medical gowns to bio-
logics. That would lead to good jobs but also to the public health
resilience that we need in the face of this pandemic and for future
pandemics.
Technical assistance is obviously much-needed but so is capital
to help this region, a post-industrial region, really seize on its eco-
nomic-development opportunity. This question is for both Mr. Kel-
logg and Mr. Sands.
Based on your experiences with Lendistry and with the State
Small Business Credit Initiative, how can we better incent capital
formation really, really far upstream in terms of creating bio-ready
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
27
sites and in terms of giving the capital structure that would-be en-
trepreneurs need to become manufacturers in the life sciences
space?
Mr. KELLOGG. Do you want to take that, Everett?
Mr. SANDS. Yes, sure. I think the first thing, Congressman, that
we always want to look at is that creating structure means cre-
ating a path to success when you are talking about small business
ownership. So, I think the structure, again, relates to capital.
Where I think CDFIs and mission-based organizations play a role
is in what I would call the startup to the small, and the medium-
sized. Then, that business should graduate.
As Mr. Cunningham mentioned, intertwined in that graduation
is technical assistance, is business advising, is a certain amount of
support. But that business should then graduate into a more struc-
tured approach. I do not think necessarily the industry matters be-
cause I think industry experts are really part of the technical as-
sistance. And truthfully, no one knows better than the business
owner when it comes to their industry. As bankers, we would like
to think that we know things, but we do not know the metrics as
well as the business owner does. What we want to do is just create
a structure for the path of success as it relates to capital as they
grow that business.
Mr. KELLOGG. My comments would focus first on physical infra-
structure, and second on human infrastructure. And physical infra-
structure—obviously, there is a lot of conversation nationwide
about the state of our infrastructure of all types, and that is critical
to making a location an attractive place to do business. And then
the human infrastructure, I think, centers around our education in-
tuitions, and by that, I am including universities, but also our com-
munity colleges. And the human infrastructure for entrepreneur-
ship includes very much an ecosystem of investors, angel investors,
successful entrepreneurs and mentors as well. So both of those are
precursors, I think, to getting the maximum potential out of a re-
gion. I hope that is responsive.
Mr. AUCHINCLOSS. It is. And I am proud to say that Massachu-
setts has many of those ingredients you just mentioned. We have
reasonably good housing stock in the south coast, relatively good
transportation infrastructure, although not good enough, and cer-
tainly a tremendous amount of talent both in greater Boston and
in southeastern Massachusetts.
Is there a role that you see the Federal Government playing in
the provision of low-interest loans or in grants to help people with
a process that at the beginning, is high risk, because it involves
both permitting, if you are talking about bio-ready sites, for exam-
ple, as well as being able to attract the right kind of investor and
developer?
Mr. SANDS. Yes. Excuse me, Mr. Kellogg, if I am over-speaking
here, but I think this is one of the unique things that the SSBCI
program did, is that it allowed States to determine what was im-
portant to them and then build capital programs accordingly. So,
for example, Michigan was focusing on manufacturing and a couple
of other things, which was obvious, because of the auto industry at
the time the SSBCI first came out. So I think absolutely, on a
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
28
State level, you could decide what are the industries you would like
to see some significant capital investment and benefit from that.
Mr. KELLOGG. That is exactly right. As I said in my testimony,
local conditions create different capital gaps and local conditions
create different opportunities to use the credit and capital market
systems that exist there. That is the value of a flexible State-by-
State decision-making.
Chairman HIMES. The gentleman yields back. The gentleman
from Texas, Mr. Green, who is also the chairman of our Sub-
committee on Oversight and Investigations, is recognized for 5 min-
utes.
Mr. GREEN. Thank you ever so much, Mr. Chairman. And many
times, Mr. Chairman, these words of gratitude and thanks are stat-
ed in a perfunctory fashion. I say this sincerely, not perfunctorily.
I say so because I think this is a very meaningful hearing, and I
think that it can cause us to give thought to how we can correct
some of the things that we should have corrected years, decades,
or perhaps even longer ago, so I thank you for the hearing.
I also want to thank Chairwoman Waters because she has been
a champion in this area for years, ever since I have known her, and
I knew her before I came to Congress. This has been something
that has been of importance to her. And I am grateful that she has
you at the helm, and I thank Mr. Hill as well. He and I have col-
laborated on issues in the past, and I trust that we will be able to
continue our collaboration.
I would like to talk to you for just a moment, if I may, about
something of importance, which is the Minority Business Develop-
ment Agency. A little bit of history: In 1969, President Nixon, by
way of an Executive Order, created an Office of Minority Business
Enterprise. Later on, President Carter renamed it the Minority
Business Development Agency. This Agency, as it were, is devoted
exclusively to the growth and expansion of minority business enter-
prise by providing technical assistance, managerial expertise, sup-
port, and resources, and this is all for minority-owned businesses.
Given that it was created by Executive Order, it continues to sur-
vive from President to President. In the CARES Act, we appro-
priated approximately $10 million, not nearly enough, but it was
something, and that was a good benefit, because at least we contin-
ued it. Ten million dollars to this Agency which allowed minority
Members of Congress to give grants to provide outreach and tech-
nical assistance to its members.
Last Congress, I introduced H.R. 6869, the Minority Business Re-
siliency Act, and I wish I could say that I developed and syn-
thesized it myself, but it was because of the Honorable Maxine
Waters and the staff that I was allowed to have this as a piece of
legislation to go forward with.
In the CARES Act, we had $25 million for minority business de-
velopment, for the Agency. And now, what we would like to do is
permanently codify this Minority Business Development Agency
into an administration, and have it as an independent agency that
would be tasked with, and be the only one with this unique task
of satiating and satisfying the needs of minority-owned businesses.
I think it is time to give serious consideration to this, and for this
reason, I would like to ask all of the witnesses, if I may, to tell me
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
29
whether you think there is a need for an agency with this mission
that can give benefit to you for a good many things that you have
talked about today.
So, I will start with Ms. Brown-Massey. Thank you for your serv-
ice. I appreciate much of what you said about having some difficul-
ties in accessing the system in an appropriate way. But with that
said, ma’am, would you give your comments on the possibility of
this Agency being codified, made permanent, so that we can help
minority-owned businesses in this unique way?
Ms. BROWN-MASSEY. Yes, Congressman, thank you. I do think
that this particular Agency that you are mentioning is of use, but
I also think that we should be looking for local communities to set
up minority chambers of commerce so that they are able to better
understand what their community needs are at the local level. So,
yes, I do agree.
Mr. GREEN. Thank you very much.
Mr. Cunningham, if you would please?
Mr. CUNNINGHAM. Yes, briefly. Absolutely. The Minority Busi-
ness Development Agency (MBDA) has a group of 40 organizations
that are located in cities and rural places throughout the country.
It would be fantastic if we could actually knit together a perma-
nent agency for the MBDA. The future of American small busi-
nesses actually are minority businesses. And so, if we concentrate
on that, we will help everyone in this country. Thank you.
Chairman HIMES. The gentleman’s time, having expired, we will
bring this hearing to a close. I would like to profusely thank all of
our witnesses for their testimony today. It was a very interesting
and very timely conversation that we had, and we really appreciate
your preparation and participation.
Without objection, the following items are entered into the
record: a letter from the Small Business Majority; a joint letter
from the U.S. Black Chambers, the U.S. Hispanic Chamber of Com-
merce, and National ACE; a letter from the Brookings Institution
Metropolitan Policy Program; the Annual Report for Fiscal Year
2020 from the SEC’s Office of the Advocate of Small Business Cap-
ital Formation; and a letter from the Center for Indian Country De-
velopment at the Federal Reserve Bank of Minneapolis.
The Chair notes that some Members may have additional ques-
tions for this panel, which they may wish to submit in writing.
Without objection, the hearing record will remain open for 5 legis-
lative days for Members to submit written questions to these wit-
nesses and to place their responses in the record. Also, without ob-
jection, Members will have 5 legislative days to submit extraneous
materials to the Chair for inclusion in the record.
Again, with a big thank you to our witnesses, this hearing is ad-
journed.
[Whereupon, at 4:43 p.m., the hearing was adjourned.]
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\HBA035.100 TERRI
APPENDIX
February 4, 2021
(31)
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00037 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
32
the
MAIN STREET I
alliance
U.S. House Committee on Financial Services
Subcommittee on National Security, International
Development, and Monetary Policy
"Supporting Small and Minority-Owned Businesses
Through the Pandemic"
February 04, 2021
3:00 P.M.
Testimony of Nneka Brown-Massey
Founder & CEO,
Innovative Supplies Worldwide, Inc.
Tulsa, Oklahoma
Insert offset folio 1 here 43965.001
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00038 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
33
Chairman Himes, Ranking Member Hill, and members of the Subcommittee:
Thank you for the opportunity to testify today on the need to better support
minority-owned and smaller businesses like mine. I am honored and humbled to speak
before your esteemed panel and to be alongside my distinguished fellow witnesses. More
importantly, thank you for putting this hearing topic front-and-center at the start of the
117th Congress and demonstrating your strong commitment to helping the small business
community.
My name is Nneka Brown-Massey and I am the founder and CEO of Innovative Supplies
Worldwide, a school supplies design company based in Tulsa, Oklahoma. I am also speaking
today as a member of Main Street Alliance, a national network of more than 30,000 small
business owners who, like me, are eager to share their perspectives on critical public policy
issues, especially as we try to find our way out of this once-in-a-lifetime pandemic.
My Story
In July of 2016, less than two months after finishing my nine-year career as a Human
Resources Specialist in the United States Army, I launched Innovative Supplies Worldwide,
a stationery manufacturing company. In the first 24 hours of my e-commerce launch, my
brand new business had sold more than 8,000 stationery notebooks globally. In 2017,
former Georgia Governor Nathan Deal recognized my company with the G.L.O.B.E award. In
2018, I was named to the prestigious 40 under 40 List in the Gifts+ Stationery Industry.
Soon after, I was accepted into and completed the Class of 2018 Women Business
Enterprise National Council Student Entrepreneur Program and the National Minority
Supplier Development Council Emerging Young Entrepreneur program. Needless to say,
the future could not have looked better or brighter for my start-up company.
Then COVID-19 hit us all last Spring, and in my case, caused consumers to shift to online
classes. With the transition to remote and digital learning, demand for my physical product
dipped and my sales dropped more than 60 percent. Despite the revenue loss, I remained
hopeful we would come together and beat this virus so that schools could safely reopen in
the Fall and allow my business to return. Yet here we are, almost a full calendar year later,
still struggling to come to grips with the magnitude of this pandemic, while my seasonal
business suffers a fourth consecutive quarter oflow-to-no sales.
My Struggle to Access Capital
When relief programs opened last April following passage of the CARES Act, I immediately
applied for both the PPP and EIDL small business support. However, after months of radio
Insert offset folio 2 here 43965.002
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00039 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
34
silence, I was finally told in June by a Small Business Administration (SBA) representative
that I had been denied both for vague "credit reasons." This was devastating not only for
me and my family, but also for my lone employee I then had to lay off. But the lack of clear
communication from beginning to end speaks to a larger issue of training and
accountability at SBA.
Part of the frustration of applying for the PPP was that I was forced to establish a new
relationship with a new bank because the bank I previously worked with closed their only
branch in my town, forcing me to drive nearly two hours to reach the next-closest location.
I eventually had to make the difficult and life-changing decision to move from Columbus,
GA to Tulsa, OK to be closer to the services I needed since being in a rural area was making
the process too challenging.
To compound matters I am a service disabled veteran with concussion complications from
airborne missions held inside the United States with the 82nd Airborne Division. As a result
of injuries I sustained, my executive functioning skills impact the ability to manage and
process large amounts of paperwork without disability accommodations or support. The
extensive and complicated loan application process required to access credit and capital
became overwhelming for me.
My Attempts to Cope, Personally and Professionally
As profits dissipated and capital dried up for my struggling business, I resorted to using
disability benefits from the Department of veteran affairs for my traumatic brain injuries
and post traumatic stress disorder. It wasn't too long before my car was repossessed. Then
I was forced to take a second job at Waffle House just to get by.
With what little faith I had left, I applied for the Tulsa Remote Program, a business
incubator, and was accepted into the program that pays Remote Workers $10,000 to move
to Tulsa, Oklahoma for a year. However, just to pay for the move, I used my tax refund and
my stimulus check. This has been the only source of financial support I've gotten, but it has
at least allowed me to keep my business afloat.
I started my business with small loans through fintech providers, which I have paid back
slowly and diligently as my sales came through -- though likely at much higher interest
rates than from other lenders. In the meantime, I am still relying on my VA benefits for
housing. I have also decided to use some of that support to go back to school.
My Wish List for Myself and Others Like Me
Insert offset folio 3 here 43965.003
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00040 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
35
What my experience underscores are the very real barriers that exist when it comes to
accessing capital and credit. As a person of color, living in a rural area, who wasn't well
connected to the banking industry, 1should have known that my chances of securing
financial support were already slim. But I also believed, perhaps naively, that the
immediate and early success of my business would help my cause in spite of those inherent
disadvantages. So far, the former has trumped the latter.
I am here today not just to share my story, but to advocate for other small business owners
who could just as easily be sitting on this panel. COVID-19 continues to present the greatest
threat in generations to the country's more than 30 million small businesses, particularly
businesses in Black and Brown communities, micro -businesses, veteran and women-owned
businesses, and businesses in rural communities. A survey conducted last Fa ll by Main
Street Alliance and Color of Change found that nearly half of Black owned businesses were
saying they would have to close without additional support (compared to a third of
businesses overall) . Women-owned businesses had to wait longer, and in some cases were
10 times less likely to hear in a couple days from their lenders compared to their male
counterparts. In that same survey, among small business owners who applied for any of the
government aid programs, only 58% said they received the full amount they applied for,
and Black men and women were twice as likely than that to not receive what they applied
for. While waiting for economic assistance people of color and women owners were more
like ly across the board to reduce hours, pay, or make other financial sacrifices.
Main Street small businesses are the mainstay of our jobs, our economy, and our
community life. They are also the most trusted institution in our co untry. Yet, since Ja nu ary
2020, more than a quarter of the country's small businesses have shuttered, and smal l
business revenue is down by 32 ~ercent (as of December 31, 2020 accord in g to th e
Opportunity Insights Economy Tracker).
What would have helped me the most, and could still help me now, is a flexible, responsive,
direct grants program. Even just a $5k-10k grant can change the course of my business and
my life. The other needed support is technical assistance -- someone who can point me in
the right direction, help me navigate programs I am unfamiliar with, and make sure I dot
the i's and cross the t's. I simply can't afford an accountant or a lawyer on payroll who
might offer expert advice and counsel.
During these times when COVID has closed many business doors around the country, small
business owners are now unable to afford their commercial or personal rent. This is made
worse by the fact that commercial leases often don't allow tenants to live in their place of
work. I am personally living off the grid and in a school bus that I won through an eBay bid
in January 2020, so that I can have more liquid capital to pay for commercial rent.
Insert offset folio 4 here 43965.004
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00041 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
36
My Journey Continues
In closing, I am grateful to appear before this committee today. Despite experiencing the
highest of highs and the lowest of lows, at the end of the day I am an entrepreneur trying
my hardest and doing my best to succeed. I have proudly and dutifully served my country,
sought the same opportunities that others have been afforded, and done whatever
necessary to achieve financial freedom -- including packing my bags, moving to a foreign
place, and securing my daughter's well-being by making the incredibly painful decision to
send her to be with her father in another state rather than force her to share the same
sacrifices I am making. Despite the setbacks I have been dealt, I look forward to resuming
the business mentorship I was providing to my employees, many of whom are "at-risk"
youth -- training them on inventory software, social media marketing, resume building, and
other skill sets. Despite everything I have been through, I still believe in myself and the
potential of future entrepreneurs.
I hope that you and your colleagues in Congress will make the most of this uniquely
challenging yet historic moment in time to learn from the past and rethink
entrepreneurship in this country. There are a number of lessons from 2020 and the uneven
implementation of COVID relief programs for small businesses. My experience is one data
point that could be built into a more intentional and systematic effort to collect quality
disaggregated data about minority-owned small businesses.
There should be a thorough examination of SBA lending, technical ass istance, and other
programs to assess their effectiveness for supporting very small businesses, including
minority-owned businesses, rural businesses, and other underserved Main Street
businesses. Consumer protections should be expanded to small business borrowers,
guaranteeing that: small business borrowers receive clear, accurate information that
allows them to compare financial products; financial corporations cannot charge excessive
interest rates and fees or engage in abusive debt collection practices; and, small business
owners can retain personal assets while financing their businesses. Lastly, Congress should
consider a new public entity to dramatically expand access to capital for small businesses
by better assessing small business needs, exploring alternate measures to credit history,
and delivering support along with technical assistance on the scale they need.
In closing, you have the ability to make course corrections in the midst of this pandemic to
build a resilient, flourishing sma ll business economy for the future by:
Insert offset folio 5 here 43965.005
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00042 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
37
• Rebuilding businesses like mine that have been devastated by COVID, focusing on
grants to hardest-hit businesses, those excluded from earlier relief programs, and
businesses having to pivot as a result of the pandemic;
• Adequately addressing our capital, credit, and business development needs through
increased outreach and technical assistance, especially in communities of color and
rural areas;
• Leveling the playing field for small businesses by supporting a safety net for owners
and their employees; and
• Reining in monopolies that inhibit the ability of small businesses to compete and
thrive.
Thank you for your time and attention. I look forward to answering any questions you may
have.
Insert offset folio 6 here 43965.006
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00043 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
38
Testimony of Gary L. Cunningham
President and CEO of Prosperity Now
Before the Financial Services.Subcommittee on National Security, International Development
and Monetary Policy
Thursday, February 4, 2021
Chairman Himes, Chairwoman Waters, Ranking Member McHenry and other Members of the
Full Committee, thank you for inviting me here today. It is truly an honor.
My name is Gary Cunningham, and I am the President and CEO of Prosperity Now, a national
non-profit that creates, identifies, tests, and scales new and existing solutions that address the
root causes of racial economic injustice. I came to Prosperity Now after serving as the president
and CEO of a Community Development Financial Institution and Minority Business
Development Center. Therefore, I have had experience working hands-on with the Minority
Business Development Agency, the State Small Business Credit Initiative, and the Small Business
Administration to help entrepreneurs of color succeed.
I'd like to begin by setting the stage. According to the data from the US Senate Committee on
Small Business and Entrepreneurs, over the last ten years, minority businesses accounted for
more than 50 percent of all new business starts in the United States, and created more than 4.7
million jobs. There are now more than four million minority owned companies in the US, with
annual sales of close to $7 billion. That's a sizeable footprint. Ensuring their financial health as
an employer and economic contributor, therefore, is critical.
Small minority business owners are the lifeblood of many communities. They hire a significant
percentage of the minority workforce. For example, the Association for Enterprise Opportunity,
where I'm the Board chair, completed a study that demonstrates that over 20 percent of the
African American workforce in this country are employed by Black-owned firms.
It's critical that we develop specific approaches to help minority businesses grow and scale. This
will require targeted programs designed to serve those that have been historically left out-due
to the vestiges of discriminatory policies and practices that continue to this day.
For instance, the Paycheck Protection Program, a universal program with outstanding goals, did
not reach all businesses equally. Many minority owned businesses were left out of the process
inadvertently because the universal program wasn't targeted to their specific situation. Many
minority businesses couldn't take advantage because funds were primarily directed to
commercial banks and other mainstream financial institutions. Many minority businesses do
not have strong relationships with large banks or other financial institutions. It's important to
note that even in better times, Black business owners were denied bank loans at triple the rate
of nonminority business owners. And on average, Black and Latinx businesses have seven billion
dollars in unmet capital needs annually.
Insert offset folio 7 here 43965.007
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00044 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
39
We are losing economic productivity and trillions of dollars in GDP when we don't fortify and
support a strong ecosystem of minority business enterprise. In fact, according to the US
Business Census, Black-owned businesses were the fastest growing business segment in our
economy before COVID hit. Between February and May last year, however, a whopping 41
percent of Black-owned firms shuttered. The impact of COVID on BIPOC businesses is dire and
threatens to undo the growth seen in the last decade.
I must be clear, however. I am not here to argue for hand-outs. I'm here to argue that targeted,
strategic investments to minority businesses will yield significant returns in the forms of
increased home ownership, jobs, and tax revenue streams to support local communities. Such
an investment makes sense not only in the context of our current crisis, but will also help
America build back better.
White-owned firms have significantly higher revenues than BIPOC firms. This is the result of
gaps in access to specifically management education or technical assistance, money (access to
capital) and markets.
From my experience in working with minority entrepreneurs, access to technical assistance is
the secret sauce of success. Trusted guidance in the form of technical assistance is needed to
grow and scale. Many need investments in their infrastructure such as bookkeeping and
accounting, or even how to successfully apply for a loan. The current systems of SSBCI, MBDA
and SBA provide needed infrastructure that should be expanded.
As has been documented by the Federal Reserve and others, another significant barrier is a lack
of access to capital. Given the significant wealth gap in this country, BIPOC entrepreneurs are at
a significant disadvantage from the start. BIPOC wealth is substantially less, on average, than
White wealth in the US. Therefore, many BIPOC business owners don't even have a 401(k) to
tap into or friends and family to borrow from to start their businesses.
Despite all of these barriers, entrepreneurs of color are making a difference in this country.
They are at the forefront of closing the racial wealth divide. A study from the University of
Washington showed that on average, the income gap between white and Black families closed
completely for Black families with an entrepreneur.
We face a moment of true reckoning-there's just so much at stake. Giving minority businesses
the tools to survive can result in stronger employment and economic outcomes, a healthier
trajectory for communities across the country, and a chance to truly close the growing racial
wealth gap. Closing this gap is not just a moral argument, it is vital to establish a sound
economic future-and, according to McKinsey & Company, could increase the GDP by 1 trillion
to 1.5 trillion dollars over the next decade.
Thank you again for the opportunity to be here. I look forward to your questions.
Insert offset folio 8 here 43965.008
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00045 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
40
Testimony of Clifton G. Kellogg
House Financial Services Committee
Subcommittee on National Security, International Development, and Monetary Policy
"Supporting Small and Minority-Owned Businesses Through the Pandemic"
February 4, 2021
Hi, my name is Cliff Kellogg. I would like to thank the committee for inviting me today and for holding
this hearing on this crucial issue. My full resume has been provided to the committee, however I believe
the committee invited my testimony primarily based on my experience directing the State Small
Business Credit Initiative during the Obama-Biden Administration, an initiative the committee is
considering for reauthorization.
First, I would like to review SSBCl's outcomes to demonstrate that this economic recovery program can
play a critical role in the recovery of small businesses and communities across the country. Second, I
would like to offer a few ideas on how SSBCI could be scaled up and extend its impact on minority
owned businesses and disadvantaged communities.
In the wake of the 2009 recession, lawmakers designed SSBCI to induce more private-sector lending and
investing. Then, as now, economic conditions made lenders and investors extremely cautious. Today,
the lack of credit is literally starving many small businesses to death, but especially minority-owned
firms. In the Federal Reserve Banks' Small Business Credit Survey released yesterday, just 13 percent of
African American owned firms received the full amount of financing they sought, while over three times
as many White-owned firms received the full amount they requested.
SSBCl's strategy is to provide states with funds to turbo-charge the availability of loans and equity
capital by sharing in the risk of financial losses. In 2010, SSBCI awarded $1.SB to programs in all 50
states, D.C., and the U.S. territories.
• SSBCI funds supported over 21,000 new loans and investments, exceeding $10. 7 billion. In
other words, each federal dollar leveraged $9 in private sector capital.
• 43 percent of the loans or investments went to firms in low- or moderate-income census tracts,
and 41 percent went to women-owned or minority-owned businesses.
• SSBCI built the capacity of state agencies to benefit underserved businesses and communities.
I will share three lessons or observations:
1. A key element of SSBCl's success was giving states the flexibility to design their program to suit
local conditions. States funded startups and expansions, manufacturing loans and microloans.
States provided additional collateral for loans or funded reserve accounts for losses on a
portfolio of loans. Some states operated their program directly; others hired a private
contractor to manage the program.
1
Insert offset folio 9 here 43965.009
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00046 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
41
2. SSBCI support enabled lenders to make larger loans or loans on more favorable terms than they
would have made. SSBCI required at least $1 of private capital at risk for every federal dollar.
The state's application had to show how leverage would increase to 10:1 during the program.
3. Well-run programs reached a vast range of small businesses, including underserved businesses.
The hallmarks of a well-run program are simple: identify the capital gaps, make the program
easy to understand, and staff the program with lenders or investors who are responsive to the
needs of aspiring entrepreneurs and businesses, including minority-owned firms.
Now, I will turn to a critical question before the Committee: how could SSBCI Version 2 be structured?
1. First. re-authorizing the original SSBCI program with higher appropriations to benefit more
businesses. As part of reauthorization, states should include outreach through CD Fis and
Minority Depository Institutions (MDls). States should be authorized to gather demographic
information on small businesses served and be held accountable to invest a fair share in
disadvantaged businesses.
2. Increase states' allocations or run a competitive funding round for states that reach a high
percentage and/or high number of minority-owned firms. Consider lowering the required
leverage requirements for these extra funds.
3. Provide funding for technical assistance to small businesses. which is essential to assure
equitable access and optimum use of these resources.
4. Run a competitive funding round that awards funds directly to lenders and investors with a
multi-state footprint. provided they serve a high percentage and/or high number of minority-
owned firms. A multi-state footprint is especially important for equity investment programs
that target underserved communities for an adequate deal flow.
In summary, after the last major recession, SSBCI demonstrably supported small business economic
recovery. The current credit crisis is even more severe, The public health measures taken to control
the COVID-19 pandemic have inflicted a terrible cost on minority small businesses and their
employees. The need to find solutions is surely a unifying issue across the political spectrum. An
expanded SSBCI, with enhancements to reach underserved communities can be part of the nation's
recovery strategy.
Thank you for the opportunity to offer this information and I welcome any questions you may have.
###
2
Insert offset folio 10 here 43965.010
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00047 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
42
lendl1t.ry
TESTIMONY OF EVERETT K. SANDS TO THE
HOUSE FIN ANCIAL SERVICES COMM ITTEE'S
SUBCOMMITTEE ON
NATIONAL SECURITY, INTERN ATIONA L DEVELOPMENT, AND MONETARY POLICY
Supporting Sma ll and Minority-Owned Businesses Through the Pandemic
February 4, 2020
www.lendistry.com I 330 E. Lambe rt Road suite 27S. Brea, CA 92621 I 777 S. Alameda Street Z"' Floor. Los Angeles, CA 90021 I 844.662. 7297 I info@lendistry.com
Insert offset folio 11 here 43965.011
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00048 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
43
lendl1t.ry
Committee Chairwoman Waters, Ranking Member McHenry, Subcommittee Chair Himes, Subcommittee Ranking
Member Hill and Vice Ranking Member Taylor, and distinguished members of the Subcommittee, thank you for your
interest in my perspectives and insights on today's topic, Supporting Small and Minority-Owned Businesses Through the
Pandemic, and for inviting me to testify before you today. I also wish to extend my wishes for a full and rapid recovery to
Congressman Lynch, who was very generous in providing me the opportunity to testify before his Task Force last fall, as
well as to any of his family members, colleagues or staff who may be affected.
My name is Everett K. Sands, and I have more than 20 years of experience in lending. For the past five years, as founder
and CEO of Lendistry, my focus has been on responsible lending to underserved small businesses, and particularly those
owned by minorities, women, veterans, and people in rural areas. By the one-year anniversary of the onset of COVID-19
lockdowns and their related impacts, Lendistry will have been the primary point of contact in connecting tens of
thousands of affected small businesses -overwhelmingly minority-owned - with nearly $1 billion in loans or grants.
I commend this Subcommittee, and other House and Senate subcommittees and committees with which it is working,
for moving so rapidly in recent weeks to focus on reauthorizing the State Small Business Credit Initiative (SSBCI). I will
focus a significant portion of my testimony on the SSBCI and recommendations I respectfully urge the Subcommittee to
consider as it develops potential authorizing legislation.
To preview and summarize my main points regarding the SSBCI specifically:
1) The funding level for the SSBCI should be at least $10 billion;
2) The portion of the authorized funds for the SSBCI that will be dedicated to minority-owned businesses should be
60%;
3) At least 5% of authorized funds for the SSBCI should be dedicated to enhancing and providing technical
assistance to prospective applicants, particularly in the areas of i) recovery planning, ii) generating financial
statements, iii) upgrading technological skills to take advantage of commonly-available and increasingly
necessary business software tools and applications and iv) understanding credit;
4) The legislation should grant automatic authorization to offer SSBCl-supported loans nationwide to the following
categories of federally-certified institutions so that such institutions are exempted from any state-by-state
approval process: Community Development Financial Institutions (CD Fis) and Small Business Administration-
approved Community Development Corporations (CDCs) and Business Development Corporations (BDCs);
5) With regard to program design, each program supported by the SSBCI should provide for loans to minority-
owned businesses to qualify for 10% additional guaranteed coverage; and
6) The legislation and rules should create mechanisms to rescind funds from states that fail to deploy their
allocated capital expeditiously and redeploy rescinded funds to states that effectively utilize program funds.
I. Introduction
I have more than 20 years of experience in the banking and lending fields. Prior to starting Lendistry, I worked in both
national and community banking. I have served as a Board Member and an Executive for two minority deposit
institutions; as a sales team leader for a national bank on both the East and West coasts; as a member of committees
focused on compliance, rate-risk, and commercial lending; and as a manager of credit and operations departments. I
also currently serve as a Board Member of the University of Pennsylvania's Institute for Urban Research, and of
Lendistry's nonprofit small business advisory and technical assistance affiliate, The Center for Strategic Economic Studies
and Institutional Development ("The Center").
www.lend istry.com I 330 E Lambert Road suite 275. Brea, CA 92821 I 777 S. Alameda Street 2"" Floor. Los Angeles. CA 90021 I 844.662.7297 I info@ lendistry.com
Insert offset folio 12 here 43965.012
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00049 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
44
lendl1t.ry
As a banker I typically served in a change agent capacity, being called in to turn around a unit of a bank, and as such,
units I have led typically recorded annual growth rates of between 300% and 600%. I have closed more than $4 billion in
transactions. During my career, businesses I have led have been regulated by the Federal Deposit Insurance Corporation,
Federal Housing Administration, Federal Housing Finance Agency, Federal Home Loan Bank of San Francisco, Office of
Comptroller of Currency, Office of Thrift Supervision, Small Business Administration, Veterans Administration and
various state regulators.
Lendistry is a minority-owned and fintech CDFI and Community Development Entity (COE), and a member of the Federal
Home Loan Bank of San Francisco. Women and minorities comprise a significant majority of Lendistry's management
team. Our proprietary technology and online application portal enable a faster and more widely accessible lending
process for small business borrowers. As a CDFI, Lendistry is dedicated to providing economic opportunities and
progressive growth for underserved urban and rural small business borrowers and their communities. The Center also
offers business coaching, financial education and technical assistance. Lendistry is a proud signatory of the Small
Business Borrowers' Bill of Rights, guidelines set by The Responsible Business Lending Coalition.
I recruited a team to start Lendistry with me because I saw that consolidation trends in the community banking and
regional banking segments were leaving an expanding gap in the small business lending market. Small businesses that
were ready to graduate beyond financing themselves through credit cards and home equity were finding far fewer
community banks available to help them take the next step in their growth so that they eventually could become large
enough for a large regional or national bank to serve them. (The dual trends of dwindling numbers of community banks
and larger banks withdrawing from the smaller end of the small business market due to operational efficiency
considerations has continued and become so pronounced that I believe the definition of " underserved small business
borrower" should be expanded to include a loan size threshold, and loan size has become a larger and more significant
barrier to capital access for small businesses than all other traditional criteria combined.) Into this credit vacuum for
small businesses, unscrupulous lenders have proliferated and thrived.
This adverse capital availability environment for small businesses was, and continues to be, compounded for
entrepreneurs with historically weaker ties to traditional banks, including women and minorities, as well as
entrepreneurs based in rural areas with fewer banking options. I believed technology could play a significant role in the
solution, and by approaching fintech from my banking background rather than from a technology background, I believed
I could bring a somewhat differentiated lens to the market.
Since launching in 2015, Lendistry has sought to use fintech - and partnerships with financial institutions, non-profits
and government organizations-to help solve the problem of disparities in access to capital, to open doors that were
previously closed to small businesses owned by minorities, women, and veterans, businesses located in rural areas, or
businesses whose financing needs to take the next step in their development are just too small for traditional banks.
As a hybrid of a fintech lender and community bank, and with roots in traditional banking as mentioned above, Lendistry
combines the best of fintech-efficiency, scalability, and seamless user experience-with the best of traditional
lending-low cost of acquisition, low cost of funds, and strong risk management-and all with an unwavering
commitment to responsible credit culture and expanding access to small business funding.
Today Lendistry ranks second nationwide in SBA Community Advantage lending, a pilot program spearheaded in 2011 to
increase SBA-guaranteed loans to small businesses in underserved areas. Community Advantage loans range in size
between $50,000 and $250,000, and it is the only category of SBA loan in which Black and Latinx borrowers, combined,
account for more than 10% of annual loan volume. More than 73% of Lendistry's outstanding principal loan balance is
www.lendist,y.com I 330 E. Lambert Road suite 27S. Brea, CA 92621 I 777 S. Alameda Street 2"" Floor. Los Ange les, CA 90021 I 844.662. 7297 I info@lendistry.com
Insert offset folio 13 here 43965.013
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00050 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
45
lendl1t.ry
with minority and women-owned borrowers, and 92% of Lendistry's outstanding principal loan balance is with low- or
moderate -income borrowers.
Lendistry also has a highly nuanced understanding of sma ll business ecosystems. In the fourth quarter of 2020,
Lendistry, Next Street Financial, Concerned Capita l and other local stakeholders, published a detailed examination of the
current small business community and supporting ecosystem in Los Angeles County, with a focus on local businesses
owned by people of color and the COVID-19 response and recovery.
Ecosystems and partnerships are fundamental to Lendistry's operating method and philosophy. Lendistry has
partnerships in place with more than 50 organizations, including business associations, chambers of commerce,
Community Development Financial Institutions, and mission-based organizations. These partners in turn have extensive
networks, enabling Lendistry to reach underserved geographies, demographics and provide services and support in
more than 15 languages.
With our reach, technology, and operational and capital capacity, Lendistry has both the ability and interest to serve a
much larger geographic footprint and broader market than we do today and fill the lending gaps left by mainstream
finance for the benefit of small businesses, and particu larly those owned by minorities, women, veterans and those in
rural areas.
II. Lendistry and COVID-19 Small Business Recovery Effort
In response to the COVID-19 crisis, Lendistry has stepped up to provide desperately needed capita l to small businesses
struggling amid the pandemic, both as a lender and as an admin istrator of state and local grant programs, including
those made possible by the Coronavirus Relief Fund under the CARES Act and state funding sources. By the one-year
anniversary of the onset of COVID-19 lockdowns and their related impacts, Lendistry will have been the primary point of
contact in connecting tens of thousands of affected small businesses - overwhelmingly minority-owned - with nearly $1
billion in loans or grants.
The urgent need among small businesses - particularly very sma ll businesses and those owned by historica lly
disadvantaged people, which data show have minimal reserve resources to withstand a prolonged downturn - has been
a challenge that we at Lendistry believed from the beginning of the pandemic we were built to take on. The business
owners we are mission-bound to serve have been suffering a crisis of financial liquidity, and we knew we possessed the
relationships to connect with them, the technology to serve them, the experience to meet them where they are, and the
technical assistance to help guide them.
What we never had before, however, were two critical ingredients: access to a very large amount of capita l to deploy,
and access to geographic territories outside of California. Once Lendistry was selected by Goldman Sachs' 10~000 Small
Businesses Initiative to have access to $175 million in capital to deploy for SBA Paycheck Protection Plan loans and was
granted authorization by the SBA to expand our footprint to 12 states with large populations, diverse populations, and
significant rural areas -the true power of our platform and our organization was unleashed.
During the four-month span of our PPP offering in 2020, Lendistry originated, processed and approved more than $180
million in PPP loans to more than 3,500 small businesses.
The major learnings of PPP for Lendistry, and we believe for policymakers, is that lack of access to capita l and territory
were significant limiting factors to the impact that Lendistry had been able to make prior to PPP - despite the fact that
www.lendist,y.com I 330 E. Lambert Road suite 27S. Brea, CA 92621 I 777 S. Alameda Street 2"" Floor. Los Ange les, CA 90021 I 844.662. 7297 I info@ lendistry.com
Insert offset folio 14 here 43965.014
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00051 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
46
lendl1t.ry
Lendisty is a CDFI, a COE and a member of the Federal Home Loan Bank of San Francisco. We believe these takeaways
also apply to many if not all CDFls generally.
This point bears emphasis as an area for public policy to address: two significant barriers to CD Fis' ability to have greater
impact in our mission are 1) the fact that CDFls must depend on larger financial institutions for capital, rather than
having direct access to Fed facilities, even though CDFls are certified by the Treasury Department, and 2) the fact that
CDFls - again, despite being federally-certified - must obtain separate approvals from the SBA for each state they wish
to serve.
Lendistry's contribution to the small business recovery effort amid the COVID-19 pandemic has not been limited to PPP,
however. By the one-year anniversary of the pandemic-related shutdowns, Lendistry wi ll have administered $780 million
in small business coronavirus relief grants funded by federal CARES Act funds and state resources. This aggregate
amount includes $280 million in CARES Act funds to more than 17,000 small businesses across all 67 counties of the
Commonwealth of Pennsylvania, through the statewide PA CARES program and eight separate county-sponsored
programs, all of which were completed in the fourth quarter of 2020; and $500 million to California sma ll businesses
through a state-funded program that launched in late December and is expected to conclude in March.
Importantly, all ten of the small business coronavirus relief grant programs administered by Lendistry to date have not
been first-come, first-served. Rather, one of Lendistry's significant responsibilities has been to design systems to
efficiently execute grant programs intentionally conceived to prioritize impact.
In Pennsylvania, where more than 62,000 small business owners applied for grants ranging in size from $5,000 to
$50,000, 50% of the total grant pool was allocated to business owned by Historically Disadvantaged entrepreneurs, and
of these: (i) 81.6% were low-to-moderate income, (ii) 94.7% were in NAICS priority industries, (iii) 67.4% had greater
than 75% revenue loss, (iv) 22.8% were located in Revitalization Areas, (v) 15.9% were located in rural communities, and
(vi) 62% were women-owned businesses. In Ca lifornia, with more than 300,000 applications completed and processed in
the first of two application rounds, small businesses and nonprofits selected (pending a verification step) for grants
ranging from $5,000 to $25,000 are: (i) 77% underserved and disadvantaged small businesses; (ii) 51% owned by a
minority; (iii) 49% women-owned; (iv)S8% LMI; and (v) 14% rural.
Lendistry's active engagement in small business grant administration and PPP loans during the pandemic reflects the
many sim ilar capabilit ies required in such roles as those that are demanded in traditional underserved lending: building
an engine to process a high vo lum e of applications according to criteria specified by the state or local authority,
providing technical support for applicants, processing the applications, verifying information, complying with applicable
federal requirements, reporting on the status, and ultimately funding approved businesses. The difference between the
current pandemic environment and the past is the effort being placed on intentional programs to help underserved
communities, such as the SSBCI program.
Ill. The Need for Public Policy to Address, in the Interest of National Economic Expansion as Well as Equity, a Double
Imperative tor Small and Minority-Owned Businesses: Survival and Recovery, and New Launches and Growth
An important factor that left smal l businesses extraordinarily vulnerable to the vicious effects of the pandemic is the 20-
year contraction in capital access for small businesses, as illustrated by the dramatic reduction in the number of
community banks over that time, from 8,315 FD IC-insured banks in 2000 to 4,519 in 2019, with just 32 new FDIC-insured
www.lend;stry.com I 330 E. Lambert Road su ite 27S. Brea, CA 92B21 I 777 S. Alameda Street2"' Floor. Lo:;Angeles, CA 90021 I 844.662.7297 I info@le ndistry.com
Insert offset folio 15 here 43965.015
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00052 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
47
lendl1t.ry
bank charters issued since 2010. 1 As the number of banks has declined, the median asset size of remaining banks has
grown by more than 500%, from $751 million in 2000 to $3.9 billion in 2019 2 • In general, the larger a bank, the higher its
thresholds for what constitutes operationally efficient and economically worthwhile relationships and transactions.
Ever-larger banks have quietly yet steadily raised their minimum business loan amounts. The result is that business size
and loan size have become inversely correlated with being underserved by banks, alongside more widely recognized
factors such as minority ownership.
The void left behind in the smaller end of the business banking market by vanishing community banks and receding
bigger banks has been filled by an explosion of unscrupulous lenders offering high-interest loans funded by private
investors. As a result, small businesses, and particularly minority-owned small businesses, entered the pandemic already
starved of cash flow and a financial cushion. Their businesses were severely undercapitalized because their choice was
no choice at all: either enter into unsustainable lending arrangements that starve their businesses of cash flow, or forgo
such loans and remain sub -scale, often as sole proprietors, without a path to growing big enough to be served by
traditional banks offering competitive lending terms.
Today, as the pandemic nears the one-year mark, it is vital to recognize the two-fold imperative for small and minority-
owned business financing, and the full opportunity that a reauthorized SSBCI must capture. Not only is capital needed
for survival and recovery, it also is needed for new business formation and growth. New launches in and following a
downturn represent an enormous opportunity for job creation, wealth creation and community revitalization. Fulfilling
the double imperative of business survival and recovery and business formation and growth demands an ample capital
allocation to the SSBCI program, along with thoughtful program design that applies learnings from the lessons of the
past.
The Subcommittee 1 s Hearing Memo cogently framed, presented and supported the dire circumstances for small and
particularly minority-owned businesses during the pandemic, as well as many of the inequities that were found to have
limited the effectiveness of the public policy response to the effects of the pandemic. Federal Reserve Banks in 2020 also
were active in documenting the impacts to small business, and the attendant racial disparities. 3
Below I bring to the Subcommittee's attention several items of complementary data to that which is included within the
Subcommittee 1 s Hearing Memo 1 to illustrate and support the double imperative stated above. In general, the
information and sources that follow provide the Subcommittee with i) more recent data underscoring the urgency of
further action to business recovery, and ii) evidence of the importance of acting boldly enough to support business
formation and growth, in the interests of both equity and national economic expansion.
1) Recent Additional Evidence of the Stakes and Barriers for Small and Minority-Owned Business Survival and
Recovery:
A. A continuing unemployment crisis is disproportionately impacting Black and Latinx populations, as well
as women.
1
FDIC BankFind Suite: Find Annual Historical Data Bank· also find graphic representations at Statista.com for annual total FDIC-
chartered banks and new FDIC-chartered banks
2
FDIC BankFind Suite: Find Annual Historical Data Bank
3
See, among others: Can Small Firms Weather the Economic Effects of COVID-19 April 2020· Double Jeopardy: COVID-19's
Concentrated Health and Wealth Effects in Black Communities August 2020· An Uphill Battle: COVID-19's Outsized Toll on Minority-
Owned Firms October 2020
www.lend i5lry.com I 330 E. Lambert Road su ite 275 . Brea, CA 92821 I 777 S. Alameda Street 2"" Floor. Lo5 Angele5. CA 90021 I 844.662.7297 I info@lendi5lry.com
Insert offset folio 16 here 43965.016
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00053 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
48
lendl1t.ry
• The overall unemployment rate in December 2020 was 6.7%, but the Black (9.9%) and Hispanic
(9.3%) unemployment rates were more than 50% higher than the white (6.0%) unemployment
rate. 4
• Women accounted for all of the net job losses in December 2020. 5
• January 2021 1s initial jobless claims rates (all adults) were the highest since August 2020. 6
B. Small and minority-owned businesses that survived into November are in distress and believe greater
access to capital and technical assistance can help.
• The number of small businesses open as of year-end 2020 compared to January 2020 was 29.7%
lower - the lowest point since May 2020. 7
Newly-published research 8 from the nonprofit Small Business Majority of a scientific opinion poll
conducted in November 2020 reveals, among other things, that:
o 18% of Black and 18% of Latino entrepreneurs report they are likely to close their
business in the next three months (i.e., February), compared with 14% of white small
business owners.
o 29% of Black and 32% of Latino entrepreneurs report they are likely to close their
business temporarily in the next three months, compared with 21% of white business
owners.
o 22% of minority business owners may lay off employees permanently in the next
three months, compared with 14% of white business owners.
o Small business owners ranked accessing capital as the 4 th most useful measure to help
their businesses survive, with Black and Latino respondents rating it significantly more
important than the overall mean for all respondents.
o 68% of all respondents support significantly expanded technical assistance programs.
C. Public policy in support of minority-owned small business lending is necessary to counteract continuing
evidence of racial disparities and bias in small business lending.
• A study conducted and published in 2020 by the National Community Reinvestment Coalition 9 -
part of a series of "matched pair mystery shopping" studies of bias in small business lending
conducted by NCRC since 2017 -found racial bias by several Washington, D.C. banks in PPP
lending, with white candidates receiving more favorable treatment than similarly-qualified Black
candidates in 43% of tests, as evidenced by differences in:
o levels of encouragement in applying for a loan (including, in 44% of tests that
exhibited bias, discouragement of the Black candidate from applying at all, alongside
encouragement of the white candidate to apply for more one or more loan products);
o products offered;
o information provided by the bank representative.
The NCRC study's finding significant instances of banks discouraging Black candidates from
applying for loans casts light on a two well-documented factors behind disparities in capital
access between Black and non-Black business owners: the higher likelihood that Black business
4
Bureau of Labor Statistics The Employment Situation - December 2020 January 8 2021
5
Bureau of Labor Statistics Economic News Release January 8 2021
6
Opportunity Insights presentation of BL5 data
7
Opportunity Insights
8
Small Business Majority Scientific Opinion Poll "Small businesses continue to face closures in 2021 "January 27 2021
9
"Lending Discrimination within the Paycheck Protection Program" A. Ledrer S. Oros NCRC July 15 2020
www.lendist,y.com I 330 E. Lambert Road suite 27S. Brea, CA 92621 I 777 S. Alameda Street 2"" Floor. Los Ange les, CA 90021 I 844.662. 7297 I info@ lendistry.com
Insert offset folio 17 here 43965.017
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00054 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
49
lendl1t.ry
owners lack a banking relationship (which came into conflict with the original design of the PPP
initiative 10 ) and the higher likelihood that Black business owners will not pursue loans from
lenders who offer responsible terms due to fear of rejection. The latter phenomenon was
identified as a factor in racial disparities in capital access in a 2010 report published by the
Minority Business Development Agency. 11
Federal Reserve research shows that Black entrepreneurs are denied or given lower bank loans
than requested at more than twice the rate of white entrepreneurs, 53% vs. 25%. 12 Other
research finds that people of color pay higher interest rates than white borrowers. 13
• Academic research has found evidence that racial bias may play at least a partial role in financial
capital differences between minority and non-minority entrepreneurs. 14 The 2016 paper, which
examined financing patterns among minority and non-minority entrepreneurs at startup and
during early years of operation, also found that Black-owned businesses:
o start with less capital and do not catch up over time; and
o face more difficulty in raising external capital and invest lower levels of capital into
growth and development.
2) Evidence of the Importance of Supporting Small and Minority-Owned Business Formation and Growth:
A. New business formation and growth account for a significant portion of job creation, which historically
has been particularly valuable in recovering from economic downturns.
11
• Businesses that are less than 5 years old create nearly all of the net new jobs in the American
economy," according to a 2019 Kauffman Foundation white paper'slS summary of published
2013 economic research. 16
• Within the past 15 years, at least two significant economic shocks - one regional, Hurricane
Katrina's unprecedented swath of devastation across the Gulf region, and the other global, in
the 2008-2009 Great Recession -taught that when employment is disrupted on a wide scale,
new job creation by startups lead the economy from recession to growth .17 18
Business ownership represents an opportunity for minority households to close the wealth gap,
with research over a sustained period showing that individuals who opted for self-employment
experienced a growth in wealth four times larger than those who did not seek self-
employment. 19
10
"Double Jeopardy: COVID-19's Concentrated Health and Wealth Effect in Black Communities" Federal Reserve Bank of New York
August 2020
11
"Disparities in Capital Access between Minority and Non-Minority-Owned Businesses: The Troubling Reality of Capital limitations
Faced by MBEs" R. Fairlie A. Robb for U.S. Department of Commerce Minority Business Development Agency January 2010
12
Report to Congress on the Availability of Credit to Small Businesses Board of Governors of the Federal Reserve System September
2017
13
"Black and White: Access to Capital among Minority-Owned Startups" R. Fairlie A. Robb D. Robinson Stanford Institute for
Economic Policy Research December 15 2016
14
"Black and White: Access to Capital among Minority-Owned Startups" R. Fairlie A. Robb D. Robinson University of California
Santa Cruz March 7 2016
15
Start US Up: American's New Business Plan Ewing Marion Kauffman Foundation October 2019
15
"Who Creates Jobs? Small Versus Large Versus Young" J. Haltiwanger R. Jarmin J. Miranda The Review of Economics and
Statistics May 2013
17
"Employment and self-employment in the wake of Hurricane Katrina," J. Zissimopoulos, L. Karoly, Demography May 2010
18
"Entrepreneurship economic conditions and the Great Recession" R. Fairlie Institute for Labor Economics May 2011
19
"An Uphill Battle: COVID-19's Outsized Toll on Minority-Owned Firms" L Misera Federal Reserve Bank of Cleveland October 2020
www.lendi5try.com I 330 E. Lambert Road 5uite 27S. Brea , CA 92821 I 777 S. Alameda Street 2"" Floor. Los Ange le5, CA 90021 I 844.662.7297 I inlo@lend i5try.com
Insert offset folio 18 here 43965.018
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00055 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
50
lendl1t.ry
However, a new business that remains small for several years, due to lack of capital or other
factors, is unlikely to become a significant source of job creation, which argues for policy-
including relating to capital access -to be particularly supportive of startups obtaining and
maintaining adequate capital to support investments in expansion. 20
Furthermore, capital access is a determinant of the industries an entrepreneur can enter, with
many higher growth industries requiring greater capital. Minority-owned businesses historically
and in the present are concentrated industries with low relatively capital requirements to enter,
but which tend not to have high growth characteristics, which in turn is a significant
determinant of job creation, employee wage growth and wealth creation. 2122
B. local market analyses in two major metropolitan areas, where minority-owned businesses are
disproportionate concentrated, project significant unmet needs for capital among small businesses.
In New York City, projections are for:
o Small businesses seeking to grow to require $1.1B- $2.7B in the first year of recovery;
$689M -$1.7B of this amount is estimated to be required by minority small business
owners. 23
o New business launches to require $303M- $705M in estimated total capital; $123M-
$287M of this amount is estimated to be required by minority entrepreneurs. 24
In Los Angeles County, there is an estimated unmet annual capital demand among small
businesses of $60 billion, with particular gaps in lending in neighborhoods with high
concentrations of Black and Latinx residents. 25
C. Without sufficient capital, many minority-owned businesses will be unable to benefit from purchasing
pledges made by states, municipalities, and private industry in 2020 following protests over the deaths
of George Floyd and Breanna Taylor, among others.
For example, New York City pledged to invigorate and vastly expand municipal contracting with
MWBEs, including to grant $12 billion in City contracts to MWBEs between 2020 and 2025, and
to increase utilization of MWBEs for contracts to 30% in the current fiscal year. 26 Yet New York
City, like many other municipalities, has been scrutinized for lagging behind in contracting with
African American, women and latinx businesses, receiving grades from the NYC Comptroller of
F, D and C, respectively, for its performance in fiscal 2019.27 Any progress that is made will
20
'Who Creates Jobs? Small Versus Large Versus Young" J. Haltiwanger R. Jarmin J. Miranda The Review of Economics and
Statistics May 2013
21
''To expand the economy invest in Black businesses" A. Perry C. Romer The Brookings Institution December 31 2020
22
''The Tapestry of Black Business Ownership in America: Untapped Opportunities for Success," I. Gorman, C. Evans, Association for
Enterprise Opportunity February 16 2017
23
"New York City Small Business Ecosystem Assessment: Building a more inclusive resilient New York City " NextStreet &
CommonFuture Fall 2020
24
"New York City Small Business Ecosystem Assessment: Building a more inclusive resilient New York City " NextStreet &
CommonFuture Fall 2020
25
"Los Angeles County Small Business Ecosystem Assessment: Building a more inclusive resilient Los Angeles County" NextStreet &
CommonFuture Fall 2020
26
"Mayor Signs Executive Order Supporting Minority and Women Owned Business" Cityland August 14 2020
27
"Making the Grade" NYC Comptroller Scott M. Stringer November 17 2019
www.lendistry.com I HOE. Lambert Road su ite 275. Brea, CA 92621 I 777 S Alameda Street 2nd Floor. Los Ange les. CA 90021 I 844 662.72 97 I info@ lendistry.com
Insert offset folio 19 here 43965.019
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00056 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
51
lendl1t.ry
translate to outsized growth in need for financing from a segment of businesses that, per the
New York Fed data, have weak relationships with traditional banks.28
In general, large G2B or B2B purchasers maintain significant vendor requirements as a matter of
operational and risk management necessity, to ensure their suppliers have the capabilities to
fulfill vital orders as specified and on time. Lack of capital should not be a reason minority-
owned small businesses cannot take advantage of an overdue but welcome effort on the part of
large purchasers to make an economic equity impact with their operating budgets.
D. Multiple major studies in recent years spotlight the enormous opportunity cost to the national economy
from racial inequities, and the enormous benefit available to the economy from supporting minority-
owned businesses. However, in addition to the recent literature, it also is illuminating to review a report
from 2010 commissioned by the Minority Business Development Agency, with interesting parallels to
the present day, as the report considered issues around capital access disparities for minority owned
businesses in the context of the immediate aftermath of the Great Recession. 29 Though it is difficult not
to come away from that report with the feeling that we have been here before, I hope it instead will
help the Subcommittee redouble your resolve to make the current effort big and smart enough to make
a step-change difference in the capital access environment, and for the real prosperity of small and
minority-owned businesses.
• According to a 2020 Citigroup study3°:
o Not addressing racial gaps between Blacks and whites has cost the U.S. economy up to
$16 trillion over the past 20 years.
o Closing four key gaps - wages, homeownership, higher education, a small business
financing - could generate $5 trillion in additional GDP over the next five years,
representing 0.35 percentage point boost to U.S. GDP growth per year, and even a
positive impact on global growth.
o Closing the share of Black-owned firms-gap 20 years ago might have generated $13
trillion of revenues for investment, 6.1 million jobs per year, and a cumulative $182
billion in income for consumption.
• According to a 2018 study by the W.K. Kellogg Foundation and Altarum 3 ':
o By 2050, the U.S. stands to realize an $8 trillion gain in GDP by closing the U.S. racial
wealth gap - an amount greater than the current GDP of every country in the world
except the U.S. and China.
o Overall spending would increase by $2.6 trillion. Consumer spending alone could
increase by more than $1 trillion, and federal, state, and local governments in
aggregate could gain an additional $550 billion annually in tax revenue to fund
priorities and reduce public debt.
o The projected boost to GDP would be 22%, or the difference from 2% annual GDP (the
CBO's long-term projected growth rate) and 2.5% GDP.
28
"Double Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black Communities" Federal Reserve Bank of New York
August 2020
29
"Disparities in Capital Access between Minority and Non-Minority-Owned Businesses: The Troubling Reality of Capital limitations
Faced by MBEs" R. Fairlie A. Robb for U.S. Department of Commerce Minority Business Development Agency January 2010
30
"Closing the Racial Inequality Gaps: The Economic Cost of Black Inequality in the U.S." Citigroup September 2020
31
"The Business Case for Racial Equality: A Strategy for Growth" A. Turner W.K. Kellogg Foundation and Alta rum 2018
www.lend i5lry.com I 330 E. Lambert Road su ite 275 . Brea, CA 92821 I 777 S. Alameda Street 2"" Floor. Lo5 Angele5, CA 90021 I 844.662.7297 I info@lendi5lry.com
Insert offset folio 20 here 43965.020
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00057 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
52
lendl1t.ry
• According to a 2017 study by the Association for Enterprise Opportunity 32 :
o If just 15% of Black-owned nonemployee firms (sole proprietors) hired just one
employee, it could add $33 billion to the economy.
o If Black-owned employer firms added just two more employees, to bring them on par
with the average employment size for all U.S. firms, the revenue generated on a per
employee basis could add an additional $22 billion to the economy.
IV. SSBCl's Potential Impact, and Lendistry's Impact in the SSBCI Program
A robust and thoughtfully designed SSBCI reauthorization should have the effect of drawing more lenders into the
market to serve smaller and minority-owned businesses. By increasing borrowers' access to responsible sources of
financing, the competitive environment for unscrupulous lenders will become more difficult, which in turn would be
expected to make them less attractive vehicles for the investors who capitalize them. Furthermore, by attracting new
and responsible entrants to the market for financing small and minority-owned businesses, the SSBCI will be a means by
which some responsible lenders will gain their first direct experiences with an underserved segment ofthe borrower
market, which in turn could lead some lenders eventually to make expanded commitments to the market segment.
As a CDFI with a mission of serving underserved small business communities, Lendistry has participated in several SSBCI
programs over the course of four years, and funded millions of dollars in loans. These programs have allowed us to be
flexible in our underwriting criteria while remaining focused on a disciplined credit culture and strong risk management.
SSBCI programs have allowed us to finance non-profit schools that serve economically disadvantaged children and
veteran and minority owned small businesses that provide employment services to the Department of Defense.
However, we could have originated more. Lendistry had two main barriers to entry into these programs: onerous
paperwork as we attempted to gain multi-state approval, and lack of capital to deploy. SSBCI legislation should grant
CD Fis automatic authorization to participate in SSBCI programs on a national basis. New SSBCI authorization also must
include a process for rescinding funds from states that do not utilize the program expeditiously and redeploying the
capital to states that utilize and abide by the program with effective systems for deployment of funds. Such a measure
will remedy a flaw in the original SSBCI program, in which some state SSBCI programs still had funds remaining from the
initial $1.5 billion allocation at the expiration of the program, while many other states had exhausted their funds. When
authorized funds for such an important and powerful program as SSBCI languish unused, there are underserved small
businesses that suffer as a result.
The SSBCI provides a significant incentive for approved lenders to utilize the program, in the form of loan guarantees.
Requiring states to add an additional 10% coverage in their credit enhancement programs to each loan to an
underserved borrower is a small tweak that would carry a lot of power in enhancing the effectiveness and impact of the
SSBCI program for underserved small businesses.
The stakes for expanding responsible lending are enormous and the urgent need for action in this regard cannot be
overstated. It is critical that as this Subcommittee and others work on the SSBCI program, both program design and
considerations for enabling lenders to maximize their impact remain top of mind.
V. Lendistry's Insights and Recommendations on SSBCI Reauthorization
32
"The Tapestry of Black Business Ownership in America: Untapped Opportunities for Success " I. Gorman C. Evans Association for
Enterprise Opportunity February 16 2017
www.lend istry.com I 330 E. Lambert Road suite 275. Brea. CA 92821 I 777 S. Alameda Street 2od Floor. Los Angeles, CA 90021 I 844.662.7297 I info@lendistry.com
Insert offset folio 21 here 43965.021
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00058 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
53
lendl1t.ry
To expand on the summary provided in the opening of this testimony:
1) The funding level for the SSBCI should be at least $10 billion. Lendistry agrees with the recommended funding
proposal of $10 billion that has been voiced both within the prior Congress, as reflected by former Congressman
McAdams' bill, and from organizations dedicated to closing the funding gap facing minority-owned businesses,
such as the Small Business Majority and fellow CDFI, the Opportunity Fund. The funding commitment must be
large enough to enable the SSBCI to fulfill the dual imperatives of supporting business survival and stabilization,
while also supporting new business formation and growth.
2) The portion of the authorized funds for the SSBCI that will be dedicated to minority-owned businesses should be
60%. The disproportionate decimation of minority employment and minority-owned businesses over the past 11
months, combined with the longstanding disparity in access to capital that minority business owners have faced,
with ever-increasing implications of gaps in generational wealth creation and neighborhood revitalization,
demands that the SSBCI be designed with an intentional objective of making a disproportionately positive
impact for minority owned businesses. As an increased focus on equity begins to open new doors to long shut
out business owners, it is vital that their businesses have adequate capital necessary to seize the new
opportunities. Accordingly, more than a majority of the funding should be dedicated to minority-owned
businesses, and 60% is appropriate.
3) At least 5% of authorized funds for the SSBCI should be dedicated to enhancing and providing technical
assistance to prospective applicants, particularly in the areas of i) recovery planning, ii) generating financial
statements, iii) upgrading technological skills in order to take advantage of commonly-available and increasingly
necessary business software tools and applications and iv) understanding credit. Lendistry's extensive first-hand
experience on the front lines of PPP loan and small business grant administration during the pandemic has
crystallized the urgent need among small and minority-owned businesses for significant assistance in fulfilling
application requirements, particularly in the specific skill areas noted above. The success of the SSBCI program
depends on providing no less than 5% of funding to technical assistance and putting in place oversight to ensure
the funds are effectively spent.
4) The legislation should grant automatic national authorization to offer SSBCl-supported loans to the following
categories of federally-certified institutions so that such institutions are exempted from any federally-conducted
state-by-state approval process: Community Development Financial Institutions (CDFls) 1 and Small Business
Administration-approved Community Development Corporations (CDCs) and Business Development
Corporations (BDCs). The process of CD Fis, which are federally-certified, obtaining from federal agencies state-
by-state approval to expand their geographic footprint is redundant, operationally burdensome and, most
important, creates barriers to small businesses obtaining access to capital.
5) With regard to program design, each program supported by the SSBCI should provide for loans to minority-
owned businesses to qualify for 10% additional guaranteed coverage. For example, a feature of the Collateral
Support Program offered by some states is a companion program that provided additional 10% loan coverage
for businesses that qualified as operating in a Severely Affected Community. The same principal and benefit
should be extended across all programs for minority borrowers.
6) The SSBCl's authorizing legislation and rules should recognize the value created by states deploying their
allocated funds on an expeditious basis, by creating mechanisms to revoke funds from states that fail to deploy
their allocated capital expeditiously and redeploy revoked funds to states that effectively utilize program funds.
Such mechanisms would help to address a shortcoming of the original SSBCI program, which resulted in many
www. lendistry.com I 330 E. Lambert Road suite 275. Brea. CA 92B21 I 777 S. Alameda Street 2"" Floo r. Los Angeles. CA 90021 I 844.662.7297 I info@lend istry.com
Insert offset folio 22 here 43965.022
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00059 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
54
lendl1t.ry
state programs running out of funds while other state programs still had funds remaining when the program
expired.
VI. Conclusion
Reauthorization of SSBCI is an important opportunity that the Subcommittee should seize aggressively to bring about
the degree of impact that is necessary to alleviate and reverse the widening capital disparity and the rapidly
deteriorating state of U.S. small and minority-owned businesses during the pandemic, while also supplying necessary
capital for new business formation and growth to fuel national economic expansion. It is vital that SSBCI is 1) large
enough to meet the dual nee d; 2) des igned to make an impact for minority -owned businesses, from the size of a
dedicated allocation to the funding provided for specific technical assistance needs, to features that will help ensure that
its funds are deployed expeditiously and completely; and 3) includes provisions that remove obstacles that historically
have limited CD Fis' impact.
Lendistry's front lines perspective on the continuing wo rsening plight of small and minority-owned businesses during the
pandemic, combined with the senior management team' s longstanding focus on providing critical capital to underserved
small businesses, informs the perspectives and recommendations provided today. Thank you for your interest in my
testimony and for the opportunity to provide the Subcommittee with my insights.
www.lend;stry.com I 330 E. Lambert Road su ite 27S. Brea, CA 92B21 I 777 S. Alameda Street2"' Floor. Lo:;Angeles, CA 90021 I 844.662.7297 I info@lendistry.com
Insert offset folio 23 here 43965.023
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00060 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
55
TESTIMONY BEFORE THE UNITED STATES CONGRESS
ON BEHALF OF THE
NATIONAL FEDERATION OF INDEPENDENT BUSINESS
NFIB.
Statement for the Record of Holly Wade
Executive Director, NFIB Research Center
Before the
United States House Committee on Financial Services, Subcommittee on
National Security, International Development, and Monetary Policy
Hearing on: "Supporting Small and Minority-Owned
Businesses Through the Pandemic"
Thursday, February 4, 2021
National Federation of Independent Business
(NFIB) 555 12th Street, NW Suite 1001
Washington, DC 20004
Insert offset folio 24 here 43965.024
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00061 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
56
2
Chairman Himes, Ranking Member Hill, and distinguished members of the
committee, my name is Holly Wade, and I serve as the Executive Director of the
National Federation of Independent Business (NFIB) Research Center.
On behalf of NFIB, I appreciate the opportunity to testify before the House Financial
Services Subcommittee on National Security, International Development, and
Monetary Policy hearing entitled, "Supporting Small and Minority-Owned
Businesses Through the Pandemic."
NFIB is the nation's leading small business advocacy association, representing
members in Washington, D.C., and all 50 state capitals. Founded in 1943 as a
nonprofit, nonpartisan organization, NFIB's mission is to promote and protect the
right of its members to own, operate, and grow their businesses. NFIB proudly
represents approximately 300,000 members nationwide from every industry and
sector.
The NFIB Research Center promotes greater understanding of small business and
the conditions that impact it. The Center produces and disseminates various
surveys and studies on small business, focusing on areas related to business
operations and public policy's effects.
Small businesses employ nearly half of the private sector workforce and are
responsible for about half of our Gross Domestic Product (GDP). The small business
half of the economy has been significantly damaged by the COVID-19 pandemic.
The NFIB Research Center has conducted a series of surveys over the ten months
assessing the impact the pandemic has had on small business owners.
These surveys have shown that many small businesses are still struggling to survive
as economic conditions and business restrictions remain serious challenges after
more than ten months since the national emergency declaration concerning the
COVID-19 outbreak. 1 Owners continue to adjust business operations as the health
crisis evolves all while trying to keep their employees on the payroll. Still, 15% of
small business owners report that they will have to close their doors if current
economic conditions do not improve over the next six months, down from 25% two
months ago. 2 Moreover, according to N Fl B's latest monthly Small Business Economic
1
Declaring a National Emergency Concerning the Novel Coronavirus Disease (COV/0-19) Outbreak, Federal Register, Procla mation 9994
of March 13, 2020, https:I/www federalregister.gov/documents/ZQ?Q/03/18/ZQ?Q-05794/decla ring-a-national-emergency-
concer ning-the-novel-coronavirus-disease-c □vid-19-outb rea k.
2 Hol ly Wade, Covid-19 Small Business Survey (15)- PPP, ERTC, the Economy, the Vaccine, and Minimum Wage, NFIB Research Center,
January 28-31, 2021.
Insert offset folio 25 here 43965.025
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00062 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
57
3
Trends survey, small business optimism dropped below historic averages, with 9 out
of 1O components of the index declining. This month's drop in small business
optimism is historically very large and most of the decline was due to the outlook of
sales and business conditions in the first half of 2021. 3 When the small business
half of the economy emerges from the public health crisis, it is critically important
that they have a solid foundation from which to operate and invest in their
business.
The body of my testimony is broken down into two parts. Part 1 is focused on the
small business programs created during the health crisis and what has and has not
worked well. Part two is focused on the path ahead for small businesses.
Small Business Pandemic Programs - What Has and What Has Not Worked
The Paycheck Protection Program (PPP) has been extremely popular with small
business owners with 76% of NFIB members receiving a PPP loan in 2020. Outside
of some initial implementation and funding concerns, the first round of PPP was
very effective in helping small employers maintain payroll as well paying for other
eligible expenses that were critical in business operations. 4
The PPP was envisioned as providing short-term liquidity to small business owners
to help them survive government-mandated economic shutdowns and dramatic
shifts in consumer spending. However, many small business owners needed
additional financing and assistance with expenses not authorized though the PPP.
The Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL)
program was intended to provide that longer-term liquidity. The EID L's 30-year
term and 3.75% interest rate were very attractive to many small business owners.
About one-third of NFIB members applied for an EIDL loan. However, the EIDL
program has been plagued by well-documented administration issues ranging from
loan application backlogs to a lack of communication with Congress and
stakeholders about funding levels and arbitrary limitations. NFIB still regularly
receives phone calls and emails from small business owners complaining that they
cannot get updates from the SBA on the status of their EIDL application. EIDL is an
important program that provides eligible small business owners with a loan option
that would be difficult, if not impossible for many to access in the private lending
markets. NFIB urges Congress to use its oversight to ensure that this program
3
William C. Dunkelberg and Holly Wade, NFIB Small Business Economic Trends, NFIB Research Center, December 2020,
https:11assets.nfib.comtnfibcom/SBET-Pec-2020- odf.
' Hol ly Wade, Cavid-19 Small Business Survey (15) - PPP, ERTC 1he Economy, the Vaccine, and Minimum Wage, NFIB Research Center,
January 28-31, 2021
Insert offset folio 26 here 43965.026
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00063 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
58
4
functions the way it was intended to and provide sufficient information and
customer assistance to small business owners participating in the program.
The Federal Reserve's Main Street Lending Program (MSLP) was also created to help
provide financial assistance to small and medium size businesses but was largely
ineffective in achieving its goal. The MSLP's loan terms were structured in a way
that were too restrictive for most small business owners. The repayment schedule
was too short, the minimum loan amount was too high intitally, and the interest
rate was too high to attract many small businesses to the program. At a time when
the EIDL program was struggling with loan backlogs, NFIB had hoped that the MSLP
would be able to fill the void, but unfortunately, the program was not easily
accessible and the terms were just not attractive to the average small business
owner.
There have also been COVID-19 related programs that have made life more difficult
for small business owners. The paid sick and family leave mandate enacted within
the Families First Coronavirus Response Act, and specifically targeted at small
business owners, was challenging for many small business owners. Nearly half of
small employers have had employees take COVID-19 related sick leave or family
leave, however, only 41 % of those have claimed the available tax credit to
reimburse those expenses. The terms and conditions of the mandate are
complicated and the credit is difficult to claim for many small employers who have
to navigate both programs themselves.
Small businesses have also had to do their best to comply with varying state and
local public health mandates to keep their employees and customers safe.
Depending on the industry, state, and locality, these compliance costs have been
expensive for many. However, small business owners still have concerns that they
may end up in court if someone contracts coronavirus through no fault of their
own. NFIB supports and encourages Congress to enact common-sense COVID-19
small business liability protections to help those that have done everything in their
power to protect their employees and customers.
The Path to Small Business Recovery
As stated earlier, about 15% of small businesses report they will have to close their
doors if the small business economy does not improve in the next six months. The
best path for small businesses to recover is to get as many Americans vaccinated as
possible, and quickly, so Main Street can fully reopen. In the mean time, many small
Insert offset folio 27 here 43965.027
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00064 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
59
5
businesses may continue to need economic assistance in the form of grants or tax
incentives to survive. The second round of PPP should be helpful to those small
businesses struggling the most right now. The EIDL program also remains a sound
option for those interested in additional financing .
NFIB finds that there is very little need or interest in small businesses acquiring new
forms of debt. According to the most recent NFIB Small Business Economic Trends
survey,
"Three percent of owners reported that all their borrowing needs were not
satisfied (up 1 point). Twenty-six percent reported all credit needs met (up 1 point)
and 60 percent said they were not interested in a loan (up 2 points). A net 3
percent reported their last loan was harder to get than in previous attempts (up 1
point). Credit markets have never been friendlier, and the Federal Reserve
promises that will continue indefinitely. Add to this the reopening of the PPP
program allowing eligible small business owners to access a second forgivable
loan, easing demand for additional private sector borrowing. One percent
reported that financing was their top business problem (unchanged). The net
percent of owners reporting paying a higher rate on their most recent loan was
negative 5 percent, down 1 point from November. The average rate paid on short
maturity loans was 4.8 percent, up 0.1 percentage points from November.
Twenty-six percent of all owners reported borrowing on a regular basis (up 4
points)."5
Instead of focusing on new borrowing options to small business owners, NFIB
recommends that Congress first should adopt the principle of "do no harm ."
Proposals such as those to more than double the federal minimum wage to $15 per
hour, expand paid leave mandates, and create new federal enforcement actions on
small businesses will make it even harder for Main Street to recover. Making it
more expensive to operate a business will only serve to hamper the ability of small
firms to survive the pandemic. Thank you for allowing me the opportunity to testify
before you today.
5Wil lia m C. Dunkelberg and Holly Wade, NFIB Small Business Economic Trends, NFIB Research Center, December 2020,
https•llassetsnfib.com1nfibcom1SBET·Dec·2020.pdf.
Insert offset folio 28 here 43965.028
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00065 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
60
BROOKINGS
Q UA LI T Y. I N DE P EN D ENCE. I M PACT.
Minority-Owned Small Business Trends and Policies in the Wake of COVID-19
Testimony Submitted to:
U.S. House Committee on Financial Services
Subcommittee on National Security, International Development, and Monetary Policy
"Supporting Small and Minority-Owned Businesses Through the Pandemic"
February 4, 2021
Sifan Liu (Senior Research Analyst) and Joseph Parilla (Fellow)
Brookings Metropolitan Policy Program
Thank you, Chairman Cleaver, Ranking Member Hill, and members of the Subcommittee, for the
opportunity to submit written materials for the record. This testimony focuses on two basic questions: 1)
what is the state of minority-owned small business in America? and 2) how can public policy provide
targeted support to minority-owned small businesses to spur a dynamic, equitable recovery from COVID-
19?
State of Minority-Owned Small Business in America
The COVID-19 pandemic has put the economy under historic distress and millions of small businesses at
risk. ' As of January 2021 , 40% of small business owners report operating below capacity as compared to
a year ago and 69% expected it would take at least four months to return to normal operating levels, if
ever. 2 About 30% of businesses are closed.' T11e near-tem1 pressures from the COVID-19 recession have
intersected with a second crisis that is longer-standing and equally damaging: the racial disparities in
business ownership that undermine the nation 's economic dynamism and exacerbate wealth inequities.
Below, we review three unique challenges that minority-owned small businesses currently face.
The first challenge is the continuous and long-standing structural racial disparities in small
business ownership and performance. Nationally, people of color represent about 40% of the
population, but only 20% of the nation 's 5.6 million business owners with employees. Minority-owned
small businesses also have fewer employees, lower profit margins, and higher failure rates .4
Importantly, these trends represent structural impediments to starting and scal ing businesses, and do not
reflect the inherent entrepreneurial abilities or interests of different groups.5 Several studies indicate that
the playing field is uneven for entrepreneurs of color on key factors , including consumer perceptions,
access to finance, and social capital. A Brookings analysis found that businesses located in majority-
Black neighborhoods receive lower Yelp ratings, and earn less revenue than businesses with similar
quality ratings in other neighborhoods. 6 The Federal Reserve 's 2020 Small Business Credit Survey shows
that large banks approve around 67% ofloans sought by white smal l-business owners, 43% of those
sought by Latino or Hispanic smal l-business owners, and just 29% of those sought by Black small-
business owners. 7 Because the enduring impact of structural racism compounds over generations,
minority entrepreneurs also have less exposure to business ownership within their families, and lower
levels of family wealth to draw from as startup capital or collateral. 8
Insert offset folio 29 here 43965.029
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00066 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
61
FIGUREl
Women and people of color own businesses at much lower rates than men and
non-Latino or Hispanic white Individuals
Women
Disparity ratio =!~: =65%
Minority Disparity ratio =:~: = 50%
Source: Brookiogs11n11lysisolthe U.S.Census Bure11u's2016
Annu11ISurveyolEntrepreneurs(ASE)11ndAmerican
Community Survey (ACS)
B Metropoli tan Policy Program
011JROOJ..li\'GS
This second challenge is the acute economic disruptions induced by COVID-19 that
disproportionately affected minority-owned businesses. These long-standing structural impediments
have consequences on the financial health of minority-owned businesses, putting them in a more
vulnerable position during economic downturns. Minority-owned small businesses are more likely to
operate in retail services, accommodation and food services, and personal care services industries that rely
on foot traffic, which were hit hardest from a nationwide lockdown. 9 In addition, COVID-19 infection
rates are higher in communities of color, which coincides with minority-owned business locations.10
Federal Reserve Bank of New York found that among the counties with highest share of Black-owned
businesses, two-thirds were among the top 50 COVID-affected areas in July 2020. 11
The monthly-updated Current Population Survey shows that in the first month of the pandemic, active
business owners declined by 41 % for African-Americans, 32% for Latinos or Hispanics, 26% for Asian-
Americans, compared to 17% for white Americans . These temporary losses later bounced back in August
for all groups, with the exception of Asian-American businesses, where ownership is still down 20%. 12
For small businesses that have maintained operations, Black-, and Latino- or Hispanic-owned businesses
experienced a steeper decline and slower recovery in their cash balances than white-owned businesses,
according to a research from the JPMorgan Chase Institute. 13
The third challenge is the delay and failure in getting federal small business relief to communities of
color. While we do not have definitively reliable data on the demographics of PPP loan recipients, a
range of evidence strongly suggests that access to PPP was not equal. A matched-pair test conducted in
April found that Black business owners in Washington, DC were more likely to be denied PPP loans
compared to white business owners with similar application profiles due to outright lending
discrimination. 14 Brookings research shows that small businesses in majority-white neighborhoods
received PPP loans much more quickly than small businesses in majority-Black and majority-Latino or
Hispanic neighborhoods. For sole proprietors, the neighborhood-level gaps were even more significant. 15
2
Insert offset folio 30 here 43965.030
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00067 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
62
Figure 1. PPP loans in majority-minority neighborhoods were approved later than those
in majority-white neighborhoods
Average days since PPP application started (April 3) to when loans were approved
Employer Nonemployer
MaJonty-Black
Majority·lat1nc,
orH1spamc
""""
Ma)Ol"ity•Asian
Amencan
MaJor1ty-white.Ji====,, i = - - - - ~ - ~ ~
A new NBER report released last month indicates that the second tranche of PPP reached smal l
businesses in underserved and majority-minority communities, 16 but these delays are likely costly to
businesses in those communities that operate on very short cash buffers. 17
In the absence of reliable demographic data at the national scale, local surveys of business owners are also
revealing. A recent survey by the New Economy Initiative ofmicrobusiness owners in Detroit found that
64% of Black respondents who applied for PPP loans were approved, compared to 94% of businesses in
Southeast Michigan. Moreover, many business owners are skeptical that existing small business relief
solutions wi ll work for them. One leader of a neighborhood business organization in Detroit summarized
the dynamic: "There hasn't been an appetite for PPP from many of the businesses in the neighborhood.
They are anxious about it being a loan and then getting stuck to pay it back if they have to let employees
go. Even if they try to fix it up, there is sti ll a lot ofmistrust." 18
Policy Considerations for Supporting Minority-Owned Small Businesses
Against the backdrop of the three challenges above, this section concludes with five policy considerations
to support minority-owned businesses in the wake ofCOVID -1 9.
I. Ensure existing emergency relief is broadly accessible. Mitigating small business failures will be
critical in bridging towards a strong economic recovery. Absent broad and accessible relief, large-
scale small business destruction will take a tremendous toll on the nation 's workforce, physical and
intangible capital stock, and the physical landscape of local communities. 19 If relief is not accessible
to minority-owned businesses, then business fai lures wi ll disproportionately concentrate in minority
communities, which in tum negatively impacts wealth accumulation , social mobility, and community
development. 20 In the early part of 2021 , Congress and the relevant agencies made welcome
modifications in the PPP and certain elements of the EIDL program to better support undeserved
businesses. For PPP, reserving initial access to round three for Community Financial Institutions
(CF!s), including Community Development Financial Institutions (CDF!s), Minority Depository
Institutions (MD!s), Certified Development Companies (CDCs), and Microloan Intennediaries helped
advance the agency 's ongoing efforts to reach underserved and minority smal l businesses. 21 For
EIDL, a second round of grants will only be available to businesses in low-income communities
whose revenue dropped at least 30% in 2020. 22
2. Consider new, additional pathways for future relief. 11,ere are additional approaches the federal
government could take to ensure this mitigation phase is as effective and inclusive as possible. Small
business relief could be better targeted to address the specific challenges related to racial disparities in
capital access. Given the challenges around reaching minority business owners in the first round of
relief and the worries from those businesses about taking on more debt through PPP loans, direct
grants to minority-owned businesses could be provided through a distribution network of community-
based organizations via the Minority Business Development Agency (MBDA). Similarly, the
3
Insert offset folio 31 here 43965.031
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00068 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
63
proposed RELIEF for Main Street Act would provide $50 billion in loans and grants via a distributed
network oflocal communities. building on the lending infrastrncture that local relief funds established
in the spring to target microbusinesses and provide them with technical assistance (in addition to
capital)." Another way to channel fonds to decisionmakers more proximate to the small business
challenges of local communities would be to reinstate the State Small Business Credit Initiative,
which would devolve capital to state-led funds to be distributed to small businesses. Originally used
in the wake of the Great Recession, SSBCl's program evaluation found that it gave states flexibility
to tailor their small business support strategies to the particular needs of their state, with 43% of the
transactions invested iu minority or other underserved commuuities .
., . Experiment with new partnerships that broaden capital access to smaller small businesses. A
federal entrepreneurship strategy will also need to intentionally reflect the fact that minority
entrepreneurs are more likely to operate as sole proprietorships or very small microbusinesscs (under
10 employees). Yet. traditional SBA loan guarantees arc not targeted to these microbusinesses. Over
the past couple decades. large banks have been less likely to operate in the small-loan space due
to low profit margins, 25 and small banks that traditionally served local small businesses have declined
due to a wave of bank consolidations since the financial crisis. 26 This has a disparate impact at the
neighborhood level. According to the Institute for Local Self-Reliance, since 2006, communities of
color have lost more small community banks than other communities.2 7 Online lenders have stepped
up to fill the gap with internet-based technologies that allow for more efficient loan processing and
lower transaction costs, albeit with higher interest rates. 28 l11e SBA could broaden the reach of its 7(a)
loan program by partnering with a fintech lender that can issue loans at much lower costs. Because
microbusiness lending is riskier, the federal government could offer loan loss guarantees to fintech
lenders, who as a result could offer underserved business owners lower interest rates. At the same
time, the federal government should enhance investment in lenders serving communities of color,
including a significant increase in the CDFI Fund.
4. Invest in the success of new "necessity" entrepreneurs. National unemplo}ment remains high,
especially an10ng minority workers. Previous research has found that unemployed workers are more
likely to start a business to avoid prolonged unemployment and financial hardship. 30 Yet. starting and
growing a business is an extremely complex. iterative undertaking, and "necessity" entrepreneurs
overwhelmingly start that journey with less financial and social capital. Currently. the Department of
Labor provides small grants through Self-Employment Assistance (SEA) programs, which allow
unemployed workers to receive a weekly self-employment allowance while learning necessary skills
to set np their businesses. State SEA programs usnally partner with SBA Small Business
Development Centers (SBDC) to provide counseling, training, and technical assistance to small
business owners throngh its local branches. A 2017 evaluation of the SEA progran1 reported positive
outcomes for participants. Y ct, due to fluctuations in available fonding and legislative gridlock, only
six states had an active program at the end of2015." l11e SBA should consider expanding fonding
and services at SBDCs to partner with local workforce agencies to reach potential '"necessity"
entrepreneurs.
5. Invest more federal resources in building productive, inclusive local entrepreneurship
ecosystems, In addition to providing capital and technical assistance, federal policy needs to better
support the development of inclnsive local entrepreneurship ecosystems. Small businesses rarely can
sncceed in isolation, and are more likely to grow when surrounded by other entrepreneurs, investors.
and customers who are open to collaboration and knowledge sharing. 32 So much of entrepreneurial
success is rooted in the in-person social exchange of ideas, infonuation, and resources. Yet, currently
the SBA and Economic Development Administration together invest less than $40 million annually in
supporting local small business ecosystem-building, a tiny sum compared to the $23 billion in loans
that the SBA provided in FY2019. Bnilding on pilots such as the SBA ·s Growth Accelerator Fund
4
Insert offset folio 32 here 43965.032
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
64
Competition, the federal government could increase its investments in those institutions that support
local entrepreneurial ecosystems significantly. Importantly, minority entrepreneurs are usually
overlooked or underserved in local entrepreneurial ecosystems, and it would require proactive
interventions to overcome existing systematic barriers. 33 As federal policy seeks to expand
entrepreneurship ecosystems, it must design them in ways that prioritize racial equity. Given the
importance of inclusive ecosystem-building as an economic strategy, the Eiden administration and
Congress should fund a new Minority Business Accelerator (MBA) challenge grant program that
supports the creation of new accelerators and existing ones, replicating promising models like the
Cincinnati Minority Business Accelerator. 34
Conclusion
Because the nation is facing a massive potential disruption to a well-known status quo, the COVID-19
small business crisis has inspired a historic, necessary policy response. But structural racial exclusion that
limits entrepreneurship is no less insidious than COVID-19 ' s impact on small businesses, and because it
is a status quo that's been built up over decades, there has not been the same urgency to address it-even
if closing these disparities could result in a fairer, more productive U.S. economy. Without addressing this
issue intentionally, America' s recovery from COVID-19 will be slower, more incomplete, and more
inequitable.
The views expressed in these written remarks are those of the authors alone and do not necessarily
represent those of the staff, officers, or trustees of the Brookings Institution.
1
Robert Fairlie, "The Impact of COVID-19 On Small Business Owners: Evidence of Early-Stage Losses from the
April 2020 Current Population Survey" (Cambridge, MA: National Bureau of Economic Research Working Paper
Series, 2020).
2
Brookings analysis of U.S. Small Business Pulse Survey.
3
Brookings analysis of Opportunity Insights data.
4
Fairlie, Robert W., and Alicia M. Robb. Race and entrepreneurial success: Black-, Asian-, and White-owned
businesses in the United States. MIT Press, 2010.
5
Jonathan Rothwell, "No Recovery: An Analysis of Long-Tenn U.S. Productivity Decline", Gallup, December 6,
2016
6
Andre Perry, Jonathan Rothwell, and David Harshbarger. "The devaluation of assets in black
neighborhoods." (Washington: Brookings Institution, 2018)
7
2020 Small Business Credit Survey, available at https://wmv.fedsmallbusiness.org/survev/2020/report-<Jn-
emplover-fim1s
8
ibid.
9
Sifan Liu and Joseph Parilla, "Businesses owned by women and minorities have grown. Will COVID-19 undo
that?" (Washington, Brookings Institution, 2020).
10
Adhikari, Samrachana, et al. "Assessment of conununity-level disparities in coronavirus disease 2019 (COVID-
19) infections and deaths in large US metropolitan areas." JAMA network open 3.7 (2020): e2016938-e2016938.
11
Mills, Claire Kramer, and Jessica Battisto. "Double Jeopardy: COVID-19 ' S Concentrated Health and Wealth
Effects in Black Communities." Federal Reserve Bank of New York (2020).
12
Robert Fairlie 's analysis of CPS data, available at https ://people.ucsc.edu/~rfairlie/current/, data retrieved on
February 2, 2020
13
Farrell, Diana, et al. 2020. Small Business Financial Outcomes during the Onset of COVID-19. JPMorgan Chase
& Co. Research. June.
14
Anneliese Lederer et al. , "Lending Discrimination within the Paycheck Protection Program" (Washington:
National Conununity Reinvestment Coalition, 2020).
15
Sifan Liu and Joseph Parilla, " New data shows small businesses in communities of color had w1equal access to
federal COVID-19 relief' (Washington: Brookings Institution, 2020).
5
Insert offset folio 33 here 43965.033
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00070 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
65
16
Fairlie, Robert W., and Frank Fossen. Did the $660 Billion Paycheck Protection Program and $220 Billion
Economic Injury Disaster Loan Program Get Disbursed to Minority Communities in the Early Stages of COVID-
19?. No. w28321. National Bureau of Economic Research, 2021.
17
This delay is particularly acute because, according to the JPMorgan Chase Institute, in at least 90% of all
majority -Black and majority-Latino or Hispanic neighborhoods, a majority of small businesses have cash buffers of
less than three weeks, compared to only 35% of majority-white neighborhoods.
18
Preliminary survey results from the New Economy Initiative.
19
Tomaz Cajner et al, "The U.S. Labor Market During the Beginning of the Pandemic Recession" Working Paper
No. 2020-58 (Chicago, IL: Becker Friedman Institute for Econo1nics at University of Chicago, 2020).
20 Bates, Timothy, and Timothy Mason Bates. Race, self-employment, and upward mobility: A n illusive American
dream. Woodrow Wilson Center Press, 1997.
21
" SBA Re-Opening Paycheck Protection Program to Small Lenders on Friday, January 15 and All Lenders on
Tuesday, January 19" Available at: hllps://www.sba.gov/article/2021/jan/13/sba-re-opening-pavcheck-protection-
pro gram-small-lenders-friday-j anuary-15-al 1-lenders-
tuesdav#: ~:text~ W ASHINGTON%20%E2%80%93%20The%20U. S. %20Small%20Business.202 I %20at%209%20
am%20ET.
22
Greg Iacurci, " Small businesses can get a second PPP but not this popular Covid-era loan." CNBC, January 15,
2021.
23
"Recharge and Empower Local Innovation and Entrepreneurs Fund (RELIEF) for Main Street Act" Available at:
https://www.booker.senate.gov/imo/media/doc/RELIEF%20for%20Main%20Street%20Act%20two%20pager FIN
AL.pdf
24
Center for Regional Econo1nic Competitiveness and Cromwell Schmisseur, "Program Evaluation of
The US Department of Treasury State Small Business Credit Initiative" (2016).
25
Oscar Perry Abello, " Small Banks Save Small Businesses, So Why Aren't There More Small Banks?" Next City,
May 12, 2020
26
Davig, T. "Community bank mergers since the financial crisis: how acquired community banks compared with
their peers." FDIC Quarterly II (2017): 41 -52.
27
Stacy Mitchell, "PPP Loan Data Continues to Show that Big Bank Consolidation has Hampered Small Business
Relief' (Institute for Local Self-Reliance, 2020)
28
Gene Marks , "Online lenders are stepping up to fill the gap left by banks during the pandemic", the Guardian,
April 16, 2020.
29
Bureau of Labor Statistics, data available at: hltps://www.bls.gov/web/empsit/cpsee el6.htm
30 Beckhusen, Julia. Employment Transitions among the self-employed during the Great Recession. No. 329-2016-
13098. 2014.
31
Weigensberg, Elizabeth, et al. "A Study of the Self-Employment Assistance Program: Helping Unemployed
Workers Pursue Self-Employment." Final report submitted to the US Department of Labor, Chief Evaluation Office.
Princeton, NJ: Mathematica Policy Research (2017).
32
Brad Feld and Ian Hathaway, The Startup Community Way: Evolving an Entrepreneurial Ecosystem (Hoboken,
NJ: Wiley, 2020.)
33
"Building supportive ecosystems for Black--0wned US businesses", Mckinsey, October 29, 2020; Ben Hecht,
" Why Entrepreneurs of Color Are Struggling", CityLab, April 28, 2018
34
Joseph Parilla and Darrin Redus, "How a new Minority Business Accelerator grnnt program can close the racial
entrepreneurship gap" (Washington: Brookings Institution, 2020).
6
Insert offset folio 34 here 43965.034
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00071 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
66
§ FEDERAL RESERVE BANKo, MINNEAPOLIS
P11rs11i11ga11 economy rhm works/oral/ of11s
February 3, 2021
The Honorable Maxine Waters The Honorable Patrick McHenry
Chairwoman Ranking Member
U.S. House Committee on Financial Services U.S. House Committee on Financial Services
2 129 Rayburn House Office Building 2 129 Rayburn House Office Building
Wasltington, DC 20515 Washington, DC 20515
The Honorable Jim Himes The Honorable French Hill
Chair, Subcommittee on Natio nal Security, Ranking Member, Subcommittee on National Security,
International Development, and Monetary Policy International Development, and Monetary Policy
U.S. House Committee on Financial Services U.S. House Committee on Financial Services
2129 Rayburn House Office Building 2 129 Rayburn House Office Building
Washington, DC 20515 Washington, DC 205 15
Dear Chairwoman Waters, Ranking Member McHenry, Subcommittee Chair Himes, and Ranking Member Hill,
Thank you for providing tl1e Center for Indian Country Development (CICD) 1 at the Federal Reserve Bank of
Minneapolis the opportunity to share infom1ation on how a reestablished State Small Business Credit Initiative
(SSBCO program could better meet small business needs in Indian Country. CICD, a research institute dedicated to
assisting tribes to reach their full economic potential, conducts economic research on tribal economies. Since the
beginning of the COVID -19 pandemic, CICD has tracked the specific eco nomic impacts to tribal businesses and
Native American workers. CICD hopes its insights and reconunendations a re infonnative to you as the House
Financial Services Conunittee contemplates reestablishing the SSBCI and ensuring equitable access to this critica lly
important econo mic recovery tool.
Indian Country has ex11erienccd more severe im11acts of the 11andemic across almost every measure.
At various points since March 2020, tribal communities have had the highest COVID-1 9 infection rates per capita in
tl1e counuy. In August, tl1e Centers for Disease Control and Prevention (CDC) reported that compared to White non-
Hispanics, Native Americans had experienced nearly triple tl1e rate of cases: 5.3 times more hospitalizations per
capita and nearly 1.5 times more deaths per capita. The CDC reported similar results in December, further
evidencing the co ntinued and disproportionate public health impact COVID-1 9 is having in Indian Country. 2
Job losses have been more severe, hitting scn'ice sector workers the hardest.
Prior to the COVID-1 9 pandemic, Native American employment nationwide was concentrated in lower-wage jobs in
the service sector. Some tribes had more than 30 percent of their tribal members in se"1 ice sector occupations-
almost double the national average of 18 percent. 3 As state and tribal lockdowns were implemented and tribal
gaming operations closed their doors in Apri l, Native American unemployment rates spiked to 26 percent, higher
tlmn that of any minority population in the country. 4 In a September 2020 CICD survey, 60 percent of tribal-
govemment-0wned enterprises reported employment reductions of at least 20 percent. As of December 2020, Native
Ame rican unemployment rates had recovered to near pre-pandemic levels, yet the Native American labor force
1 https://www.minneapolisfed.oru/indiancountrv
2 https://www.cdc.oov/mmwr/volmnes/69/wr/mm6949a3.htm
3
https://www.minneapolisfed.org/article/2020/covid-19-and-indian-countrv-earlv-snapshot-reveals-disproportionate-economic-
exposure-and-tmcertaintv
4
https://www.minneapolisfed.oro/article/2020/native-emplovment-durino-covid- \ 9-hit-hard-in-april-but-startino-to-rebound.
90 HENNEPIN AVENUE , MINNEAPOLIS , MINNESOTA 55401 I minneapolisfed.org
Insert offset folio 35 here 43965.035
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00072 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
67
participation rate still hovered around 57.5 percent 5- lower than tha t of any minori ty population in the nation-
indicati ng many Native wo rkers are likely ridi ng out the pandemic from the sidelines.
Tribal enterprises experienced steep revenue losses and ca1>ital and credit strains.
State a nd tribal closures in spring 2020 reportedly shut down 100 pe rcent of tribal gaming operations natio nwide,
mid other tribal e nterpri ses, suc h as triba l energy compa nies, suffe red severe revenue losses. Even after the
reopening of many tribal operatio ns in the summer, a September C ICD survey found over 50 perce nt of tribal
enterprise respondents repo rted revenue declines of 20 percent or more to date, which in tum resulted in tribal
govenune nt revenue declines 6 and reduced de livery of essential gove rnment services to tribal co mmunities. 7 In all
the CICD surveys co nducted in 2020, tribal enterprises reported sig nificant unmet capital needs that continue to
dampen econo mic recovery in India n Country .
Tribal-member-owned small businesses have also suffered during the 1>andemic.
In an August CICD survey of mostly tribal-member-owned businesses, 8 only 20 percent of the 400 respo ndents
reported having enough cash on hand, which includes financial assista nce and loans, fo r mo re than three months of
operatio ns. Only 15 perce nt of respondents received Eco no mic Injury Disaster Loans assistance and 22 pe rcent
received a Paycheck Protection Program (PPP) loan. CICD conducted further analysis of the PPP in Nove mber 2020
and found that just 12 percent of businesses in census tracts witl1 greate r than 50 perce nt Native population received
PPP loans, much less tha n the nationa l average of 20 percent. 9
All this is to say that tribal businesses, eitl1er owned by tribal governments or by tribal members, and Native
American workers are suffering, and many have been left out of the nation's emergency relief efforts.
Considerations to support Indian Countrv participation in the reestablishment ofSSBCJ
Reestablishing tl1e SSBCI program is precise ly the type of recovery measure that is needed to support tribal sma ll
businesses. Much can be learned from ana lyzing triba l inclusion in the prio r SSBCI program. Using publicly
available SSBCJ loan data, CICD investigated the degree of inclusion of Indian Country borrowers. Only 0.3 percent
of loans were made to borrowers in or near Indian Country. Focusing on the dollar amount of SS BCI loans, CICD
fo und that 0.4 percent of total funds went to borrowers in or near Indian Country. 10 Given the lack of tribal inclusion
in the previous SSBCI program, additio na l actions should be considered to reach Indian Country borrowers:
(1) Include tribal governments as eligible government anplicants under the definition of "state"
Through treaty rig hts and Supreme Court ho ldings, tribes have a unique political statu s with tl1e U.S.
governme nt. The fe deral government engages with tribes in a government-to-government relationship, and
spec ific inclusion of tribal governments in the SSBCI reauthorization would be a clear act by the federal
governme nt to deliver on its trust responsibilities to tribes. With this addition, tribal governments would j oin the
othe r eligible gove rnment applicants-states, U.S. te nito ries, and certain municipali ties-as eligible applicants.
(2) Include a codified definition of " tribal governments"
CICD reco mmends tliat tl1e reauthorizatio n legislatio n incorporate the defi nition of "tribal govenunents"
codified in 25 U.S. Code §51 3 1, which includes a list of all fe derally recognized tribes in tl1e U.S eligible for
5 hnps://www.bls.oov/cps/.
6
Tribal entervrises allocate varying amounts of revenue to their tribal governments.
7 hllps://www.minneapolisfe<l.oro/article/2020/tribal-entities-remain-resilient-as-covid-19-batters-their-finances.
8 hnps://www.minneapolisfed.org/article/2020/indian-countrv-small-businesses-face-strong-headwinds-in-covid- \ 9-recoverv
9 https://www.minneaoolisfcd.or2/articlc/2020/pavcheck-protcction-program-lcavcs-somc-businesses-in-tribal-arcas-bchind.
10 These estimates are necessarily imperfect because SSBCI loans can only be geographically identified by ZIP Code, which does
not map perfectly to the boundaries of tribal areas. We counted a loan as occurring "in or near Indian Country" if at least 50
percent of the ZIP Code's area overlapped with a tribal area. Using a more inclusive definition-any overlap above O percent-
we calculate that 2.8 percent of loans (and 3.3 percent of total loaned funds) went to borrowers in or near Indian Country .
Insert offset folio 36 here 43965.036
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00073 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
68
special programs and services provided by the federal government. This list is updated annually at the end of
the calendar year. There are currently 574 federally recognized tribes in the U.S.
(3) Provide a minimum allocation for tribal governments
In 2010, the SSBCI program provided for a minimum allocation of0.9 percent ofprognun funds to states. By
incorporating tribal governments into the reauthorization of the SSBCI program, the Committee could consider
providing a specified, collective, minimum allocation to tribal governments, to ensure the program reaches
tribal borrowers.
(4) Establish a multi-tribal government narticination nrogram
Given the anticipated capacity co nstraints for some individual tribes to administer their own SSBCI program,
CICD recommends an option be considered for tribal governments to participate in a multi-tribal government
participation progmm, similar to what is being contemplated in the legislation for states.
(5) Enhance nrogram data collection and renorting
In addition to the required infonnation to be reported annually by program participants, CICD recommends the
Department of the Treasmy collect and make available to the public the following infomrntion:
Names of participating government entities;
Race , ethnicity, and tribal affiliation for all participating borrowers; and
More-precise geographic detail for SSBCI borrowers than was previously available to the public.
(6) Include tribal business concerns in definition of "minoritv-owned business"
Tribal enterprises, also known as tribal business concerns, play a significant role in Indian Country economies,
creating jobs and allocating revenues to tribal governments. They arc often the largest employers in tribal
communities and provide local goods, setv ices, and critical eco nomic infrastructure for tribal and surrounding
communities. They share the same credit access challenges that tribal-member-owned businesses face. CICD
recommends tribal enterprises that have 500 or fewer employees or that satisfy the program requirements for
number of employees be included in the program ' s definition of " minority -owned business." The PPP utilized
tl1e definition of "tribal business concern" codified in U.S. Code 657a(b)(2)(C) to establish eligibility for tribal
enterprises. A similar approach to the PPP would allow for a greater pool of potential borrowers in Indian
Countiy.
(7) Deliver technical assistance to narticinating tribal governments
Given the complexity and capacity needed to successfully administer an SSBCI program, CICD recommends
that technical assistance be specifically and sufficiently delivered to tribal gove rnment participants by technical
assistance entities approved by the Department of the Treasuiy.
(8) Waive nrivate leverage ratio for narticipating tribal governments
As indicated in the 2014 SSBCI revised program guidelines, for other credit support programs to be eligible for
federal funding, they must demonstrate a " reasonable expectation" to ge nerate small business lending
equivalent to at least 10 times the federal co ntribution amount. 11 Given the capital constraints of lenders-and,
in particular, Native American Community Development Financial Institutions- tliat setve tribal communities,
Cl CD reconunends the private leverage ratio requirement be waived for tribal government progmms. 12
11
https://www.trea.surv.gov/resource-center/sb-pmgrams/Documents/SSBCI%20Policv%20Guidelines.pdf.
12 https://www.minneapolisfed.or0 /research/cicd-workin°•paper-series/findinos.from-the-2017-native•cdfi-survev-industrv-
opportunities-and-limitations.
Insert offset folio 37 here 43965.037
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00074 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
69
The disproportionate public health and eco nomic impacts of the pandemic on Indian Count!)' make the road to
economic recovery challenging for tribes. Tribal government inclusion in the SS BCI progra m will go a long way in
providing the credit a nd technical assistance to stabilize tribal economies. The CICD appreciates the opportunity to
share insights and provide recomme ndations. Should you have questions or need additional infonnation, please do
not hesitate to reach out to me at casey.lozar@mpls.rrb .org.
Lem'lmnts,
Casey Loza r
(Confederated Salish and Kootenai Tribes)
Director, Ce nter for Indian Count!)' Development
Federa l Reserve Bank of Miruieapolis
Insert offset folio 38 here 43965.038
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00075 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
70
Center for Responsible Lending
Statement for the Record
Hearing on "How Invidious Discrimination Works and Hurts: An Examination of Lending
Discrimination and Its Long-term Economic Impacts on Borrowers of Color" Before the
Subcommittee on Oversight and Investigations, Committee on Financial Services, U.S. House
of Representatives
February 4, 2021
The Center for Responsible Lending appreciates this opportunity to submit a statement for the
record for today's hearing.
CRL shares concerns about the profound disparities in how business owners fund their
enterprises. For small businesses to thrive and grow into larger enterprises they need to be able
to access capital. There is now overwhelming evidence that this is far more difficult for
businesses owned by persons of color than it is for white-owned businesses. For example,
research conducted by a number of Federal Reserve banks has found that in the previous five
years, 46% of white-owned businesses with employees accessed credit from a bank compared
to just 23% of Black-owned employer firms and 32% of Latino-owned employer firms . Lacking
access to credit, 28% of Black owners and 29% of Latino owners relied on personal funds as the
primary funding source for their business, compared to just 16% of white business owners.'
In large part, these disparate results are attributable to overtly discriminatory practices by
lenders. A recent study by the National Community Reinvestment Coalition makes this clear: it
found that Black and Hispanic testers when applying for loans were required to produce more
documentation to support their loan application and received less information about fees, and
less friendly service when visiting a small business lender. 2 But facially neutral practices with
disparate effects are also important contributors to the difficulty that Black and Latino business
owners have in obtaining credit, as was most recently demonstrated by the Paycheck
Protection Program which, by relying on banks as its distribution mechanism, gave a large leg
up to existing bank customers, who are disproportionately white, at the expense of businesses
owned by persons of color. 3 We have appended our June testimony before the House Small
Business Committee which provides additional background about the small business landscape
and the first two rounds of the Paycheck Protection Program (PPP) specifically.
1
"Small Business Credit Survey: Report on Employer Firms," 2020.
https://www.fedsmallbusiness.org/medialibrary/FedSma11Business/files/2020/2020-sbcs-employer-firms-report.
2
"Disinvestment, Discouragement and Inequity in Small Business Lending." National Community Reinvestment Coalition,
2019. https ://ncrc.org/wp-content/u ploa ds/2019/09/N CR C-Sma II-Business-Research-FIN AL. pdf.
3
Granja, Makridis, Yannelis, Zwick, Did the Paycheck Protection Program Hit the Target?,
https://bfi. uchicago. edu/workinq-paper/did-the-paycheck-protect;on-proqram-hit-the-tarqet/
Insert offset folio 39 here 43965.039
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00076 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
71
Because of these disparities, we have joined with many civil rights, consumer, and small
business groups to urge Congress to include direct grant aid for small businesses in any future
relief bills. Grant aid, not loans, are desperately needed for the most vulnerable small
businesses, many of which were already in a financially precarious position prior to this crisis.
Further, if recovery is to be inclusive direct funding and technical support for individuals to start
new businesses will also be needed.
At least $50 billion small business relief dollars should be allocated for the purpose of
supporting small minority-, women-, and veteran-owned businesses that have been neglected
or otherwise underserved by the original Paycheck Protection Program, the Economic Injury
Disaster Loan program, or any other federal assistance program. It is imperative that Congress
provide support to the most vulnerable small businesses in our nation that have suffered
discrimination in capital markets through direct federal, state, and local policies, or through
disparate impact.
There are many mechanisms which could be used to provide this direct grant assistance. The
IRS, FEMA, the SBA EIDL program, or even through already approved PPP lenders are options. A
reauthorized State Small Business Credit Initiative could also be a great mechanism for
providing this much needed relief and support. However, we request a specified allocation for
grants, rather than a new loan program that is likely to continue the trends we have seen in PPP
and that lenders are unlikely to take up.
Grants should be equivalent to 1.5 times the business' annual revenues as reflected in its
preceding annual tax filing, but not to exceed $100,000. Small businesses must meet the
eligibility criteria outlined below.
For existing businesses, grant funds may be used to defray the cost of payroll, rent, mortgage
principal and interest payments, equipment lease or loan payments. Funds may also be used
for existing operational costs as well as any equipment required to comply with new health
restrictions. For new businesses, the grant aid will provide the start-up capital needed to launch
their business.
Eligibility for the grant program should be limited to the most vulnerable businesses and
entrepreneurs, those that qualify as "socially and economically disadvantaged" individuals as
defined in the Small Business Act. For existing businesses that meet the definition, they must
also have been in business for at least a year, have no more than 10 employees, be located in
an LMI census tract, employ personnel residing in the LMI area where it is located, and not have
received funding through equity, bond, or other capital investment market during prior year.
Publicly traded corporations should also be ineligible.
It is a truism that small businesses are a critical engine of economic opportunity and growth.
This is especially true for communities of color: businesses owned by people of color account
Insert offset folio 40 here 43965.040
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00077 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
72
for more than 8.7 million jobs at a total annual payroll of $280 billion, and these businesses
generate $1.3 trillion in revenue. 4
Fostering economic security is more essential than ever in the current moment. We appreciate
your efforts to shed light on the needs of businesses owned by people of color and ensure that
relief and support reaches all businesses and communities. The only way to ensure real relief
reaches the most vulnerable businesses is through targeted grant aid. We look forward to
working with you to craft a program, through SSBCI or some other means, to achieve this goal.
Sincerely,
Center for Responsible Lending
4
2018 Annual Business Survey
Insert offset folio 41 here 43965.041
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00078 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
73
APPENDIX
Testimony of Ashley C. Harrington
Federal Advocacy Director and Senior Counsel
Center for Responsible Lending
Before the United States House Committee on Small Business
"Paycheck Protection Program: Loan Forgiveness and Other Challenges"
June 17, 2020
1
Insert offset folio 42 here 43965.042
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00079 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
74
I. Introduction
Good afternoon Chairwoman Velazquez, Ranking Member Chabot and Members of the United States
House Committee on Small Business. Thank you for the opportunity to provide testimony today about
the need to address the challenges posed by the Paycheck Protection Program (PPP). My name is Ashley
Harrington, and I am Federal Advocacy Director and a senior policy counsel at the Center for
Responsible Lending (CRL). CRL is a non-profit, nonpartisan research and policy organization dedicated
to protecting homeownership and family wealth by working to eliminate abusive financial practices. The
organization is an affiliate of Self-Help, one of the nation's largest community development financial
institutions. For forty years, Self-Help has focused on creating asset-building opportunities for families of
color, women, rural residents and low-income people and communities, primarily through financing
safe, affordable home loans and small business loans. In total, Self-Help has provided more than $7
billion in financing to 87,000 homebuyers, small businesses and non-profit organizations and serves
more than 80,000 mostly low-income families through more than 40 retail credit union branches in
North Carolina, California, Florida, Illinois, South Carolina, Virginia, and Wisconsin.
CRL and Self-Help have seen firsthand the potential for the PPP to serve as a lifeline to small businesses
as they navigate the current economic crisis. As a long-time SBA lender, Self-Help began accepting
Paycheck Protection Program (PPP) applications on April 6. As of June 13, Self-Help has received SBA
approval for $170 million in loans to 1,395 small businesses and non-profits across the country. These
loans have been a lifeline for our borrowers, allowing them to continue employing over 18,000 people
through the current economic uncertainty. Self-Help's PPP efforts have focused on assisting
underserved applicants: by dollar amount, fifty-three percent of the loans are to small businesses and
entities led by people of color, and sixty-seven percent are to non-profits. With a median loan amount of
less than $28,000, these loans primarily serve truly small businesses: sixty-five percent of the loans are
under $50,000, and eighty-three percent are under $150,000.
Preserving businesses owned by people of color is paramount to an equitable recovery. Employer
businesses owned by people color are a substantial source of income and employment-accounting for
more than 8.9 million jobs at total annual payroll of $295 billion, and $1.4 trillion in revenue. 1 Yet many
of these businesses as well as non-employer or self-employed businesses were likely excluded from the
first round of funding in the PPP. Business ownership is also a proven mechanism for wealth-building,
with economic benefits that extend beyond the individual business to the entire community. Ensuring
that federal small business relief works for small businesses owned by people of color is essential to an
inclusive economic recovery.
As a result of the devastating economic impacts of an already catastrophic public health emergency,
Congress rightfully moved quickly to provide some of the desperately needed financial support to
families and businesses. This crisis comes even as the effects of the last recession continue to be felt in
many communities, especially communities of color. The Great Recession resulted in more than 8. 7
million lost jobs, 8 million homes foreclosed, and 500 community banks shuttered. 2 This does not
include the non-direct financial harms of the crisis, such as the estimated 95 million households who lost
1
2018 Annual Business Survey
1Calhoun, Michael. "lessons from the Financial Crisis: The Central Importance of a Sustainable, Affordable and Inclusive Housing Market,"
Brookings (blog), September 5, 2018. https://www .brooklngs.edu/research/lessons-from-the-finandal-crisis-the-centrat-importance-of-a-
sustainab!e-affordable-and-indusive-housing-market/.
2
Insert offset folio 43 here 43965.043
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00080 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
75
home equity due to surrounding foreclosures; this lost wealth totaled $2 trillion with $1 trillion coming
from communities of color. 3 Just as the last recession widened the racial wealth gap even further, we
are already on track to see disparities drastically increase because of COVID-19.
My testimony today will:
• Provide an overview of the disproportionate economic impacts of the COVID-19 health crisis.
• Discuss issues with the structure and implementation of the PPP and how they served to limit
access for the smallest businesses and businesses owned by people of color.
• Highlight the challenges posed by the current requirements to access PPP forgiveness.
• Provide policy recommendations to ensure 1) the remaining PPP funds reach the smallest
businesses and businesses owned by people of color; 2) the forgiveness process is streamlined
and workable for the smallest businesses and their lenders; and 3) equitable small business
relief, beyond the PPP, is available as we enter the recovery period.
II. The Economic Effects of the COVID-19 Public Health Crisis Have Fallen Disproportionately on
Communities of Color
A. The Disproportionate Economic Effects of the COVID-19 Public Health Crisis
Unemployment rates have skyrocketed, well exceeding the rates seen during the financial crisis, but
they have been highest for communities of color. In May 2020, unemployment hit 17.6% for Hispanic or
Latino workers, 16.8% for Black workers, 15.0% for Asian workers and 12.4% for white workers.4 The
recent spike in unemployment, however, masks the persistently high rates in these communities, many
of which took years to return to even pre-financial crisis levels. The 2007 pre-financial crisis lowest
unemployment rate among Black workers was 7.6% in August 2007, a rate that was only slightly lower
than the peak financial crisis unemployment rates among white workers of 9.2% in October 2009 (Figure
1). The severity of the current unemployment crisis can also be measured in the rate of increase. The
lowest pre-financial crisis unemployment rates occurred in early- to mid-2007, with the peak crisis
unemployment rates in most communities not occurring until the end of 2009, nearly two and a half
years later. In contrast, in 2020, unemployment figures by race and ethnic group jumped between 149%
and 255% from March 2020 to April 2020 (Figure 1).
Unlike the last financial crisis and accompanying unemployment levels, this unemployment rate increase
and recession are driven by federal and state policies effectuated in response to a health pandemic. As
such, the federal and state response must equitably restore and make whole those who are
disproportionately impacted. It is imperative that we take steps now to make sure relief and recovery
efforts reach all communities.
cJ Bocian, Debbie Gruenstein, Peter Smith, and Wei LL "Collateral Damage: The Spillover Costs of Foreclosures." Center for Responsible Lending,
October 2012. https://www .responsiblelending.org/mortgage-lending/research-ana!ysis/col!atera!-damage.pdf.
4 Bureau of Labor Statistics Current Population Survey, Table A-2 and A-3.
3
Insert offset folio 44 here 43965.044
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00081 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
76
Figure 1. Monthly unemployment rate from 2006 to present, seasonally adjusted
20.0% May 202
17.6%
16.0% 16.8%
15.0%
12.0% 12.4%
8.0%
4.0%
0.0%
.,, co .-< <t .,, co
0
0
I'-
0
0
0
0
"'
0
0
0
.-<
0
.-<
0
N
.-<
0
"'.-<0 .-<
0
"'.-<0 .-<
0
I'-
.-<
0
.-<
0
"'.-<0 0
N
0
N N N N N N N N N N N N N N N
- White - Asian Black - Hispanic or Latino
Source: Burea u of Lab or Statistics Current Popul ation Survey, Table A-2 and A- 3.
B. The Impact of the Crisis on Small Businesses
The effect of the crisis on small businesses has been profound-more than half of small businesses said
the crisis has had a large negative effect on their businesses and 50.3% of small businesses said they
have had a decrease in operating revenues in the last week. In late April, temporary closings impacted
41.5% of small businesses, and 26.5% were impacted in late May. These impacts were far worse for
some hardest-hit sectors, including education, food service and accommodations, and recreation. 5
The crisis has impacted industry sectors differently, with widely varying responses to two key measures
of hardship measured by the U.S. Census Small Business Pulse Survey. For example, small business
owners in the accommodation and food service sector were 15 times more likely to say that the crisis
has had a large negative effect on their bu siness than owners of utilities. Variation is likely due to the
extent that the business is subject to a temporary shutdown order or other factors that have resulted in
a steep decline in revenue. Industry sectors with higher than average ownership by people of color
averaged higher response rates to two key measures of hardship, however. On average, 50.7% of
business owners in sectors with above-average ownership by people of color said that the crisis had a
large negative impact on their bu siness compared to 34.3% of business owners in sectors with below
average ownership by people of color. Likewise, 12.4% of business owners in sectors with above-
average ownership by people of color said that their bu sinesses were unlikely to return to a normal level
of operations relative to one year ago compared to 7.5% of business owners in sectors with below-
average owne rship by people of color (Appendix A) .6
C. Federal Relief for Small Businesses was Quick but Inequitable
5
"S mall Business Pulse Survey - May 31 to June 6," June 11, 2020. https:/fportal.census.gov/pulse/data/#data. The survey ta rget population
was all nonfarm, single nonfarm, single-locati on employer bu sinesses with bet wee n 1-499 em ployees and rece ipt s of $1,000 or more in t he 50
st at es, Dist rict of Co lumbia, and Pu erto Rico. Some industries were excluded, a com plet e list is provided in th e survey meth odology ava il able at
https:l(portal.census.gov/pulse/data/#methodology. The Small Business Pulse Su rvey The Small Business Pulse Su rvey may be subject t o non-
response bias, as busin esses t hat have closed due t o COVID-19 may not be rece iving th e invitation to parti cipate and unable t o respon d.
6
See "S mall Busin ess Pulse Survey Qu est ionn aire." Sma ll Busin ess Ad min istrat ion . Accessed June 14, 2020.
htt ps ://www.census.gov/content/d am/Census/data/experimenta l-dat a- produ cts/sma ll-busin ess-pulse-su rvey/s mal l-busi ness-pulse-su rvey-
quest ionn aire.pdf.
4
Insert offset folio 45 here 43965.045
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00082 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
77
One of the largest economic support components of the federal response to this pandemic has been the
PPP, representing a $670 billion investment in small businesses which serve as the backbone to the
American economy. According to the Small Business Administration (SBA), as of June 12, 2020, the
program has dispersed 4.6 million loans totaling over more than $512 billion.' However, despite this
substantial investment, it is clear that many small businesses have not been able to access this vital
relief.
At the outset of the program and during the first round of funding from April 3 to April 16, 2020, it was
clear that structural inequities were built-in to the administration of the program, the application
process, and the fee structure. These structural inequities made it extremely difficult for small
businesses-and particularly businesses owned by people of color--to qualify for assistance or receive it
in time to save their businesses and the jobs of the employees that depend on them. The expected
effects of these policies have already borne out.
Using data from the April 2020 Current Population Survey, recent research found that the number of
active business owners in the United States decreased by 3.3 million or 22 percent from February to
April 2020. This decline was the largest on record and spanned nearly all industries. Business owners
of color, women-owned businesses, and business owned by immigrants were especially hard hit. Black
and Latino business owners declined by 41% and 32%, respectively. Asian business owners dropped by
26%. Active white business owners, comparatively, declined by 17%. Immigrant business owners
declined by 36%, and women business owners declined by 25%. 8
Figure 2. Active businesses owners of color declined sharply since February
Total Black Latino Asian White Immigrant Women
Source: Fairlie, Robert. "The Impact of Covid-19 on Small Business Owners: Evidence of Early-Stage Losses from the April 2020
Current Population Su rvey."
As businesses of color struggle to get the same access to federal relief dollars as white businesses, they
are busy keeping their businesses alive just as businesses all across this country are doing. As Black
7
"Paycheck Protection Program (PPP) Report Approva ls t hrough 06/12/20 20." Sm all Business Administration. Accessed Jun e 16, 20 20 .
htt ps:/ /www.s ba.gov/sites/default/files/2020-06/PPP _Report_202006 12-508. pdf.
8
Fairli e, Robert. "Th e Impact of Covid-19 on Small Bu sin ess Owners: Evidence of Ea rly-St age Losses from the April 2020 Current Popul ation
Survey." Stanfo rd In stitute for Eco nomic Policy Resea rch, May 23, 2020. htt ps://siep r.st anford .edu/ resea rch/ publicati ons/impa ct-covid- 19-
smaII-busin ess- owners-evidence-- early-st age-- losses- april-2020 .
5
Insert offset folio 46 here 43965.046
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00083 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
78
businesses owners and other business owners of color innovate, re-organize, and work tirelessly to be
successful, just as they have done despite years of marginalization, they will not have as much aid in
their recovery as white-led businesses who benefitted from billions of dollars of relief. We must
collectively work to ensure the entrepreneurial spirit of this nation's businesses owners is fully
supported and that support does not fall along the same lines of historical discrimination for
communities of color.
Ill. The structure and implementation of the Paycheck Protection Program continue to
disadvantage to smaller businesses. including the self-employed. Businesses of color were
more likely than White-owned businesses to be disadvantaged by the structural limitations
built into the PPP program.
Several issues were baked into the structure of the PPP from its inception and launch. Minority-owned
small businesses, already hardest hit by the pandemic, were also hardest hit by these structural
limitations. To fully understand the impact of the inequities, it is imperative to have a full picture of the
make-up of small businesses in this country and how ownership and success is directly tied to historic
exclusionary policies and ongoing racial discrimination.
Businesses owned by people of color are likely to have fewer employees and less revenue than white-
owned businesses. As a result, they were less likely to qualify for larger loans that would yield the higher
fees that would make them a priority for lenders at the outset of the program. Businesses owned by
people of color are even more likely to have no employees, putting them at an even greater
disadvantage to larger businesses that could garner higher fees. Further, businesses of color have
historically lacked access to SBA loans and credit generally, just as individuals and communities of color
writ large. Thus, by creating a program that relied on traditional mainstream financial institutions as its
intermediary, it effectively ensured that business owners of color were likely to face barriers in accessing
critical PPP loans. Other exclusionary and administrative hurdles also resulted in long delays in the
distribution of funding and small businesses and businesses owned by people of color had to wait to
receive critical PPP loans to retain their employees and stabilize their businesses. These unnecessary
delays amount to perilous pressures for the smallest of businesses and businesses of color in particular
during a period of economic uncertainty coupled with very real dual public health emergencies of
COVID-19 and racism.
A. The PPP fee structure heavily discourages small loans to smaller businesses and non-
employer firms. Businesses owned by people of color are likely to have fewer employees,
less revenue, and to lack a relationship with a commercial lender.
The PPP fee structure heavily incentivizes loans to larger firms that can garner higher fees. PPP loans are
capped at 2.5 times average monthly payroll, resulting in smaller maximum loan amounts for very small
businesses, businesses employing lower-wage workers, and non-employer businesses. Lenders earn an
origination fee equal to 5% of the loan balance for loans under $350,000, 3% for loans between
$350,000 and $2,000,000, and 1% for loans above $2,000,000. For a loan of $25,000, a lender would
make just $1,250, while the $10 million loan given to Shake Shack and later returned, would have
6
Insert offset folio 47 here 43965.047
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00084 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
79
garnered $100,000 in fees.9 This fee structure created a powerful incentive to make larger loans to
larger firms and put very small businesses, businesses in critical but lower-paid sectors, and non-
employer businesses at a distinct disadvantage.
Businesses headed by people of color are less likely to have employees, have fewer employees when
they do, and have less revenue compared to white-owned businesses. These disparities are the result of
structural inequities resulting from less wealth compared with whites who were able to accumulate
wealth with the support of public policies. White-owned businesses are twice as likely to be employers
and hire 50% more employees than businesses owned by people of color. 10 This made businesses of
color less likely to garner the higher lender fees that would make them attractive borrowers at the
outset of the program .
In addition to the over 5.7 million businesses with fewer than 500 employees, there are over 26 million
non-employer firms. 11 Though this was created as a payroll protection plan, two thirds (63%) of non-
employers rely on their businesses as their primary source of income, and 20% of non-employers started
their businesses because they lacked other options.12 Non-employer businesses are far more likely to be
owned by people of color. Nearly 95% of Black-owned firms were non-employers, and 91% of Latino-
owned firms were non-employers. In comparison, 78% of white firms are non-employer businesses. 13 Of
all small businesses, businesses without employees were the most likely to face challenges accessing
PPP funds in the initial round_l4 Along with other very small businesses with few employees, the PPP fee
structure continues to ensure that these businesses may face challenges finding lenders willing to make
small, but critical loans.
B. While access to PPP funding is heavily dependent on traditional financial institutions and
prior banking relationships, business owners of color have historically lacked access to
credit through these channels and are more likely to not have these relationships.
To receive a PPP loan, applicants must apply with an eligible SBA-approved lender, almost all of which
are conventional banks. While additional financial institutions were allowed to become PPP lenders, the
process to approve these additional lenders took several weeks. By requiring applicants to go through
an SBA-approved lender, rather than directly applying to the PPP program, the program ensured that
those businesses with existing conventional lending relationships were more likely to access PPP funds
quickly and efficiently, especially in a program where "speed" was the first priority.
There are profound disparities in how business owners fund their enterprises. Research from the
Federal Reserve found that in the previous five years, 46% of white-owned businesses with employees
accessed credit from a bank, and 6% accessed credit from a credit union. During that same time, just
23% of Black-owned employer firms accessed credit from a bank, and 8% from a credit union and 32% of
9 "S hake Shack W ill Return Its $10 M illion Loan Amid Furor Over Stimulus Program - The New York Tim es."
https:J/www.nytimes .com/2020/04/20/busin ess/ shake-s hack-returning-loan-ppp- coronavirus.html.
10
M cManus, Mi chae l. " Minorit y Business Own ership: Data fr om th e 20 12 Survey of Business Ow ners." US Sm all Business Administration,
Septe mber 14, 2016. htt ps :// cdn .advocacy .s ba. gov /w p-co ntent/u pica ds/2016/09 /07141514/M in o rity-Own ed-Bus inesses- in-the- US .pdf.
11 See U.S. Ce nsus Bureau 2018 Annual Business Survey (ABS) and 2018 Nonemployer Statistics {NES )
12
"Sm all Busin ess Credit Survey: Report on No nemployer Firms." W ashington, DC: Board of Gove rn ors of the Federal Reserve Syst em, 2019.
https:/fwww.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs- nonemp1oyer-firms -report-l9.pdf.
13
McMa nus, 2016.
14
Th e ava ilability of Pandemi c Une mployment Assist ance does not so lve th e probl em of lack of access to th e PPP program, for m any sm all
busin esses. W hile t he PUA g ives st at es th e option t o offer expan ded un em ploym ent assist ance t o se lf-em ployed busin ess ow ners, it should not
be consid ered a substitute for the critica l lifeline prov ided to busin esses th rough the PPP prog ram, w hi ch replaces co nside rably mo re lost
inco m e.
7
Insert offset folio 48 here 43965.048
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00085 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
80
Latino-owned employer firms accessed credit from a bank and 4% from a credit union. 15 Lacking access
to credit can be harmful in the normal course of business, but the se disparities also put them at a
distinct disadvantage w hen accessing PPP funds through banks at a time w hen so many w ere already on
precariou s financial footing. In the period April 26 to May 2, the U.S. Census reported that 30.1% of
businesses had less than two weeks of ca sh on hand for business operations and 48% had less than four
weeks. While the cash on hand position for many businesses has improved as of the period May 31 to
June 6, w ith 16% reporting two w eeks or less, 33.9% of businesses still reported that they had four
weeks or less of ca sh on hand .16
Relationship banking may have also played a role in lenders' application processing decisions, and thu s
pre-existing disparities in access to capital have posed further disadvantages for business owners of
color. These disparities made it less likely that they would have the commercial lending relationships
necessary to access the PPP program and discouraged many from applying. A recent study by the
National Community Reinvestment Coalition found steep reduction s in SBA 7(A) lending to Black
bu sinesses between 2008 and 2016. That same study also found that Black and Hispanic testers when
applying for loans were required to produce more documentation to support their loan application and
received less information about fees, and less friendly service when visiting a small business lender. 17
Additional research found that business owners of color are more likely than white bu siness owners to
feel discouraged from seeking loans. 18 Research from the Federal Reserve also found that business
owners of color were more likely to rely on personal funds and personal credit scores to finance their
bu siness. Twenty-eight percent of Bl ack and Asian owners and 29% of Latino owners relied on personal
fund s as the primary funding source for their business, compared to 16% of white business owners.
Bla ck and Latino bu siness owners were also more likely to use their personal credit scores when
obtaining financing with 52% and 51% doing so, respectivel y, compared to 45% of white and 43 % of
Asian business owners. 19 In addition, in SBA' s fiscal years ending September 30, 2019 and 2018, for all
SBA 7(a) loans made, only 5% were made to Black-owned businesses, and only 9% were made to
Hispanic-owned businesse s.20
C. SBA and Treasury failed to take steps to ensure businesses owned by people of color would
be able to access the PPP. In fact, several administrative decisions actively prevented many
owners of color from participating in the program.
Despite a Congressional requirement in the CARES Act, the SBA and Treasury failed to issue guidance to
lenders about prioritizing borrowers in underserved and rural markets. A report by the SBA Inspector
General did not find any evidence that the SBA issued guidance to lenders to ensure that they prioritized
15 "Sma ll Busin ess Credit Survey: Report on Employer Firms," 2020.
htt ps://www .feds ma llbusin ess.o rg/mediali brary/FedSmall Busin ess/files/2020/2020-sbcs-employer-firms-report .
16
"Sma ll Busin ess Pulse Survey, Apri l 26 to May and May 31 to June 6. https:/fportal.census.gov/pulse/data/#data
17
"Dis investme nt, Discouragement and In eq uity in Sma ll Busin ess Lending." Natio nal Com munity Rei nvestm ent Coa litio n, 2019.
htt ps:// nere.a rg/w p- content/ uploads/2019/09 / NCRC-Sm a11-Busin ess- Res ea rch-FINAL. pdf.
18
See McMa nu s, 2016. ("Resea rch also find s th at min ority busin ess owners are more like ly t o feel discouraged fro m seeking private loa ns. In a
Ce nsus survey, only 16% of non minorities felt discou raged from seeking a loan, w hil e almost 30% of minorities felt th e sa m e way. Th ese, in
co mbin at io n w ith ot her reaso ns, m ay be w hy min ority busin ess owners have a heavier relian ce on perso nal fin ances.") (citing Christin e Kymn,
Janu ary 2014, "Access to Ca pital for Wo m en- and M in ority-owned Busi nesses: Revisiting Key Variabl es." U.S. Sm all Bus iness Administration,
Office of Advocacy, ava ila bl e at https:/{'www.sba.gov/sites/defau lt{fi1es/1ssue%20Brief%203%20Access%20to%20Capital.pdf)
19 "Sm all Busin ess Credit Su rvey: Report on Mino rity-Owned Firms." Fede ral Reserve, 20 19.
https://www .fedsma llbus in ess .org/mediali brary/fedsm al lbusiness/fil es/20 19/2019 1211-ced-m inority-owned-firms-report .pdf.
20 "SBA Busin ess Loan Ap prova l Activity Com pa riso ns for Fisca l Years 2012 to 2019, for the Period End ing 08-30-2019." Sma ll Business
Administrat ion. Accessed June 16, 2020. https:J/www.s ba.gov/sites/defa ult/ f iles/abo uts baarticle/WebsiteRepo rt_asof_20190830.pdf.
8
Insert offset folio 49 here 43965.049
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00086 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
81
underserved markets, including rural, minority, and women-owned businesses.21 As of today, SBA has
has yet to provide this guidance.
The SBA and Treasury also did not collect demographic data on the initial application to determine if
lenders prioritized, or even served, underserved markets and businesses. The SBA Inspector General
noted that the SBA did not include the "optional standard demographic information for principals" on its
PPP loan application form. As a result of this failure to collect data, the SBA Inspector General found that
it was unlikely that the SBA would be able to determine whether funds reached underserved markets. 22
Without the data, it will also be hard to measure the full impact of the PPP and provide the necessary
oversight of this $660 billion taxpayer funded lifeline.
More than just inaction, the unnecessary hurdles and delays created for non-employer firms
disproportionately impacted businesses owned by people of color. For instance, non-employer
businesses, which represent 95% of black-owned firms and 91% of Latino-owned firms, were forced to
sit on the sidelines for days, while billions of dollars went to large and well-connected businesses. PPP
rules prevented non-employer firms, such as the self-employed, from applying for loans until April 10,
one week after the program opened to other businesses. 23 As of April 13, 2020, almost $250 billion of
the initial $350 billion had already been allocated. 24 The first round of PPP funding was depleted entirely
by April 16, 2020. This delay likely caused irreparable harm to smaller businesses with no employees,
which had to wait to receive PPP funds more than 10 days for the second round to start.
Non-employer firms were also forced to provide tax documentation not required for employer firms.
SBA guidance for the program requires non-employer firms that file their business taxes on IRS 1040
Schedule C (the most common option for non-employer firms) to submit a draft or filed copy of their
2019 IRS 1040 Schedule C. Although Congress extended the tax filing deadline to July 15th as a result of
the COVID-19 crisis, non-employer firms were forced to prepare their 2019 taxes in order to be eligible
for a PPP loan - incurring additional costs and delays to which employer firms were not subjected.
Second, though community development financial institutions (CDFls) and minority-depository
institutions (MDls) have historically best-served businesses and communities of color, many CD Fis and
MDls were unable to participate in the first round of PPP funding. Non-depository institutions that have
not had a loan volume of $50 million within the last three years were unable to serve as lenders during
the first round, despite the fact that size of the loans needed for most small businesses does not require
a loan volume capacity of anywhere close to that level. Almost half of CDFls are loan funds that do not
take deposits. Many of these CD Fis had loan volumes below $50 million but also demonstrated
significant lending capacity. 25 Treasury did not revise this rule until April 30, 2020. 26 The revision,
however, only lowered the volume threshold to $10 million. This threshold still excluded many CDFls
21 "Flash Report Small Business Adm inistratio n's Implementation of the Paycheck Protection Program Requirements." Wash ington, DC: SBA
Inspector General, May 8, 2020. https:/fwww.sba.gov/sites/default/files/2020-05/SBA OIG Report 20- 14 508 .pdf.
22
SBA Inspector Genera l, 2020.
23
"Sma ll Business Paycheck Protection Program." US Department of Treasury. https:lfhome.treasury.gov/system/files/136/PPP%20--
%200verview.pdf
24
"Paycheck Protection Program (PPP) Report Approva ls through 4/13/2020." Sma ll Business Ad minist ration, April 13, 2020.
https:/fwww.sba.gov/sites/default/fi1es/2020-04/PPP%20Report%20SBA%204.l4.20%20%20-%20%20Read-Only.pdf.
25
According to an analys is by the Hope Policy Institute of 2017 CDFI Fund Awa rdee reports (the most recent available), in 2017, there were 315
Awardees, 212 of wh ich reported originating commercia l loans du ring the year. Twenty-seven of those CDFls (13%) did more than $50 million
in commercia l loan origi nations that yea r. Howeve r, 146 of CDF ls who did commercia l lending (67%) did more than $1 million in commercia l
loan originations.
26 htt ps:// home .treasury .gov/system/files/ 13 6/1FR--Co rporate- Gro ups-and- Non- Bank- and-Non- Insured- Depos ito ry- Inst itu t ion-Lenders. pdf
9
Insert offset folio 50 here 43965.050
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00087 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
82
that had received CDFI Fund Awards. Further, recognizing that many financial institutions would need
additional liquidity in order to serve as lenders through the PPP, on April 8, 2020, the Federal Reserve
Board of Governors voted to create a lending facility for eligible PPP lenders. 27 The facility became
operational on April 16. However, eligibility was limited to depository institutions. Many non-depository
CDFIS also faced liquidity issues, yet the facility was not extended to all PPP lenders, including non-
depository CD Fis (that met the other Treasury eligibility requirements) until April 30. 28
The program also out-right excluded people based on many forms of criminal legal system involvement,
including people who have been charged, but not tried or convicted of a crime. Given the myriad of
barriers some system-involved individuals already face to employment, self-employment is a major
source of income and opportunity, strengthening family incomes. 29 This program, however, excludes
business owners with past felony convictions, penalizing those who have already served their sentences
and have returned to their communities for a fresh start. Additionally, employees of these business
owners also suffer from this restriction to access of the PPP program, given that system-involved
individuals are not eligible. Racial disparities in all aspects of the criminal justice system are well-
documented, and there is some evidence that this provision in the PPP has already negatively impacted
business owners of color, their employees, and their communities. 30 While this particular barrier was
partially removed earlier this week, with only $100 billion and 2 weeks left in the program, it is unlikely
that the businesses that have already been irreparably harmed by this exclusion will be made whole.
D. Second-round funding remains available and some improvements have been made, but
structural issues remain that continue to limit PPP access for owners of the smallest
businesses and business owners of color. The negative impact on business' long-term
prospects may be difficult to reverse.
There is growing evidence that the structural barriers at the outset of the program and carried over to
the second round resulted in either no access or delayed access to critical PPP funding.
At the end of the first round of funding on April 16, 2020, the average loan size was $206,000. Second
round funding averaged $72,296 as of May 12, 2020 31 and the average loan size for both rounds of the
program to date was $112,126 as of June 12, 2020. 32 Smaller businesses that were pushed to the end of
the line by larger and more connected businesses at the outset of the program, however, were forced to
go weeks without critical support to keep their employees on payroll and their businesses afloat.
27
https://www.federalreserve.gov/publications/files/paycheck-protection-program-lending-facility-4-16-20.pdf
28
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200430b.htm
29
The program excludes businesses for which "An owner of 20 percent or more of th e equity of the applicant is incarcerated, on probation, on
parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal crimina l charges are brought in
any jurisdiction; or has been convicted of a felony within the last five years; has been convicted of a felony with in the last five years." SBA
Business Loan Program Temporary Changes; Paycheck Protection Program, Interim Final Rule, 85 FR 20811,
https://www.federalregister.gov/documents/2020/04/15/2020-07672/business-loan-program-temporary-changes- paycheck- protection-
program
30
Brooks, Khristopher. "A Criminal Past Means No Paycheck Protection Program Loan." CBS News, April 21, 2020.
https://www.cbsnews.com/news/paycheck-protection-program-loans-small-business-owners-criminal-convictions-excluded-coronavirus/.
31
See "Paycheck Protection Program (PPP) Report Approvals through 12 PM EST 4/16/2020." Small Business Association: 4/16/2020, "Paycheck
Protection Program (PPP) Report: Second Round Approvals from 4/27/2020 through 05/01/2020." Sma ll Business Administration, 2020.
https://home.treasury.gov/system/files/136/PPP2- Data-05012020.pdf and "Summary of Paycheck Prot ection Program Round 2 Data as of 5:00
P.m. EDT, Wednesday, May 6, 2020." Small Business Administration. https://www.sba.gov/fundin g-programs/loans/coronavirus-relief-
o pt ion s/paych eek-protection- prog ra m#section-h ea d er-11.
32 "Paycheck Protection Program (PPP) Report Approva ls through 05/30/2020." Small Business Ad ministration, May 30, 2020.
https://www .sba.gov/sites/default/files/2020-06/PPP_Report_ 200530-508 .pdf.
10
Insert offset folio 51 here 43965.051
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00088 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
83
The U. S. Cen sus Small Business Pul se Survey, a weekly survey of small bu sinesses with 500 or fewer
employees in certain sectors, provides some insight into the early delays small businesses faced
accessing PPP funds. 33 Bu sinesses with no other employees other than the owner are not included and
no information on the race, ethnicity, gender or veteran statu s of the bu siness owner is available. Since
late April, approximately 75% of small businesses with 500 or fewer employees responded that they had
requested fund s from the PPP program . As of the first week of the survey, which follows the end of the
first round and the beginning of the second round of PPP funding, only 38.1% of businesses responded
that they had received funding. Two weeks later, 66.7% of bu sinesses responded that they had received
funding. Not until a month after the beginning of the survey did the received rate begin to track the
application rate (Figure 4).
Figure 4. Business owners faced long delays at the outset of the program
80%
69.4% 71.0% 71.2%
60% 66.7%
40%
38.1%
20%
0%
4/26-5/2 5/3-5/9 5/10-5/16 5/17-5/23 5/24-5/30 5/31-6/6
■ Requested PPP loan Received PPP loan
Source: U.S. Ce nsus Small Business Pulse Survey weekly data 4/26 to 6/6.
In May 2020, Color of Change and UnidosUS released a survey conducted by Global Strategy Group,
documenting the challenges that Black and Latino bu siness owners faced when attempting to access
PPP loans. 34 The survey found that 51% of Black and Latino smal l business owners who sought ass istance
applied for less than $20,000, with on ly 12% responding that they received the full amount of assistance
requested. In all 41% of Black and Latino business owners responded that they had been denied
assistance. As of the date the survey was fielded, 21% indicated that they were still waiting to hear if
they wi ll receive any assistance. As discussed in the prior section, PPP app licants faced long delays at the
outset of the program. Of the Black and Latino business owners who received e ither partial or full
assistance, 45% responded that they had to wait more than two weeks to receive their funds. 35
33 For deta ils on the survey methodology, see United States Census Bureau. "S mall Business Pulse Survey Data - Abo ut the Data." Accessed June
14, 2020. https://portal.census.gov/pu lse/data/#a bout
34
Global Strategy Group conducted a national onlin e survey of 500 Black and Latinx sma ll bus iness owners, 609 Black workers, and 610 Latinx
workers, from April 3D through May 11, 2020 on behalf of Co lor of Change and UnidosUS. The precision of onlin e surveys is measured using a
credibility interval. In the case of the surveyed population of Black and Latinx small business owners the interval is +/-4.4% when ana lyzed in
aggregate. Complete findings are available at https://colorofchange.org/press release/first-covid-19-survey-of-black-and-latino-small-
bus in ess-ow ners- rev ea ls-dire-economic-future/ and htt ps:// co lo rofch ange .o rg/ press _rel ease/fi rst-covid-19-survey-of-black- an d-1 at in o-sma 11-
busi ness-ow ners-revea ls-dire-eco nom ic-futu re/.
35 Global Strategy Group
11
Insert offset folio 52 here 43965.052
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00089 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
84
This same survey also found that 56% Black and Latino bu siness owners said that they strongly support
direct federal assistance to prevent mass layoffs and keep them afloat so they can quickly and safe ly
restart and rehire their workers. 36
In a survey conducted by Goldman Sachs of more than 1,700 small business owners, Black-owned firms
were less likely to apply for and less likely to be approved for PPP during the first round of funding.
While 91% of all firms in the survey applied for funding, just 79% of Black-owned firms applied. Of those
that applied, just 40% of black-owned firms were approved for funding, while 52% of total firms were
approved. Black-owned firms were more likely to indicate that their finances had been hurt and that
they had less than one month's cash reserves on hand. 37 Even these disparities in application and
approval are likely understated. The study was based on a convenience sample of firms participating in
the Goldman Sachs 10,000 Small Businesses Program, suggesting these firms may have advantages and
connections not readily available to most small businesses.
While funding is still available in round two, the lost opportunity for prompt relief may have
compounded financial hardship for many businesses and may increase the amount of assistance
required to get them back on their feet. Given that the number of business owners of color has declined
sharply since the beginning of the crisis, falling on communities hardest hit by the Great Recession that
have yet to fully recover.
Ensuring these firms were fully supported at the outset of the crisis should have been a top priority.
Among non-employers, those firms with no employees besides the owner, 71% have plans to expand,
and one in four (24%) plan to hire employees in the next 12 months. 38 According to the SBA, the number
of non-employer firms increased 58% between 1997 and 2015 and owners of non-employer firms are
younger and more diverse than employer firms. 39 Barring them from funds at the outset of the program
may have imposed additional long-term challenges to economic growth, future hiring, and
entrepreneurship opportunities for some firms. These harms should be considered in assessing the
extent of necessary further relief.
IV. The loan forgiveness requirements present substantial challenges to small businesses whose
survival depends on PPP loan forgiveness rather than conversion to long-term debt.
PPP loans are, of course, intended to be forgivable if the proceeds are used for payroll and other eligible
expenses. But for those micro-businesses that were fortunate enough to obtain a PPP loan, the process
they must go through to obtain forgiveness is so complex and time-consuming, it may strain those
businesses to the breaking point. And for the lenders who made these loans, the process they must go
through before submitting the forgiveness application will cost far more than the origination fees they
received.
36
Global St rategy Group
37 "Survey: US Small Busin ess Ow ners Need Mo re Funding and Immediate Legislative Action ." Goldman Sachs, 2020.
https://www.goldmansachs.com/citizenship/10000-small-businesses/US/infographic-sma11-business-relief/.
38
"Small Busi ness Credit Survey: Report on Nonemployer Fi rms." Washin gton, DC: Board of Govern ors of th e Federal Reserve Syst em, 2019 .
https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-nonemployer-firms-report-19.pdf.
39 "A Look at Non employer Busin esses." Small Busin ess Administration, August 2018 .
https:/ /www .sba .gov/s ites/defaul t/files/advocacy/ Non employer-Fact-S heet .pdf.
12
Insert offset folio 53 here 43965.053
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00090 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
85
A. The forgiveness application is unnecessarily burdensome and complicated, especially for the
smallest businesses.
The loan forgiveness application process is set forth in an eleven-page packet of instructions and forms
issued by the SBA "in consultation with" the Treasury Department. The forms require borrowers, among
other things, to calculate the amount paid to each employee during the "Covered Period" or the
"Alternative Payroll Covered Period," and, for each employee who also was employed during the first
calendar quarter of 2020, the amount paid during that period. The borrower also must calculate the
average number of full-time equivalent employees during the Covered Period or Alternative Payroll
Covered Period and during the "chosen reference period," which can be either the period from February
15 to June 30, 2019, or the period from January 1 to February 29, 2020. In the case of seasonal
employees, it can be any consecutive twelve-week period between May 1, 2019, and September 15,
2019. As to all of this, the borrower must certify- under penalty of what amounts to perjury and threat
of civil and criminal penalties including significant fees and jail time - that the borrower has accurately
verified the amounts claimed and made all applicable reductions.
Further, the borrower must submit with a loan forgiveness application documentation verifying the
amount paid to each employee during the Covered Period or Alternative Payroll Covered Period, and the
amount paid for non-cash benefit payments, including bank statement or payroll service provider
reports; tax forms or equivalent reports; and payment receipts, canceled checks, or account statements
documenting contributions for health insurance and retirement plans. Borrowers seeking forgiveness for
amounts spent on mortgage or rent must submit additional documentation. Documentation
requirements for mortgage payments must show the amount of the payments attributable to interest
separate from principal, and rental payment documentation must show the amount of rent that was
due under the lease and the amount that was paid. Borrowers seeking forgiveness for amounts spent on
utilities must submit invoices and receipts or canceled checks verifying those payments. When
submitting the application, the borrower must certify- again under penalty of what amounts to perjury
--that it has submitted all the required documentation.
Additionally, the instructions list four other categories for which the borrower must maintain documents
for six years, including documentation supporting the listing of each individual employee in PPP
Schedule A Worksheet Table 1 and Table 2.
These complex instructions were issued on May 15, 2020. Three weeks later, Congress enacted changes
to the PPP, which created welcome exceptions to some of the provisions of the CARES Act governing the
calculation of loan forgiveness. However, those exceptions will only add to the complexity of the
application process. Borrowers may now be required to submit in addition to all the other
documentation requirements documents verifying efforts to recall or replace laid-off employees or
verifying the business' inability to return to its prior level of business activity for reasons related to
worker or customer safety requirements related to COVID-19. While these are welcome exceptions, in
all likelihood, the eleven-page application package will soon grow even bigger and more complex.
Despite SBA's estimate that the complex, eleven-page form should take 3 hours to complete, recent
research by AQN Strategies estimates that the time necessary to complete the forgiveness form ranges
from 20 hours to 100 hours at the high end. 40 For large businesses with well-staffed human resources
40 Sabloff, Ben, Jason Ford, and Gaby Garcia. "ls !t Easierto Ask for Forgiveness Than Permission? Not for PPP Loans Under $150K." AQN
Strategies, June 1, 2020. https://bpi,com/wp-content/u p!oads/2020/06/CBA-BP1-letter-Forglveness-Proposal-6.2.20.pdf.
13
Insert offset folio 54 here 43965.054
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00091 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
86
and finance functions, these requirements, while burdensome, would not be prohibitively difficult. But
for the small businesses the PPP was designed to serve and especially for micro-businesses with a
handful of employees - it is simply not realistic to expect the business to do all these calculations and
assemble all the required papers while still attempting to operate their business in a challenging
business environment. Combined, the complexity of the form and the related civil and criminal penalties
for inaccuracies are tantamount to a requirement that these small firms pay significant fees to
accountants or financial advisors to assist in completing their forgiveness application -funds these
businesses need instead for their ongoing operations. Moreover, businesses that might otherwise have
applied for PPP loans in round two have been discouraged from doing so because of the gauntlet of
paperwork they would have to navigate to obtain forgiveness.
B. Lenders who well serve small businesses will also be burdened by unduly application and
documentation requirements for small loans.
For the lenders who made these loans, the burden is equally crushing. The SBA has issued an Interim
Final Rule which requires lenders to review each borrower's forgiveness application and "Confirm
receipt of the documentation borrowers must submit ... as specified in the Loan Forgiveness Application
Form," and, after "reviewing the documentation," "Confirm the borrower's calculations on the Loan
Forgiveness Application, including the dollar amount ... claimed on Lines 1,4,6,7,8 and 9 on PPP Schedule
A and ... on Lines 2, 3, and 4 on the PPP Calculation Form." The regulation allows for "minimal review of
calculations based on a payroll report by a recognized third-party payroll processor." But where the
borrower is not big enough to use such a processor - which will be true for the smallest of the
businesses which obtained PPP loans -- "more extensive review of calculations and data would be
appropriate." Based on all this, the lender must decide whether "the borrower is entitled to forgiveness
of some or all of the amount applied for under the statute and applicable regulations." 41
Simply to state these requirements is to make plain the problem. Perhaps for those lenders whose
average PPP loan exceeded $200,000 - and who thus were paid, on average, $10,000 per loan - it is
economically feasible to undertake this kind of review. However, the regulations will surely discourage
even those lenders from making smaller loans going forward. But for the PPP lenders who have been
making loans averaging $50,000 or less - most of whom are themselves small businesses with limited
staff and who averaged only $2,500 or so per loan - processing these loan forgiveness applications will
be prohibitively difficult. Without changes to the forgiveness process and requirements, many lenders
will likely conclude that they cannot afford to continue in the program.
C. Despite Congressional intent, some borrowers will also have their forgiveness amount
reduced due to receipt of an EIDL Advance.
It was the intention of this Congress when it drafted the CARES Act to expedite the delivery of EIDL loan
proceeds by providing advances of up to $10,000 in the form of grants to loan applicants. The EIDL
advance was meant to be received within days, but the actual execution took much longer. If the Small
Business Administration ultimately approved the EIDL loan, then the lender would enter a loan
agreement with the borrower and release the remaining loan amount if it exceeded $10,000. As a grant,
the $10,000 advance portion was not meant to be repaid even if the SBA ultimately denied the EIDL
loan. SBA reference materials have consistently said that EIDL advances did not need to be repaid, and
4-1 85 Fed. Register 33010, 33013 (June 1, 2020).
14
Insert offset folio 55 here 43965.055
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00092 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
87
many borrowers entered into these agreements with that expectation. Borrowers deserve better than a
bait and switch in emergency assistance.
Further, the CARES Act clearly permitted borrowers to seek both an EIDL and a PPP loan. If the EIDL loan
were utilized for payroll, it was required to be refinanced into its PPP loan. Since the entire amount
could then be forgiven as a PPP loan, the PPP forgiveness amount would be reduced by any EIDL
advance. Should the borrower choose to use its EIDL for other purposes, it would not have to refinance
its EIDL into the PPP loan. In that case especially, reducing PPP forgiveness by the amount of an EIDL
advance used for other business purposes creates an unfair disadvantage for businesses that permissibly
obtained emergency loans to help them survive. However, even in the case of an EIDL grant used for
payroll expenses there is little justification for decreasing PPP forgiveness by the EIDL amount. If these
funds were used according to the express purpose of the program, there should not be a penalty for
seeking support that was available quicker and with fewer hurdles for some borrowers.
To date, we have seen numerous cases of PPP loans that should be considered for full forgiveness as
they were spent on eligible expenses. Instead, PPP borrowers will be saddled with repaying their EIDL
advances in 2-5 years, instead of receiving the advance as the promised grant.
V. Improvements to the Paycheck Protection Program are necessary for more businesses to
access to relief and recover.
To date, SBA has already spent more through the PPP program than through all of its lending over the
past three decades. As one of the largest government small business programs ever and a key
component of the federal government's pandemic relief program, it is imperative that the funding and
benefits are distributed equitably and that communities are not left out of our relief and recovery going
forward. Several key fixes are critically important for ensuring that the smallest and most vulnerable
businesses, including those owned by people of color, have sufficient access to PPP funding and
forgiveness. To address these issues, we recommend the following:
A. Ensure remaining funding reaches businesses that were previously unable to access the PPP.
• Congress should immediately extend the origination period and separate the PPP from
other SBA 7(a) programs. Over $100 billion remains in the second PPP allocation. Congress
should ensure that these funds are available for PPP loans to new borrowers until they are
exhausted. Currently, the PPP is set to expire at the end of this month whether or not funds
remain.
• Institute a minimum origination fee of the lesser of $2,500 or SO% of the loan amount. A
minimum fee is required to address the higher cost of reaching and serving underserved
borrowers and to incentivize more lenders to serve smaller businesses.
• Provide adequate support and resources for community development financial
institutions (CDFls) and minority-depository institutions (MDls) (not to include bank-
affiliated CDFls). Reserve $10 billion of the remaining PPP small business loan funding for
loans by CD Fis and MD ls of which $5 billion should be reserved for loans of up to $75,000.
Congress should also make a $1 billion emergency allocation to the CDFI Fund. Though
Treasury recently created a set-aside for CDFls, it did not include MDls and the allocation
only included $7 billion in new funding.
15
Insert offset folio 56 here 43965.056
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00093 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
88
The changes made between Round 1 and Round 2 of the PPP somewhat increased CDFls'
and MDls' access to deploying PPP funds. For example, since May 8, CDFI lending more
doubled, and as of June 12, MDI lending exceeds $10 billion. 42 Minority-led financial
institutions in particular are "uniquely positioned to cater to the needs of their
communities, which are often people of color." 43 These institutions "have significant social
capital within the communities they serve. Through close ties and engagement, they are
able to develop and deploy financial products that address the needs of their
communities." 44 The nation's largest MDI decided to become a PPP lender in Round 2
because of the extent to which Black businesses were locked out of access in Round 1. 45
This is promising evidence of their capacity to supporting the survival and growth of small
businesses of color. It is not, however, enough to fully address the reality of businesses of
color being locked out by program design and the exclusionary way in which banks deployed
the overwhelming majority of the PPP dollars. Now and in the future, more support will be
needed to ensure CDFls, particularly minority-led CDFls, and MDls have sufficient resources
to adequately meet the depths of the needs of small businesses of color harmed by this
crisis and unserved by the federal relief dollars that have flowed from it.
• Require SBA and Treasury to immediately issue guidance to lenders on prioritizing
underserved markets and businesses with fewer than ten employees located in low- and
moderate-income census tracts.
• Expand the list of eligible expenses that can be used to determine loan amount and
forgiveness. Include necessary ongoing business costs, such as business insurance,
inventory, costs associated with vehicles and equipment (loan payments, insurance,
maintenance), costs needed to adapt to the pandemic, including safety equipment,
retrofitting spaces, and payments to IRS Form 1099 independent contractors, on whom
small businesses rely.
• Revise existing guidance that prohibits businesses from including documented IRS Form
1099 payments to independent contractors in their PPP loan amount calculations and
forgiveness requests. By requiring independent contractors to apply for their own,
necessarily smaller, PPP loans, SBA has made it less likely that independent contractors will
receive funding, and less likely that the small businesses that rel y on independent
contractors will be able to continue to operate.
• Allocate funding for outreach and enrollment assistance: $30 million in funding for grants
to Community Development Corporations and community-based organizations for outreach,
enrollment assistance, and technical support for compliance and loan forgiveness, for
eligible businesses. Many of the eligible borrowers that have not yet accessed the PPP do
not have a "preferred" banking relationship or lawyers and accountants to assist them in
42 " Paycheck Protection Program (PPP) Report Approva ls th rough 06/12/20 20." Small Busin ess Administration. Accessed June 16, 2020 .
https://www .s ba.gov/s ites/defa ult/fi les/2020-06/PP P_Re port_202006 12-508. pdf.
43
Kiya dh Burt, Hope Policy In stitute, Clos ing t he CDFI Asset Ga p, http://hopepolicy.org/blog/dosing-the-cdfi-asset-gap/
44
Id.
45
'That was it- silence': As bailout f unds eva porat e, minority-owned businesses say th ey've been shut
out, https://www.fastcompany.com/90498767/that-was-it-silence-as- bailout-funds -evaporate-minority-owned- businesses-say-thewe-been-
shut-out ("Due t o the min ority underba nkin g cris is, especia lly sin ce Africa n-America n and Hispanic co mmu nities have been hardest hit by th e
coro naviru s, Willi ams says th at her bank decided over th e w eekend t o participat e as a lender in th e second roun d of th e program" ).
16
Insert offset folio 57 here 43965.057
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00094 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
89
understanding the program. The time and resources needed to reach out to underserved
businesses and support them through the application and loan forgiveness process will be
significantly greater than for larger businesses. To expand their reach, many CDFI and MDI
lenders are engaging non-profit "agents," including community-based organizations, that
have experience working with underserved borrowers, and particularly those that provide
culturally and linguistically relevant services to business owners of color.
B. Provide automatic forgiveness with safe harbor treatment for any loan under $100,000 based
on a simple certification from the business owner. Although CRL believes that SBA has the
discretion to reduce the burden imposed by its loan application forgiveness requirements, we
also believe that a full solution requires Congressional action. Specifically, we urge Congress to
enact a streamlined set of forgiveness requirements for loans under 100,000 and, for such loans,
a safe harbor which permits lenders to rely on borrowers' certification without having to review
and confirm borrower calculations. To receive forgiveness on a loan, a borrower need only
submit a simple form including demographic information, a statement of the total amount spent
on payroll and the total amount spent on eligible non-payroll expenses with a cap on the latter
relative to the former, and an attestation that the information is true to the best of the
applicant's knowledge. In addition, now that the covered period for expenses is 24 weeks,
Congress, SBA and Treasury should also ensure that borrowers are able to apply for forgiveness
as soon as they have exhausted the funding.
As of May 30, 79.2% of PPP loans originated were for amounts of less than $100,000, representing
19.6% of the total dollars lent. 46 The average loan size was $114,000. The smallest PPP loans are
being provided to microbusinesses and sole proprietors that have the least capacity and resources
to engage in a complex process with their financial institution and the SBA and that should not be
saddled with debt or ongoing audit risk as a result of participating in the PPP program. Applying
automatic PPP loan forgiveness for loans of $100,000 or less would likely exempt firms with, on
average, 13 or fewer employees and save 71 million hours of small business staff time (Figure 5 ).
Based on the average monthly payroll per employee of $3,108 for smaller firms (1-9 employees)
and the PPP application formula, a firm that qualified for a $100,000 loan would likely have a
monthly payroll of $40,000 supporting, on average 13 employees. 47 Firms with 1 to 9 employees
make up 68% of total businesses with employees, and firms with 1-19 employees make up 78%
of total businesses with employees. 43
46
"Paycheck Protection Program (PPP) Report Approvals through 05/23/2020." Small Business Administration, May 23, 2020.
https://www .sba.gov/sites/default/files/2020-05/PPP~ 200523.pdf.
47 Annual Business Survey: Employment Size of Firm Statistics for Employer Firms by Sector, Sex, Ethnicity, Race, and Veteran Status fort he U.S.,
States and Metro Areas: 2017. Estimated monthly payroll represents the total PPP loan amount divided by 2.5. Average payroll of $37,299
annually per employee is based on the total payroll for all firms with 1-9 employees divided by the total number of employees for all firms with
1-9 employees. Using the same method, the next employee category of 1 to 19 employees results in an annual average payroll per employee of
$37,944 or $3,162 per month. Firms reporting payroll but no employees in the pay period that in duded March 12 of the reference year were
excluded to determine the annual and monthly payroll per employee. For more information on the Annual Business Survey see
https://www .census.gov/programs-surveys/abs/about.html.
48 2017 Annual Business Sutvey.
17
Insert offset folio 58 here 43965.058
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00095 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
90
Figure 5. Automatic loan forgiveness for small loans would benefit small firms and save millions of
hours of labor
$100,000 or less $350,000 or less
PPP loans as of May 30 49
Count 3,544,335 (79.2%) 4,196,555 (93.8%)
Dollars lent $100,003,285,235 (19.6%) $217,574,329,726 (42.6%)
13 (based on average payroll per 42 (based on average payroll
Number of employees based on average
employee for firms with per employee for firms with
payroll per employee 50
1-9 employees) 20-49 employees)
Percent of total employer
firms" ~Gs to 78% of employer firms "'86% of employer firms
Hours of labor saved" 71 million hours 84 million hours
C. Expressly permit lender and SBA reliance on good faith borrower certification - For PPP loans
under $2,000,000, borrowers should submit a forgiveness application and basic documentation.
The application should include a good faith certification that all PPP funds have been used on
eligible expenses and per the statutory guidelines. It must be made clear that lenders submitting
forgiveness applications on behalf of borrowers to SBA may rely on the borrower's certification,
absent outside evidence of fraud, as sufficient to establish the borrower's eligibility for
forgiveness without lender review and re-calculation of the forgiveness amount, and the
amount of forgiveness to which the borrower is entitled shall be based on such borrower
certification. The SBA, likewise, may rely on all information submitted by the lenders for these
loans absent outside evidence of fraud. Without the ability to rely on these certifications,
borrowers will still be subject to extensive documentation requirements and costs for the lender
to review, whether or not that documentation must then be sent to the SBA.
49 "Paycheck Protect ion Program (PPP) Report Approvals through 05/30/2020." Sma ll Business Administration, May 30, 2020.
https://www.sba.gov/sites/default/fi1es/2020-06/PPP_Report_ 200530-508.pdf.
so An nual Business Survey: Employment Size of Firm Statisti cs for Em ployer Firms by Secto r, Sex, Ethnicity, Race, and Vet eran Status for the U.S.,
States and Metro Areas: 2017. Estimated monthly payroll represents the total PPP loan amount divided by 2.5. Average payroll of $37,299
annually per employee is based on the total payroll for all firms with 1-9 employees divided by the total number of emp loyees for al l firms w ith
1-9 employees. Using the same method, th e next employee category of 1 t o 19 employees results in an annual average payroll per employee of
$37,944 or $3,162 per month and the annual average payroll for firms of 20-49 employees is $40,796 or $3,400 per month. Firms reporting
payro ll but no employees in the pay period that included March 12 of the reference year we re excluded to determ in e the annual and mo nthly
payroll per employee. For more information on th e An nual Busin ess Survey see https://www.ce nsus.gov/programs-surveys/abs/about .html.
si Percent of total employer firms exempted under each automatic loan forgiveness threshold based on the number of employer firm s w ith 1-9,
1- 19, or 1-49 employees. Based on the maximum per employee payroll eligible for PPP payroll calcu lations, it is likely that non-employerfirms
that received PPP f unds would be inclu ded as well.
s2 Based o n the estimat e of 20 hours saved per loan subject to automatic loan forgiveness. See Sabloff, Ben, Jason Ford, and Gaby Garcia. " Is It
Eas ier t o Ask for Forgiveness Than Permission? Not for PPP Loans Under $1S0K." AQN Strat eg ies, June 1, 2020. https://bpi.com/wp-
co nte nt / u pl oads/2020/06/ CBA-BPI-Letter- Fo rgiveness- Pro posa 1-6 .2 .20. pdf.
18
Insert offset folio 59 here 43965.059
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00096 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
91
D. Require all lenders who receive support from any federal lending facility or program to offer
technical assistance to small and micro businesses. To date, the federal government has
provided billions of dollars in relief and incentives to financial institutions and large corporate
entities. These companies can and should play a critical role in supporting small businesses and
the economy.
E. Implement and require a robust data collection and public reporting process for all PPP loans.
SBA should collect and report demographic information on race, national origin, and gender of
principal owners of each applicant and each approved loan, and require SBA to publicly release
data on applications and approvals by race, national origin, and gender by lender. As reported
by the SBA Inspector General in its Flash Report of May 8, 2020, the SBA has not implemented
the program in a way that aligns with the provisions of the CARES Act. The report specifically
identified four areas that need strengthening: prioritizing underserved and rural markets,
providing clear guidance for forgiveness, providing guidance on loan deferments, and
establishing a registry of loans. Transparency is essential to this program, and true transparency
and impact can only be determined if data is collected and analyzed. Data tells the American
public which businesses are being served with public dollars. Businesses of color deserve their
fair share. We estimated that more than 90% of businesses of color were unlikely to access the
original $349 billion. Further, SBA loan programs, in general have a poor track record of serving
Black and Latino businesses in particular. 53
F. Ensure robust data collection on small business lending going forward. Even before the
transparency issues with this massive influx of government support, the dearth of data on small
business lending has been a major obstacle for ensuring equity for decades. The limited data
masks the lack of equitable investment of taxpayer-supported funds and access to business
capital for communities of color and those in rural markets. In fact, in addition to data collection
being one of the much-needed improvements to the PPP program, robust data collection is also
needed for existing laws enacted to incentivize community investment and job creation through
access to business capital. Without publicly available data, it is difficult to prove or disprove, or
adequately address, inequities in small business lending.
The Community Reinvestment Act (CRA), enacted in 1977 to encourage federally regulated
depository institutions to meet the credit needs of all families and communities, mandates some
small business data disclosure, but CRA data only provides the aggregate dollar volume of loans
originated to businesses with revenues less than $1 million, not individual loan amount or type
of loan, and is only required from institutions with assets over $1.2 billion (as of 2019). 54 In fact,
ten years ago, Congress took steps to address this issue through Section 1071 of The Wall Street
Reform and Consumer Protection Act, requiring much more comprehensive data collection for
small business loans. However, Section 1071 has yet to be implemented by the Consumer
Financial Protection Bureau. Congress should urge an immediate rulemaking under Section 1071
of Dodd-Frank for the overall business lending market.
A recently released Office of the Comptroller of the Currency final rule took steps to weaken the
effectiveness of the Community Reinvestment Act and its ability to encourage lending in low-
53
!n FY2019, SBA 7a program approvals were 6.3% Hispanic and 3.3% African American. https://fas.org/sgp/crs/misc/R41146.pdf
1
"Disinvestment, Discouragement and Inequity in Small Business Lending." National Community Reinvestment Coalition, 2019.
'i,
https:// nere. org/wp- content/uploads /2019 /09 /N CRC-SmaU-Busin ess- Research-FIN AL.pdf.
19
Insert offset folio 60 here 43965.060
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00097 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
92
and moderate-income communities and to small business owners and did not sufficiently
improve the disclosure of small business data. The final rule will not require the collection of
data on race and ethnicity.
VI. Conclusion: Congress, Treasury and the SBA must ensure all small businesses owners can
participate in the coming economic recovery.
During this major economic and public health disruption, we must take care not to continue a legacy of
discrimination and harmful outcomes laid upon communities of color, who are already suffering
disproportionate health effects from COVID-19. The Great Recession drained communities of color of a
trillion dollars of wealth that they have yet to recover and now these same communities are
experiencing the brunt of this pandemic, including higher levels of lives lost, illnesses, and job losses.
Despite this, there is already overwhelming evidence that one of the largest COVID-19 relief programs
has excluded businesses of color and exacerbated the underlying racial wealth gap.
To ameliorate some of this damage, at a minimum, we must ensure that those excluded are more easily
able to access the remaining PPP funds; that the loan forgiveness process is not overly burdensome; and
that data on recipients of PPP loans is collected and made available.
In a time of economic uncertainty, as we continue to reckon with our nation's history and racial injustice
permeates every facet of our society, we should be taking every step to ensure that individuals and
communities of color are well served and supported going forward.
While the above fixes are necessary to ensure that at least some relief reaches communities of color,
much more will be needed. Bold new policies and programs are needed to create equity in small
business lending and ensure that business owners have access to the credit and relief they deserve. We
also must move towards solutions that are not reliant on credit and financial intermediaries, such as
providing grant funding for micro businesses. These grants could be distributed monthly directly by the
IRS, SBA or FEMA, in an amount sufficient to cover payroll and other expenses until the business is able
to reopen and return to normal or similar operations. There must also be dedicated efforts and targeted
help for underserved communities to curb the effects of this pandemic on income and wealth inequality.
The current wealth and public health disparities did not occur by happenstance. We cannot allow
federal policies and investments to continue the centuries old practice of excluding people of color.
20
Insert offset folio 61 here 43965.061
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00098 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
93
Appendix A. Industry sectors with above-average small business ownership by people of color hard hit
by the crisis
Percent of small
Crisis has I do not believe this business
businesses
had a large will return to its normal level of
Industry Sector majority-owned
negative operations relative to one year
by people of
effect ago
color
Accommodation and food service 34.4% 73.7% 19.2%
Other services (except Public
23.2% 52.6% 14.5%
administration)
Health care and social assistance 22.5% 55.7% 10.8%
Retail trade 22.4% 39.8% 9.6%
Tran sportation and ware housing 19.4% 42.5% 11.6%
Wholesale trade 18.1% 40.5% 8.8%
Firms with <500 employees, all sectors 17.6% 41.3% 10.1%
Administrative and support and waste
15.3% 35.0% 8.3%
management and remediation services
Professional, scientific, and technical
14.0% 28.1% 7.6%
services
Educational services 12.8% 58.9% 14.3%
Information 12.0% 38.0% 8.3%
Construction 10.8% 20.6% 6.3%
Finance and insura nce 10.5% 18.2% 6.1%
Real estate and rental 10.0% 37.0% 8.1%
Manufacturing 9.8% 37.1% 7.3%
Arts, entertainment, and recreation 7.0% 71.7% 14.1%
Mining, quarrying, and oil/gas
4.3% 44.3% 9.9%
extraction
Management of companies and
4.0% 17.8% 0.0%
enterprises
Utilities 3.1% 4.7% 0.0%
Above average concentration of small business owners of
50.8% 12.4%
color
Below average concentration of small business owners of
34.3% 7.5%
color
Source: 2018 Annual Business Survey (ABS) and U.S. Census Small Business Pulse Survey (SBPS). Responses to SBPS questions : "Overall, how
has this business been affected by th e COV ID-19 pandemic?" and "I n your opinion, how much t ime do you think will pass befo re this
business returns to its norma l level of operations relative to one year ago?" NAICS industry codes from the Annual Business Survey are
inclu ded where U.S. Census SBPS data is available. Percent majority ownership by people of co lor determ in ed based on all sectors ava ilable in
the ABS for businesses w ith fewer than 500 employees. Majority ownership by people of color determined using the ABS minority ownership
status defined as firms class ified as any race and ethnicity combinat ion other than non-Hispanic and white. Technica l documentation is
availab le at https://www .census.gov/programs-su rveys/abs/techn ical-docu ment ation/methodo logyO.htm I.
21
Insert offset folio 62 here 43965.062
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00099 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
94
Appendix B. Business owners describe their experience with the Paycheck Protection Program
1. Rahama Wright, a business owner in Washington, DC, was preparing to shut Shea Yeleen, her
beauty supply business down, when she failed to get a PPP loan in the first round. She furloughed
her entire staff of five, before finally receiving a loan in the second round. "1100% feel like I got
lucky," Wright said, who estimates the funding will give her a three to four month runout and allow
her to bring back three of her staff members. Her storefront will remain closed as she boosts her
online presence. 55
2. Calvin Stevens, President of Bernard Irby Electric in Charlotte, North Carolina says the PPP loan
received by Irby, a Black veteran-owned business, will allow him to maintain the entire staff of 30
employees. 56
3. Bernard Loyd, a native of Chicago, Illinois's Bronzeville neighborhood, attributes the success of his
community economic development organization Urban Juncture in receiving a PPP loan to his
financial se rvices background, and points out that many Black-owned enterprises in Chicago haven't
been as lucky: he estimates that of the community businesses he's worked with, 90% were unable
to access the first round of PPP loans. 57
4. Pasto rs and clergy across America have also been finding mixed success through the PPP process:
"We applied when the program first became public, but we did not receive any funding," sa id Rev.
James Perkins, the pastor of Greater Christ Baptist Church, in Detroit, Michigan. Perkin s was forced
to lay off most of his nine church employees, and he has asked the remaining staff to take salary
cuts. When the process has been successful, it has been extremely helpful : "It's a huge boon for us,"
said Father Carl Beekman, parish priest at the Church of St. Mary, which serves about 1,300 families
in Sycamore, lllinois. 58
5. Claudia Garza owns Bright and Early Productions in Dallas, Texas with her husband. The company, a
photography and videography company, serves the real estate industry. To keep safe from COVID-
19 they are currently only photographing unoccupied homes. The business has suffered as a result
and had to reduce their employees' hours. Claudia Garza described struggling to get their bank,
Wells Fargo, on the phone, and then when she did, she was not satisfied. "It feels like I'm a small
fish ... maybe they have people who have larger accounts or maybe contacts within the bank. They
got the help a lot faster than I did. I don't have contacts at Wells Fargo," she said. 59
55 Presha, Alex. ABC News. "DC small business owner struggling to get PPP funds during coronavirus crisis", access ibl e at
https:/Jabcnews.go.com/Business/dc-small-business-owner-struggling-ppp-funds-oronavirus/stoty?id=70842196 .
56 Triangle Business Journal. "Opinion: How PPP helped minority-owned firms across the nation", accessible at
https://www.bizjournals.com/triangle/news/2020/06/05/how-ppp-helped-minority-owned-businesses.html .
57
Black, Curtis. The Chicago Reporter. "Minority-owned businesses largely miss out on federal relief', accessible at
https:lfwww.chicagoreporter.com/minority-owned-businesses- targely-miss-out-on-federal-relief/
',8 Gjelten, Tom. National Public Radio. "Black Pastors Say They Have Trouble Accessing SBA Loan Program", accessible at
htt ps: //www .n pr.o rg/2020/04 /25 /84480295 7/black- pastors-say-they- have-trouble- access ing-sba- loan- program
59 Flahive, Paul. Texas Public Radio . "Latino Businesses Not Receiving 'Fair Share' Of Federal Relief, Say Advocates", accessible at
htt ps://www .kera news .o rg/post/lati no-businesses-not-receivi ng-fair-sh are-fede ra I-relief-say-advocates
22
Insert offset folio 63 here 43965.063
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00100 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
95
6. Rosemary Ugboajah, owner of Neka Creative in Minneapolis, Minnesota applied through her credit
union, but was unsuccessful: "They were hard to reach, but eventually I got through to someone and
they emailed me back saying they can't process the loan because they don't process SBA loans, " she
said. "I wasn't aware ofthat." 60
7. Dannesia Pullen, owner of PullenBoy Hauling in Rolesville, North Carolina, has experienced a difficult
time during the COVID-19 crisis: "We have seen a 15-20 percent decline in cash flow," she says. She
has applied for a PPP loan and for an Economic Injury Disaster Loan and has been denied for both .
She added, "When I see businesses like the NBA, Ruth Chris, and Potbelly receiving funding, I no
longer have faith in the government." 61
8. Portia Kimble, sole proprietor of a hair salon in Hoover, Alabama, was encouraged to apply for a PPP
loan by several peers. "I had a little savings, but didn't know how long that would last," she said.
HOPE Federal Credit Union was able to offer her a $5,200 PPP loan, which will allow her to weather
the financial storm, and hopefully expand her business in the future. "This business, being an
entrepreneur, it is a faith business," Kimble says. "God is my source. You don't know how things are
gonna go. I'm glad we're still standing." 62
9. Brighter Beginnings, is a non-profit with locations in Oakland, Richmond and Antioch, California.
Brighter Beginnings has been responding to the needs of families in resource-poor neighborhoods
since 1984 by providing tele-medicine services, intensive services to special needs children, and food
for families struggling to make ends meet. Unable to obtain a PPP loan from its bank of many years,
Brighter Beginnings was forced to furlough its eight-person staff and discontinue its critical
community services. After receiving a PPP loan from Self-Help, it was able to bring back all eight staff
members and is now supporting over 450 existing and new clients in its communities. 63
10. ASI Services is a female person-of-color led non-profit organization that has served the Chicago area
for 45 years. Through its 300-person staff, ASI provides quality supportive home-care services to
post-acute patients, senior citizens and persons with disabilities; its services are available to persons
of all backgrounds, but approximately 95% of its clients are people of color. Even though ASI had an
existing banking relationship, it was unable to obtain a PPP loan from its bank and turned to Self-
Help. ASI noted that the PPP loan ha s provided it a "runway to last through the summer," allowing
ASI to continue providing vital services and continue paying all 300 of its employees. 64
11. Kiddie World Child Development Center is a child-care provider in rural eastern North Carolina. With
an eight-person staff, this female person-of-color led nonprofit serves essential workers by
providing child-care for workers of the local chicken factory, hospital and nursing homes. Obtaining
a PPP loan from Self Help has allowed Kiddie World to keep its staff employed and continue
providing high-quality, safe child-care. 65
60
Kurtzleben, Danielle. National Public Radio. "Minority-Owned Sma ll Businesses Were Su pposed to Get Priority. They May Not Have",
accessible at https:l{WoNw.npr.org/2020/05/12/853934104/minority- owned-small- businesses-were-supposed-to- get-priority-they-may- not-
have
61
Allam, Chantal. WRAL Tech Wire. "Black- led businesses getting shut out of PPP loan program, owners and experts say", accessible at
https:lfwww.wraltechwire.com/2020/05/22/black- led- businesses-getting-shut-out- of- ppp-loan-program-owners- and-experts-say/
62 Johnson, Roys. The Birmingham News. "Am id corona-crash, small businesses found savior in smaller banks, fund", accessible at
https:/ /www.al.com/opin ion/2020/05/joh nson- in-corona-crash-sma ll-businesses-found-savior-in-sma ll er-banks.html
63
Story on file with Self Help Federal Credit Union
64
Story on file with Self Help Federal Credit Union
65 Story on file with Self Help Federal Credit Union
23
Insert offset folio 64 here 43965.064
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00101 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
96
12. Shaw Legal Services is a female person-of-color owned law firm with a staff of six. After finding that
she was unable to obtain a PPP loan from her business and personal lender of over 20 years, this
Chicago-area small business owner learned about Self-Help. Her PPP loan has enabled her to keep
all six employees on payroll, and to provide low-cost or pro bona legal services to help small
business clients that were unable to obtain PPP funding in Round 1 negotiate out of leases and
contracts they are no longer able to honor. 66
66 Story on file with Self Help Federal Credit Union
24
Insert offset folio 65 here 43965.065
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00102 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
97
Opinion: Small business
owners face inequality during
■
coronav1rus
Shawn Wooden and Jim Himes
April 18, 2020Updated: April 18, 2020 10 a.m.
With growing income inequality and wealth disparities it is critical, now more
than ever, for the government to get resources to the communities that need
them most. As state treasurer and a member of Congress, we are sounding the
alarm on the Payroll Protection Program (PPP) and the federal government's
small business response to the COVID-19 pandemic. This has provided essential
relief to many, but has altered the landscape for the worse of what our small
business landscape looks like for the next generation.
Despite longstanding challenges, the face of American business ownership has
changed. Where we once saw a lack of diversity, new small business start-ups
from women, minority, and native-owned entrepreneurs outpace all other
demographics in the last few years. What we're hearing is borne out by the facts.
American Express's 2019 State of Women Owned Business reports that women
owned business startups have increased at twice the rate of all new businesses.
And half of those women owned businesses are also minority owned. Here in
Connecticut, we've spent years building these small business ecosystems because
they employ those in our communities and provide important services.
PPP is essential to the survival of small businesses and to ensuring our local
economies can recover quickly from this crisis, but only if funds go to the people
who truly need them and not just to the well -connected. We fear that many
minority and women owned businesses will end up shut out of the Small
Business Administration's PPP. We are hearing time and time again of
underserved communities lacking access to these lending programs - partially
because they didn't have access before this crisis.
The original intent of the PPP was to quickly put funds in the hands of small
business owners to keep employees on the payroll, but, just last week, Ruth's
Chris Steak House and its 5,000 employees announced that they had received
Insert offset folio 66 here 43965.066
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00103 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
98
$20M from the program. How is it possible that Ruth's Chris can receive these
funds but a mom-and-pop restaurant on Main Street would be left to struggle?
Our small businesses in this country and in Connecticut face a disparity in how
they are banked and treated daily. Many minority and women owned small
businesses have never worked closely with an SBA bank lender and don't have
traditional access to capital. Without proper protections, first-time borrowers
are at the back of the line and shut out of PPP funds.
Now with the initial allocation of PPP funds exhausted, negotiations are
underway to assist these under-resourced and unbanked communities in the
next round. Connecticut leaders on the state and federal level must stand up now
and demand fairness and smart economic policy.
In Congress, we must have a more focused program to get capital into the hands
of community banks, non-bank lenders, and smaller institutions focused on
lending to underserved communities. House Speaker Nancy Pelosi and Senate
Minority Leader Chuck Schumer are right to call for leveling the playing field for
women and minority owned businesses.
Here in Connecticut we must ensure our state programs provide equal access to
underserved communities. We must ensure that our banks bring access to capital
to Main Street. We're going to work directly with consumer banks to encourage
the opening of more branches in underserved communities so we can begin to
build vital relationships on the front lines.
The Paycheck Protection Program is leaving too many businesses behind in its
current form. Putting more money into the program without essential reforms is
not the most effective use of taxpayer dollars. Small business owners in this state
and country face an inequality that has been exacerbated by this pandemic.
Together, we need to do everything we can to make sure we don't lose these
businesses, the backbone of our communities. We have a unique second chance
here to make things right Let's not squander the opportunity.
Insert offset folio 67 here 43965.067
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00104 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
99
O pportunity Fund
February 11 , 2021
The Honorable Maxine Waters The Honorable Patrick McHenry
Chairwoman Ranking Member
U.S. House Committee on Financial Services U.S. House Committee on Financial Services
2129 Rayburn House Office Building 4340 O'Neill House Office Building
Washington , D.C . 20515 Washington , DC 20024
Re: Reauthorizing the State Small Business Credit Initiative (SSBCI)
Dear Chairwoman Waters and Ranking Member McHenry,
On behalf of Opportunity Fund , a US Treasury-certified Community Development Financial Institution (CDFI) and
leader in small business lending , I am writing to express our strong support for the $10 billion reauthorization of
the State Small Business Credit Initiative (SSBCI) in the upcoming COVID-19 relief package . Opportunity Fund 's
mission is to provide affordable capital to underserved entrepreneurs, like women , minority, or low-to-moderate
income (LMI) business owners , who are often left behind by traditional lenders. SSBCI is critical for us to meet the
capital needs of entrepreneurs as our nation strives to recover in the months and years ahead.
While the Payment Protection Program (PPP) has been a critical resource for small businesses during this crisis,
it is not a long-term solution. SSBCI was originally crafted by Congress in response to the 2008 Great Recession
and supported state programs designed to help provide credit and investments in small businesses. From 2011
onward , Opportunity Fund participated as a SSBCl-supported lender and was the most prolific user of the SSBCI
Capital Access Program nationally-accounting for over 4,700 loans in California with an average loan size of
$12 ,000. 1 We have since expanded our lending to 46 states through innovative FinTech partnerships and can
significantly scale our lending and impact if SSBCI is reauthorized.
SSBCI leverages significant private sector dollars , gives states flexibility to meet local and regional needs, and is
a scalable solution for helping our nation's small businesses recover and grow. Furthermore, it is a tried and true
system of ensuring resources reach the smallest and most underserved businesses-those that have been hit
hardest by the pandemic and often received little to no PPP funding. According to an analysis from the US
Treasury Department, 80% of SSBCI funds supported firms with 10 or fewer employees , and by 2015, 42% of
SSBCl-supported businesses were located in LMI communities. '
SSBCI makes it possible for mission-based lenders, organizations who have long served historically
disenfranchised communities, to say "yes" to more small businesses and get them the capital they need to
survive , re-build , and prosper.
I urge Congress to move swiftly in reauthorizing SSBCI in its latest stimulus package. Thank you for the
opportunity to share our expertise and input.
Sincerely,
Luz Urrutia
Chief Executive Officer, Opportunity Fund
1
US Department of the Treasury. "Program Evaluation of The US Department of Treasury State Small Business Credit Initiative." October
2016,
https://www.treasury .gov/resource-center/sb-programs/Documents/SSBCl%20Program%20Evaluation %202016%20-%20Full%20Report .pdf
2
Ibid.
Insert offset folio 68 here 43965.068
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00105 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
100
Office of the Advocate for
Small Business
CaP,·tal Formation
Insert offset folio 69 here 43965.069
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00106 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
101
Insert offset folio 70 here 43965.070
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00107 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
102
Message from the Advocate
2020 is the year that none of us could have predicted. The challenges of
the COVID-19 pandemic have been-in a word-disastrous for small
businesses. Since March, our team has been fully engaged in supporting
small businesses and their investors as they navigate new waters: closed
doors, loss of foot traffic, sudden drops in revenue, changing consumer
behavior, and of course challenges in raising capital.
Many have commented on the incredible companies that rose from the
ashes of the last recession, some of whom have become household names
and created significant wealth for their investors. I am optimistic about the entrepreneurs who envision
new companies borne out of this pandemic, as well as the success stories of some companies and sectors
who are thriving. However, I am also keenly aware of the present day needs of the myriad of small
businesses working to navigate a wi nding path out of this COVID-19 maze. Access to investor capita l
will no doubt be a critical element in success for many who weather the current challenges.
In addition, 2020 has cast a brighter spotlight on the racial inequities that permeate our society, and as
a result, our markets. Focusing on the unique challenges faced by underrepresented founders and their
investors is hardwired into our Office's mission. While we by no means view access to investor capital
as a panacea cure to a systemic challenge, it is clear that minorities and women are not on level playing
field with obtaining funding, a topic meriting further examination and action.
Much like last year's inaugural annual report,1 this year's report highlights how we have approached
our mission over the past fiscal year, complemented by an even more robust State of Capital Formation
section that paints the picture of how capita l is being raised and by whom, and begins an exploration of
the impacts of the COVID-1 9 pandemic.
Our team commends the Commission for its recent actions to support capital formation, and we look
forward to continuing to collaborate on practical solutions that support those who need us most: our
small businesses and their invaluable investors.
MARTHA LEGG MILLER
Director
Office of rhe Advocate for Sma ll Business
Capita l Formation
ANNUAL REPORT FISCAL YEAR 2020 I I
Insert offset folio 71 here 43965.071
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00108 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
103
Breaking Down Our Long Title
An independent office housed
within the U.S. Securities
and Exchange Commission, One called to use your
created by Congress via voice for others, derived
special legislation from Medieval Latin
-•--- -----•-
Office of the Advocate for
Small Business Capital Formation
---• --------
1
From start-ups to small cap, The deployment of
"small " is relative for the SEC's productive capital by
newest Office, which supports informed investors to
emerging, privately-held create economic growth
companies up to small public
companies
Insert offset folio 72 here 43965.072
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00109 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
104
Contents
ABOUT THE OFFICE .
HIGHLIGHTS FROM FISCAL YEAR 2020 . 4
STATE OF SMALL BUSINESS CAPITAL FORMATION 11
COVID-19 and Capital Formation . 17
Small and Emerging Businesses 28
Mature and Later-Stage Businesses . 35
Small Public Companies .. 40
Founder Demographics and Capital Formation . 46
Natural Disasters and Capital Formation . 60
Rural Communities and Capital Formation. 62
POLICY RECOMMENDATIONS . 65
Education to Ease Challenges of Offering Complexity and Friction 66
Regulatory Clarity to Bridge Networks between Founders and Investors . 68
Diversifying Access to Capital 69
Attractiveness of Public Markets . 70
SMALL BUSINESS CAPITAL FORMATION ADVISORY COMMITTEE
FY2020 SUMMARY 73
ENDNOTES 87
ANN UA L RE P ORT: FISC A L YEAR 2020 I Ill
Insert offset folio 73 here 43965.073
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00110 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
105
Insert offset folio 74 here 43965.074
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00111 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
106
About the Office
ongress created the Office to
provide a dedicated champion
( to smaller companies accessing
cri tical capi tal to build, grow, and
thri ve. The Office operates pursuant
to sections 4(j) and 40 of the Securi ties
Exchange Act of 1934 (15 U.S.C. §§
78d a nd 78qq), as added by the SEC
Small Business Advocate Act of 2016
(P.L. 114-284) and amen ded by the
Small Business Access to Capital after a
Natural Disaster Act (title IX of division
S of Public Law 115-141) (collec tively, The Office hosted an event at Morehouse College in At lanta, GA in October 2019
highlighting success stories of entrepreneurs of color.
the Small Business Ad vocate Act).2
Th e Office officia ll y commenced operations in January 2019. As an independent office reporting
directly to the Commission, the Office is statutorily charged with the follow ing functions:
Assisting sma ll businesses an d their investors in resolvin g signi fica nt problems they may
have with the SEC o r with self-regulatory organizations (S RO);
Identify ing areas in which sma ll businesses and their in vestors wo uld benefit fr om changes
in SEC regula tions or SRO rules;
Identify ing problems that small businesses have with securing access to capital;
Analyzing the potenti al impact on small businesses and their investors o f proposed SEC
regulations a nd SRO rules;
Con ducting o utreac h to small busin esses and th eir investors to solicit views on capital
forma ti on issues;
Proposing app ropriate regul atory and legislative changes to the SEC and Congress to
mitiga te problems identified with small busin ess capital formation and to promote the
interests of small businesses a nd their investors; and
Consulting with the Investor Advocate on such regulatory and legislative changes and
ocher sma ll business issues.
The Office also proactively works to identify any unique cha ll enges faced by minority-owned,
women-owned, rural, an d natural disaster area small businesses and their investors.
ANNUAL REPORT: FISCAL YEAR 2020 I 1
Insert offset folio 75 here 43965.075
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00112 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
107
Our Advocacy Team
MARTHA LEGG SEBASTIAN GOMEZ
MILLER ABERO
Director Deputy Director
DEAN A.
COLIN A. CALEB
BRAZIER, JR.
Attorney
Special Counsel
JULIE ZELMAN
JENNY J. CHOI
DAVIS
Attorney
Senior Special Counsel
JESSICA W.
JENNY RIEGEL
MCKINNEY
Policy Manager
Special Counsel
MALIKA SULLIVAN TODD VANLAERE
Executive Assistant Law Clerk
Scope of Small Businesses
The Office supports a spectrum of small businesses and their investors, from emerging, privately-held
businesses to publicly traded companies with less than $250 million in public market capitalization. 3
Based upon commonalities in sources of capita l and issues faced, r.hc Office has segmented its rarget
market into three categories of businesses and their corresponding investors: small and emergi ng
businesses, mature and later-stage businesses, and small public companies.
2 I SEC OFF ICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATIO N
Insert offset folio 76 here 43965.076
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00113 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
108
Our Mission
The Office's mission is to advocate for small businesses and their investors co foster better access
to capital markets, strengthening the voice of small business within the SEC and the broader
regulatory landscape.
Work with sma ll businesses
to understand their capital
formation issues through
educat ion and outreach
Analyze the potential impact of Help small businesses
proposed rules and regulations resolve issues with the SEC
likely to s1gnif1cantly affect and SROs by recommending
small businesses pohcy changes
Core Tenets
The Office adheres to the following core tenets in approaching its delivery of services and sol uti ons
to small businesses and their investors:
Small businesses are job creators, generators of economic opportunity, and fundamental to the
growth of the country.
One size does not fit all for small bus inesses.
Good work has been done by the SEC, but we are not done and shou ld continue to evolve as the
market demands.
Small business policy should fac il itate trust and confidence in capital markets to encourage
efficient al location of investment dollars.
We serve as a coll aborator with, and contribu tor to, other SEC divisions and offices and SR.Os,
not as an auditor.
Values
The Office is guided by four core values:
ACCESSIBILITY - We engage with both small businesses and their investors, as well as with
the SEC, SR Os, Congress, and other agencies on a regular basis through a variety of channels.
TRANSPARENCY - We are visible and open in our approach to supporr.ing small businesses
a nd their investors.
PRAGMATISM - We approach problems with a solur.i on-orienced mindset by making
practical recommendations.
EFFICIENCY - We operate li ke a lean start- up, maximizing resources and focusing activities
where the Office can have a measurable impact.
ANNUA L REPORT: FISCA L YEAR 2020 I 3
Insert offset folio 77 here 43965.077
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00114 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
109
Highlights from Fiscal Year 2020
In addition ro hundreds of meetings, phone calls, emails, and cups of coffee shared with individuals
across rhe small business ecosysrem, we have sought our opportunities ro engage with diverse groups
of small business thoughr leaders-our Office's customers-through events and speaking engage-
ments, char can reach broad networks of potential beneficiaries of our Office's products, programs,
and services. Some of the events in which we have engaged this year include:
•
• • Kenan Institute
Frontiers of
National Veterans
Small Business
Joined Institute
of Management
• Office hosts
Entrepreneurship
Conference.Panel
Accountants Small itsfifst Cap.tal disrussionw1th
Coalition. Keynote
Business Committee Call styled after academics and
address on trends Keynote address at
and opportunities for National Venture Meeting to discuss earnings release thought· leaderson
Veteran entrepreneurs Capital Assoc iation's top accounting issues calls to explore JOBS Act and small
and solicitation Strategic Operations faced by advisors t o
of feedback & Po licy Summ it small businesses
Officejoins HBCU Outreach California Bay Area
lnside the Event at Morehouse Listening Tour.
lcehouse for College. Panel Attended AfroTech,
firstpodcast discussion on best met with founders.
recording . practices for minority investors.and
businesses to attract other key players
1nvestmentcap1tal in early-stage and
• growth capita l
infrastructure.
•
Ql FY2020 Q2 FY2020
4 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 78 here 43965.078
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00115 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
110
•
Keynote speech
at Angel Capital
Associat ion Summit
Discussion w ith angel
investors from across
t he country.
• •
Virtual Policy
Virtual Coffee Discussion: Policy
Virtual Coffee Break: Break with National and Business
Online Investment Small Business with Middle Market Virtual Panel D iscussion
Capital Raising Association Private Companies on Small Businesses
Discussion fo r small
businesses and
Discussion w ith
busi nesses from
& Late-Stage
Investors.
in the Public Markets
D1scuss1on on the
• WOCStars and
investors considering a wide range of Discussion on how experience of small Superwomen
industries on what to lead in crisis and public companies podcast
they are seei ng in position a company t raded over t he interv iews wit h
the market for growth. counter. the Office air.
Virtual Coffee Virtual Coffee Break Virtual Coffee Virtual Coffee
Break with with New Amer ica Break with the Break with StartOJt
National Diversity Alliance. Discussion National Association Discussion o f issues
available to access Coalition and U.S. w ith entrepreneu rs o f Securities encountered by
1nvest m ent c ap1tal. Small Business dedicated to Professionals. LGBTQ+ ent repreneurs
Adm inistration. advancing Discussion and and data on impacts
Discussion on solicitation of of exclusion
how COV ID-19 developm ent of the feedback on
is impacting American Latino inclusion in the
raising capital com munity. financial services
industry.
• • •
Entire SEC Small
Business Forum
Q3 Y2020 conducted virtually. Q4 FY2020
•
A N NUAL REPOR T : FISCAL YE A R 2020 I S
Insert offset folio 79 here 43965.079
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00116 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
111
Outreach and Engagement
Through public events, we hear perspectives from across the United Stares on topics ranging
from rulemakings, ro changing trends in capital raising, to unique challenges and opportunities o f
demographic groups and different geographic regions. Our outreach and engagement inform the
Commission's policymaking process by engaging directly with small business t-cosysrem partici pants
who arc navigating o ur regulatory req uirements ro provide timely, practical feedback.
Our events featured speakers with diverse backgrounds
from coast to coast:
•••• ••• •
. .
■
. ...
I
...T
- ·
EVENT SPEAKERS/MODERATORS
•
Iii FORUM SPEAKERS
. .
JL_ SMALL BUSINESS ADVISORY
-
COMMITTEE MEMBERS AND
THEIR SPEAKERS
With a shift to virtual events in 2020 in response to COVID-19,
we were able to broaden our engagement to reach participants
in the capital raising ecosystem
in every state.
6 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 80 here 43965.080
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00117 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
112
Engaging with Video Content
The Office con tinued producing short executive summary videos that highlight recent changes to the
capital formation rules impact.ing small businesses and their investors. These videos have made what
are otherwise often complex rules more accessible to small businesses and their investors, who in a
few minutes can evaluate r.he porenrjal impact of rules and wher.her they would like to engage more
deeply in the comment process. Some of the Office's FY2020 videos include:
Accredited Investor Amendments COVID-19 Crowdfunding Relief
AREYOUA smaller PUBLIC COMPANY?
Accelerated Filer Amendments
Capital Formation Proposal
(Sarbanes-Oxley Rule 404(b))
Modernizing the Rule Governing
Quotations for Over-the-Counter
Securities (Rule 15c2-ll)
8 Accredited Investor
Proposing Release
Accredited Investor Proposal
ANNUAL REPOR T : F ISCAL YEAR 2020 I 7
Insert offset folio 81 here 43965.081
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00118 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
113
Small Business Forum
The Office hosted the SEC's 39th annua l Government-Business Forum on
Small Business Capital Formation completely virtually on Jun e 18, 2020.
The Forum is a unique event where members of the private and public
sectors gather to craft suggesr.io ns for securities policy impacr.ing emerging
businesses and their investors, from startups to smaller public companies.
The Office assumed responsibility fo r th e Forum beginning in 2019 under
the Small Business Advocate Act. The 2020 virtual Forum resulted in
an inclusive event that engaged entrepreneurs, investors, market partici-
panrs and other thought leaders from across the country. Video archives
of the keynote addresses and spo tlight discussions are available in the
Office's Forum video gallery. On September 14, 2020, the Forum report was released and delivered to
Congress summarizing the proceedings a nd recommendations of the participants.4
Virtual Engagements
ln FY2020, our Office sought to supplement our in-person outreach events with broadly accessible
virtual events that would allow o ur Office to engage with businesses, investors, and oth er market
participants across the country. From our Office's first podcast interview to our first Capital Call,
we expa nded avenues for more voices to be heard.
Following the onset of COVID-1 9, the Office pivoted outreach strategies in March to engage
with the market through an entirely virtua l outreach strategy. The Office launched a series of
" virtual coffee breaks" 5 aimed at gathering thought leaders to discuss timely topics impacting
segments of the capital formation ecosystem and spark engaging and accessible conversations on
capital raising challenges.
Small public
companies
Mature and later-stage
businesses
Small and emerging
businesses
Complexity of fundmg sources and offering types
8 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUS I NESS CAPITAL FORMATION
Insert offset folio 82 here 43965.082
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00119 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
114
Styled after public companies earnings release
calls, this virtual meeting covered what 1s
happening with capital raising from startup to
small cap and gave the pubhc a chance to ask
questions live
Insert offset folio 83 here 43965.083
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00120 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
115
Insert offset folio 84 here 43965.084
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00121 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
116
State of Small Business
Capital Formation
he data provided in this Report is deri ved from a combin ation of public fi lings with the SEC, as
T analyzed by the SEC's Division of Economic and Risk Analysis (DERA), and is supplemented with
figures and findings from third parties. In doing so, we hope to provide a snapshot view of the
state of U.S. small busi ness capi tal formation, amalgamating many important pieces of the capital
formatio n story into o ne resource to a id in evaluating the current fl ow of in vestmen t capital between
small businesses and investors. The data sup plements a necdotal evidence an d helps qua ntify the successes
and cha llenges in small business capital formatio n nationwide. Unless otherwise indicated, the data
period utilized for DERA data is Jul y 1, 2019 t0 June 30, 2020 and covers U.S. businesses onl y.
New this year, we have highlighted some of th e in itial reported im pacts of COVID- 19 that have been felt
across the country. In addition, we have expanded the data a nd anal yses on demographic trends. Using
data, we ca n better identify what tools, strategies, and approaches wou ld be most i.mpactful in crafting
policy solutions.
What regulatory pathways are companies using to raise capital? 6
•
Initial Public
Rule 506(c)
Offerings
$69B $60B
($900,000 median)
($1SOM median)
Regulation A
• - $1.3B
Rule 504 ($2.lM median)
• - $171M
($100,000 median)
Crowdfunding
- $88M
($100,000 median)
Insert offset folio 85 here 43965.085
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00122 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
117
What are the primary types of offerings and what companies
are using them?
OFFERING TYPE IN A NUTSHELL TYPICAL CO PROFILE
Equity Crowdfunding Raising up to $1.07 million from many
Regulation Crowdfundinif investors online. In 2021, the $1.07 million
limit will be raised to $5 million. 9
Limited Offerings Raising up to $5 million from investors,
Rule 504 of Reg 0 10 often with whom the company has a
relatio nship. In 2021, the $5 million limit
will be raised to $10 million.n
Intrastate O fferings Raising capital locally according to state
Section 3(a)(11) and law exemptions, which generally cap
Rules 147 and 147A 12 the offering at between $1 million to $5
million, depending on the state.
Private Placements Raising unlimited capital from wealthier
Rule 506(b) of Reg Dor investors with whom the company has
Section 4(a)(2)1 3 a relationship. As of December 2020,
the rule will be expanded to include
investors that hold certain professional
certifications.14
Accredited Investor Raising unlimited capital from wealthier
Crowdfunding Rule506(c) investors, often online, using general
of Reg 0 15 solicitation
Mini Public Offering Raising up to $50 million from many
Regulation A 16 investors o nline. In 2021, the $50 million
limit will be raised to $75 million.17
Registered Offerings Raising large amounts of capital
(including Initial Public through initial public offerings (IPOs)
Offerings) Securities Act or secondary offerings through a
of 1933'18 registration statement filed with the SEC.
SMALL, EMERGING ~ MATURE AND LATER-STAGE
... SMALL PUBLIC
BUSINESSES T GROWTH COMPANIES COMPANIES
12 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 86 here 43965.086
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00123 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
118
How are different industries using the offering pathways to raise
capital (excluding pooled funds)?19
TECHNOLOGY
- - -T$3:B
- - - $56M
200 400 600
Billions
• REG IST ERED O FFERINGS • REGULAT IO N D • REGU LATIO N A
ANNUAL REPORT : FISCAL YEAR 2020 I 13
Insert offset folio 87 here 43965.087
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00124 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
119
·t 1?20
. ising cap1 a . 1raised under various
Where are companies ra f
he concemration O est1·mated total
location the u.s' Wit h the number of
Ill capita
The followmg maps i llustrate t
b issuers that report a pnmary
d fferent offenng types y d on each scare
offerings con ducted indicate
i
Regulati o n D
MA RI
1311 38
I
-ft=J~
CT
414
4
oE
DC 178
r' 155
MO
343
HI
GU
0 " VI
2
$0 - $100 MILLION • $100 MILLION - $1 BILLION • $1 - $10 BILLION • $10 - $170 BILLION
• $0 • $10,000 - $ 500000
" .$500,00 0 - $2 MILLION • $2 - $15 MILLI ON
-
Insert offset folio 88 here 43965.088
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00125 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
120
Regulation A
ME
MT NO VT 0
0 0
NH MA
O O RI
...---------J 0
CT
NJ 0
2
DE
DC o
MD 7
2
AK
0 HI
GU 1
PR VI
0
0 0
$0 • $10,000 - $500,000 • $500,000 - $2 MILLI ON • $2 - $15 MILLION
Registered
Offerings
~ ___J
: RI
19
,-=er
/ NJ 39
66
DE
DC 13
MD 74
30
HI
0
VI
0
• $0 - $300 MILLION • $300 MILLION - $5 BILLION • $5 - $20 BILLION • $20 - $150 BILLION
Insert offset folio 89 here 43965.089
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00126 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
121
Insert offset folio 90 here 43965.090
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00127 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
122
COVID-19 and Small Businesses
he COVID-1 9 pandemic led to an unprecedented health and economic crisis in rh e United States
T starting in March 2020. ln response to the spreading virus, many households, businesses, and
governm ents cook measures to protect public health, including lockdowns and stay-at-home
orders. Social distancing and other measures effectively closed many small businesses, leading
to a sudden d rop in economic activity a nd historic levels of joblessness.21 While this section highlights
some of the initial reported impacts of COVID-19 that have broadly been felt across the country, the
long-term impacts of the pandemic remain largely w1known. The di sruption to small business has been
extreme:22 and the economic and financial shocks felt since M arch will likely create lasting fragi li ties
wi thin th e small business ecosystem.23 Subsequent subsectio ns include additiona l data on the im pact of
COVID-19 at different stages o f r.he ca pital raising life cycle and among demographic groups.
While small businesses have endured r.imes of economic disr.resses in the pasr.-and many nor.eworr.hy
companies were born during downturns-the devastating impact of the virus and its uncertain duration
a re unlike any economic shock to date. 24
7ITT
••••
The impact has been felt most Small businesses are Reduction in spendi ng has been
acutely by founders and investors particularly vulnerable particularly harsh at businesses
in historically underrepresented to social distancing t hat require in-person interaction,
groups, in emerging ecosystems, measures. 26 such as retail, entertainment,
and among smaller fund t ransportation, personal services,
managers. 25 food services and hospitality.27
"
Small businesses make up nearly half of U.S. private-sector employment and
play key rol es in local communities. The pandemic poses acute risks to the
survival of many small businesses. Th eir widespread failure would adversely
alter the economic landscape of local communities and potentiall y slow the
economic recovery and future labor productivity growth.
BOARD OF GOVERNORS OF
T HE FEDERAL RESERVE SYSTEM 28
ANNUAL REPORT : F ISCAL YEAR 2020 I 17
Insert offset folio 91 here 43965.091
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00128 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
123
How has the number of open small businesses changed across
the US? 29
From January 2020 r.hrough September 2020, the number of small businesses decreased by 27%.
The below map illustrates the percentage change across the country.30
VT
MA
.35 RI
,-=-CT_____,
_________1
NJ -34.6
-36.9
-28.5
DE
- - DC -30.1
MD -4 2.3
-26.6
GU
VI
• Between -30% and -4 3% • Between - 25% and -30% • Between -20% and -25%
Between -13% and -20% No data
During the same time period, how did the percentages of open
small businesses change across different industries? 31
Education and Retail and
Health Service Transportat ion
Lei sure and
Hospitality
18 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 92 here 43965.092
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00129 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
124
Of the businesses still open, how have their revenues changed
during COVID-19 when compared to January 2020? 32
January March April May June July August September
10%
. 0%
-10%
!" -20%
.
C
-30%
-40%
J
u
-50%
-60%
'cl',
-70%
-80 %
- Retai l and Transportation - Education and Health Services
- Leisure and Ho spitality - - A ll Small Businesses
Access to capital remains a major concern for small business
Many small businesses entered the pandemic with enough cash
on hand to cover two weeks or less without revenue. 33
45%
of small businesses needed to reduce their headcount. 34
of small businesses planned to use of small businesses are concerned
personal savings to reopen their busi ness, about financial hardship due to prolonged
and 39% did not know where they would closures and 58% worry about having to
access capital to reopen:55 permanently close. 36
ANN U A L REPOR T : FISC A L YE A R 20 2 0 I 19
Insert offset folio 93 here 43965.093
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00130 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
125
"
Much of the contrast in the
fortunes of sma ll and large
businesses has been driven
In response to the COVID-19 pa ndemic, Congress
passed t he CARES Act providing $376 billion in by differences in the financial
relief for small businesses across the country. 37 resources ava ila ble to them.
However, since the start of the pandemic, other
bank loans have become increasingly harder for JUSTIN LAHART,
small businesses to obtai n as a result of tight- WALL STREET JOURNAL 39
ening lending standards. 38
How are small businesses responding to the pandemic and
social distancing meaures?
Many responded by ada pting to meet consumer needs. Notably, such adaptations are not available
in certain industries, and in some insta nces small business owners were only able to provide ongoing
employment opportunities for certain types of positions.40
made significant shifts in products and/or
65% are doing more business online. 42
services as a result of the pandemic. 41 25% of small businesses increased their use
of e-commerce or digital payment options. 43
•
71%of
small businesses found support
in t heir local communities. 44
---
20 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUS I NESS CAPITAL FORMATION
Insert offset folio 94 here 43965.094
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00131 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
126
"
Leadership teams have embraced technolog y and data, reinventing core
processes and adopting new collaboration tools. Technology and people
interacting in new ways is at the heart of the new operating model for
business-and of creating an effective postpandemic organization.
MCKINSEY & COMPANY 45
82% of small businesses made workspace changes
as a result of the pandemic, costing on average:
$11,729
initial set up costs
0 $1,800
ongoing monthly costs45
The new environment has accelerated adopti on of certain innovations in many industri es:47
Fintech
EdTech
Telemed1c1ne
Cloud Computing and Collaborat1on Software
ln the midst of the pandemic, Americans a re starting new businesses at the fastest rate in more
than a decade: 48
some are spoting opportunities while others are turning to
for new ideas, entrepreneurship out of necessity.
ANNUAL REPORT : FISCAL YEAR 2020 I 21
Insert offset folio 95 here 43965.095
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00132 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
127
How is capital raising being affected by COVID-19?
Given the Lmpacts of COVID-19 on business operations, the natural question many are asking is how
investment capital raising is being impacted? Dara on capita l raised from investors is often a lagging
indicator of activity. Many of the funding transactions chat occurred in the second and third quarters
of 2020 were negor.iared or planned prior to the start of the pandemic or delayed from one quarter to
another as a result of the pandemic. The sections that follow highlight comparative data on a quarter-
by-quarter basis from DERA that shows recent historic levels of funding by offering type, as well as
how that funding is changing. Many experts predict that the impacts on investment cap ital raising
will have wider ripple effects, not capable of being accurately measured by solely looking at the data
through September of 2020.
What is happening in crowdfunding?
Si nce 2016, over over raising
an average of
2,600 3,000
companies have conducted crowdfunding offerings, $342,000."
How has the number of new crowdfunding offerings changed? 50
140
120
100
80
60
40
20
0
-e- Monthly number of new Form C filings
During July and August of
2020, companies raised the as the first full year
same amount of capital (2016-2017) of online
using crowdfunding fundraising. 51
($48 million)
22 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUS INESS CAPITAL FORMATION
Insert offset folio 96 here 43965.096
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00133 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
128
Insert offset folio 97 here 43965.097
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00134 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
129
How have Regulation D offerings changed?53
$450 5,000
$400 4,500
i2 $350 4,000
3,500
ffi $300
i
C
$250
3,000
2,500
g>
~
& $200 2,000 i
11 $150 z
1,500
~ $100
<{ 1,000
$50 500
$0 0
Ql Q2 Q3 Q4 Ql Q2 Q3
2019 2020
- Amounts Raised by Pooled Funds - Amounts Raised by Other Issuers
New Offerings by Pooled Funds New Offerings by Other Issuers
Excluding pooled funds, what are the top industries raising capital
through Regulation D? 54
Real Estate
Technology
Health Care
Banking
Energy
$0 $5 $10 $15 $20 $25 $30 $35
Billions
■ January to September 2019 ■ January to September 2020
24 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUS INESS CAPITAL FORMATION
Insert offset folio 98 here 43965.098
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00135 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
130
How have Regulation A offerings changed? 55
$1,600 80
$1,400 70
I $1.200 60
~ $ 1,000 so
C,
'§i $ 800 40
a $600 30
C
0
~ $400 20
" $200 10
$0 0
Ql Q2 Q3 Q4 Ql Q2 Q3
2019 2020
- Amoun t Sought in Qualified Offerings - New Offerings
What types of businesses are using Regulation A? 56
Real Estate
Technology
Manufacturing
Banking and Financial Services
Health Care
Energy
Business and Professional Services
Retail, Restaurants and Hospitality
$0 $100 $200 $300 $400 $500 $600 $700 $800
Millio ns
■ January to September 2019 ■ January to September 2020
A N NUA L REPORT : FISCAL YEAR 2020 I 25
Insert offset folio 99 here 43965.099
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00136 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
131
What is happening in the initial public offering (IPO) market?
Innovative adaptations related to the offering process have facil itated IPOs despite challenges resulting
from COVID-19. One of the bigges t changes has been marked by the shift from in-person marketing
meetings to virtual roadshow evencs.57 While tradi tionally issuers and their underwriters traveled across
the country and sometimes across continents to pitch the lPO, in the face of the pandemic, companies
and investors have quickly adopted virtual roadshows. 58 Some of the other changes include:
Shorter Roadshows
The average roadshow shortened from 8 days to 4 days. 59
Decreased Exposure to Market Risk
The reduction in launch time from roadshow t o IPO decreased com panies'
exposu re to market risk and volat ility. 00
Cost Savings
Hundreds of t housands of dollars are saved from travel, printing, and employee
time on roadshows. 61
Longer Test-the-Waters Meetings
Test-the-wat ers meetings have lengthened.62
Greater Visibility in Pricing
Prospective invest ors are indicating interest earlier.63
Increased Accessibility
With video conferencing, companies are expanding geographical reach 64 and
gaining access to a wider pool of invest ors.65
More Sophisticated and Detailed Disclosures
Companies are working to keep investors abreast of new developments as t hey
happen amid the pandemic.66
W ill these changes become the new standard? Som e
believe that t he IPO process has adapted in ways that
will change capital markets for years to come.67
Others have cautioned t hat startups and lesser-known companies
may struggle t o pique investors' interest w ithout the opportunity to
meet investors in person or through an abbreviated schedule.68
26 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSI N ESS CAPITAL FORMATION
Insert offset folio 100 here 43965.100
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00137 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
132
What is happening with IPO activity? 69
90
$25
80
$20 70
60
$15
$10
$5
10
W 0
~~~~~~~~~$~~##~~##~##
- Total IPO Proceeds ($B) No.oflPOs
Comparing to the first three quarters of 2019, 2020 has seen a spike in IPOs: 70
What are the top industries raising capital in an IPO?
Businesses that successfully completed an IPO Ln 2020 tend to operate in fast-growing industries,
quickly pivoted to a virtual environment, and serve a wide array of clients:71
SPAC
Technology
Business Services
Manufacturing
Banking and Financial Services
Health Care
Hospitality, Retail, Restaurants
$0 $10 $20 $30 $40
■ January to September 2019 Billions
■ January to September 2020
ANNUAL REPORT : FISCAL YEAR 2020 I 27
Insert offset folio 101 here 43965.101
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00138 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
133
Small and Emerging Businesses
his segment of companies includes high-growth startups that raise ca piral ro get off r.he ground
T and through early prototypes, as well as small businesses that provide local jobs but do not fit the
high-growth model that is the target of venture capita l (VC) investments. 72
Why is access to capital for small and emerging businesses
so important?
Small businesses less than one year old have an outsized impact on job creation:73
20% of all new Jobs
"
Between 90 and 95 percent of entrepreneurs that hire require some
amount of financing to start their businesses.
VICTOR HWANG, SAMEEKSHA DESAI,
AND ROSS BAIRD 74
The vast majority of aspiri ng entrepreneurs report multiple barriers in accessing capital for their
businesses, including the following top challenges according to a recent survey: 75
28 I SEC OFF ICE OF THE ADVOCATE FOR SMALL BUS I NESS CAPITAL FORMATION
Insert offset folio 102 here 43965.102
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00139 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
134
What are common sources of capital for small and
emerging businesses?
Financing needs vary widely, and funding in the earliest stages when companies are pre-revenue or
pre-product development can be difficult to find. 76 Small and emerging businesses generally raise
capital through a combination of funding sources, with the primary sources of funding as follows: n
Personal
Retained Funds
Business 14%
Earnings
77% Loan or Line of Credit 54%
Credit Card - 53%
External Trade Credit -12%
Financing
Leasing - 11%
9% Equity Investment - 6%
Merchant Cash Advance - 5%
Factoring - 3%
Other-2%
Notably, retained business earnings are generally an option only available to established companies
or companies with short product development cycles, and personal funds are only an option for
those wit h existing resources.
What role do grants play in funding small businesses?
Grants are a non-dilutive source of early funding, but they can be time-intens ive and may not provide
as much capital as companies need to jumpstart growth. 78 COVID-19 has exacerbated r.he divide
between grant funding available and the capital needs of small businesses:
82% of Hispanic & Latino
entrepreneurs reported needing
$5,000-$50,000
in capital in order for their business
to survive the COVID-19 pandemic. 80
$4,360
Average emergency
grant to small businesses
during COVID-19.79
ANNUAL REPORT: FISCAL YEAR 2020 I 29
Insert offset folio 103 here 43965.103
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00140 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
135
What sources of collateral are used by small businesses when
accessing bank loans? 81
PERSONAL GUARANTEE 59%
BUSINESS ASSETS 49%
PERSONAL ASSETS 31%
NO COLLATERAL REQUIRED -
FUTURE SALES ■
Bank loans may not be a funding option for many small and emerging businesses. During the initial
start-up srage, they typically have mlnimal or no collateral and lack sufficient earnings histories, tax
returns, and performance track records for bank underwriting. 82 In the absence of collateral from the
business, banks often rely on information about the founder or entrepreneur, such as personal wealth,
income, debt, or home ownership, co determine loan default probabil icy. 83
What is the role of community banks?
Community banks are often better positioned co underwrite small business loans because their
relationship lending models provide an advantage for pricing lending risks that are unique, infre-
quent, and localized, including close familiarity wir.h customers, mo re tailoring of loans, and close
geographic proximity to collateral. 84
Since 1986, there has been a 70% decrease in the number of FDIC-insured banks.85
30 I SEC OFF ICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 104 here 43965.104
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00141 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
136
How is crowdfunding used for financing?
Crowdfunding is often used as a broad term that captures different methods of raising fw1ds in which
a relatively large number of people make relatively sma ll contributions or investmen ts.
Debt Crowdfunding•
Contribution with the expectation
of repayment with interest
Rewards Crowdfunding Equity Crowdfunding•
Contribution in exc hange Contribution in exchange
for rewards or pre-purchase for percentage ownership
Donation Crowdfunding Real Estate Crowdfunding*
Contribution with no Contribution in exchange for
expectation of return ownership in real estate
*Subject to securities laws.
ANNUAL REPORT : FISCAL YEAR 2020 I 31
Insert offset folio 105 here 43965.105
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00142 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
137
What is the role of angel investors?
Angel investors are genera lly high net worth ind ividuals who invest their own fund s directly in ea rl y-
stage businesses. Compa nies receiving angel investments are largely in the development stage and
therefore riski er investments. 86 Recognizing the impo rtance of diversifying, angels often syndicate,
which allows them to participa te in larger dea ls and limits their individua l check sizes.87
What was the scale of angel investing in early-stage companies
in 2019?88
~
323,365
active angel investors
I $23.9 billion
in total angel investments
63,730 $374,225
entrepreneurial ventures average angel funding round
received angel funding
"
Beyond supporting t heir own portfoli o companies, angels are an integral
compo nent of the growth of VC ecosystems. The impact of angel
mentorship and net working ca n be even more influential w ithin
ecosystems outside traditional VC hubs.
PITCHBOOl-<89
Angels generally invest in businesses located close by.
The distance between the lead investors and
the target business averages only ~
37miles."' •
••••••••••••••••••••••••
32 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 106 here 43965.106
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00143 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
138
How has seed funding activity changed in recent years?
The seed round is often a com pany's first official round of funding and consists of a small amount
of capital typically used for product development, market research, or business plan development.91
Seed rounds typically range from $250,000 to $2 rniHion. 92
U.S. angel and seed deal activity size (by number of deals)95
100%
Seed deal sizes 90%
have climbed over
the past seven 80%
years, landing at an
70%
annual median of
■ $2SM+
60%
$1.1 million ■ $10M-$25M
in 2019.93 50% ■ $5M -$10M
■ $1M-$5M
For companies 40%
■ $500K-$1M
looking to raise
30% Under $SOOK
smaller amounts,
the availability of 20%
smaller deals has
diminished.94 10%
0%
2009 2011 2013 2015 2017 2019
What changes in this market segment have been observed amid
COVID-19 since March 2020? 96
12%
of startups saw their of startups saw their of startups are
revenue drop at the revenue decline by experiencing
beginning of the at least 40%. significant revenue
pandemic. growth.
ANNUAL REPORT : FISCAL YEAR 2020 I 33
Insert offset folio 107 here 43965.107
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00144 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
139
Good and bad news for angel and seed investment activity.
First time equity financings and
seed-stage activity have seen
steady declines98 as early stage
investors turn to supporting
existing portfolio companies. 99
Angel investment activity has remained resilient as seed activity
has declined.100
775
748 726
662
632
I
586 591 585
522 535
NB ~
$1.88 $1.78 $1.58 $1.38 $1.28
liL _I_II_
Ql Q2
2019
Q3 Q4 Ql Q2
2020
Q3
- Angel Deal Value Seed Deal Value
- Angel Deal Count Seed Deal Count
34 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 108 here 43965.108
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00145 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
140
Mature and Later-Stage
Businesses
ompanies within this segment of the market are generally growing and looking for larger amounts
of capital that can fund operations of scale, ventures into new verticals, and preparation for public
( markets. Most often their investors are institutional in nature.
venture capital (VC) deals in 2019m•
12,207 (aggregate value of $136.8 billion)
5,484 private equity (PE) deals in 2019""
(aggregate value of $781.5 billion)
How much are mature and later-stage businesses raising across
their lifecycle?103
Seed Early-Stage Later-Stage
■ Exit
Seed investments Series A ($2M to $15M) Series C or Series D IPO, Merger
($250,000 to $2M) or Series B ($10M+) ($10M to $100M+) or Acquisition
ANNUAL REPORT : FISCA L YEAR 2020 I 35
Insert offset folio 109 here 43965.109
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00146 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
141
Who invests in mature and later-stage businesses?
Venture Capital Funds
Venture capital funds are generally structured as private funds that invest in early stage compa nies
with high growth potential, taking on a high degree of investment risk in exchange for significant
,,
expected investment multiples.
h
10
Years
70% of VC funds Investments are Lifespan to raise capital,
are concentrated in locked in until enter into, and exit from all
3 metro areas.104 a liquidity event. investments is limited.105
Nontraditional Investors
Investors that historically made investments through VC funds as limited parmers-such as sovereign
wealth funds, cor porar.ions, and other insr.irurions-a re increasingly making direct investments in
mature and later-stage businesses. 106
Average later-stage deal of VC deal value Many nontraditionals,
size with nontraditional originated from deals especially mutual funds,
participation in 2019 was more with nontraditionals invest w ith expectations
than 4x the average size in 2018 and 2019.108 of capturing returns from
of deals without a an imminent IP0.109
nontraditional investor.107
36 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 110 here 43965.110
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00147 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
142
Where do later-stage companies find investors?
Companies looking fo r seed financings often work through local investor networks first, genera lly
wi thin 100 mil es, while lateMtage companies genera ll y require larger funding vehicles, and the median
distance between the company and lead investor grows ro over 400 mi les.110 Given the active role
most VCs ta ke wi th their portfolio companies as board members and stra tegic advisors, proximi ty
makes it easier to monitor and stay engaged with companies through formative milcstones. 111
400 miles
- -_f
What pathways to liquidity are available for investors in
later-stage companies?
Preferred exi t strategies have cha nged over time. While IPOs were traditionally the most common
way to profitably exit an invesonent, over time an acquisition by a strategic investor or by an existing
large company has become the most popular: 112
1eilli·ilhlii•
---
$64.2 billion
was invested in the acquisition of
VC-backed businesses in 2019.113
47%oflPOs
from 1995-2018 were backed
by VC investors.115
W ithin 5 years post-lPO,
58% of founders
surveyed have acquisition as a 15% of VC-backed
long-term goal for their company, companies raise addit ional VC funding,
compared to only 17% half of which is from t heir original VCs.116
interested in an IP0.114
AN N UAL REPOR T : FISCAL YEAR 2020 I 37
Insert offset folio 111 here 43965.111
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00148 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
143
How are mature and later-stage companies and their investors
responding to COVID-19?
While some funds and portfolio companies have been significan tl y impacted by the
pandemic, initial data suggest chat the VC industry in the aggregate has been less
affected than other pa rts of the economy.l17 A primary impact of the pandemic has
been market uncertainty chat is substantially different from r.he type of u11eertaincy
these founders and investors have historically evaluated. ns Companies have been
preparing for long-term impacts by establishing cash reserves and trimming budgecs. 119
How has the pandemic impacted VC deal activity?
While early-stage VC (Series A and B) started to increase in deal value at the beginning of 2020,
deal count continues to decline: 120
$12.3 $12.3 $TI.7 $10.0 $10.3 $8.2 $9.2
Ql Q2 Q3 Q4 Ql Q2 Q3
2019 2020
- Deal Value ($B) Deal Count
Later-stage VC deal activity (Series C an d up) has been more resilient than other srages, 111 which may be
a reflection of investors focusing funding on existing portfolio companies rather than new invesonents:
838
806
751
718 700
$20.6 $21.5 $20.0 $18.6 $22.8 $28.9 $26.6
Q2 Q3 Q4 Q2 Q3
2019 2020
- Deal Value ($8) Deal Count
38 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMAT ION
Insert offset folio 112 here 43965.112
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00149 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
144
How has VC fundraising activity changed?
Through the third quarter of 2020, overa ll fundraising activity remained active. 121 However, since the
pandemic hit, there has been a significan t drop in first·time funds, which raised only $1.9 billion across
30 funds through Q3 2020, compared ro $5.3 billion over 81 funds in 2019: 123
584
The percentage of
smal l funds (<$SOM)
raised in 2020 is on
track to dip
below 40%
for the first time
since 2008.12~
$68.1 $54.9 $56.6
2018 2019 2020·
- Capital raised ($B) Fund Count
*Through 03 2020
How has exit activity changed?
Over the last three quarters, acquisition activity has dropped while lPO activity has inc reased
by deal counr:125
63
47 56
34 49
14 43
19
15 10
25
38
19
37
205 213
200 191 188
128
110
Ql Q2 Q3 Q4 I Ql Q2 Q3
2019 2020
■ Acquisition ■ IPO Buyout
ANNUAL REPORT : FISCAL YEAR 2020 I 39
Insert offset folio 113 here 43965.113
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00150 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
145
Small Public Companies
ompanies can access broad pools of investors wh en th ey conduct public offerings, a Uowing
compa ni es co raise large amounts of capita l co fund activities such as resea rch a nd development,
( capital expenditures, or debt service. Public offerings a lso provid e bqujdity to ea rl y-stage in vestors
and publicity fo r th e compa ny's prod uces and services.
How has the prevalence of U.S. publicly-traded companies
changed over time? 126
$35 8,000
7,000
$30
i $25
6.000 l
5,000
s
! $20
4 ,00Q
1
V
~
e
$15
3,000 J
0
~
i
$10
2.000 I
j/_
$5
1000
$0
~~~###~#✓##~#\##\#~~#~~#
- Market cap - Listed Companies
Since 1996. more tha n
90% of the stocks that have disappeared
are t hose of small- and micro-capita lization companies.ITT
How have corporate assets moved between the public
and private markets?
As an a lternative to eval ua ting public market trends by number of li sted com panies, th e public ma rkets
have seen a fa r lower decline wh en considering rh e change in publ ic compa ny corporar.e assers:
1111
111 111
Only a 5% decline
Vs.
in corporate assets in the public in number of publi c companies
market si nee the 1990s.128 since the end of 1997.129
40 I SEC OFFICE OF THE AD V OCATE FOR S M ALL BUSINESS CAPITAL FOR M ATION
Insert offset folio 114 here 43965.114
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00151 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
146
How does the size of the public market compare to the
private markets?
The size of the U.S. public market is significantly larger than market fo r private investments via
buyout funds and venture capital funds: 130
•
27x
theAUMfor
As of the end of 2019, private b uyout
the market cap of funds
U.S. public equ ities was
$37.7 trillion.
80x
t he AUM for
VCfunds
The amount managed by U.S. domestic mutual funds fa r exceeds the assets under management
(AUM) and dry powder for both private buyout and venture capital funds:13 1
Public Funds PmtabtFU'ldl
Buyout Fund AIJM
$1.4 1l111on
Index Mutual
Active Mutual Funds Funds
$S.6Trill1on $2.8Tnllion
When comparing the average investment returns of private funds over the past three decades using
a public market equivalent, buyout funds have outperformed the pub lic markets by a rar.io of l.2, 132
and VC funds have performed rela tively the same as the public markets at slightly above 1.0. 133
ANNUA L REPORT: F I SCAL YEAR 2020 I 41
Insert offset folio 115 here 43965.115
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00152 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
147
What has happened with public market offerings from July 1, 2019
through June 30, 2020?134
Small public company
All lPOs:
registered offerings:
232 offerings with
457 offerings with
$259M average
$53M average
proceeds
proceeds
How has the size of public companies changed over time?
T he average market capitaliza tion fo r a public compan y has dramar.icall y increased:135
--
$700 million
in 1976
(adjusted for inflation)
II
Small companies tha t remain increasingly struggle to grow to
$10.4 billion
in 2020
a larger size, o ften referred to as the "small size trap ." 136 Th e
percentage of small companjes that grew into medium or large
companies has been cut in half since the 1990s: 137
42 I SEC OFFICE OF THE ADVOCATE FOR SMA L L BUSINESS CAPITAL FORMATION
Insert offset folio 116 here 43965.116
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00153 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
148
What are the costs and benefits founders and their investors
typically weigh with becoming a public company? 138
COSTS BENEFITS
Listing fees Liquidity and ease of
Regulatory requirements capital raising
Disclosure expenses and Efficient price discovery
competitive risks Analyst research
Investor relations No investor qualification
Increased market and requirements
media attention Reputat ional prestige and
Short-termism market trust
Loss of founder control Employee incentives
How do smaller IPOs differ from larger IPOs?
Smaller LPOs have driven a subsranr.ial amount of aggregate and sustained performance in the
U.S. equity markets: 13 ?
Smaller companies pay Smaller companies may A significant portion
a larger percentage of prefer acquisition over IPO of smaller IPOs are by
deal value in listing and to capture more value and biotech startups,142 who
compliance costs when create economies of scale.141 tend to go public earlier
seeking to raise small in their lives, providing
amounts of capital as an opportunity to see
compared to larger IPOs.140 meaningful upside
valuation in the public
markets.143
What is the significance of companies staying private longer?
The propens ity to list is estimated to be half of what it was in the mid-1990s. 144 Staying private longer
has been linked with more innovative pre-IPO companies, in terms of the quantity, qual ity, and the
fundamental nature of their rcsearch,' 45 as well as the creation of more wealth for private market
investors and less for retail investors in the public market. 146
ANNUAL REPORT: FISCAL YEAR 2020 I 43
Insert offset folio 117 here 43965.117
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00154 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
149
How much capital are small public companies raising in registered
equity offerings?147
151
97 97
92 91
74
$2.1 $2A $2A $2.8 $2.0 $5.7
Ql Q2 Q3 Q4 Ql Q2 Q3
2019 2020
- Tota l Proceeds ($B) No. of Offerings
How did registered equity capital raising change between 2019
and 2020 for small public companies based on industry?148
$2.68
5PAC
$5.08
Health Care
$2.68
Business Services
Technology
■ January to September 2019 ■ January to September 2020
44 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSI N ESS CAPITAL FORMATION
Insert offset folio 118 here 43965.118
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00155 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
150
Insert offset folio 119 here 43965.119
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00156 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
151
Founder Demographics and
Capital Formation
Women-Owned Businesses
From 2014 to 20 19, women-owned businesses have experienced significant growrh com pared to all
businesses in the counrry: 149
21%
increase 1n
revenue compared
to 20% overall
From 2014 to 2019, minority women-owned businesses grew at a n even faster rare than
women-owned businesses as a whole: 150
46 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 120 here 43965.120
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00157 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
152
The almost 13 million women-owned businesses include significant minority ownershi p: 151
Native American/
Alaska Native
180,316
1% • Native Hawaiian/
Pacific Islander
Asian American 40,375
1,169,348 0.3%
Latina/Hispanic •
2,346,190
White
18%
6,525,946
51%
African
American/Black
2,681,179
21%
However, while all revenues have increased since 2014, average revenues in 2019 among
women-owned businesses varied widely by racial and ethnic groups: 152
$191,200
$142,900
$68,500
.... ..
. ...
1'42.8% 1'34.6% 1' 33.2% 1' 35.1%
All Women Native Asian Latina/ Native African
American/ American Hispanic Hawaiian/ American/
Alaska Pacific Black Women
Native Islander
ANNUAL RE PORT : F ISCAL YEAR 2020 I 47
Insert offset folio 121 here 43965.121
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00158 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
153
How are women founders faring with capital raising?
The medi an VC pre-money valu ation va ri ed by
Women constituted
gender in 2019, with mixed-gender teams
27.6% experi encing the most ra pid yea r-over-year growth:154
of entrepreneurs seeking capital in 2019
and had an investment yield rate of
21.4%
Additionall y, women fou nding teams tended to raise
less per funding round in 2019 than r.heir male
I fo unding tea m counterpa rts:155
Median Seed Round
~
(up from 17.5% in 2018)
....__.,,
compared to a baseline rate of
$460,000 $600,000
women-only founding teams male-only founding teams
30.7%
(up from 23.2% in 2018).153 Median Series A
•• .1 $7 million
women-on ly founding teams
$7.7 million
male-only founding teams
48 I SEC OFFICE OF THE ADVOCATE FOR SM ALL BUSINESS CAPITAL FORMATION
Insert offset folio 122 here 43965.122
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00159 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
154
Women-founded compa nies received only 12% of VC dollars in 2019 for a tota l of $26.6 billi on,
consistent wir.h 2017 funding levels bur down from r.he 2018 high war.er mark of 17% :156
11111111111111111111
11111111111111111111
11111111111111111111
11111111111111111111
11111111111111111111
of dollars went to women-only foundin~ teams,
3%0 and 9% went to women/men co-founding teams.
Women-founded sta rtups receiving their first financing round are dispersed across a number
of indusr.ries:157
Information Technology 43%
Consumer Products and Services (B2C) 27%
Healthcare 17%
Business Products and Services (828) 10%
Other (Financial Services, Energy, and
Materials and Resources) 3%
By proportion of tota l dollar volume raised, women raised successively less at eac h stage
of funding in 2019: 158
SEED
SERIES A
SERIES B
SERIES C+
■ Female Only ■ Female/Male Co-Founded ■ Male Only
ANNUAL REPORT : FISCAL YEAR 2020 I 49
Insert offset folio 123 here 43965.123
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00160 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
155
Women are also underrepresented in leadership roles in mature and later-stage companies. According
to an analysis of 200 of the most heavily-funded private VC-backed companies: 159
Why should investors care about investing in women-owned
businesses?
Companies with women on r.heir founding reams on average exited 1 year fasr.er than all-men
founding teams, returning capital back to investors faster: 160
MIHHiW Mi?H.
women on only men on
6.4 founding team
7.4 founding team
Research on 1,000 large companies with annua l revenues over $1.5 biJlion fo und thar companies in
the top quartile of diversity outperform the bottom qua rtile: 161
Gender diverse executive teams are Ethnically diverse executive teams are
more likely t o experience above-average profitability.
50 I SEC OFF ICE OF THE ADVOCATE FOR SMAL L BUS I NESS CAP ITAL FORMAT I ON
Insert offset folio 124 here 43965.124
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00161 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
156
Women Investors in Small Businesses
♦♦tttttttt 29%0 of angel investors in 2019 were women
(unchanged from 2018's level of 29.5%).162
Women are underrepresented in investor leadersh.ip roles withjn the VC industry:163
12%
of decision-makers in VC of top quartile VC firms lack of LP firms lack women
fi rms are women. women decision-makers in decision-makers.
GP leadership.
"
Given studies that emphasize how female VC partners are t w ice as likely
to invest in startups w ith at least one female found er and more than
three tim es as likely to back startups with female CEOs, the discrepancy
at the funder level is critical in this equation.
PITCHBOOK & ALL RAISE1&1
ANNUAL REPORT : FISCAL YEAR 2020 I 51
Insert offset folio 125 here 43965.125
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00162 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
157
Minority-Owned Businesses
New entrepreneurs in 20 19 by race and ethnicity: 165
Asian American
Pacific Islander
Hispanic/Lat ino •
23%
White
58%
African
American/Black
10%
What percentage of employer firms are owned by minorities?166
NJ
DE
18%ormore
12% to less than 18%
6% to less than 12%
Less than 6%
52 I SEC OFFICE OF THE ADVOCA T E FOR SMALL BUS INESS CAP IT A L FORMAT ION
Insert offset folio 126 here 43965.126
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00163 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
158
Minority-owned empl oyer businesses have a significant impact on the economy: 167
1.1 million
employer businesses
I\
mm
8.7 million
workers employed
99.99%
are small businesses
"
Black people represent 12.7% of the U.S. population but only 4.3%
of the nation's 22.2 million business owners. Because Black and
White people show no underlying differences in characteristics that
predict entrepreneurial success, this gap represents major untapped
entrepreneurial potential across U.S. cities.
ANDRE PERRY, JONATHAN ROTHWELL
AND DAVID HARSHBARGER,
THE BROOKINGS INSTITUTION 168
ANNUAL REPORT : FISCAL YEAR 2020 I 53
Insert offset folio 127 here 43965.127
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00164 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
159
What challenges do minority-owned businesses face in
accessing capital?
Minority-owned businesses continue to face
Minorities constituted
cha ll enges accessing financing and are more
9.3% likely to be financially constrain ed: 170
of entrepreneurs seeking capital in 2019
■ Hispanic/Latino ■ Asian American/Pacific Islander
■ African American/Black ■ White
Minorities are likely to use personal funds
as their primary business funding source
25%
22%
29%
17%
and had an investment yield rate of and are more likely to use personal funds
in response to financial challenges.
28.2%
79%
70%
76%
(up from 22% in 2018)
I 65%
Credit approval ratings are
generally lower for minorities
66%
85%
compared to a baseline rate of
59%
30.7%
(up from 23.2% in 2018).169 80%
and when approved, minorities
are less frequently approved for the
full amount of their loan .
•• . I
28%
43%
23%
49%
54 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 128 here 43965.128
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00165 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
160
How are minority founders faring with capital raising?
of VC-backed founders are African A merican/Black,
23%0 Hispanic/Latino, Middle Eastern, or A sian American.171
While all-white founding teams raise the majority of fundi ng rounds, when diverse founding teams
do raise capital from VCs, r.hey rend to raise more: 172
$40
$40
:?
f $30
C
v
$0
Seed Series A Series B Seriesc Series D Series E
■ Ethnically Diverse Founders ■ All-White Founders
ANNUAL REPORT : F ISCAL YEAR 2020 I 5S
Insert offset folio 129 here 43965.129
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00166 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
161
Why should investors care about investing in
minority-owned businesses?
Pattern matching persists:
Founders are 21% more likely to be funded by an
investor of the same ethnicity than of a different ethnicity.m
Investors in companies with ethnica ll y diverse leadership reams have higher realized return multiples
than they do from companies with all-white leadership teams: 174
Founding Team's Ethnicity C-Level Leadership Ethnicity
Ethnically Diverse All-White Ethnically Diverse All-White C-Level
Founders Founders C-Level Leadership Leadership
"
Our data show that more than 75% of all rounds are raised by White
Founding Teams. That means 3 out of 4 venture capital rounds are
going to non-diverse teams, who wi ll then go on and become repeat
founders or venture partners if their companies are successful.
MARLON NICHOLS, COLLIN WEST
AND GOPINATH SUNDARAMURTHY OF
KAUFFMAN FELLOWS175
56 I SEC OFFICE OF THE ADVOCATE FOR S MA LL BUSINESS CAPITAL FORMATION
Insert offset folio 130 here 43965.130
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00167 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
162
Minority Investors
1 7%0
of angel investors in 2019 were minorities
(up from 2018's level of 5.3%).776
t
Minorities remain underrepresented within the VC industry: 177
VC Workforce
76%
5% 4%
White Asian American Hispanic/Latino African A merican
/ Black
VC Investment Partners
80%
15%
3% 3%
White Asian American Hispanic/ Latino African American
/Black
ANNUAL REPORT : F ISCAL YEAR 2020 I 57
Insert offset folio 131 here 43965.131
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00168 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
163
How has COVID-19 impacted underrepresented founders?
The pandemic and resulting economic crisis have highl ighted a nd exacerbated preex-
isting inequities among historically underrepresented founders, including women and
minorir.ies. Data shows that founders in historicall y underrepresented groups have
been disproportionately impacted. 178 Examining recent devastation to underrepre-
sented founders' businesses caused by COVID-1 9 is cri tical to remediating long-term
gender and racial inequities in capita l formation .
Th e fi rst months of the pandemic saw widespread closures o f small businesses, with underrepresented
bus inesses disproportionately fo rced to shutter their doors in response to COVID-1 9:179
African-American/ Hispanic/ Asian/
Overall Women Black Latino American
15.0 mill ion 5.4 million 1.1mil1ion 2.1 million 885,000
~· 4.0 mi lli on
6 40,000
-~ 1.4million
"
The disproportionate losses in April 2020 to th e number of femal e
business owners will only further increase gender inequality in
business ownership and perhaps broader economic inequality.
ROBERT W. FAIRLIE OF THE NATIONAL
BUREAU OF ECONOMIC RESEARCH 190
Between August and September of 2020, 865,000 women exi ted the labor force, compared to
216,000 mcn. 18 1 Women arc exi tlng at a higher rate for a varicry of reasons, including (1) industries
disproportionately affected, (2) operation of smaller, younger, and more vulnera bl e businesses, a nd
(3) increased chil dcare and family burdens with school closures: 182
58 I SEC OFF ICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATIO N
Insert offset folio 132 here 43965.132
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00169 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
164
COVID-19 is impacting both founders and small busin esses' workforces . Women- and
mfriority-owncd businesses arc more likely to be negatively impacted by COVJ.D-1 9 because
of their industry sector, company resources, and scale of business:
of revenues for black-owned businesses
are in vulnerable sectors, compared with
25% for all firms. 183
]
Only 28% of scaled Latino-
owned businesses have a compared to 44 % of
majority of employees that white-owned businesses.184
can work from home
33%
lffi
Quarterly VC funding
of Hispanic/Latino parents for women founders hit a
and primary caregivers
have either shut down their
3yearlow
businesses or experienced in September.186
significant revenue declines.185
37% of LGBTQ+ 24% of LGBTQ+
entrepreneurs have been impacted by entrepreneurs have been impacted by
difficulty accessing short-term capital.187 difficulty accessing long-term capital.188
"
VC activity for female and other historically underrepresented founders
has seen some progress in recent years , but it remains far from parity.
Historically, investors have heavil y reli ed on network effects and pattern-
matching to make investment deci sions. [ ... ] However, with investors
turning their attention to existing portfolio companies and less likely
to travel or hold in-person meetings, it w ill bring new challenges to
founders who do not already have relationships with VC investors.
NATIONAL VENTURE CAPITAL ASSOCIATION 189
ANNUAL REPORT : FISCAL YEAR 2020 I 59
Insert offset folio 133 here 43965.133
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00170 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
165
Natural Disasters and
Capital Formation
hen natural disasters sr.rike, they often impact the surviva l prospects for r.he community's
W small businesses, which may have fewer resources to weather the chall enges to rebuild and
reinvigorate r.heir customer base.
Where were the largest natural disaster events in the past year?
Between October 1, 2019 and September 30, 2020, there were 20 natural disaster events with losses
exceeding $1 billion in U.S. states and cerritories: 190
I
What is the impact of natural disasters on small businesses?
experience revenue fail w ithin a year
losses.191 unless they can
resume operations
with in S days.192
60 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAP ITAL FORMATION
Insert offset folio 134 here 43965.134
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00171 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
166
How does the percentage of the population affected by natural
disasters compare to the amount of capital being raised?
of the U.S. population193 lives in an area that was affected by a
natural disaster during the three years ending June 30, 2020.194
Businesses in areas affected by natura l disasters over that three·year time period are generally raising
less capital relative to the affected population, except with respect to offerings pursuant to Regula tion
Crowdfunding: 195
35%
30%
Compared
25% - - - - - - - - - - - - --1 t - - - - - - - -• to26%of
affected
population
20%
15%
10%
- - - -
5%
$4028 $S1'M $IOM $108
0%
Regulation D Regulation A Regulation CF Registered Offerings
by Small Public
Companies
ANNUAL REPORT : FISCAL YEAR 2020 I 61
Insert offset folio 135 here 43965.135
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00172 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
167
Rural Communities and
Capital Formation
How do rural entrepreneurs access capital?
Rural entrepreneurs ofren rely on a diverse array of traditional and nontraditiona l capital sources to
meet their financing needs .196 T hese sources include, among or.hers, community banks, Community
Development Financial lnsti tutions (CDFls), 197 revolving loan funds, government-subsidized
solurions,1 98 angel/seed investors, and venture capital.
Community banks remain a key source of debt funding for rural businesses compa red to noncom-
munity banks. From 2014 co 2019, rural communities saw a much larger decline in the number of
offices of noncomm unity banks than community banks: 199
Decline of Rural Bank Offices
10,000
9,000
8,000
7,000
6,000
5,000
4.7% decline
4,000
3,000
2,000
1,000
2014 2015 2016 2017 2018 2019
■ Community Banks Noncommunity Banks
What sectors of the economy create jobs in rural communities?
While rural communities are often associated with the agricultural sector, employment in nonmetro·
politan communities, including rural communities, is actually more heavily concentrated in the services
sector, which includes healchcare, food, administration, professional, ans, educar.ion, and managemenc:200
28.2%
Employment by Industry in
Metro vs. Nonmetro Counties
15.7%
0.9% 0.9%
Service Farm Manufacturing Construction Mining Forest
■ Nonmetro Counties ■ Metro Counties
62 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 136 here 43965.136
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00173 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
168
Where are rural businesses growing in number?
In 2018, 53% of rural counties in the U.S. saw an increase in the number of businesses.
Rural counties in the Western U.S. led the growth, where the number of businesses inc reased
by 2.4%. The five states with r.hc highest rares of rural business growth were: 201
California Hawaii New Mexico Oregon Utah
\
How does the rural population compare to the amount of capital
being raised?
-·
t 18%
of the U.S. population
lives in rural areas. 202
J
17%
of small employer firms are
located in rural areas. 203
However, over the three years ending June 30, 2020, bus inesses in rura l areas1 04 raised less capital
relative to the U.S. popula tion :
Compared
18% to 18% of U.S.
C population
~
16%
)!!
14%
"'
~
0~ 12%
~ -~
;, E 10%
": E
mo
·6.~ 8%
m ~
Uo
00'. 6% $102M
total $6.2M
il,
total
i
~
4%
$11.3B $455M
3' 2%
total
total
0%
Regulation D Regulation A Regulation CF Registered Offerings
by Small Public Companies
The concept of ' locavescing'-which refers to community investing-has been recognized as
especially important in rural areas lacking invesnnent capital since such areas often have strong
economic ties co their local businesses.205
ANNUAL REPORT: FISCAL YEAR 2020 I 63
Insert offset folio 137 here 43965.137
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00174 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
169
Insert offset folio 138 here 43965.138
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00175 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
170
Policy Recommendations
uilding upon last yea r's annua l repo rt,206 the O ffice developed the fo ll owing policy
B recommendations for Congress and the Commission to consider based upon feedback
received through hundreds of outreach events, phone calls, meetings, video conferences,
and virtu al coffees.
The recommendati ons set forth in this Report a re crafted as pragmatic responses to the most
sigrUficant issues impacting capital formation. Each recommendarjon includes background context,
any recent Commission action, particular impact to demogra phic groups, an d a potential sol ution.
The Office, together with the SEC's Atlanta Regional Office, convened thought leaders at Morehouse College to discuss
barriers to entry for founders of color
ANNUAL REPORT: FISCAL YEAR 2020 I 65
Insert offset folio 139 here 43965.139
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00176 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
171
Education to Ease Challenges of Offering Complexity and Fnct1on
No matter the industry, every company needs capital to build, grow, and scale. When that capital
does not come from retained business earnings, personal savings, or debt financing, companies
regularly look to the private markets to finance early-stage operations and development. Some
founders do this with a single private financing in mind; others do so with aspirations of raising
multiple rounds in preparation for becoming a public company. In both cases, raising capital
through the private ma rkets via exempt offerings is a necessary step in building rhe company.
For the companies that will one day go public, the early-stage capital provides a foundation for
the business to reach the size and maturity needed to go public. For the many other millions of
small businesses that are not looking to become public companies, funding is critical for thei r
development and for job crear.ion in communities throughour. the United States. Ir is important
that we foster an environment where the next generation of publicly-traded companies can flourish
just as much as the Main Street businesses who create the majority of nee new jobs in the country
each year. 207
Last year's annual report noted that to comply with our securi ties laws in raising capital,
marketplace parr.icipanrs rend to need either a law degree or access to sophisticated counsel who
can help them navigate the rules, both of which carry a significant price tag and can be a barrier to
entry. T hose barriers to entry a re exacerbated when looking at differences in persona l wealth that
may create additional hurdles for underrepresented founders. 208 Our report specifically high lighted
the challenges created by the differing requirements among offering exemptions, as well as the
uncerta inties that come when transi tioning from one offering exemption to another. We underscored
that capital formar.ion is negatively affected when the rules confuse not only the actors who are
directly impacted by the rules-namely, businesses and investors-but also counsel on whom they
rely for expert advice.
As a potential so lution, we highlighted the SEC's May 2019 Concept Release on H armonizacion 209
and iden tified guiding principles for the Commission to consider when looking to modernize,
clarify, and streamliner.he regulations on r.he offer and sale of securir.ies. In addition, we identified
specific structural and regu latory changes that could be made to Regulation Crowdfunding to
improve the offering structure for both investors and companies. Since r.hen, the Commission
proposed210 and adopted 2 11 significant changes to the exempt offering framework that took into
account the feedback we had been hearing and our recommendar.ions. These changes are a posir.ive
step towards easing some of the friction in our exempt offering framework; however, the process
of selecr.ing r.he opr.imal exemption to raise capital remains a daunting cask for many small
businesses and their investors.
66 I SEC OFFICE OF THE ADVOCATE FOR SMAL L BUSINESS CAPITAL FORMATION
Insert offset folio 140 here 43965.140
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00177 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
172
Potential Solution: Targeted Educational Programs
Education about the exempt offering framework, Lncluding the Commission's recent changes,
supports a healrhy invesr.ing ecosystem for both small businesses and their investors. Educar.ional
resources can help small businesses and their investors identify which options best fit their capital
needs, risk tolerance, and long-term objectives. When crafting educational resources, we recommend
the following:
Provide small businesses and their advisors with information that helps promote compliance with
the federal securities laws in an accessible and easily-comprehensible format.
Equip investors with appropriate tools to understand whar informar.ion and other rights they have
under differen t types of offerings.
Target audiences r.hat face challenges in raising capital, such as minority- and women-owned
small businesses2 12 and businesses outside of traditional "hotspots" fo r capital raising, including in
rural communities. 213
Fireside chat at the National Venture Capital Associat ion's Strategic Operations & Policy Summit in October 2019.
ANNUAL REPORT: F I SCAL YEAR 2020 I 67
Insert offset folio 141 here 43965.141
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00178 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
173
Regulatory Clarity to Bridge Networks between Founders
and Investors
Many small businesses struggle with how ro connect to investors with the right ri sk tolerance,
industry experience, an d investing o bj ectives for their compa ny. For many entrepreneurs and
found ing teams who want to raise capital, their personal networks lac k investors with deep pockets.
Women and minority fo w1ders in particu lar often have networks that are less likely to be high net
worth, which ca n crea te additional barriers to entry as an entrepreneur. 214 Connecting with ea rl y-
stage investors who bring rel eva nt industry experience ca n positively impac t a company's trajectory
through mentorship, busin ess relat ionships, and support with fo ll ow-on funding, but those investors
may lie outside o f a founder's personal network. Th e matchmaking services that these sma ll
businesses and investors seek often li es outside o f the scope of services performed by registered
broker-dea lers, leaving a gap in the capital fo rmation ecosystem .
Last year's annual report noted that small businesses and their investors need clarity on what role
finders can play in providing services that fall short of requiring registration as a broker-dealer. For
decades, founders have cri ed to conn ect with invest0rs using a roadmap that could benefit from clear
signage. ln October 2020, th e Commission proposed an o rder2 15 that would permit natural persons
to engage in certain limited activ ities involving accredited investors without registering with th e
Commission. As of the date of this Report, that proposed o rder has not been made final.
Potential Solution: Clear Finders Framework
We apprec iate the feedbac k that small businesses, investors, and other market participants shared
in response to th e Commission's proposed order. Th e comments demonstrate the need fo r a clear
framework to regulate finders, and many make suggestions to improve aspects o f th e proposal.
We con tinue to hear that both sma ll businesses and their investors would benefit from additi ona l
certainty in this space, and we encourage the Commi ssion to finalize a framework that delineates
the legal obligations of persons who march small businesses with investors. Certai nty for market
participants will encourage com pliance with securities laws and provide clarity to investors on the
protections in place when engagi ng with a finder.
68 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUS I NESS CAPITAL FORMATION
Insert offset folio 142 here 43965.142
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00179 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
174
D1vers1fying Access to Capital
Accredited Investor Definition
The definition of "accredited investor" largely determines for small bus inesses who is in their pool
of potential investors, and for investors whether they are eligible to in vest Ln man y early-stage
companies. Many of the offeri ng exemptions limit participation co accredited investors or contain
restrictions on participation by non-accredited investors.
Last year's annual report identified as proposed solutions the refinement of the accredited investor
definirion to add alrcrnarive measures fo r evaluar.ing investor sophistication . Since then, r.he
Commiss ion adopted fin al rules21 6 in August 2020 that update the accredited investor definition ro
more effectively identify institutional a nd individual investors that have the knowledge a nd expertise
to participate in exempt offerings. The final rules encourage continued feed back on add itjo nal
professional criteri a that could impart accredited status for individuals .
Pooled Vehicle Funding
Fundi ng from accredited investors, including those who act as angel investors in sma ll businesses, is
on ly one piece of the early-stage capital puzzle. Small businesses also look for cap ital from private
funds, such as venture capital funds a nd private eq uity funds that operate under va ri ous exemptions
from registration. The increasing co ncentration of capital into la rger, private funds has resulted in a
growing unmet need among entrepreneurs looking for seed and ea rl y-stage capital, with larger funds
finding it inefficient or lacking bandwidth to make mulr.iple small investmenrs. 2 17
We continue to hear about
cha llenges that entrepreneurs
face in accessing capital from
funds, es pecially from women
a nd minority entrepreneurs and
from businesses located outside
of venture capital hotspots. 21 8
Women and minority
entrepreneurs often find
themselves pitching ro investors
The Office's Colin Caleb and Atlanta Regiona l Office's Richard Best and
Mark Youdell engage with attendees at the SEC's Atlanta HBCU homecoming whose historical notion of
week event in October 2019.
successful entrepreneurship
looks white and ma le, which aligns with the profi les of the majority of investment decision-
makers. 219 Many such investors are " pattern marching," or looking to replicate investments based
on the profile of a "successful" founder who matches a predictable pattern, which often does nor
reflect the diversity of the talented founders making the pitch. 220 Pattern ma tching perpetuates
a cycle that concentrates capital in limited geographies, ethnicities, genders, and educational
backgrounds. Entrepreneurs loca ted in parts of the country that are not traditional hubs for cap ital
ra ising are likely to have to travel long distances-or move their compa nies-in order to access such
capita l. Last yea r's a nnu al report flagged many of these challenges.
ANNUAL REPORT : FISCAL YEAR 2020 I 69
Insert offset folio 143 here 43965.143
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00180 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
175
Potential Solution: Support for Pooled Investment Vehicles
L1creased diversity amo ng fw1d managers, the location of funds 1 and the size of funds shouJd improve
access to capital for entrepreneurs, as well as opportunities for investors to support a more diverse
pool of talented entrepreneurs. We encourage Congress and the Comm_jssion to explore initiatives
to increase diversity among investment decision-makers to help shift the pattern matching that
historically has negatively impacted women an d rninority entrepreneu rs. In addition, we encourage
exploration of pathways to promote the for mation of smaller, regional funds to facilitate the growth
of sustainable regional ecosystems through locavesting. 221
Attractiveness of Public Markets
Jr is critical that compa ni es conti nue to view participating in our public markets as an attractive
goal, and we contin ue to engage in conversations on how to encourage more companies to go
public. When deciding whether to remain private or embark upon an IPO, most compa njes
understandably weigh the costs-including costs of regula tory complia nce-agai nst the benefits-
namely liquidity, ease of future capital rais ing, an d a reputationa l boon. 222 M any aspects of our
reguJatory structure were o ri ginally targeted at the largest of public compa ni es, and when appli ed to
small public companjes, they bea r a djsproporrionate financial burden to assure compliance. This is
added on top of the declinin g research coverage of small pub lic companies, wh ich creates liquidity
cha ll enges that in cent private compa ni es to delay becoming public until they reach a larger size and
scale (which notably diminjshes potential returns for public market investors). ln many cases, it may
encou rage smaller private compa nies to co nsider an alternative exit, such as an acquisition.
ln last year's annual report, we encouraged Congress and the Commission to continu e to tailor
the d isclosure and reporting framework to scale the obligations of reporting compa nies to their
complexity and scale of operations. Since then, the Commission has taken further actjon in this area
through multiple rulemakings.22 3
70 I SEC OFF ICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 144 here 43965.144
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00181 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
176
Potential Solution: Foster the Public Company Environment
Congress and the Commission should continue to consider market innovations that could have
the effect of incenting more companies to go public and to remain public. For example, 2020 saw
innovations in the rPO process, including continued interest in the direct listing process. During the
year, we also saw an increased nwnber of public listings,224 including a notable increase in offerings by
specia l purpose acquisition companies (or SPACs).115 While the relative advantages and disadvantages
of these new processes remain to be fully explored, we are encouraged by the advancement of market
innovations, and we support the Commission considering or.her innovations that will encourage more
private companies to go public and thereby expand investment opportunities for retail investors.
For companies that are already publicly traded, it is important that they are motivated to stay public
to maintain breadth of investment opportunities for investors. We encourage Congress and the
Commission to regularly evaluate both sides of the regulatory coin: the rules that encourage private
companies to become pub lic, such as the emerging growth company accommodations, as wel l as the
rules that support the many existing smalJ public companies who are juggling increasing compLance
costs a longside declining research coverage and liquidity concerns. Together they will inure to the
benefi t of our country's investors and the market at large.
Miami area ent repreneurs share their experiences ra ising capital with the Office's Martha Miller and Jessica McKinn ey during
a January 2020 roundtab le gathered by the Miami-Dade Beacon Council,
ANNUAL REPOR T : FISCAL YEAR 2020 I 71
Insert offset folio 145 here 43965.145
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00182 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
177
Insert offset folio 146 here 43965.146
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00183 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
178
Small Business Capital
Formation Advisory
Committee FY2020 Summary
he Small Business Advocate Act estab lished the SEC's Small Business Capital Formation Advisory
T Committee (Commitcee). 126 The Committee provides a forma l mechanism for r.he Commission
to receive advice and recommendations on Commission rules, regulations, and policy matters
affecting small businesses, from emerging, privately-held companies co publicly-traded companies
with less than $250 million in public market capi talization; trading in securities of such companies;
and public reporting and corporate governance of such companies. The Office provides administrative
support for the Committee, whic h otherwise functions independently.
ln April 2019, the Commission ap pointed r.he inaugural members of the Committee.227 The membershi p
includes com panies and investors from across a diverse set of ex periences, industries, geographies,
and company life cycle stages. In FY2020, two inaugural members of the Committee resigned: Terry
Mc New and Karen Mills. In addition, Melanie Senter Lubin succeeded Michael Pieciak's service as the
Norr.h American Securities Administrators Association's representative, and William Manger succeeded
Joseph Shephard as the Small Business Administration's representative. The Commission is grateful
for their service and commitment to small businesses and their investors. Two new members were
appointed by the Commission in FY2020 to fill vacancies: Kesha Cash and Sue Washer.228 The members
of the Committee as of the end of FY2020 are as follows:
CARLA GARRETT, Chair YOUNGRO LEE, Assistant Secretary
Corporate Partner, CEO and Co-Founder,
Potomac Law Group PLLC NextSeed
Washington, DC Houston, TX
JEFFREY M. SOLOMON, KESHA CAS H
Vice Chair Founder and General Partner,
Chief Executive Officer, Cowen, Inc. Impact America Fund
New York, NY Oakland, CA
GREGORY YADLEY, Secretary GREG DEAN'
Partner, Shumaker, Loop & Senior Vice President of the Office
Kendrick, LLP of Government Affairs, FINRA
Tampa, FL Washington, DC
A N NUAL REPORT: FISCAL YEAR 2020 I 73
Insert offset folio 147 here 43965.147
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00184 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
179
ROBERT FOX MARTHA LEGG MILLER'
National Managing Partner, Director, Office of the Advocate for
Professional Standards Group, Small Business Capital Formation,
Grant Thornton LLP U.S. Securities & Exchange
Chicago, IL Commission
Washington, DC
STEPHEN GRAHAM
Co-Chair, Fenwick & West LLP's Life CATHERINE MOTT
Sciences Practice Founder and CEO of Blue Tree
Seattle, WA Capital Group, Blue Tree All ied
Angels, and Blue Tree Venture Fund
SARA HANKS Pittsburgh, PA
CEO and Co-Founder,
CrowdCheck, Inc. POORVI PATODIA
Alexandria, VA CEO and Founder,
Biena Snacks
BRIAN LEVEY Allston, MA
Chief Business Affairs and Legal
Officer, Upwork Inc. JASON SEATS
Santa Clara, CA Chief Investment Officer,
Techstars
MELANIE SENTER LUBIN' Austin, TX
Maryland Securities Commissioner
for the Securities Division, Office MARC OORLOFF SHARMA'
of the Attorney General Chief Counsel of the Office of the
Baltimore, MD Investor Advocate, U.S. Securities
& Exchange Commission
WILLIAM MANGER' Washington, DC
Chief of Staff and Associate
Administrator for the Office of HANK TORBERT
Capital Access; U.S. Small Business President,
Administration AltaMax, LLC
Washington, DC New Orleans, LA
SAPNA MEHTA SUE WASHER
General Counsel & Chief President and CEO, Applied Genetic
Compl iance Officer, Rise of Technologies Corporation
t he Rest Seed Fund; Associate Gainesville, FL
General Counsel, Revolution
Washington, DC
:(.Commirree members include the SEC's Advocate for SmalJ Business Capita l Formation and three
non·voting members appointed by each of the SEC's In vestor Advoca te, the North American Securiti es
Administrarors Association (NASAA), and the Small Business Administration, as well as an observer
appointed by the Financial Industry Regu latory Authori ty (FINRA).
74 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUS I NESS CAPITAL FORMATION
Insert offset folio 148 here 43965.148
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00185 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
180
Summary of Activities
Th e Committee met six times duri ng FY2020: two in person, one telephonic, and three by video
co nference. M aterials from meetings, including agenda, transcripts, and presentations, are ava ilabl e
on the Committee's webpage.
Small Business Capital Formation Advisory Committee FY2020 Meetings
Harmonization of the Exemp t Offering Framework and
November 12, 2019
Pooled Investment Funds
December 11, 2019 Harmonization of the Exempt Offering Framework (continued)
Exploration of Small Business Capital Markets Data and
Challenges Faced by Small Businesses and Their Investors;
February 4, 2020
and Local Capital Availabi lity for Early-Stage Companies
and the Role of Regional Funds
Ad Hoc Meeting in Response to COVID-19 Challenges Faced
April 2, 2020
by Small Businesses
May 8, 2020 Capi tal Formation Proposal
August 4, 2020 Underrepresented Founders and Investors
[Top left] Members of the Com m ittee discuss the
exempt offe ring framework at the Committee's
meeting at the SEC's Washington, DC
headquarters on November 12 , 2019
[Top right ] Chair Carla Garrett opens a video
conference meet ing. The Committee focused
many of its discussions t his year on the impacts
of COVID-19 on small businesses
[Bottom right] Members Jason Seats, Hank
Torbert, Greg Dean, and Michael Pieciak engage
in discussion
ANNUAL REPORT: F ISCAL YEAR 2020 I 75
Insert offset folio 149 here 43965.149
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00186 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
181
Committee Recommendations
During FY2020, the Committee put forward the fo llowing six recommendations to the Commission:
Accredited Investor Definition
November 12, 2019
T he Commission's Concept Release on H a rmonization of Secu ri ties Offering Exemptions,
Release No. 33-10649 (lune 18, 2019) (Harmonization Concept Release)"' included
a discussion of wher.her the SEC should amend the acc redited invesror definition. With
respect to the definition of "accredited investor" as set forth in Securities Act Rule 501(a)
of Regula tion D, the Committee recommends that the Commission:
1. Leave the current financia l thresholds in place, subjec t to possibly adjusting such
thresholds downwards for certain regions of rhe counrry.
2. Going forward, index the financial thresholds for Lntlation on periodic basis.
3. Revise the defini tion to allow individuals to qualify as accredited investors based on
measures of sophistication. In doing so, the Commission should create bright line
rules for qualifying as an accredited investor by sophistication, which could include
professional credentials, work experience, education, and/or a sophistication test.
RELEVANT COMMISSION ACTION
On December 18, 2019, as part of its broader effort to consider ways to harmonize and improve
the exempt offering framework under the Securities Ac t of 1933 (Securities Act), the Commission
proposed amendments to the definition of "accredited investor" under Regulation D of the Securities
Act to add new categories of qual ifying natural persons and entities and to make certain other
modificar.ions tor.he existing definirion .230
76 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 150 here 43965.150
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00187 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
182
After receivi ng public comment on the proposal, on August 26, 2020, the Commission adopted
final rules.231 The amendments maintain the financial thresholds in the rule and also permit natural
persons to quali fy as accredited investors based on, among other things, certain professional
certifications, designations, or credentials. The amendments also add new categories for
"knowledgeable employees" of private funds and "famjJy offices" wir.h more th an $5 million in
assets under management and their "famil y clients." ln a related order, the Commission designated
hol ders in good standing of the Series 7 (Licensed General Securities Representative), Series 65
(Licensed Investment Adviser Representative), and Series 82 (Licensed Private Securities Offerings
Representa tive) licenses as accredited invcsrors.232 Both the proposing rel ease and adopting release
referenced the Committee's recommendation to index the financ ial thresholds for inflation on a
periodic basis. However, comments were mixed on this topic and the final rules did not include
a n indexing provision. The adopting release stated that the Commission will continue to monitor
the size o f the accredited investor pool, the characteristics of individual accredited investors who
participate in the private markets, the appropriateness of the income and net worth thresholds, and,
to the extent data is availab le, performance and incidence o f fraud in exempt offerings, including in
connection with the Commission's quadrennial review of the acc redited investor definition required
by the Dodd-Frank Act.
Members Brian Levey, Sapna Mehta, and Cat herine Mott discuss during the Comm ittee's development of recommendations
on the accredited investor definition.
A N NUAL REPORT : FISCAL YEAR 2020 I 77
Insert offset folio 151 here 43965.151
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00188 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
183
Retail Investor Access to Registered Closed-End Funds
Investing in Private Funds
November 12, 2019
The Commission's Ha rmonization Concept Release included a discussion of whether the
SEC should ra ke steps to fac ilitate capital formation in exempt offerings through pooled
investment funds and whether retail investors should be allowed greater exposure to
private, growth-stage companies through pooled investment funds.
As part of such initiatives, the Committee recommends that the SEC remove the standard
chat registered closed-end funds investing more than 15% of their assets in private funds
must limit thei r sales to accredited investors.
RELEVANT COMMISSION ACTION
On November 2, 2020, the Commission adopted final rules to simplify, harmonize, and improve
certain aspects of the exempt offering framework to promote capital formation, while preservi ng
or enhancing important investor protections.133
Committee members Youngro Lee, Greg Yadley, Sara Hanks, Sapna Mehta, and Catherine Mott engage in discussion with
fund experts during the November 12, 2019 meet ing.
78 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 152 here 43965.152
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00189 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
184
Among other thi ngs, these final ru les increase the offering limits fo r Regulation A, Regu lation
Crowdfunding, and Rule 504 offerings; revise certain individual investment limits; and permit the
use of certai n special purpose vehicles to facil itate investing in Regulation Crowdfundi ng issuers.
ln addition, as described in connection with the accredited investor recommendation above, the
Commission adopted final rules that, among other things, add additional means for individual s ro
qualify as acc redited investors and participate in private offeri ngs, including certain private funds.
Chairman Clayton has also expressed interest in exploring options for increasing opportunities
for retail investors ro invest in private markets, includ ing through professionally managed funds,
on terms sim ilar to those available to institutional investors, and on a diversified basis.234 The
Director of the Division of Investment Management has emphasized the importance of expanding
public access to private markets as well, and has solicited feedback from fund sponsors, investors,
a nd other market participants o n how closed-end funds of private funds co uld help enha nce such
access, includ ing with respect to appropriate structures for these investmen ts, criter ia that would
promote access to high quality priva te market investments, a nd ways to avoid an extra layer of
fees and expenses.235
Regulation Crowdfunding
December 11, 2019
The Committee conti nued its discussion of topics covered in r.he Comm ission's Concept
Release on Harmonization of Securities Offering Exemptions, Release No. 33-10649
(June 18, 2019).
With respect. to Regu lation Crowdfunding, the Committee recommends r.hac
the Commi ssion:
1. Strea mli ne a nd tier the compli ance obligations, including ar what offering amounts
issuer reporting and financial sta tement audi t and review obligations are triggered;
2. Raise the $1 .07 mi llion per yea r offering limit;
3. Remove limits on acc redited investors' investment amount;
4. Change investment limits to apply on a per investment. basis rat.her than using an nual
investment limits, a nd ca lcul ate those limits based upon the greater, rather than lesser,
of income or net worth;
5. Allow eljgible investors to invest through special purpose vehicles; and
6. AJlow grea ter flexibility in porta l compensation.
A N NUAL REPORT : FISCAL YEAR 2020 I 79
Insert offset folio 153 here 43965.153
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00190 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
185
RELEVANT COMMISSION ACTION
As described above, on November 2, 2020, th e Commission adopted a set of rule amendments
that, among other things, raise r.hc offering limit in Regulation Crowdfunding from $1.07 million
to $5 million, permit the use of spec ial-purpose vehicles that function solely as a conduit to invest
in a business raising capital under Regulation Crowd funding, and increase rhe investment limits
a pplicable to investors in Regulation Crowdfunding offerings by no longer applying those limits to
accredited investors and allowing non-accredited investors to rely on the greater of their income or
net worth in calc ulating their invesonent limit.
The proposing release also requested comment with respect co the Regulation Crowdfunding
thresholds for different tiers of finan cial statement requirements. On May 4, 2020, the Commiss ion
adopted temporary final rules under Regulation Crowdfunding to faci litate capital formation for
small businesses impacted by COVID-19, which include, among other things, an exemption from
certain financial statement review requi rements for issuers offering $250,000 or less of securities
in reliance on Regulation Crowdfunding within a 12-month period. 236 On August 28, 2020,
the Commission extended that relief for offerings initiated through February 2021.237 While the
Commission did not adopt permanent changes to the financ ial statement thresholds, the November
2, 2020 final amendments extend the $250,000 threshold through August 2022.
Chair Carla Garrett and Vice Chair Jeff Solomon at the February 4, 2020 meeting, d iscussing the availability of capital in
d ifferent geographic reg ions.
80 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 154 here 43965.154
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00191 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
186
Harmonization General Principles
December 11, 2019
The Committee continued its discussion of topics covered in the Commission's Concept
Release on Harmonization of Securities Offering Exemptio ns, Release No. 33-10649
(June 18, 2019).
The Committee supports harmonization of the exempt offering framework and
recommends chat the Commission harmonize the exempt offering framework with the
following principles in mind:
a. The exempt offering framework should be clear, concise, and effective for small
bus inesses to raise capital;
b. The exempt offering framework should be simple and easy to understand, thereby
making it less complex for small buslnesses to raise capital;
c. T he elements of the current exempt offering framework that are functioning well
should be mainta ined, and therefore, the Commission should "do no harm" to RuJe
506(6) of Regulation D; and
d. integration should be revised so that the exemptions can be better utilized.
RELEVANT COMMISSION ACTION
As desc ribed above, on November 2, 2020, the Commission adopted a set of rule amendments to
simpl ify, harmonize, and improve certain aspects of the exempt offering framework to promote
capital formation, while preserving or enhancing important investor protections.
T he amendments genera lly reta in the
current exempt offering structure, but
reduce potential friction points and
seek to close gaps and reduce complexi6es
in the exempt offering framework r.hat
may impede access to investment
opporrun iries for investors and access to
capital for businesses and entrepreneurs.
Among other changes, r.he final rules
establish a new integra6on framework
that provides clarity with respect to
issuers' ability to successively ra ise capital
Member Poorvi Patadia shares detai ls about her company's
experiences during the early months of the COVID-19 pandemic under different exemptions.
ANNUAL REPORT: FISCAL YEAR 2020 I 81
Insert offset folio 155 here 43965.155
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00192 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
187
Capital Formation Proposal
May 8, 2020
The Committee generally supports the proposed changes to the exempt offering
framework set forth in the Capital Formation Proposa l, specifically:
1. Increasing annua l offering limits, allowing issuers to raise up to:
$5 million using Regulation Crowdfunding;
■ $10 mi llion using Rule 504 of Regulation D; and
• $75 million using Tier 2 of Regulation A.
2. Crcarjng an exemption from general solicirar.ion for "demo days" and similar pitch
events under proposed Rule 148.
3. Creating new ways for issuers to test the waters to gauge ma rket interes t prior to
incurring offering expenses by allowing:
Generic solicitation of interest materials for issuers to "test the waters" for an
exempt offer prior to determining which exemption it will use; and
Regulation Crowdfunding issuers to "test the waters" prior to filing an offering
document with the SEC.
4. Harmonizing what disclosures are provided to investors, including aligning the
non-accredited investor financial disclosure requirements in Rule 506(6) offerings with
the d isclosure requi rements of Regulation A.
5. improving the utility of Regulation Crowd funding by:
Increasing how much some individuals can invest by:
» Removing limits on how much accredited investors can invest; and
» Basing non-accredited investor limits on the grearer, nor lesser, of their
income or net worth;
Allowing investors to pool their funds together in a special purpose vehicle to
invest in a Regulation Crowdfunding offering; and
Aligning the types of securities el igible for offer under Regulation Crowdfunding
to correspond with the eligible securities in Regu lation A offerings.
T he Committee also encourages r.he Commission r.o clarify the basis for der.ermining
accredited investor status in Regulation Crowdfunding offerings.
6. Reducing the complexities across the offering framework by adopting an integration
framework that consistently defines and clarifies integrar.ion, including by r.he new
general principle and through the four proposed non-exclusive safe harbors. In
addir.ion, the Cornmirr.ee recommends char. rhe Commission add more cla rity around
integration with respect to convertible notes and subsequent public offerings.
82 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 156 here 43965.156
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00193 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
188
In addition to items included in the Capiral Formation Proposa l, the Committee
encourages the Commission to:
a. Consider adding a micro-offering exemption, as referenced in question 64 of the
Capital Formation Proposal, with fewer reporting requirements and restri ctions
for issuers;
b. Provide pa thways for retail investors to invest in a wider range of small businesses
r.hrough pooled investment vehicles; and
c. Adopt a clear framework for unregistered fin ders (as recommended by the prior
SEC Committee on Small and Emerging Com panies2 38 and at SEC Small Business
Forums239 ) in light of thei r role as intermediaries in fosteri ng capital formation for
sma ller businesses.
RELEVANT COMMISSION ACTION
As discussed above, on November 2, 2020, the Conunission adopted, among other things, rule
amendments consistent with each of the Committee's specific recommendations numbered 1 through
6 above, other than the recommendation to align the types o f securities eligible fo r offeri ngs under
Regular.ion Crowd funding to correspond with r.he eligible securities in Regulation A offer ings.
Further, in response to comments received on the proposing release suggesting the addition of an
accredited investor verification requirement in Regulation Crowdfunding, the Commission stated
its belief in the adopting release that a
verification requirement is unnecessary.
On October 7, 2020, the Commission
proposed a limited, condi tional
exemption from broker registration
requirements for " finders" who
assis t issuers with raising capital
in private markets from accredited
investors. The Commission requested
public comment on aU aspects of the
proposed exemption.
Committee members greet one another before their meet ing.
A N NUA L REPORT : FISCA L YEAR 2020 I 83
Insert offset folio 157 here 43965.157
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00194 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
189
Underrepresented Founders and Investors
August 4, 2020
T he Committee presented the following findings regarding how capita l markets are
serving underrepresented founders and in vestors, and in particular how minority-
and women-owned businesses and funds face barriers to entry due to less access to
capital rhan r.heir peers:
The Committee acknowledges that r.he counr.ry is at an in fleer.ion point wir.h
respect to confronting matters of racial equity and inclusion, and access to capital
is a powerful cool ro help achieve racial and economic equity.
Inclusion in the development of new business and economic growth is important
to our national well -being, particularly for minori ties and women.
As evidenced by the statistics240 presented co the Committee during [its August 4,
2020J mee6ng, including that minority-owned and women-owned businesses
have significantly less capital when srarr.ing a business compared with new whir.e-
owned businesses, the Committee acknowledges that the capital formation rules
may include impediments for minorir.ies and women to access the capital markers.
Regulatory action to improve the current capital-raising system-in which
minorities and women have been underrepresented and inadequately supported-
is critical.
The Committee supports regulatory revisions to the capital-raising rules and
ecosystem that promote increased opportunities for diverse entrepreneurs
and investors, particularly minorities and women, and asks the SEC to take
leadership in the area.
84 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUS I NESS CAPITAL FORMATION
Insert offset folio 158 here 43965.158
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00195 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
190
Member Kesha Cash at the August 4 , 2020 video conference meeting where the Committee diso.issed the need to promote
increased opportunities for diverse entrepreneurs and investors
RELEVANT COMMISSION ACTION
Over the course of 2020, the SEC heard from a variety of thought leaders on how the Commission
can support improvements to diversity and incl usion, includ ing in small business capital formation,
as well as in the asset management industry. Further, the Commission published its first Diversity
a nd Incl usion Strategic Plan for Fisca l Years 2020-2022241 in collaborar.ion wir.h the SEC's Office
of Mi nority and Women Inclusion as a bluepri nt to build upon to promote workforce diversity,
inclusion, and opportunity, as well as supplier di versity, in lighr. of r.he dynamic and ever-changing
nature of the markets the SEC oversees. In the November 2, 2020 release that accompanies the
amendments tor.he exempt offering framework menr.i oned above, r.he Commission srar.ed:
We are m indful of concerns expressed in the Recommendation of the SEC Small Business
Capital Formation Advisory Committee regarding how our capital markets are serving
underrepresented founders and investors. The recommendation states that m inority- and
women-owned businesses and funds face barriers to entry due to less access to capital than
their peers. We believe that the amendments adopted in this release will enable small
businesses generally to access capital through exempt offerings more effectively and we
encourage further specific, tangible suggestions for action by the Com mission and are
com mitted to continued engagement on this topic.
A N NUA L REPORT : FISCAL YEAR 2020 I 85
Insert offset folio 159 here 43965.159
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00196 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
191
Insert offset folio 160 here 43965.160
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00197 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
192
END NOTES
1 See https:l/ww w. sec.gov/fil es/20 19_0ASB_An- "O ther exempt offeri ngs" includes estimated
nual%20Report.pdf. amounts raised under Section 4(a )(2), Reg-
See https://www. sec.gov/files/Sma11 %20Busi- ulation S, and Ruic 144 A for cale ndar year
ness%2 0Advocate%20Act% 20of% 2020 16- 2019. See note 600 in "Faci litating Capital
a s%20amcnded.pd f. Formation and Expanding In vestment Op-
The Small Business Advocate Act also estab- portuniti es by Improving Access to Capital in
li shed a Small Business Capital Formati on Private Markets," Rel. No. 33-10884 (Nov. 2,
Adv isory Committee at the SEC. Th e Office uses 2020), available at https://www.sec.gov/r ules/
the Committee's parameters to define the scope fi nal/2020/33- 10844.pdf (" Amendments to Ex-
o f small businesses that it ser ves. empt Offering Framework ") for a description of
The SEC conducts the Forum annually and the methodology used to ca lculate this amount.
prepares a report in accordance with the Sma ll We do not yet have data to provide an estimated
Business ln vestmem Incentive Act of 1980 [15 amount raised under Section 4 (a )(2), Regulation
U.S.C. 80c- 1 (cod ifying section 503 of Pub. L. Sand Rule 144A for the period through J une
No. 96-477, 94 Stat. 22 75 (1980))]. 30, 2020 .
See https:l/www.sec.gov/virtua lcoffee . 17 C.F.R. § 227.100 et seq.; see https://www.sec.
Th is graphic is based on DERA data. This gov/small busincss/excmptofferings/regcrowd-
graph ic depicts a mounts reported or estimated fundin g.
as ra ised from July I, 2019 through June 30, See Amendmen ts to Exempt Offering Frame-
2020 . Data on offerings under Regulati ons D work, supra note 7.
and Crowdfunding is based on in format ion 10 17 C.F.R. § 230.504; see https://www. sec.gov/
reported by compani es and was collected fr om smallbusiness/exemptoffet ings/rule504.
EDGAR filings (new filings and amendments) 11 See Amendments to Exempt Offering Frame-
on Forms D and C, respectively. Data on regis- work, supra note 7.
tered offerings was collected from Thomson Fi- 12 Securities Act of 1933 § 3( a )( l 1), 17 C.F.R. §
nancial's SOC Pl atinum database. For offerin gs 230.147, and 17 C.F.R. § 230.147 A; see https://
under Regulation Crowd funding, except where www.sec.gov/smallbusiness/exempto ffer ings/
specified otherwise, estimates o f the nu mber in trastateofferings.
o f offerings arc based on offerings completed 13 17 C.F.R. § 230.506(b); see https://www.sec.
during this period as shown on progress updates gov/smallbusiness/exemptofferings/rule506b.
on Form C-U; estimates o f amounts raised are 14 See "Final Rule: Accredited Investor Defi ni-
based on proceeds reported in progress updates ti on," Rel. No. 33-10824 (Aug. 26, 2020),
filed on Form C-U during th e report period. available al https://www.sec.gov/ru les/fi -
For offerings under Regulati on A, except where na l/2020/33- 10824 .pdf.
specified otherwise, estimates of the number of 15 17 C.F.R. § 230.506(c); see https://ww w.sec.gov/
offerings are based on offerin gs qualified during smallb usiness/exemptofferings/rule506c.
this period, excluding post-qualification amend- 16 17 C.F.R. § 230.251 el seq.; see https://www.sec.
ments; estimates of amounts raised are based on gov/smallbusiness/exemptoffer ings/rega .
proceeds reported in filings made during the re- 17 See Amendments to Exempt Offering Frame-
port period. Capita l raised is based on in forma- work, supra note 7.
tion reported by companies in Forms 1-Z, 1-K, 18 15 U.S.C . § 77a, er. seq.; see https://w ww.sec.
1-SA, 1-U, and offering circular supplements gov/smallbusiness/goingpublic.
pertaining to completed and ongoi ng Regulation 19 This graphic presents capital raised in registered,
A offerings and post-qua li fi cati on amendments, Regulati on D and Regulati on A offeri ngs across
a nd for companies whose shares have become the top six industries from Jul y 1, 20 18 thro ugh
exchange- listed, in for mati on fro m other public J une 30, 2019. Offerings by non-pooled in vest-
sources. Estimates represent a lower bou nd ment fonds in other industries accounted for
on the amounts rai sed given the time fram es approximately $225 billion, $43 billion and
for reporting proceeds following completed or $55 million in registered, Regulati on D a nd
terminated offerings and that offerings qualified Regulation A offerings, respectively. Regulation
during rhc report period ma y be ongoi ng. For A and registered offerings were classified into
the offerings that permi t pooled investment industry groups based on th e primary SIC code
funds, such as Rule 506(6) and (c) of Regulatio n reported by the compan y. In dustry groups were
D and registered offeri ngs, the data incl udes self-reported by compan ies on Form D. Differ-
offerin gs conducted by pooled investment funds. ences in data sources and definitions may limit
ANNUAL REPORT : FISCAL YEAR 2020 I 87
Insert offset folio 161 here 43965.161
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00198 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
193
the com parability of industry dara. Offerings by goods or services that require in-person physical
pooled investment funds, which accounted for interaction and thereby carry a risk of COV ID
approximately $29 billion and $ 1.32 trillion in infection, such as hotels, transportation, and
registered offerings and Regulation D, respec- food services, consistent with the findings of
tively, are excluded from this graphic. See supra Diane Alexa nder & Ezra Karger, "Do Stay-at-
note 6 fo r a description of how these amounts Home Orders Cause People to Stay at Home?
were reported or estimated. Effects of Stay-at-Home Orders on Consumer
20 T he maps included in this section depict rhe Beha vior." Federal Reserve Bank o f Chicago
amounts reported or estimated as raised by Working Paper No. 2020-12. The composi-
issuers, including pooled investment funds that tion of spending cuts - with a large reduction
report a primary location in the U.S., including in services - differs sharply from that in prior
U.S. territories, from July 1,2019 through June recessions, where service spend ing was essen-
30, 2020 . See suf)ra note 6 for a description of tially unchanged and durable goods spending
how these amou nts were reported or estimated . fell sharply."); see also Bartik, supra note 22,
21 See Board of Governors of the Federal Reserve at 3 (" Impacts also vary across industries, with
System, "Monetary Policy Report" (Jun. 12, retail, arts and entertainment, personal services,
2020 ) at 1, available at https://www.federa lre- food services, and hospitality businesses all
serve.gov/monetarypolicy/files/20200612_m pr- reporting employment declines exceedin g 50
fu llreport.pdf {" In response to the public percent. Finance, professional services, and real
health emergency precipitated by th e spread estate related businesses have seen less disrup-
of COVID-19, many protective measures were tion."' ).
adopted to limit the tran smission of the virus. 28 Board of Governors of the Federa l Reserve
These social-distancing measures effective ly System, sufna note 21, at 4.
dosed parts of the economy, resulting in a sud- 29 This map illu strates th e percentage change in
den and unprecedented fall in economic activity open small businesses across the U.S. relative
and historic increases in joblessness."). to January 2020 based on transaction data. See
22 See Alexander W. Banik, et al., "How are Small Cherry, sufna note 27, at 12 ("We define small
Businesses Adjusting to COVID-19? Early businesses as being open if they have a transac-
Evidence from a Sur vey," N ational Bureau of tion in the last three da ys. We exclude coun-
Econom ic Research, {Apr. 2020 Working Paper ) ties with a total average revenue of less than
at 3, available at http://www.nber.org/papers/ $250,000 during the pre-COV ID-1 9 period
w26989. (January 4-31 )." ). Data is available at https://
23 See Board o f Governors of the Federal Reserve tracktherecovery.org/.
System, su/na note 2 I, at 2. 30 See id. at 12 (" We define small businesses as
24 See National Venture Capital Association, being open if ther have a tran saction in the last
"Startup Ecosystem Faces Capital Crunch th ree da ys. We exclude counties with a total av-
over Coming Month s" (Apr. 27, 2020) at 2, erage revenue of less than $250,000 during the
available at https://nvca.org/wp-content/up- pre-COVID-19 period {Janua ry 4-31 ).") . But
1oad s/2 020/04/Startup- Ecosystem -Faces-Ca pi- see Board of Governors of the Federal Reserve
tal-Cru nch-over-Com ing-Months-5. pd f. System, "Business Exit During the COVID-19
25 See id. at 12 {" The capital crunch in the indus- Pandemic: Non-Traditional Measures in H istor-
try will be felt across the board, but perhaps ical Context" (October 2020) at 2-3, available
most acutely by founders and in vestors in at https://www. federa lreserve.gov/econres/feds/
historicall y underrepresented groups, in emerg- fi les/2020089pap.pd f (noting " [aJ key challenge
ing venture ecosystems, and smaller (<$ 100 is distinguishing between temporary shutdown
million ) and new venture fund managers."); see and permanent shutdown (death) .... and that
also MetLife and U.S. Chamber of Commerce, identifying deaths is more difficult in alternative
"Small Business Coronavirus Impact Poll," data sources." Further noting that "the li ne be-
(Jul. 29, 2020 ) ar 6, available at https://www. tween temporary and permanent shutdown may
usch amber.com/sites/defau lt/files/metlife_uscc_ be blurry at times, as even temporary shutd own
sbi_coronavirus_impact_poll j uly.pdf. may have significan t economic impli cati ons if
26 See Board o f Governors of the Federal Reserve it is prolonged or results in substantia l business
System, supra note 21, at 24. restructuring before reopening." ).
27 See Raj Cherry et al., "The Economic Impacts 31 See Cherry, supra note 27, at 12 ("We defin e
of COVID-19: Evidence from a New Public small busi nesses as being open if they have a
Database Built from Private Sector Data," transaction in th e last three days. We exclude
Opportunity !11sigbls, (Se pt. 2020) at 3, avail- counties with a total average reven ue of less
able at https://fairmodel.econ.ya le.edu/ec438/ than $250,000 during the pre-COVID-19
chettyl. pd f ("Most of th e reduction in spend- period (January 4-31 ). "). Data is available at
ing is accounted for by reduced spend ing on https://tracktherecovery.orr).
88 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 162 here 43965.162
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00199 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
194
32 See id. of senior loan officers, conducted in July, 70%
33 See Bo:1rd of Governors of the Fedeml Reserve of respondents reported tightening lending
System , supra note 2 t, :it 24 ("Sm:1ll firm s standard s for sm all firm s-the most since the
tend to be more financ ially constrained than fourth q uarter o f 2008, when the fin anci al crisis
larger firms. For example, b:1nk :1ccount d:1t:1 struck. "). The underlying data was obtained
suggest that roughly half of sma ll businesses from the Federal Reserve Board's Senior Loan
entered th e COVID-19 crisis with cash reserves Officer Opinion Survey on Bank Lending Prac-
sufficient for fewer than 15 days of operati ons tices for July 2020, available at. https://www.
with ou t revenue. Moreover, even under normal federa lreserve.gov/data/sloos/sloos-202007.htm.
circumstances, many small firms face fi nancial 39 Id.
cha llenges and lack access to liquid fina ncial 40 See "Founder Demographics & Ca pital Forma-
markets, relying instead on bank loans, credit tion" section, i11fra.
cards, and the personal resources of owners."). 41 Sec NSBA Small Business Survey, "Covid- 19:
See also Diana Farrell, et :1I., " Pl ace Matters: The Path Forward," Ou[ . 2020 ) available at
Small Business Financial Health Urban Commu- https://nsba.biz/wp-content/uploads/2020/07/
nities," JPMorga11 Cbase Institute, (Sept. 2019) COVI D-1 9-Path-Forward-Survey-J uly-2020.
(" In the rypical communiry ... 47 percent had pdf. This survey was taken among 630
two weeks or less of cash liquidity. [... J In all small -business owners June 16-23, 2020; see
majority Black or Hi span ic communiti es, most :1lso The UPS Store, "I nsid e Small Business
small busin esses had fewer than twenty-one Survey," (2020) available at https://www.
cash buffer days."); see also Banik, supra note theupsstore.com/File%20Library/theupsstore/
22 , at 3 ("Second , our results suggest that many pr/theupsstore-inside-small-business-in fogra ph-
businesses are fi nancial ly fragile. T he med ian ic-2020.pdf (reporting tha t 41 % o f small busi-
firm with ex penses over $ 10,000 per month nesses changed or pivoted their business) ; see
has only enough cash on hand to last for two also The Visa Back to Business Stud y, "Global
weeks."). Small Business and Consum er In sigh ts Power-
34 See Hell o Ali ce & CCV Capi tal Impact Report ing Recovery Through Digital and Contactl css
(Oct. 2020) available at https://alice-data-pro- P:1yments Amidst COVID- 19," (2020) available
duction.s3.us-east-2.amazonaws.com/data_re- at https://usa.visa.com/damNCOM/global/run-
ports/Hello_Alice_and_GGV_Capital.pdf. See your-business/documents/visa-back-to-business-
also B..1 rtik, supra note 22, at 3 (stating that study.pdf (reporting that more than 67% of
sma ll businesses on :1verage reported having small and micro businesses in the U. S. pivoted
reduced th eir empl oyees by 40% sin ce January). to keep their business on track sin ce the onset of
35 See Facebook and Small Busin ess Roundtable, COVID-19).
"State o f Sm:1ll Business Report" (May 2020), 42 See The UPS Store, supra note 41.
available at. https://about.fb.com/news/2020/05/ 43 See Rieva Lesons ky, " Pivoting Helps Small Busi-
state-of-small-business-report/ (based on a sur- nesses T hri ve During COV ID-19 Pandemic,"
vey o f 86,000 small- and medium-sized busi ness U.S. Chamber of Commerce, (Sept. 1, 2020 )
owners, managers, and workers ). available at https://www.uschamber.com/co/
36 See MetLife and U.S. Chamber of Commerce, start/strategy/metli fe- us-ch amber-small-business-
"Small Business Coronaviru s Impact Poll ," index-covid- 19 citing https://www.uschamber.
(Jul. 29, 2020) at 2, available at https://www. com/report/july-2020-sma ll-business-coronavi-
uschamber.com/report/jul y-2020-small-busi- rus-impact-poll.
ness-corona viru s-impact-pol 1. 44 See Vis:1 Back to Business Study, supra note 41.
37 More information on the relief package is avail- The Visa Back to Business Study was conducted
able at "The CA RES Act Provides Assistance by Wakefield Research between J une 18 and
to Sma ll Businesses," U.S. Departme11t of the June 29, 2020, amon g 250 small business own-
Treasury, available at https://home.treasury.gov/ ers at co mpa nies with 100 employees or fewer
policy-issues/cares/assistance-for-smal l-busi- in each of the fo ll owing markets: U.S., Germa-
nesses. See also "Coro11avirus Relief Options," ny, Cana da, Ireland , Hong Kong, Singapore,
U.S . Small Business Admi11istratio11, available at Brazil, and UAE ("7 1% of small and micro
https://www.sba.gov/funding-programs/loans/ businesses globa lly have found their local com-
corona virus-rel ief-options . munity to be "supportive" of their business. ").
38 See Justin Lah art, "Covid Is Cru shing Small 45 Aaron DeSmet et al. " Ready, Set, Go: Reinvent-
Businesses. 1l1at's B..1d News for American ing the Organ ization for Speed in the Post-
Inn ova ti on," Tbe \Vall Street Journal, (Oct. 9, COVID- 19 Era," McKi11sey & Company, Oun.
2020) available at https://www.wsj.com/articles/ 26, 2020) available at https://www.mckinsey.
covid-is-crushing-srnal l-businesses-thats-bad- com/business-fu ncti ons/organization/our-in-
news-for-american-in novation-11602235804 sights/ready-set-go-reinventing-the-organization-
(" In th e Federal Reserve's third-quarter survey for-spee d-in-the-post-covid-19-era .
ANNUAL REPORT: FISCAL YEAR 2020 I 89
Insert offset folio 163 here 43965.163
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00200 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
195
46 See NS BA Small Business Survey, supra note 5 1 T he data in th is graphic includes businesses that
41. The NS BA survey was taken among 630 have conducted ei ther a Regulation Crowdfund -
small-bu siness owners June 16-23, 2020. ing offering or a parallel Regulation Crowd~
4 7 See Miles Kruppa, "Hottest Silicon Valley Starr- funding and Rule 506 (c) offering since May
Ups Begin to Sell T hemselves at a Discount," 2016. See Crowdfun d Capital Advisors and
Fi11a11cial Times, (May 1, 2020) available at Small Business and Entrepreneurship Counci l,
https://www.ft.com/content/Oa4 a651e-8057- supra note 49.
44f8-92e2-f23a89cd632a ("The start-ups 52 See id.
in high demand tend to be th ose in sectors 53 T his graphic is based on DERA data. See supra
benefiting from th e lockdown, such as tclc- note 6 for a descripti on of the meth odology
med icinc, cloud computing and collabora- used to ca lculate this data.
tion software."); see al.so PitchBook-NVCA, 54 T his graphic is based on DER.A data. Th is
"Venture Monitor Q 3 2020," (Oct. 12, 2020) graphic includes all industries that accounted
at 3, available at https://pitchbook.com/news/ for over five percent of the reported amounts
reports/q3-2 02 0-pitch book- n vca -ven rure-m on - raised by non-pooled fund issuers during one of
itor (noting that th e pandemic accelerated the the respective periods. Offerings by non-pooled
adoption of fintec h, ed tech, and telemedicin e fund issuers in other industries accounted fo r
innovations). approximately $38.6 billion and $28 .3 billi on in
48 See Gwynn Guilford and Charity Scott, "Is it the nine months ended 2019 and 2020, respec-
Insane to Start a Busin ess During Coronavirus? ti vely. See sufJra note 6 for a description of the
Millions of Americans Don't "l11in k So," The methodology used to calculate this data.
\Vall Street journal, (Sept. 26, 2020) available 55 Th is graphic is based on DERA da ta. Because
at https://www.wsj.com/artides/is-it-insane- of lags in offering qualifications, withdrawals,
to-start-a-busi ncss-d u ring-corona virus- mi 11 i- and abandonments, for greater comparability,
ons-of-americans-d on t-th ink-so-1160 1092841 this analysis considers all initiated Regulati on
(" Applications for the employer identification A offerin gs (whether qualified or not) and does
numbers that entrepreneurs nee(! to start a not excl ude offerings that are subsequently
business have passed 3.2 million so far this year, withdrawn or aband oned. Du e to lags and
compared with 2. 7 million at the same point bunching in proceeds data and temporary relief
in 2019, according to the U.S. Census Bureau . provided to Regulation A in March 2020, th e
That group includes gig-economy workers do llar amounts in this graphic are based on the
and other independent contractors who may amounts sought (in $ milli on) in qualified Regu-
have struck out on their own after being laid lation A offerings and not on reported proceeds.
off. "); see also L·rnren Bauer et al., "Ten Facts 56 Id. T his graphic includes all industries that
about COVID-19 and th e U.S. Economy," The accounted for over five percent of the aggre-
Brooki11gs lnstitutio11, (Sept. 17, 2020) available gate amo unts sought in qualified Regulation A
at https://www.brookings.edu/research/ten-facts- o fferings during one of the respective periods.
about-covid-19-and-the-u-s-economy/ (noting Additional offerings accounted fo r approxi-
that by mid-August 2020 there were 56% more matel y $229 million and $298 million in the
new bu siness applic..1tions for high-propensi- nine months ended 20 19 and 2020, respectivel y.
ty businesses (i.e., those new businesses that 57 See Tom Zanki, "3 Ways the Pandemic has
are most likely to become employers ) than in Ch an ged how IPOs are Done," Law 360, (May
mid-August 2019). 22, 2020 ) available at https://www.law360.com/
49 This data includes bu sinesses that have articles/ 127 5 33 0/3-ways-the-pan dem ic-h as-
conducted either a Regulation Crowdfunding changed-how-i pos-are-d one.
offering or a parallel Regulati on Crowd- 58 See id.
funding and Rule 506 (c) offering since May 59 See id. See also Fabiane Goldstein, "Virtual
2016. See Crowd fund Capital Advisors and IPOs: Temporary or Definitive Soluti on? ,"
Small Business and Entrepreneurship Coun cil, IR Magazine, (J une 18, 2020) available at
" Regulati on Crowdfu1Hling by Congressiona l https://www.irmagazine.com/sell-side/virtual-
District: A Report Card ," (Sep. 2020 ) avail- ipos-rem porary-or-defin itive-sol uti on; see
able at https://crowdfundcapitaladvisors.com/ also Crystal Tse, " IPOs Boom with Lasting
regu lation-crowdfunding-by-congressional-dis- Pandemic Effect on How Deals Get Done,"
trict-a-report-card/. Bloomberg Neivs, (J ul. 14, 2020) available
50 This graphic is based on DER.A data. Because at https://news.bloomberglaw.com/corpo-
of lags in offering qualifications, withdrawal s, rate-governance/ipos-boom-with-pandemics-
and abandonments, for greater comparabiliry, lasting-effect-on-how-deals-get-done; see also
this analysis considers all initiated Regulati on Joe Reinhardt, "Five Takeaways for Doing
Crowd funding offerings and docs not exclu de an IPO in the Pandemic," Bloomberg Law,
offerings that are subsequently withdrawn or (Nov. 9, 2020) available at https://news.
abandoned. bloomberglaw.com/securities- la w/five-rake-
aways-for-d oing-an-ipo-in-the-pandemic.
90 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSI N ESS CAPITAL FORMATION
Insert offset folio 164 here 43965.164
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00201 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
196
60 See Leah Hodgson, "Virtual !PO Roadshows a Itern ati ve-sou rces-of-fina ncing-for-startups
could Become the New Post-Crisis St:mdard," (" VC is not a fit for all companies, business
Pitch Book, Oun. 10, 2020) available at https:// models or founder persona lities. Ir begins an im-
pitchbook.com/news/articles/virtual-ipo-road- plicit, and sometimes very explicit, need fo r the
shows-post-crisis; see also Nina Trentman, company to prod uce hyper-growth-sized metrics
"Companies Find a Lot to Like About Virtual to raise further capital and eventually exit at a
IPOs," CFO Journal, The \Vall Street Journal, huge valuation.").
(Jul. 2, 2020) available at https://www.wsj.com/ 73 See Kenan Institute, "Frontiers of Entrepreneur-
a rticles/companies-find-a-lot-to- like-about-vir- ship 2020 Trends Report, " (Jan. 2020) at 12,
tual-ipos-11593700622; and Tom Zanki, supra available at https://frontiers.unc.edu/index.php/
note 57. trends-in-entrepreneurship-report.
61 See Nina Trentman, sufJra note 60. 74 Victor Hwang, et al., "Access to C'lpital fo r En-
62 See Crystal Tse, sufna note 59. trepreneurs : Removing Barriers," Ewing Marion
63 See id. Kauffma11 Fou11datio11, (April 2019) at 4, avail-
64 See Tom Zanki, supra note 57. able at https://www.kauffman.oryjwp-content/
65 See Leah Hodgson, supra note 60. uploads/2019/12/C'tpita1Report_0425 19.pdf.
66 See Tom Zanki, supra note 57. 75 See Jessica Looze and Sameeksha Desai,
67 See Crystal Tse, supra note 59. See also Tom "Challenges Along the Entrepreneurial Journey:
Zan ki, supra note 57. Considerations for Entrepreneurship Support-
68 See Scott Murdoch and Joshua Franklin, "Virtu- ers," Ewing Marion Kau{{num Poundatio11,
al Certainty? Bankers Ask if Success of Remote (May 2020) at 5, available at https://www.
Roadshows will Last," Reuters, (Jun. 5, 2020) kauffman .oryjwp-contcnt/uploads/2020/05/
available at https://www.reuters.com/article/ Chal lenges-Along-The-Entrepreneurial-Journey.
us-health-coronavirus-banks-roadshows/vi rtu- pdf. Percentages add to more than I 00 because
al-certainty-bankers-ask-if-s uccess-o f-remote- respondents could select multiple options.
roadshows-will-last-idUSKBN23C0TM ; see also 76 See Kyle Stanford, sufJra note 72, at 2.
Tom Zanki, supra note 57. 77 See Federal Reserve Banks, "2020 Report on
69 Th is graphic is based on DERA data. Employer Firms: Small Business Credit Survey,"
70 Th is graphic is based on DERA data, excluding (2020) at 6, available at https://www.fedsmall-
IPOs file d by pooled funds. See also Kristin bu siness.oryJmedia li brary/FedSma ll Business/
Broughton and Mark Ma urer, "Why Finance fi les/2020/2020-sbcs-employer-firms-report.
Executives Choose SPACs: A Guide to the !PO Percentages add to more than 100 because
Rival," The \Vall Street Journal, (Sep. 23, 2020) respondents could select multiple options.
available at https://www.wsj.com/articles/why- 78 See Kyle Stanford, supra note 72, at 3.
finance-exec uti ves-ch oose-spacs-a-guide-to-the- 79 See Yuka Hayashi and Anthony DeBmros,
ipo-rival-1160082820 l , citing data provider "Emergency Grants to Sma ll Businesses Av-
Dea logic. erage $4,360, Data Shows," The Wall Street
71 See Joe Reinhardt, sufJra note 59. This graphic journal, (Apr. 22, 2020 ) available at https://
is based on DER.A data, exclu ding IPOs filed www.wsj.com/arti cles/emergency-grants-
by pooled funds. T his graphic includes all to-small-businesses-average-4-360-d ata-
industries that accounted for over fiv e percent shows- 11 587556783.
of the !PO proceeds during one of the respec- 80 See Hello Alice, "The Impact of COVID-19
tive periods. Additional offerings accounted on Hispanic & Larin x Business Owners,"
for approximately $2.6 bill ion a nd $5.9 billion (Sept. 2020) at 9, available at https://alice-da-
in the nine months ended 2019 and 2020, ta-production.s3. us-east-2.amazonaws.com/
respectively. SPA Cs accounted for approxi- data_reports/latino_an d_hispanic_business_re-
mately 44% of the number of IPOs and 46% port_covid 19_impa nct.pd f.
of the total IPO proceeds, each over the nine 81 See Federal Reserve Banks, "2020 Report on
months ended September 30, 2020. A SPAC is a Employer Firms: Small Business Credit Survey"
publicly tra ded company that raises cash for the (2020 ) at 7, available at https://www.fedsmall-
purposes of acquiring a closely held firm and, bu siness.oryJmedialibrary/FedSmallBusiness/
through the deal, taking it public. SPACs often fi les/2020/2020-sbcs-employer-firms-report.
focus on companies withi n a particular industry. 82 See Darryl E. Getter, "Small Business Credit
Deals for technology- particularly biotechnol- Markets and Selected Policy Issues," Co11gres-
ogy- and transportation companies have been sio11al Research Service, (Aug. 20, 2019 ) at
popular for SPA Cs recently. See also Kristin 9, available at https://crsreports.congress.gov/
Broughton and Mark Maurer, supra note 70, prod uct/pdf/R/R 4 5 8 78.
citing data provider Dealogic. 83 See Gregory Brown et al., "Filling the U.S. Small
72 See Kyle Stanford, "Alternative Sources of Business Funding Gap," Fra11k Hawkins Ke11a11
Financing for Startups," Pitch Book, (Feb. 11, Institute of Private EnterfJrise, (Feb. 2020) at
2020 ) at 12, available at https://pitchbook.com/ 7, available at http://uncipc.org/wp-content/up-
news/reports/q 1-2020-pitchbook-analyst-note- loa ds/202 0/02/Fund ing Gap_ 02 04 2 02 0. pd f.
A N NUA L REPORT: FISCA L YEAR 2020 I 91
Insert offset folio 165 here 43965.165
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00202 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
197
84 See Darryl E. Getter, supra note 82, at 10-11. I 02 See Wylie Fernyhough et al., "US PE Break-
85 See id. at 6. down," PitchBook, (Oct. 8, 2020) at 4, avail-
86 See Kyle Stanford, supra note 72, at 9. able at https://files.pitchbook.com/website/fi les/
87 See id. at 10. pd f/PitchBoo k_Q3_2020_US_PE_Breakdown.
88 See Jeffrey Sohl, "The Angel Market in 2019: pd f.
Commitments by Angels Increase with a Sig- 103 See CB Insights, supra note 92, at 35.
nificant Rise in Deal Valuations," Center for 104 See Kyle Stanford and Darren Klees, "Analyst
Venture Research, (May 5, 2020 ). Note: The Effect of Capita l Resources on Dcal-
89 Kyle Stanford, "Angels: Foundational Investors making: Can Patterns in VC Resources Help
to VC," PitchBook, (Sep. 1, 2020) at 7, avail- Pinpoint Underfunded Ecosystems?," Pitcb-
able at https://files. pitchbook.com/website/files/ Book, (Nov. 15, 2019 ) at 3, available at l1ttps://
pdf/Q3_2020_PitchBook_Analysr_Nore_An- fi les.pitchbook.com/website/files/pdf/4Q_2019_
gel s_Foundational_In vestors_to_ VC. pdf. Pitch Book_Analysr_Notc_TI1e_Effect_of_ Cap-
90 See id. at 10. iral_Resources_on_Deal making.pdf. The three
9 1 See PirchBook, "What Are The Private Mar- metro areas include: San Jose-Sa n Francis-
kets?" (Nov. 1, 2018) at 13, available at co-Oakland, CA (43% ), New York-Newark,
https://pirchbook. com/6\og/what-are-the-pri- NY-NJ -CT-PA (16%), and Boston-Worces-
vate-markets. ter-Providence, MA-RI-NH-CT ( 11 % ). The
92 See CB Insights, "What is Venture percentages are based on number of funds that
Capital?" (2020) a t 31, available at have closed since 2015.
https://www.cbinsights.com/reports/ 105 See Jason D. Rowley, "Inside The Ups And
CB- Insights_What-is-Ven ture-Capita l. Downs Of The VC J-Curve," Cru11chba.se
pdf?utm_campaign=marketing_what- News, (Nov. 20, 2019) available at https://
is-vc 2020-05&urm medium=email& news.crunch base.com/news/i nside-the-ups-and-
hsmi~88604078&_~enc=p2ANqtz-9H9tu- d owns-of-the-vc-j-curve/#:- :text= Though%20
foV2LjHkDYUcH skAdqOvNXH 0jy8QvxK- rhere%20are%20exceptions%2C%20
Dgs2W693 FgDiAgsQCkE2Xe5_pMrv_NP- rhe,%2C%20in%20one%2Dyear%20in-
Ggqme05NsvF-bU4bxuL3eoH fg&utm_co n- crements (noting that general partners may
tent=8860407 8&urm_source=hs_automation. negotiate extensions to a fund's lifespan,
93 See PitchBook-NVCA, "Venture Monitor Q4 typically between one and three years, gener-
2019," (Jan. 13, 2020) at 7, available at https:// ally in one-year increments); but see Cameron
pitchbook.com/news/reports/q4-2019-pitch- Stanfill eta!., "Analyst Note: Shadow Capital
book-nvca-venture-monitor. in Venture Investing: Estimating Nontradition-
94 See id. at 7 and 9. al Investor Participation in VC Deal mak ing,"
95 See id. at 9. Pitch Book, (Jun. 5, 2020) at 2, available at
96 See St.1rtup Genome, "The Globa l Startup Eco- https://files.pitchbook .com/website/fi les/pdf/
system Report CSER 2020: The Ne w Normal PitchBook_Q2_2020_Analyst_Note_Shadow_
for the Global Startup Economy and the Impact Capital_in_Venture_I nvesting. pdf (noting that
of COYID- 19," (June 2020) at 20, available at nontraditional investors that have historically
https://startupgenome.com/reports/gser2020. accessed venture capital in a limited partner ca-
97 See PitchBook-NVCA, supra note 47, at 7. pacity are doubling down on their direct venture
98 See id. at 8 (" First rime equity financings have capital investing practices ).
declined to just 23. 7% of total completed 106 See Stanfill, supra note 105, at 2 and 7 (also
financings in Q3 2020, compared with 27.3% noting that the "diversity of nontraditional
in Q3 2019. "). investor types and the strategies within those
99 See Pitch Book, "2020 Venture Capital Outlook: groups makes generalizing about the group
Hl Follow-Up," (J ul. 6, 2020) at 2 (""l11e previ- extremely difficult" ).
ous traj ectory of increased valuations and deal 107 See id. at 5 (noting that "[s]o far in 2020,
activity for seed-stage companies has stalled in corporate VC investors have participated in
the last six months, as startups no longer have 55.5% of deal va lue despite participating in
the leverage to command the frothy valuations just 29.5% of comp leted deal s, and SWFs have
they previously enj oyed. Seed-stage investors participated in 16% of deal value in while being
have also been focusing their efforts internally present in just 1.2% of deals. Overall, U.S.
toward current portfolio companies, leaving venture dea ls with nontrad itional participation
less time for sourcing deals and performing due added $106 billion and $96 billion worth of
diligence. "). deal value to market totals in 20 I 8 and 2019,
100 See PitchBook- NYCA, supra note 47, at 7. respectively, representing more than 70% of
101 Seeid. total deal value participation each year by non-
traditiona l investors").
92 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION
Insert offset folio 166 here 43965.166
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00203 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
198
108 See id. ar 1. 117 See Will Cornall, "Venture Capitalists and
109 See Josh Lerner a nd Ram:rna Na nda, "Venture COVID-1 9," Harvard Law School Fonun on
Capital's Role in Financing Innovation: What Corporate Governance, (Sep. 1, 2020) available
We Know an d How Much We Still Need to at https://corpgov.law.harvard.edu/2020/09/01/
Learn," 34 Journal of Economic Perspectives venture-capitali sts-and-covid-19 (citing Paul
237-261 (Summer 2020) at 252, available at Gompers, et al., "Venture Capitali sts and
https://www.nber.org/system/files/working_pa- COVID-19," (Oct. 2020) available at https://
pers/w27492/w27492.pdf. papers.ssrn.com/sol3/papers.cfm?abstract_
110 See Kyle Stanford and Darren Klees, supra ;d:3669345 ).
note 104, at 8-9 ("Companies looking for seed 118 See id.
financings generall y work through loca l investor 119 See Deloi tte, supra note 113, at 12.
networks fi rst, while later stages generally 120 See PitchBook-NVCA, supra note 47, at 9
require large fu nd ing vehicles tha t may not be (" Early-stage VC deal activ ity showed signs of
located nearby. Th is trend holds distinctly in rebounding in Q3 2020 with $9.2 billion raised
the data. The median distance between a target across 657 deals . . . " This com pares to $8.2
company and lead investor for late-stage deals billion raised over 764 dea ls).
in the U.S. notched over 400 miles so for in 121 See id. at 5, 11 (deals over $100 million have
2019, while the median distance for seed deals not seen much change, with 223 deals valued
is just under 100 miles between the lead investor at $53.2 bill ion (of which 189 were late stage
and target company."). TI1e authors furthe r deals ), which puts them relatively on par with
note that " [f]unds tend to cluster in areas with 20 19 (242 deals at $55.3 bill ion )).
investable companies rather than stationing 122 See id. at 31.
themselves in promising areas with the hope of 123 See id. at 32.
attracti ng founde rs to create new enterprises." 124 See Cameron Stanfill, et al., "Analyst Note :
Id. at 4. 2020 Venture Capi tal Outlook: 1-1 1 Follow-Up,"
111 See id. at 4. PitcbBook, (Jul. 6, 2020) at 8-9, available at
112 See Michael J. Ma uboussin and Dan Ca llahan, https://pitchbook.com/news/reports/2020-pitch-
"Public to Private Equity in the United States: book-analyst-note-venture-capital-out-
A Long-Term Look," lvlorga11 Stanley, (A ug. 4, look-h 1-foll ow-up.
2020) at 46, available at https://www.morgan- 125 See PitchBook-NVCA, supra note 47.
stanley.com/im/publication/insights/articles/ 126 Data on U.S. listed domestic firms was estimat-
articles _pub Ii ctopriva teeq ui tyin theusalongterm - ed by DERA based on the Center for Research
look_us.pdf? 1607 3624 18999. in Security Prices (C RSP) database. The a nalysis
113 See "Road to Next," Deloitte, (2020) at 7, in cl udes U.S. common stocks (share codes 10
available at https://www2.deloitte.com/content/ and 11 ) listed on NYSE, NYSE MKT, and
dam/Deloitte/us/Documents/audit/us-audit-road- Nasdaq. ·n1e analysis excl udes investment funds
to-next-q2-2 02 0. pd f. and trusts (Stan dard In dustria l Classification
114 See Silicon Valley Bank, "2020 Global Startup codes 6722, 6726, 6798, a nd 6799). A company
O utlook" (Feb. 2020) at 7, available at https:// with several classes of shares is counted once.
www.svb.com/globalassecs/library/uploadedfiles/ Data for 2020 represents the n umber of listed
content/trends_and_insights/reports/startup_ firms and market ca pitaliza tion as of September
ou tlook_report/suo__global_report_2020-final. 30, 2020. TI1e numbers included in this graphic
pdf. differ slightly from the graphic included in
115 See Josh Lerner a nd Ramana Na nda, supra note the Office of the Advocate fo r Small Business
109, at 240. Capital Formation's Annual Report for Fisc.11
116 See Peter ll iev and Michelle Lowry, "Venturing Year 2019 at 24 (note 69), which was based on
Beyond the !PO: Financing of Newly Public Worl d Bank Group Open Data.
Firms by Venture Capitalists," The Journal of 127 See Michael J. Mauboussin and Dan Callahan,
Fi11a11ce, (Jan. 2020) at 1, available at https://on· supra note 112, at 3.
linelibrary.wi ley.com/doi/ful l/10.1111/jofi.12879 128 See id. at 26.
(" In a sam ple of priva te firms that go public for 129 See id. at 25.
the first time, 15% of the firms backed by VC 130 See id. at 30.
financing prior to the IPO received additional 131 See id. at 3. The amount included in the graphic
funding from VCs withi n the first five years for U.S. domestic eq uity mutual fun ds does
after the !PO. Approximately half of these not incl ude $4. 7 rrill ion in separately managed
post-IPO VC financings were from the same accounts.
VC that fun ded the company prior to the 132 See id. at 8 (examining data fro m 1984 to
]PO. Press releases on these financings provide 20 15).
suggestive evidence of their importance to the 133 See id. at 9 (examining data fro m 1984 to
underlying companies. "). 20 13).
ANNUAL REPORT : FISCAL YEAR 2020 I 93
Insert offset folio 167 here 43965.167
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00204 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
199
134 Th is graphic is based o n DERA data. Registered 144 See Michael J. Mauboussin and Dan Callahan ,
offerin g data was collected fr om Th omson supra note 112, at 26.
Financia l's SOC Platinum database. Sma ll public t 45 See Josh Lerner and Raman a Nanda, supra note
companies include publ ic companies with a size 109, at 5.
less than or equal to $250 million on the date 146 See Michael J. Mauboussin and Dan Callahan,
of the offeri ng, calculated by multiplying price supra note 112, at 48.
of the company's stock at the dose of the day 147 Regis tered equity offering data includes IPOs
of the offeri ng by the number of outstandin g and registered secondary equi ty offerings
shares on the day of the offering. Data from the and was coll ected by DERA fr om Thomson
Center for Research in Securities Prices (C RSP ), Financial's SDC Platinum database. Small public
Dealogic, and Compustat were used to fill in co mpanies include public compani es with a size
missing information from SOC Platinum. Mu- less than or equal to $250 milli on on the date
tual fund s and Closed-end funds arc excluded of the offerin g, calculated by multiplying price
from the statistics. Those companies missing a of the company's stock at the close of the day
stock price or nu mber of outsta ndin g shares arc of the offerin g by the number of outsti.ln ding
not included in the statistics. shares on the day of the offering. Data from the
135 See Michael J. Mauboussin and Dan Callahan , Center for Research in Securities Prices (CRSP)
supra note 112 at 5. and Compustat was used to fill in mi ssi ng
136 See id. at 26. informati on on price and outstand ing sha res
137 See id. at 26 (stating that the percentage of from SDC Platinum. Those compani es with
small compan ies that grew into medium or large missing a stock price on the offering day or
companies in the 1990's was between 15-20% nu mber of outstanding sha res are not included
and has now been cut in half). in the statistics. T he offeri ngs with missing data
138 See id. at 26; Chris Joseph, "What Are the Bene- include: 44 !PO offerings in 2019 ( 18% of the
fits of Becoming a Public Company?," Houston rotal IPO offerings in 2019), 42 secon da ry equi-
C/Jro11icle, available at https://smallbusiness. ry offerings in 2019 (6% of the total registered
chron.com/benefits-becoming-public-compa- eq uity offerings in 2019), 4 1 !PO offerin gs in
ny-41 66 7.html; see also Kenan Institute, supra 2020 (14% of the total !PO offerings in 2020 ),
note 73, at 26. and 36 secondary eq uiry o fferings in 2020 (4 %
139 See Cameron Stanfill and Van Le, "Analyst of the total registered equ ity offerings in 2020).
Note: Index of Venture-B..1cked IPOs: An Analy- Registered debt offerings have been excluded
sis," Pitch Book, (A ug. 13, 2020) at 3, available due to the omiss ion of a significant portion of
at https://fi. les.pitchbook.com/website/fi.l es/pdf/ the relevant data in SDC Platinum, CRSP and
Pitch Book_Q3_2020_Analyst_Note_lndex_of_ Co rnpustat databases to calculate the size of the
Venture- Backed_lPOs_an_Ana lysis.pdf. registered debt issuers during thi s period.
140 See PriccwaterhouseCoopers, "Considering an 148 See suf>ra note 147 for a descripti on of the
IPO? First, Understand the Costs," available methodology used to estimare registered cquiry
at https://www.pwc.com/us/en/services/deals/ offerings by small public compani es. This
library/cost-of-an-ipo.html. These costs included graphi c includes all industries thi.lt acco unted
fees related to underwriting, SEC registrati on, for over fi ve percent of the total proceeds ra ised
legal, acco unting, FINRA, exchange listing, in registered equity offerings by small public
printing and miscellaneous. This data shows company during one of the respective periods,
that for offerings with a deal value between $25 excl uding offerings filed by pooled funds. Addi-
million and $99 milli on, the costs were a larger tional offerings for industries under five percent
percentage of the deal value (10% to 15%) as accounted fo r approximately S0.9 billion and
compared to larger deals (generally between 6% $1.3 billion in the nine months end ed 2019 and
and 10% of the total deal value). 2020, respectively. Offerings by pooled funds
141 See MichaelJ . Mauboussin and Dan Ca llahan , accounted for approximately 24 million and
su/Jra note 112 at 27; Kenan Institute, supra 100 million in the nine months ended 2019 and
note 73, at 26. 2020, respectively.
142 See Cameron Sta nfill et al., "Analyst Note: 149 See America n Express, "The 2019 State of
Index of Venture-Backed IPOs: New Tools for Women-Owned Businesses Report," (Sept.
Evaluating Price Performance of VC-Backed 2019 ), at 3, available at https://about.american-
IPOs," PitchBook, (M ay 21, 2020) at l, avail- express.com/fil es/doc_library/fil e/2019-state-of-
able at https://files.pitchboo k.com/ website/fi les/ women-owned-businesses-report.pdf.
pdf/PitchBook_Q2_2020_Analyst_Note_ln- 150 See id. at 4.
dex_of_ Venture-B..-.cked_lPOs.pdf. 151 See id. at 6.
143 See Cameron Sta nfill and Van Le, supra note I 52 See id. at 7.
139, at 5. 153 See Jeffrey Sohl , su/Jra note 88 at 2.
94 I SEC OFF ICE OF T HE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATIO N
Insert offset folio 168 here 43965.168
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00205 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
200
154 See PitchBook-NVCA, supra note 93, at 25. that startups with diverse leadersh ip teams out-
155 See Crunch base, "Funding to the Female perform and generate better returns on equity
Founders, " (Mar. 2020 ) at 13- 14, 16, available compared to starn1ps with non-diverse teams ).
at https://about.cru nchbase.com/wp-content/ 162 See Jeffrey Sohl, supra note 88, at 2.
uploads/2020/03/Funding-To-Female--Found- 163 See Pitch Book and All Raise, supra note 160, at
ers_Report.pdf; see also, International Finance 25.
Corporation, "Venture Capital and the Gender 164 Id. at 24.
Financing Gap: The Role of Accelerators" (Feb. 165 See Ewing Marion Kauffman Foundation,
2020), at 8, available at https://www.ifc.org/ "Who is the Entrepreneur? Race and Ethnici-
wps/wcm/connect/f62312ad-7ef5-4 690-657d- ty, Age, and Immigration Trends among New
66793ae20a 17/20200216-VC-WeFi-Research- En trepreneurs in the United States, 1996-2019,"
Snapshot.pdf? MO D=AJPERES&CVID=n 151znn (2020) at 2, available at htcps://www.kauffman.
(noting that, for startups raising funds after org/entrepreneurship/reports/race-ethnici-
participating in an accelerator, male-led startups ty-age-immigration-crends-united-states-en-
raise 2.6 times more equity than female-led trepreneurs-1996-2019/ (compared to 74.3%
startups). Whi te, 9.6% African American/Black, 12.2%
156 See Crunch base, supra note 155, at 7. Hispa nidLatino, 3.6% Asian American/Pacific
157 See Ian Hathaway, "The Ascent of Wom· Islander in 1999). Race and ethn icity groups
en-Foun ded Venture-Backed Startu ps in the were reported only for Asian, Black, L'"ltino, and
United Sta tes," Center for American Eltfrepre- White.
11eurship, (Feb. 2019) at 16, available at http:// 166 See Sma ll Business Administration Office of
www.startupsusa.otg/women-founded-ven- Advocacy, "Small Business Facts: Spotlight on
ture-backed-startups/. M inority-Owned Employer Businesses," (May
158 See Gene Teare, "EoY 2019 Diversi ty Re- 20 19) available at https://cdn.advocacy.sba.
port: 20 Percent of Newly Funded Startups gov/wp-con tent/uploads/2019/05/3 11 31339/
in 20 19 Have a Female Founder," Cru11cb- Small -Business-Facrs-Spotlight-on-Minori-
base, (Jan. 21, 2020) available at Imps:// ty-Owned-Employer-Businesses.pdf.
news.cru nchbase.com/news/eoy-2019-di- 167 See id.
versicy-report-20-percent-of-newly-fund- 168 Andre Perry el al., "Five-Star Reviews, One-Star
ed-startups-in -2019-h ave-a -female-found - Profits: The Devaluation of Businesses in Black
er/#:-: text:: Di versicy%20 % E2 % 80% A2%20 Communities," T/Je Brooki11gs lllstitutio11, (Feb.
Venture-,Eo Y%2020 19%20Di versicy%20 2020) at 11, available at https://www.brookings.
Report%3A %2020%20Percent%20Of%20 edu/wp-content/upl oads/2020/0212020.02_
Newly%20Funded%20Startups,2019%20 DevOfBizlnBlackCommuniries_Perry-Roth-
Have%20A %20Female%20Founder&- well-Harshbarger-final.pdf.
text= We%20close%20out%20the%20de- 169 See Jeffrey Sohl, supra note 88, at 2.
cade,2019%20having%20a%20female%20 170 See Alicia Robb, "Minority-Owned Em-
foun der.&text=TI1e%20proportion%20of%20 ployer Businesses and Their Credit Market
fema le%20co,which%20stood% 20at%20 Experiences in 2017," SBA Office of Advo-
I 0%20percent. cacy, Uul. 22, 2020) at 4, 22, 26, available
159 See Gene Teare, "2019 Stud y of Gen der Diversi- at https://cdn.advocacy.s6a.gov/wp-con-
ty in Private Company Boardrooms," Crunch- tent/uploads/2020/07/22 172533/M inori-
base, (Dec. 11, 2019) available al https://news. ty-Owncd-Employer-Businesses-a nd-their-Crcd-
cru nchbase.com/news/2019-study-of-gender-di- it-Market-Experiences-in-2017.
versicy-in-private-company-boardrooms/. pdf?utm_medium=emai l&utm_source=govdeli v-
160 See PitchBook and All Raise, "All In: Women ery.
in the VC Ecosystem," (Nov. 11, 2019) at 3, 171 See RateMyln vestor and Diversity VC, "Diversi-
available al https://pitchbook.com/news/re- ty in U.S. Startups," (Feb. 2019) at 8, available
ports/2019-pitchbook-all-raise-all-in-women-in- at https://ratemyinvestor.com/diversity_report
the-vc-ecosystem. (analyzing data on 10,000 founders and 135
161 See McKinsey & Com pany, "Diversity Wins: venture firms ).
How Inclusion Matters," (May 2020 ) at 3-4, 172 See Marlon Nichols et al., "Deconstructing the
available al https://www. mckinsey.com/-/media/ Pipeline Myth and the Case fo r More Diverse
McKinsey/Featured%20Insights/Diversity%20 Fund Manager," Kauffman Fellows and iWaC
and%20Inclusion/Diversity%20wins%20 Veltfure Capital, (Feb. 2020 ) available at https://
How%20incl usion%20matters/Diversi- www.kauffmanfellows.org/journal_posts/
ty-wins· How-inclusion-matters-vF.pdf; see also, the-pipeline-myth-ethnicity-fund-ma nagers.
International Finance Corporation, supra note 173 See Kenan Institute, supra note 73, at 78.
155, at 11 (citing several recent studies showing 174 See Marlon Nichols et al., supra note 172.
ANNUAL REPORT : FISCAL YEAR 2020 I 9S
Insert offset folio 169 here 43965.169
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00206 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
201
175 Id. I 9%20Investing%20in %20black%20lives%20
176 See Jeffrey Sohl, supra note 88, at 2; see also, and%20li velihoods/CO VI D-19-ln vesting-in-
Jeffrey Sohl, "The Angel Market in 2018: black-lives-and-livelihoods-report.pdf.
More Angels Investing in More Deals at Lower 184 See Stanford Graduate School of Business
Valuations," Center for Venture Research, (May Latino Entrepreneurship Initiative, "The On -
9, 2019) at 3, available at https://scholars.u nh. goi ng Impact of COVID-19 on Latino-Owned
edu/cgi/viewcontent.cgi?article= 1016&contex- Businesses," (A ug. 2020) at 8, available at
t=Cvr#:~:text=The%20average%20angel%20 https://www.gsb.stanford.edu/faculty-research/
deal%20size,%2C%20and%20subsequent%20 pu bl icatia ns/ongoi ng-i m pact-covi d- 19-la ti-
valuati ons%2C%20decreased . n o-owned-b usi nesses (noting th at thi s is due
177 See NVCA and Deloi tte, "Hu man Cap ital Sur- in part to th e industries in whi ch a substantial
vey," (20 18) available at https://www2.deloitte. number o f scaled Latin o-owned businesses are
com/con ten ti campai gns/us/au di ti survey/di versi- located, namely constructi on, accommodation
ry-ventu re-capi tal-h uman -ca pi ta 1-survey-da sh- and food services, and retail trade).
board.html. The survey methodology all owed 185 See Gabri el R. Sanchez eta/., "COVID- 19
for selection of more than one race. is I-laving a Devastating Impact on the Eco-
178 See Robert W. Fairlie, ""n1e Impact of nomic Well -Being of L1tino Families, " The
COVID-19 on Small Business Owners: Con- Brookings l11stitutio11, (J ul. 27, 2020) available
tinued Losses and the Partial Rebound in May at https://www.brookings.edu/blog/how-we-
2020," National Bureau of Economic Researcb, ri se/2 02 0/07/2 7/covid-19-i s-ha ving-a-devasta t-
(Jul. 2020 Working Paper) at 15, available ing-impact-on-the-economic-wel l-bei ng-o f-lati-
at http://www.nber.org/papers/w27462; see no-families/.
also Claire Kramer Mills, "Double Jeopardy: 186 See Priyamvada Mathur, "Quarterly VC Fun d-
COVID- 19's Concentrated Health and Wealth ing for Female Founders Drops to TI1ree-Year
Effects in Black Communiti es," Federal Reserve Low," Pitch Book, (Oct. 8, 2020 ) available at
Bank of New York, (Aug. 2020) at 1 (" Black- https://pitchbook.com/news/artides/vc-fu nd-
owned fi rms are more likely to be loc..1 ted in ing-fema le-founders-drops-low (T he funding
COVID- 19 hot spots, where as white-owned ch allenges faced by women in 2020 followed a
firms are less likely to be in the most heavily record 20 19. For example, in the first quarter
a ffected areas."). of 2019 VC fundi ng hit a decade peak ($950
179 See Robert W. Fairlie, supra note 178, at 21. million across 207 dea ls) and the year ended up
180 Robert W. Fairlie, "The Impact of COV ID- 19 with a total of $3.35 billion invested over 709
on Small Business Owners: Evidence of Ear- deals. While VCs have only injected about $1.9
ly-Stage Losses from the Apri l 2020 Current billion into female-founded companies so for
Population Survey," National Bureau of th is year. ).
Economic Research, (J un. 2020 Working Paper ) 187 See 1-icllo Alice Impact Report, "The Impact
at 9, available al http://www.nber.org.lpapers/ of COVID- 19 on LGBTQ+ Busin ess Owners,"
w27309. (J une 2020) at 10, available at https://alice-da-
181 See Abby Vesoulis, " "If We Had a Panic Button, ta-production.s3.us-east-2.amazon aws.com/
We'd be Hitting it.' Women are Exiting the L1- data_reports/20200908_LGBTQ %2B_Owned-
bor Force en Masse-and that's Bad for Every- Covidlm pactReporr.pdf.
one," Time, (Oct. 17, 2020) available at https:// 188 See id.
time.com/5900583/women-workforce-eco no- 189 National Venture C.1pital Association, supra
my-covid/. note 24 at 12 ("The capital crunch in the in-
182 See Tatiana S. Manolova, et al., "Pivoting to dustry will be fe lt across the board , but perhaps
Stay the Course: I-low Women Entrepreneurs most acu tely by fo unders and investors in his-
Take Advantage of Opportunities Created torically underrepresented groups, in emerging
by the COVID- 19 Pandemic," l11tematio11- venture ecosystems, and smaller (<$ 100 million )
al Small Business j ournal, (2020 ) at 484, and new venture fund managers. ").
available at https://journa ls.sagepu b.com/ 190 See https://www.ncdc.noaa.gov/billions/.
do;/1 0.1177l0266242 620949 136. 19 1 See https://www.practicalbusinessskills.com/
183 See McKinsey & Company, "COVID-19: managing-a-business/planning-for-emergencies/
In vesting in Black Lives an d Livelihoods,"' disaster-preparedness (quoting the "2017 Small
(Apr. 2020) at 14, citing "Surver of Business Business Credi t Survey - Report on Disaster-Af-
Owners (S BO) - Survey Results: 2012," U.S. fected Firms," Federal Reserve Banks).
Census Bureau, February 23, 2016, uscensus. 192 See https://www.fema.gov/media-li-
gov, available at https://www.mckinsey.com/-/ brary-data/144 1212988001- laa-
media/McKinsey/Industries/Public%20and%20 7fa978c5f999ed088dcaa815cb8cd/3a_Busi-
Social%20Sector/Our%20 ln sights/COV!D%20 nesslnfographic- 1.pdf.
96 I SEC OFFICE OF THE ADVOCATE FOR SMALL BUSI N ESS CAPITAL FORMATION
Insert offset folio 170 here 43965.170
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00207 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
202
193 Dara from the U.S. Census Bureau, American 200 See Center for American Progress, Redefi11i11g
Community Survey (ACS ) was used by DERA Rural America, (Jul. 17, 20 19) at 2 and 4,
to estimate the popu lati on in zip codes affected available at https://cdn.americanprogress.org/
by the natural disasters as described in infra content/uploads/2019/07/1 7050340/redefin-
note 198. However, certain zip codes were ing-rural-america-_briefl. pdf. For purposes of
identified as missi ng popu lati on values, so the this report, a rural area means a non metropoli-
percentage is likely underestimated. tan a rea.
194 This graphic is based on DERA data . Evaluated 201 See Dan iel Wilmoth, PhD, "Growth in N umber
from July 1, 2017 to June 30, 2020 using zip of Rural Establishm ents," Office of Advoca-
codes affected by natura l di sasters. Zi p codes cy, U.S . Small Busi11ess Admi11istratio11, (Dec.
designated as affected are defined as havi ng one 2019 ) available at https://cdn.advocacy.sba.gov/
or more residents approved for housing assis- wp-content/uploads/2020/02/041 11621/Rural-
tan ce under FEMA's !HP program for natural Business-Growth-Fact-Sheet 1.pdf.
disasters with classifications of Major Disaster 202 Dara from the U.S. Census Bureau, Ameri-
Declaration and incident start dates between can Community Survey (ACS), and the U.S.
July 1, 2017 and Ju ne 30, 2020. Given the trail- population growth rate from World Bank was
ing impact caused by natural disasters, each zip used by DER.A to estimate th e population in zip
code affected in that three year period was in- codes in rural areas. Classification of rural areas
cluded. Classification of disaster areas are based are based on the list of 20 19 Q4 rural area zip
on FEMA Disaster Decl arati on Summaries codes from the Center for Medicare & Medic-
data and FEMA Housing Assistance Program aid Services, available at https://www.cms.gov/
Dara at https://www.fema.gov/about/openfema/ Medicare/Med icare- Fee-for-Service-Payment/
data-sets, updated on August 1, 2020. T he clas- FeeScheduleGen In fo .
sificatio n method for disaster areas is based on 203 See The Board o f Governors of the Federal
the methodology in the "2017 Sma ll Busi ness Reserve System, "Sma ll Business Credit Survey:
Credit Survey - Report on Disaster-Affected 2019 Report on Empl oyer Firms" (20 19) .1t
Firms," Federal Reserve Banks o f Dallas, New 29, available at https://www.fedsmallbusiness.
York, Richmond, and San Francisco, available org/medialibrary/fedsmall business/fil es/2019/
at https://www.newyorkfed.org/medialibrary/ sbcs-employer-firms-report.pd f.
media/sma llbusiness/2017/SBCS- Report-on- Di- 204 Th is graphic is based on DERA data. Classifica-
saster-Affected-Firms.pdf. tion of rural areas are based on the li st of2019
195 Evaluated fr om Jul y 1, 20 17 to J une 30, 2020 Q4 rural area zip codes from the Center for
using zip codes affected by natural disasters as Medicare & Medicaid Services, as described in
described in supra note 194. supra note 202 .
196 See Appalachian Regional Commission, "Entre- 205 See Arny Cortese, Locavesti11g: Tbe Revolution
preneurial Ecosystems in Appalachi a, Literature i11 Local lnvesti11g am/ How to Profit From It
Review" (Sept. 2018 ) at 23, available at http:// (20 1 I ).
www.arc.gov/wp-content/uploads/2018/09/ 206 https://www.sec.gov/files/2019 _0 ASB_Annu-
Entrepreneurial EcosystemsLiteratureRe- al %20Report.pd f.
view2018.09.pd f; see also Center on Rural 207 See Small Business Administration, Office of
Innovation, "The Power of Capital in Rum[ Advocacy, "Sm all Business Economic Bulletin:
Entrepreneu rsh ip " (Sep. 22, 2020) available at April 2020," available at https://cdn.advocacy.
h ttps://rural innovation. us/ access-to-ca pi ta 1/. sba. gov/wp-con ten t/u pl oads/2 02 0/04/30 103025/
197 CD F!s are financial in stitutions that share a Apri l-2020-Econ- Bulleti n.pdf ("Small fir ms
common goal o f expanding economic opportu- (fewer than 500 employees) accounted for 9.3
nity in low-income co mmunities by providing million net new private-sector jobs fr om 2005
access to financial products and services fo r to 2019, or 64 percent of the total. While job
loca l residents and busin esses. A CDFI may be creati on rends to flu ctuate from one q uarter to
a bank, credit uni on, loan fund, microloan fund the next, small firm s created more jobs than
or venture capita l fund, https://www.cdfifund. large firms in 8 o f the last 12 quarters of avail-
gov/Docu ments/CDF!jn fographic_v08A.pdf. ab le data." ).
198 These include grants, loans, loan guara ntees, 208 See Neil Bhutta et al., "Disparities in Wealth
and equity products offered by the Department by Race and Ethn icity in the 2019 Survey of
of Commerce's Economic Development Admin - Consumer Finances," FEDS Notes, Board
istration , the Departm en t of Treasury's CD FI of Governors of the Federal Reserve Sys-
Fund , the SBA , and USDA's Rural Development. tem, (Sept. 28, 2020) available at https://doi.
199 See "FDIC Quarterly- Quarterly Banking org/ l 0. 17016/2380-7 172.2797 ("W hite families
Profile: Fourth Quarter 2019" at 35, available have the highest level of both median and
at https://www.fdic.gov/bank/analytica l/quarter- mean family wealth: $188,200 and $983,400,
ly/2020-vol 14- l/fdic-vl 4 n 1-4q2019-article.pdf. respective ly. Black and Hispanic families have
ANNUAL REPORT : FISCAL YEAR 2020 I 97
Insert offset folio 171 here 43965.171
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00208 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
203
considerably less wealth than White fam il ies. 221 See Amy Cortese, su11ra note 205.
Black fam ilies' median and mean wealth is 222 See "Small Public Companies" section of the
less than 15 percent that of Wh ite families , at Report above.
$24,100 and $142,500, respectively. Hispanic 223 See e.g., SEC Press Release 2020-58, SEC
families' median and mean wealth is $36,100 Adopts Ame11dme1tts to Redu ce Un11ecessary
and $165,500, respectively. "). Burdens 011 Smaller Issu ers by Afore Appro-
209 "Concept Release on Harmonization of Securi- priately Tailoring the Accelerated and lArge
ti es Offering Exemptions," Rel. No . 33-10649 Accelerated Filer Definitions (Mar. 12, 2020)
(Jun. 18, 2019) available at https://www.sec. available at https://www.sec.gov/news/press-re-
gov/rules/concept/20 19/33-10649.pdf. lease/2020-58; SEC Press Release 2020-1 18,
210 "Proposed Rul e: Facilitating Capital Formation SEC Adof}ts Amendments to lmfJr011e Fi-
and Expanding In vestment Opportunities by 11a11cial Disclosures about Acquisitio11s a11d
Improving Access to Capital in Private Mar- Disf1ositio11s of Busiuesses (M ay 21, 2020)
kets," Rel. No. 33-10763, available at https:// available at https://www.sec.gov/news/press-re-
www.sec.gov/rules/proposed/2020/33- l 0763. lease/2020-118 ; SEC Press Release 2020- 192,
pdf. SEC Adopt.s Rule Amendments to Modemize
211 "Final Ruic: Facilitating Capital Formation and Disclosures of Business, Legal Proceedings,
Expandi ng Investment Opportunities by Im- and Risk Factors Under Regulation S-K (Aug.
proving Access to C'lpital in Pri vate Markers,,. 26, 2020) available at https://www.sec.gov/
Rel. No. 33-10884, available at https://www. news/press-release/2020-192; and SEC Adof}ts
sec.gov/rules/final/2020/33-10844.pdf. Amendments to Modernize and E11ha11ce
212 See "Founder Demographics & Capita l Fonna- Manageme11t's Discussion and Analysis and
tion " section of th e Report above. other Financial Disclosures (Nov. 19, 2020 )
213 See "Rural Communities and C'lpital Forma- available at https://www.sec.gov/news/press-re-
tion" secti on of th e Report above. lease/2020-290.
214 See Report 011 the 39tb An11ual Small Business 224 See "COVID-19 and Capital Formation - What
Forum (Jun. 18, 2020) available at https://www. is happening in the initial public offering (IPO)
sec.gov/files/2020-oasb-forum -report-fina l_0. market?" section of the Report above .
pdf; see also Transcript of Sma ll Business Cap- 225 A SPAC is a publicly traded company that raises
ital Formation Advisory Committee Meeting cash for the purposes of acquiring a closely held
(Aug. 4, 2020) available at https://www.sec.gov/ firm and, through the deal , taking it public. See
info/smallbus/acsedsbcfac-transcript-080420. supra note 71.
pdf. 226 See https://www.sec.gov/page/small -busi-
215 "Notice of Proposed Exemptive Order Grant- ness-capital-formation-advisory-committee.
ing Conditional Exemption from the Broker 227 See SEC Press Release 2019-61, SEC An-
Registrati on Requirements of Section 15(a ) of nounces Members of Small Business Cat1ita/
the Securities Exchange Act of 1934 fo r Certain Formation Advisory Co mmittee (Ap r. 25, 2019)
Activities of Finders," Release No. 34-90 112, available at https://www.sec.gov/news/press-re-
available at https://www.scc.gov/ru les/exor- lease/2019-6 1.
ders/2020/34-90112.pdf. 228 See SEC Press Release 2020-171, SEC A11-
216 " Final Rule: Accredited Investor Definition," 11ou11ces New Small Business Capital Formation
supra note 14. Advisory Committee Members {Aug. 4, 2020)
217 See, e.g., Roundtable on C'lpital Formation available at https://www.sec.gov/news/press-re-
Between the Coasts, May 6, 2019, at minutes lease/2020-171 .
42-48, archived webcast available at https:// 229 "Concept Release on Harmonization of Securi-
www.sec.gov/video/webcast-archive-player. ti es Offering Exemptions," supra note 209.
shtml?document_id=sbround050619. 230 "Proposed Rule: Amending the "Accredi ted
218 See, e,g., Virtual Sma ll Business Fonun (June Investor" Definition," Release No. 33- 10734
18, 2020) available at https://www.sec.gov/oasb/ (Dec. 18, 2019) available at https://www.sec.
sbforum. gov/rules/proposed/20 19/33- 10734.pdf.
219 See "Founder Dem ograph ics & Capita l Forma- 231 "Final Rule: Accredited Investor Definition,"
tion " section of the Report above. supra note 14.
220 See Sarah Lyon s-Padilla, et. al., " Race Influences 232 "Order Designating Certain Professional Licens-
Professional Investors' Financial Judgments," es as Qualifyin g Natural Persons for Accredited
Proceedi11gs of tbe Natio11al A~demy of Sci- Investor Status Pursuant to Rule 501(a)(10)
ences of the United States of Ameri~, (Aug. 27, under the Securities Act of 1933," Release No.
2019) available at https://www.ncbi.nlm.ni h. 33-10823 (Aug. 26, 2020) available at. https://
gov/pmdarticles/PM C67 l 72 74/. www.sec.gov/rules/other/2020/33-1 0823. pd f.
98 I SEC OFFICE OF T HE ADVOCATE FOR SMALL BUSINESS CAPITAL FOR MAT ION
Insert offset folio 172 here 43965.172
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00209 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
204
233 See "Final Rule: Facilitating Capital Formation blass-speech-pli-investment-management-
and Expanding Investment Opportunities by institute.
Improving Access to C.1pital in Private Mar- 236 See "Temporary Amendments to Regulation
kets," Release Nos. 33-10884; 34-90300; IC- Crowdfunding," Release No. 33-10781 (May
34082 (Nov. 2, 2020) available at https://www. 4, 2020) available at https://www.sec.gov/rules/
sec.gov/rules/final/2020/33-10844 .pdf. interim/2020/33-10781.pd f.
234 See Jay Clayton, Chairma n, SEC, Remarks 237 See "Temporary Amendments to Regulation
at Meeting of the Small Business Capita l Crowdfunding; Extension," Release No. 33-
Formation Advisory Committee (Nov. 12, 10829 (A ug. 28, 2020) available at https://www.
2019) available at htrps://www.sec.gov/news/ sec.gov/rules/interim/2020/33-10829 .pdf.
public-statement/clayton-remarks-small-busi- 238 See https://www.sec.gov/info/smallbus/acsed
ness-capital-formacion-advisory-commit- acsec-recommendation-05 151 ?-fin ders. pdf.
tee-111219. 239 See https://www.sec.gov/oasb/sbforum .
235 See Dalia Blass, Director, Division of Invest- 240 See https://www.sec.gov/spotlight/sbcfadsbc-
ment Management, Speech: PU Investment fac-learn-fro m-data.pdf.
Management Institute {July 28, 2020) avail- 241 See https://www.sec.gov/fil es/2020_Diversi-
able at https://www.sec.gov/news/speech/ ty_and_ In cl usi on_S trategic_Plan. pdf.
ANNUAL REPORT: FISCAL YEAR 2020 I 99
Insert offset folio 173 here 43965.173
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00210 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
205
www.SEC.gov/OASB
smallbusiness@sec.gov
202.551.5407
@SEC_News and #SECSmallBiz
Insert offset folio 174 here 43965.174
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00211 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
206
Insert offset folio 175 here 43965.175
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00212 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
207
OFFICE OF THE
ADVOCATE FOR SMALL
BUSINESS CAPITAL
FORMATION
US Securities and
Exchange Comm ission
100 F Street NE
Washington, DC 20549
202.5515407
www.sec.gov/oasb
smallbusiness@sec.gov
Insert offset folio 176 here 43965.176
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00213 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
208
•.•.~ . ~ . ~ . Celebrating 15 Years
IIIIII SMALL BUSINESS
MAJORITY
February 3, 2021
The Honorable Maxine Waters The Honorable J im A. Himes
Chainvoman Chairman
U. S. House Committee on Fina ncial Services Subcommittee on National Security,
2129 Rayburn House Office Building International Developm ent and Monetary Policy
Was hington, D.C. 20515 U.S. House Committee on Financial Serv ices
2129 Rayburn House Office Building
Washington , D.C. 20515
RE: Importance of 1·eauthorizing the State Small Business Credit Initiative
Dear Chairwoman Waters and Chairman Himes:
As a representative of Ame rica's 30 million small bus inesses, Sma ll Bus iness Majority writes today to
share comments o n the success of the State Sma11 Business Cred it Initi ati ve (SSBCI) and the importa nce
of reauthori zing this program to better serve s mall bus in esses' credit needs.
Small Bus iness Majority is a national small business o rganization that empowers America's diverse
entrepreneu rs to build a thriving and inclusive economy. We engage our network of more than 8 0,0 00
small bus inesses a nd 1,00 0 bus in ess and co mmunity orga nization s to advocate for public policy so lutions
and deliver resources to e ntreprene w·s that promote equitable small bus iness growth.
The State Small Bus iness Credit Initiative (SSBC I) was a critical resource to st rengthen state programs
th at s upport finan cing for small bus in esses across the count ry, and we strongly s upport reinstating the
program to get ca pital into th e hands of vulnerable s mall bus inesses. With 47 states participatin g, SS BCI
helped direct fund s to 15 2 s mall business prog ra ms, and So % of those funds s upported the s mall est of
businesses with 10 o r fewer employees. By 2 01 5, 4 2 % of the SS BCI funds were for s mall bus in esses
located in low- and moderate in come communities.
SSBCI was s uccessful in part beca use it did not take a one-size-fits-all approach, which is critica l to
addressin g the needs of our nation 's diverse sma ll bus inesses. We've seen the challenges that ca n arise
from a rigid fundin g structure like the Paycheck Protection Program (PPP) that has struggled to d eliver
fundin g to s mall bus in esses owned by people of colo r and vulnerable s mall bus in esses. As a result of a
more flexible approach, the SSBCI prog ram helped dri ve ca pital to unde rserved markets and benefitted
ea rly-stage, rural, tribal, minority-owned , and women-owned bus inesses.
Small businesses, particularly women- and minority-own ed businesses that have been left behind during
th e pandemic, a re still experi encing significant declin es in revenue. Indeed , our most recent research
found more than half of s mall bus inesses report their revenues are down compared to the sa me time last
year and 1 in 5 Black and Latino owned businesses are facing clos ure. These s mall bus iness owners are
looking to Congress to create innovative pathways towards accessing capital. SSBCI has a proven track
record of s uccess that all s mall businesses stand to benefit from and there's no tim e to waste in its
rea uthorizatio n.
Thank you for th e opportunity to s hare comm ents on the importance of reautho rizing this program to
support s mall businesses during this critica l time .
Sincerely,
J ohn Arens meyer
Founder and CEO
101515th Street NW, Suite 450 • Washington, DC 20005 • (202) 828-8357 • www.smallbusinessmajority .org
Insert offset folio 177 here 43965.177
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00214 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
209
ASIAN/ PACIFIC ISLANDER AMERICAN CHAMBER
OF COMMERCE AND ENTREPRENEURSHIP
■
U.S. House Committee on Financial Services
Public/Virtual Hearing
More than a Shot in the Arm: The Need for Additional COVID-19 Stimulus
February 4, 2021 10:00 AM ET
Chairwoman Maxine Waters (CA-43), Presiding
Written Testimony on behalf of:
Asian/Pacific Islander American Chamber of Commerce and Entrepreneurship
(National ACE)
United States Hispanic Chamber of Commerce (USHCC)
U.S. Black Chambers, Inc. (USBC)
Insert offset folio 178 here 43965.178
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00215 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
210
ASIAN/PACIFIC ISLANDER AMERICAN CHAMBER
OF COMMERCE AND ENTREPRENEURSH I P
February 3, 202 I
The Honorable Maxine Waters
•
The Honorable Patri ck McHenry
Chairwoman Ranking Member
Committee on Financial Services Committee on Financial Services
U.S . House of Representatives U.S . House of Representatives
Washington, D.C. 20515 Washington, D.C. 20515
Dear Chairwoman Waters and Ranking Member McHenry :
On behalf of the minority business community in the United States, we are thankful for the
leadership and commitment your committee has demonstrated in helping to advocate for small
minority-owned businesses during our current economic crisis.
Collectively, the undersigned organizations represent the interests of more than 9.3 million
minority-owned business enterprises (MBEs) and a network of more than 450 minority
chambers of commerce and business associations across the United States. As the leading
national voices for minority businesses in the United States, we want to your committee is
aware of the incredible risk these businesses are facing and how their economic security will
be threatened by the COVID-19 economic crisis without the proper investment in technical
assistance provided by Minority Business Development Centers (MBDCs) and other local
partners. This model saw tremendous success in deli vering to our minority-owned businesses
the technical assistance they needed to access COVID-19 economic relief such as the Paycheck
Protection Program (PPP), the Economic Injury Disaster Loan (EIDL) program, among key
programs. We stand at an economic precipice in American history, to help businesses survive
and recover, as we continue to fight this unprecedented global pandemic.
The Minority Business Development Agency (MBDA) is the only federal agency solely
dedicated to the development and growth of our nation ' s minority business enterprises. We
urge the increase of funding to be made available to the MBDA through any future federal
stimulus or economic relief packages. The MBDA is an institution that many of our minority-
owned businesses and chambers of commerce throughout the country tum to for resources and
guidance. This funding and support are needed to help us reach more minority-owned
businesses during this pandemic, provide technical assistance, and assist more businesses to
keep their doors open. This funding is critical to saving America' s minority-owned businesses
who are struggling more than any other groups. Our continued collaboration with the MBDA
will lead the economic recovery and job growth for our nation as a result of our technical
assistance, intervention, and support.
Page 1 of 4
Insert offset folio 179 here 43965.179
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00216 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
211
As a result of CARES Act funding from the MBDA, many organizations were able to
implement nationwide technical assistance programs to help MBEs during this crisis. Under
the MBDA's leadership, these national business organizations are providing the most accurate
and current information about federal resources available to minority business enterprises,
partnering with our national networks of local, state, and regional minority chambers of
commerce throughout the country. These programs include how to access capital and loan
assistance for stopgap funding such as the PPP, EIDL, and other loan and grant opportunities;
offering in-language resources and tools; and education and training to support small business
resiliency. The programs enlist subject-matter experts to support training, education, and
outreach to ensure our programs are impacting the largest possible number of MBEs in low
minority income (LMI) communities across our country.
The CARES Act grant awards have had a direct impact in saving jobs within the minority
business community. In 2020, the U.S. Hispanic Chamber of Commerce (USHCC) provided
support to more than 6,000 Hispanic and minority-owned businesses through its seven
technical assistance centers at chambers across the country. Furthermore, the USHCC has
hosted over 100 webinars and virtual trainings to help business owners recover and scale
during the pandemic. The U.S. Black Chambers, Inc. (USBC) has served 2,800 businesses
through technical assistance, counsel, and informational resources. The USBC also
implemented new access to capital programs to ensure that its members could stay afloat,
which resulted in over 200 businesses receiving grants and loans totaling$ l, 100,000. To date,
the National Asian/Pacific Islander American Chamber of Commerce and Entrepreneurship
(National ACE) has helped over 300 minority businesses apply for federal assistance through
PPP and EIDL. National ACE has also conducted 41 webinars on financial assistance and 68
virtual events on business recovery and resiliency, providing support to 9,650 businesses and
individuals.
Even before COVID-19, minority-owned businesses have all faced challenges that underscore
their economic fragility. A recent assessment by the Federal Reserve Bank found that minority-
owned businesses were more likely to show signs of limited financial health indicated by
factors such as profitability, credit scores, and a propensity to use earnings as a funding source
for their business. In a recent analysis of data provided by the MBDA, 11 % of small minority-
owned businesses had employees compared with 22% of non-minority-owned businesses.
Prior to the COVID-19 economic crisis, MBEs had been succeeding in spite of the many
historical barriers minority entrepreneurs face as they work to start and grow a business. MBEs
are two to three times more likely to be denied business loans, have one-third of the annual
gross revenues when compared to non-minority owned companies, and are half as likely to
have at least one employee on payroll. When we fail to invest in minority-owned firms, our
economy suffers.
Now, in the midst of this global pandemic, the historical problems facing MBEs have been
exacerbated. A large concentration of minority-owned businesses are particularly susceptible
to disruption and vulnerable to disproportionate challenges. Minority entrepreneurs are the
Page 2 of4
Insert offset folio 180 here 43965.180
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00217 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
212
largest population of business owners in service industries including restaurants, laundry
services, salons, and other main street retail. A recent study by McKinsey shows that 51 % of
small business jobs performed by minorities could be vulnerable in the near future, compared
to 47% of non-minorities. McKinsey's recent Business Pulse Survey also indicate that 58% of
these minority businesses are extremely concerned about the financial viability of their
respective enterprise.
Overall, there has been very little data available about the effect this crisis is having on MBEs.
To get a better understanding, the National Asian/Pacific Islander American Chamber of
Commerce and Entrepreneurship (National ACE), in partnership with the U.S. Black
Chambers, Inc. (USBC) and the United States Hispanic Chamber of Commerce (USHCC),
conducted the largest survey of its kind, with Reimagine Main Street. This survey is on the
pandemic's impact on minority businesses and was conducted online from September 28-
November 30, 2020. A total of 8,328 business owners responded, including 893 Asian
American and Pacific Islander (AAPI), 2,208 Black, 879 Hispanic, and 179 Native American
business owners.
The results of our survey, attached to this letter, paint a sobering picture: 10% expect to close
permanently in the next six months, and 45% expect to lay off at least one employee. Thirty-
three percent of Black-owned, 26% of Native American-owned, and 21% of Hispanic-owned
businesses report having less than a month of cash to cover operating expenses. Of the business
owners expecting to lay off at least one employee, AAPis were the highest at 49%. Since the
survey was fielded, COVID-19 cases have surged, averaging more than 1.3 million per week
and over 3,000 deaths per day in our country. Furthermore, our minority communities have
been the most disproportionately affected by this virus from both a healthcare and economic
perspective.
Because of CARES Act grant funding from the MBDA, we now provide consulting, training,
and assistance to our partner organizations and minority businesses alike. We are leveraging
our relationships with banking and financial institutions to provide training and education
around available financing options. We are facilitating trainings; providing technical
assistance; researching traditional and non-traditional financing options and resources on a
national and local level; leveraging existing partnerships and developing new partnerships with
federal agencies and other funders such as local governments, corporations, and nonprofit
foundations to support these training and financial assistance efforts.
We are helping countless MBEs re-enter the economy by providing the training and tools
needed to restart their business safely and strategically. The trainings and resources focus on
providing education to safeguard workers, customers, and workplaces to prevent the
transmission of COVID-19 and other communicable diseases; updating policies and
procedures, including telework and providing remote customer service; the mitigation of cyber
threats in a remote customer services or telework practices; and updating personal protective
equipment (PPE). We connect MBEs to investment and procurement opportunities to help
them pivot, grow, and move their business to a digital, more sustainable model.
Page 3 of 4
Insert offset folio 181 here 43965.181
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00218 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
213
We believe that additional technical assistance for MBEs is required and we applaud the
committee for its work in this regard.
If you have any questions or require additional information, please do not hesitate to contact
us at any time. Thank you in advance for your consideration in this matter, we look forward to
future collaboration on these important policy priorities as you continue to design the economic
future of our country through strategic bipartisan legislative action.
Respectfully,
Chiling Tong Ron Busby Sr. Ramiro A. Cavazos
President & CEO President & CEO President & CEO
National ACE U.S. Black Chambers, Inc. US. Hispanic Chamber of Commerce
CC: The Honorable Nancy Pelosi, Speaker, United States House of Representatives
The Honorable Kevin McCarthy, Minority Leader, United States House of Representatives
The Honorable Charles E. Schumer, Majority Leader, United States Senate
The Honorable Mitch McConnell, Minority Leader, United States Senate
The Honorable Ben Cardin, Senate Committee on Small Business and Entrepreneurship
The Honorable Marco Rubio, Senate Committee on Small Business and Entrepreneurship
Members of the Congressional Hispanic Caucus
Members of the Congressional Black Caucus
Members of the Congressional Asian Pacific American Caucus
Page 4 of 4
Insert offset folio 182 here 43965.182
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00219 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
214
ASIAN/PACIFIC ISLANDER AMERICAN CHAMBER
OF COMMERCE AND ENTREPRENEURSHIP
Testimony Addendum: National ACE MBDA CARES Act, Technical Assistance Grant Program, Success
and Data to Date
February 3, 2021
The National Asian/Pacific Islander American Chamber of Commerce and Entrepreneurship (National ACE)
serves as a strong advocate of Asian American and Pacific Islander (AAPI) business interests and effects
positive change on all issues that enhance and advance the goals and aspirations of AAPI business owners
and entrepreneurs. We provide a unified voice for the business interests of AAPis with a network of over 65
local chambers and partners throughout the United States.
We represent over 2.2 million AAPI owned businesses who employ over 3.5 million individuals. In the
middle of last year, National ACE received a CARES Act grant from the U.S. Department of Commerce
Minority Business Development Agency (MBDA) to provide education, training, and advising to minority
business enterprises (MBEs) through a technical assistance program.
With this program, we have developed a virtual small business recovery resource center at
www.ACESmallBusiness.org where indi viduals can view past programming, learn about available federal
funding, and connect to our consulting team for complimentary one-on-one consulting to scale their business,
apply for PPP, pivot their business plan, and more.
With the CARES Act grant funding from the MBDA, we created programming and consulting to reach over
9,000 smal l businesses to remain resilient and get access to capital during the pandemic. Our ACE NextGen
program - the millennial entrepreneur arm of our organization - created a series of cohorts, mentorship, and
educational programming to help AAPI millennial business owners apply for PPP, learn from similar
industries, and create a toolkit of best practices during the pandemic to keep their businesses operating safely.
400 AAPI entrepreneurs aged 22-48 participated in the program, many of whom have shared thei r success
stories of jobs created, PPP loans received, and pivoting their businesses.
We have conducted over 100 virtual events for small businesses and nonprofits to help minority and AAPI
businesses navigate Covid-1 9 and the changing economy. As of today, we have helped over 500 AAPI-
business owners apply for federal resources through virtual programming and one-on-one application
assistance. Topics have included applying for EIDL or PPP loans, PPP forgiveness, alternate funding sources
availabl e MBEs, hazards and prevention of Covid-19 in the workplace, management and transition to
telework, identification and mitigation of cyber threats, mitigating the effects of redacted travel or outside
activities, and more.
Lastly, National ACE conducted a national survey fielded from September 28-November 30, 2020. 893 AAPI
business owners responded and the findings were dire : 53% of AAPI businesses report increased debt to keep
their businesses operating; 61% of AAPis missed out on critical aid because they did not believe they were
eligible; and 49% of AAPI business owners report having to lay off at least one employee. Additionally, the
Bureau of Labor Statistics' December 2020 report showed that 44% of AAPI women have been unemployed
for more than six months - the highest rate of unemployment among all demographics.
From this data, we know there is sti ll much work to be completed. National ACE will continue to work to
prioritize our most vulnerable populations in hopes of providing access to an equitable recovery for all
minority business enterprises.
Insert offset folio 183 here 43965.183
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00220 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
215
Testimony Addendum: USHCC MBDA CARES Act Technical Assistance Grant,
Program Success and Data to Date
Februa,y 3, 2021
As the voice of our nation ' s 4.7 million Hispanic-owned businesses that, combined, contribute
over $800 billion to the American economy every year, the United States Hispanic Chamber of
Commerce (USHCC) in 2020 received a federal grant from the Minority Business Development
Agency (MBDA) to establish eight national COVID-19 Technical Assistance Centers to design
and execute programs to support the small, Hispanic, and minority business community through
the economic hardships caused by the COVID-19 global pandemic. Since 1979, the USHCC has
built an ecosystem of over 260 local chambers and business associations throughout the United
States, and together we advocate for and work with entrepreneurs to build sustainable, profitable
Hispanic businesses, and strengthen our place in global markets to ensure our economic vitality.
The USHCC CARES Act Grant Program provides bilingual content that educates, informs, and
advises the US Hispanic community about support, news, policy, services, resources, access to
capital, and other information critical to build and sustain awareness about COVID-19 relief for
Latino individuals, families, and their respective businesses. Through this MBDA Grant funding
we have been able to accomplish the following:
• The USHCC through the MBDA CARES Act Grant established eight COVID-19
Technical Assistance Centers (TACs) across our country in major cities with significant
Hispanic and minority populations to provide small minority-owned businesses with free
solutions to increase productivity, information on access to funding and grants, webinars
and trainings featuring subject matter experts, and comprehensive resources and guidance
in English and Spanish, to enable business owners to adapt their models, execution, and
demand-generation processes to the new normal , and thrive.
• The USHCC through the MBDA CARES Act Grant has served more than 10,000 small
minority-owned businesses as of February 1, 2021 and we have identified more than 100
success stories among those businesses served in the form of loans approved, businesses
reopened, employees re-hired, business transformation to digitization, etc.
• The USHCC through the MBDA CARES Act Grant has hosted more than 200 Bilingual
webinars and trainings, with more than 15,000 attendees, these have been offered to
small minority-owned businesses at no cost to them. More than 150 business and
operational topics have been covered they have included; financial literacy, virtual work
tools, utilizing free online tools to grow business branding, customer engagement, e-
commerce and business digitization, SBA' s PPP and EIDL application technical
assistance, budgeting during an economic crisis, business solutions to retain employees,
human resources, legal , and tax compliance, reopening safely to maintain CDC guidelines,
the Main Street Lending Program from the Federal Reserve Bank, international business
opportunities, strengthening procurement capability statements to access other contracting
portfolios, government procurement opportunities, and other relevant topics that have
evolved due to the economic hardships caused by the COVID-19 pandemic.
• The USHCC through the MBDA CARES Act Grant has provided Personal Protective
Equipment (PPE) and other sanitation supplies to more than 2,000 businesses and a
Insert offset folio 184 here 43965.184
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00221 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
216
new round of PPE supply drives will take place in the upcoming months to distribute more
supplies.
• The USHCC through the MBDA CARES Act Grant created a social media resource and
mental health campaign to promote these programs on our social media platforms through
all eight of our chamber technical assistance centers. These campaigns are activated and
have reached more than 25,000 viewers with an estimated 400,000 impressions.
• The USHCC through the MBDA CARES Act Grant has developed a Bilingual website
www.ushcccares.com which launched at the end of 2020 where people can access
resources and contact the TACs closest to them. To date, more than 2,500 people have
visited this site to gain necessary resources, guidance, and technical assistance. The TACs
work with small minority-owned businesses to review the different resource options
available to their business, these include: access to capital, loans, alternative funding,
health and safety guidelines from the CDC, trainings, credit and tax guidance, operational
best practices, tools from subject matter experts on digital transformation, managing
remote teams, business opportunities, procurement, productivity, and much more.
Insert offset folio 185 here 43965.185
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00222 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
217
•
Testimony Addendum: USBC MBDA CARES Act Technical Assistance Grant
February 3, 2021
The US. Black Chambers, Inc. (USBC) provides committed, visionary leadership and advocacy
in the realization of economic empowerment. Through the creation of resources and initiatives, we
support African American Chambers of Commerce and business organizations in their work of
developing and growing Black enterprises. Our five pillars of service include; advocacy, access to
capital, contracting, entrepreneur training, and chamber development.
The USBC ' s primary advocacy asks related to the Minority Business Development Agency
(MBDA) are as follow:
• Formally codify the MBDA to increase the amount of Black-owned businesses;
• Create an MBDA website to ensure that black-owned businesses can access and navigate
federal resources;
• Establish an inter-agency council within the MBDA at the U.S. Department of Commerce
to act as an oversight and public reporting mechanism. The inter-agency will also ensure
that Black-owned firms are receiving the prioritization necessary in the months and years
ahead;
• Increase appropriations levels for the MBDA to seed and scale Black and minority-owned
firms ;
• Authorize a study within the MBDA to track and report forthcoming revenue opportunities
and solutions for Black businesses following the COVID-19 pandemic;
• Establish additional Minority Business Development Centers (MBDCs) at additional
Historically Black Colleges and Universities and Low Minority Income (LMI)
communities;
• Establish a fund within the MBDA that will specifically serve our nation ' s fastest group of
entrepreneurs, Black women; and
• Ensure that the MBDA prioritizes Black businesses within Science, Technology,
Engineering, the Arts, and Mathematics (STEAM) industries.
Insert offset folio 186 here 43965.186
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00223 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
VerDate Nov 24 2008
20:21 Apr 18, 2021
1·:
;;;JUUJMIUiliU■;1JilE
Jkt 095071
~
PO 00000
Business Owners of Color
Frm 00224
and COVID-19
Fmt 6601
December 10, 2020
218
Sfmt 6601
K:\DOCS\HBA035.100
~~ C E ■II PUBLIC PRIVATE
TERRI
ASIAN/ PACIFIC ISl ... NDER AMERICAN CHAMBER
OF COMMERCE AND ENTREPRENEURSHIP
-· 4}~=~~!! STRATEGIES
Insert offset folio 187 here 43965.187
219
N
0Vl '"O '-
:::)
C
Vl
>- 0 0 vi
"vi
·;::
E 0) 0 4- Q)
0 0)
u C
C '-
Q)
0- 0 T3 -+-
Q)
-+-
I
u C
0
C
Q)
0
'-
Q) -+-
0
Q) '"O
> u C/)
= [E [E > ..c 0 Q) -+-
Q)
[E CJ 0 -+- ..c 0
[E [E
u -+-:::) C0 -+- >
-+- ·;::
Q) 0 0 0...
..c ..c '"O Vl
u
::::
.... I-
-+- 0) Q)
Vl -+-
E 0:::) :::) Q) .0
w 0 '- u
..c 0
Q)
'-
:::)
w '-
4-
-+- 4-
-+-
C/)
0...
4-
a: '"O
C
Q)
-0.:,=
Q)
> ·a -+-
C 0
I- :::)
0. 0 u
Cl) 0 ·;:: ~ Q)
·c -+-0 ·o
.0 Vl
+=
Q)
z -+- '-
-<C
'-
-+-
t;:::
Q) '- ..c
-+-
0.
Vl
:::) C
0 0
-+- Q)
Q)
E .0 u '-
:::)
Vl
Q)
2 Vl
'- Q)
Vl
I
Vl
C
-+-
Q)
Q) Vl Q)
w ~
..c
-+-
Vl Q)
'-
-+-
'- 0 0
z '- C/)
-
C,
0 '"O
~ C
'- 0
"<5 Q) '"O += ~
u -+-
...:-
Q)
Vl
C
0
·a
C
<C ..c > 0 :::) Q)
-+- ·;::
2 ..c ..c 0Vl C
'"O -+- Q) "B)
C
w 0
Vl
Q)
+=
~
> 0E
0
Q)
a: Vl
Q) ·c
-+-
0 ·m
Vl
I
+=
Vl
Vl :::) += > 0c'.
Q)
E :::) 0
C
"vi E E C
C >-
'-
Q)
:::) 0 0
.0 u 0) >
Q) C 0
0
-+-
0
'-
0 +=
~
u
Q)
E ..c
-+- Q) 0. '-
C/)
~ :::)
Insert offset folio 188 here 43965.188
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00225 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
VerDate Nov 24 2008
20:21 Apr 18, 2021
- • Context for this Survey
Jkt 095071
PO 00000
• Small business and communities of color hard hit by
pandemic
Frm 00226
• Limited data available to reflect absolute and relative
Fmt 6601 experience of Asian-, Black-, Hispanic- and Native-owned
small businesses 220
Sfmt 6601
• Large-scale national survey of small business owners fielded
K:\DOCS\HBA035.100
from September 28 through November 30, 2020. Large
samples of Asian-, Black-, Hispanic-, Native- and White-owned
businesses provide timely insight into impact and pain points.
TERRI
Insert offset folio 189 here 43965.189
221
('0
co 0-. 0-.
0-.
0 '-0
0-. N r---- r----
co N
co ~
u
·2
-
(lj
C: ~ C (lj
C u a. ~ :2
'iii C Ill C
c( iii j: z 3:
■ ■ ■ ■
••••••••••••••••••••••••••••••••
••••••••••••••••••••••••••••••••
••••••••••••••••••••••••••••••••
••••••••••••••••••••••••••••••••
••••••••••••••••••••••••••••••••
••••••••••••••••••••••••••••••••
~
(1)
••••••••••••••••••••••••••••••••
••••••••••••••••••••••••••••••••
C
3:;
0
••••••••••••••••••••••••••••••••
44 444444 444444444
44 444444 444444444
V)
V)
(1)
C
'vi
44 444444 444444444
a, 4 ::J
-a. 4 444444 444444444
44 444444 444444444
44 444444 444444444
44 444444 444444444
co
0
E
E
(/)
44 444444 444444444 0
44 444444 4 44444444 N
C 44 444444 4 44444444 II
V) 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
44 444444 4 44444444
a, 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
oo
...
Cl) 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
44 444444 4 44444444
a, 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
·-c>
"'C V)
-+-
C: CX) C
C (])
a, N "D
...C
C) CV) 0C
.... Q_ V)
....I CX) (])
~
I
Insert offset folio 190 here 43965.190
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00227 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
VerDate Nov 24 2008
20:21 Apr 18, 2021
Jkt 095071
Robust Mix of Micro and Small Businesses
2019 Revenue Distribution b y Number of Emplo yees
PO 00000
% of respondents % of respondents
Frm 00228
Fmt 6601
• 222
Sfmt 6601
4
I ~ .lllL
K:\DOCS\HBA035.100
~lfEmploytd 1 · 10fmployus ll • SOEmployus S1 · 100Employ,n IOl • SOOEmploy,n
> $100k $700,000- $500,000 · S1 Million - >$10 Million
> $500,000 >$ 1M > S10Million
■ Asian 893
■ Hispanic 879 ■ White 4,169
■ Asian 893
■ Hispanic 879 ■ White 4,169
■ Black 2,208
■ Native 179
■ Black 2,208
■ Native 179
TERRI
~ - - - - - - - - -»> lillil@ Source: PPS Small Business Survey in partnership w ith National ACE, US Black Chambers, and US Hispanic Chamber of Commerce (October -November 2020)
RE IMAGINE MA IN STREET @Ofr ~;~~::%:~/ ~~~~~::~:st;~~~~~: \nb~~;::s~::~l~~;s include 410
1
not respondents who declined share
to
Insert offset folio 191 here 43965.191
VerDate Nov 24 2008
20:21 Apr 18, 2021
Skews Toward Established Businesses
Jkt 095071 Time in Busin ess
% o f resp o ndents
PO 00000
n=4,258
Frm 00229
n=2,277
Fmt 6601
223
n=l ,559
Sfmt 6601
n=234
K:\DOCS\HBA035.100
TERRI
- i ii ff
L ess than 1 Year
■
■
Asian
Black
893
2,208
1 - 3 Years
■ Hispanic 879
■ Native 179
4 - 10 Years
■ While 4,169
10 + Years
>» @lillil Source : PPS Small Business Survey in partnership w ith Nation~I ACE, US Black Chambers, and US Hispanic Chamber of Commerce [October-November 2020)
REIMAGINE MAIN STREET @O@ Q27:How manyyearshaveyouow ned/operaledyourbus1ness?
Insert offset folio 192 here 43965.192
VerDate Nov 24 2008
20:21 Apr 18, 2021
Takeaways
Jkt 095071
• Small businesses have been hard hit to date: 8 in 10 small business owners
PO 00000
surveyed reported negative effects from the pandemic, more than half of
respondents have experienced revenue declines of more than 25%, and 37% are
not operating at full capacity, with an average of almost 10% closed.
Frm 00230
• It's going to get worse for business owners and their employees: ~ 10% of small
Fmt 6601 business respondents expect to close permanently in next 6 months. 44% of
employer businesses that responded have already shed jobs and 45% expect 224
Sfmt 6601
more job losses to come.
K:\DOCS\HBA035.100
• Small businesses need cash: As expected, most respondents want relief in the
form of grants or another PPP loan. More than one-third of small businesses in the
survey expect to borrow to address COVID-induced cash flow constraints, making
it imperative to ensure liquidity in credit markets, especially for relatively
small-dollar loans.
TERRI
Insert offset folio 193 here 43965.193
VerDate Nov 24 2008
20:21 Apr 18, 2021
Small Businesses Hard Hit by Pandemic
Jkt 095071 Effect of COVID-19 Pandemic
% of respondents
PO 00000 Asian (~= 893)
Frm 00231 Black (n= 2,208)
Fmt 6601 Hispanic (n= 879)
225
Sfmt 6601 Native (n= 179)
K:\DOCS\HBA035.100
White (n= 4, 169)
==-,■
TERRI
Total (n= 8,328)
R El MAGIN E MAIN STREET
»> filfiHil
@O@
■ Ve,y Negative ■ Negative ■ Neuiml ■ Positive -
Source: PPS Small Business Survey in partnership with Nationa l ACE, US Black Chambers, and US Hispanic Chamber o f Commerce [October-November 2020)
QS: Overall (how) has your business been affected by the COVID-19 pandemic?
Insert offset folio 194 here 43965.194
VerDate Nov 24 2008
20:21 Apr 18, 2021
It's Not Business as Usual for the Majority of Respondents
Jkt 095071 Status of Operations
% of respondents
PO 00000
Asian (n = 893) 42
Frm 00232
Black (n = 2,208)
Fmt 6601
Hispanic (n = 879)
226
Sfmt 6601
Native (n= 179)
K:\DOCS\HBA035.100
White (n = 4,169)
Total (n = 8,328) . ,
TERRI
■ Closed (Temp and Perm) ■ Pan/ally Open ■ Operacing with Modificaclons ■ Opetodng as Usual
Insert offset folio 195 here 43965.195
VerDate Nov 24 2008
20:21 Apr 18, 2021
Revenue Down by > 25% for Most Respondents
Jkt 095071
-
Change in Revenue 2020 vs 2019
% of respondents
PO 00000
Asian (n= 893)
Frm 00233
Fmt 6601
Black (n= 2,208)
Hispanic (n = 879)
15 40
-
227
Sfmt 6601
Native (n= 179)
K:\DOCS\HBA035.100
White (n= 4,169)
-
TERRI
Total (n= 8,328)
RE IM AGINE MAIN $TR EET
»> lillillil
~ - - - - - - - - - -~lilDfr
■ Down By at Ltosr 769'
■ Down Betwttn 2596 - 759'
Down 2596 or Less
■ Abour che So~
lncrttise Up ro 2596
■ lncttose from 2696-759'
-
■ lncrtost More Thon 7696
Source: PPS Small Business Survey in partnership with Notiona l ACE, US Black Chambers, and US Hispanic Chamber of Commerce [October-November 2020)
029: Compared with your 2019 year end revenue, what do you anticipate your 2020 year end revenue will be?
Note: Down more than 76% includes businesses that expect lo be permanently closed
Insert offset folio 196 here 43965.196
VerDate Nov 24 2008
20:21 Apr 18, 2021
Expect More Small Businesses to Shut Down
Jkt 095071
Cash Crisis without Relief ~10% of Small Business Respondents Expect to Close
Months of Cash Permanently in Next 6 Months
PO 00000
Frm 00234
% of respondents
Asian
(n• 893)
Black
(n• 2,208/
-.. I % of Respondents
.,,
J:;
l:
0
:;;
--
'°
Fmt 6601
.S
.,.,,
Hispanic
(n:879)
I 0
0
.?,
l:
., 228
Sfmt 6601
C
"'
E
.;
Native
(n= 179)
I a.
B
-
.,u
K:\DOCS\HBA035.100
White I
t
#-
,2 37
~-
1
(nz3,688)
Toca!
(n•B.328) ■ Whir, /n= 3,688) ■ Hispanic (n= 879) ■ As/on /n= 893)
■ Native (n= 179) ■ Block (n= 2,208) ■ All Businesses (n= 8,328)
TERRI
■ Ltss than I Month ■ 1·3 Months 4-5 Months ■ At least 6 months
~----------»> lil@@ Source: PPS Small Business Survey in partnership with Notiona l ACE, US Black Chambers, and US Hispanic Chamber of Commerce; [October -November 2020) i I
RE IMAGINE M Al N STREET @Otill g~~;1~::i:~~t ~~;y~n~,h~,0d~;:nu/;:~:e~~r 0
cbaut~n:~:~~~~,:~nt~ ~~ ~~in~s:h:P:1: i~~/ (Select all that apptyJ
Insert offset folio 197 here 43965.197
VerDate Nov 24 2008
20:21 Apr 18, 2021
More Job Shedding Likely
Jkt 095071
~4 in 10 Small Employers Surveyed Have Already Nearly Half of Respondents Expect More Layoffs
Shed Jobs
PO 00000
Change in Number of Paid Employees
% of Employer Firms
"""
Frm 00235
fn•74()J
.,.,"'
~
"""'
/n• t, 118) a.
.,E
Fmt 6601
:t:
0
H1span1C >,
(n-756) -3
8
229
Sfmt 6601
.,
u
a.
NiilNt' ><
w
(rr-132)
;j!
K:\DOCS\HBA035.100
WhtU!
(n•J.514)
Total
(n•6,660)
■ o«rr~d II of Paid Emplaytn
■ White (n• 3,514) ■ Hispanic (n• 756) ■ Asian (n• 740)
■ f,lo Chon,e In Nurnbtr oj Paid Employrts
TERRI
■ /nuf'OWd If of Paid Employres ■ Native (n= 132) ■ Block (n• 1,718) ■ All Businesses (n• 6,860)
Source: PPS Small Business Survey in partnership with National ACE, US Black Chambers, and US Hispanic Chamber of Commerce (October -November 2020)
»> !il@@ 08: Since the Covid-19 pandemic, did your business have a change in the number of paid employees?
REI MAGI NE MAIN STA E ET lil05: 022: How are you considering managing current or potential cash flow issues? (Select all that apply)
Among respondents that employ others
Insert offset folio 198 here 43965.198
VerDate Nov 24 2008
20:21 Apr 18, 2021
Jkt 095071
Business Owners Want Relief, With Varying Priorities
Preferences Among Relief Options Presented
PO 00000
% of respondents
100
90
Frm 00236
80
70
Fmt 6601
60
50
230
Sfmt 6601
40
30
20
K:\DOCS\HBA035.100
10
0
Second Round of
PPP
Reduce Tox
Obligation
11111.
Optimized Export
Tax Rebates
Reduce Social
Insurance*
Grants Reduce Financing
Costs
111111111111
Reduce Fixed
Costs
Increased
Support from
Premiums Community Orgs
■ All Businesses (n= 8,328) ■ Asian (n = 893) ■ Black (n= 2,208) ■ Hispanic (n= 879) ■ Native (n= 179) ■ White (n = 4,169)
TERRI Source: PPS Small Business Survey in partnership with National ACE, US Black Chambers, and US Hispanic Chamber of Commerce; (October - November 2020)
~ - - - - - - - - ->» @@@ 023: Because of Covid-19, there have been a variety of proposed re lief measures. Which of the following would be the most beneficial to your business'? (Select all tha t apply)
R EI MAG IN E MA IN ST R EE T @O@ ~~,:;~;~:;~~s~~~;et~;s~~i!:~: ~'i~~~ do not lay off workers
Insert offset folio 199 here 43965.199
VerDate Nov 24 2008
20:21 Apr 18, 2021
Imperative to Maintain Liquidity in Credit Markets
Jkt 095071
More than half of respondents say they will need financial More than one-third of small businesses
assistance or additional capital in next 6 months expects to bo"ow to address COVID-induced
PO 00000
% o f respondents cash flow constraints
% of respon dents
Frm 00237
~0
.,, :
·;:;
,.
C
a,
'c
'l;l E
~
Fmt 6601
~
~-=
0
C C
,. 0
t;; E
·~ ;.,
;;; 231
Sfmt 6601
·g ~
,.c;;;·-
'-= .'.::
~ a.
.E ~
al., -5.,
K:\DOCS\HBA035.100
C l:
u:
I
.lj
E
~
■ Whlre /n• 4, 169) ■ Hispanic (n-879) ■ Asian (n=893)
■ Whire /n= 4,169) ■ Hispanic (n=879J ■ Asian (n=893)
■ Na rive (n • 179) ■ Black (n•2,208) ■ All Businesses (nsB,328)
TERRI
■ Native (n • 179) ■ Black /n•2,208) ■ AJI Buslnessts /n•B,328)
~ - - - - - - - - - -»> liHillil Source: PPS Small Business Survey in partnership with National ACE, US Black Chambers, and US Hispanic Chamber of Commerce; (October- No vember 2020)
RE IMAGINE MA IN STREET @Ofr 6~~: ~~:ea~=:~~c:~~i:;~i~~ ~oin!~~~;~~rybii~~:~: ;il~~~=~ti~ ~~s~nfl~: :i~~:~~ 7~\:~~ ~~~ ~~1 ~~~~~! opp~)
I 1 1
Insert offset folio 200 here 43965.200
VerDate Nov 24 2008
20:21 Apr 18, 2021
Federal Support to Date Not Distributed Equally
Jkt 095071
Success Rate
% Applied x % Received Relief
PO 00000
Paycheck Protection Program Economic Injury Disaster Loan
• $484 Billio n • $20 Billio n
Frm 00238
• Distributed via private lenders • Distributed by the SBA
bO
bO C
C
Fmt 6601
-0 -0
C C
:J :J
u.. u..
232
_J
CL
0
Sfmt 6601
CL
CL w
I... I....
.2 .2
...,
C].) C].)
.µ
K:\DOCS\HBA035.100
IIJ IIJ
0::: 0:::
l/l
l/l l/l
C].) l/l
u C].)
u u
:J u
Vl :J
Vl
■ White (n= 4, 169) ■ Hispanic (n= 879) ■ Asian (n= 893)
TERRI
■ Norive(n= 179) ■ Black(n=2,208) ■ All Businesses (n= 8,328)
Insert offset folio 201 here 43965.201
VerDate Nov 24 2008
20:21 Apr 18, 2021
Jkt 095071
Expectations & Needs for Federal Assistance Vary
Roughly 1 in 5 Small Businesses Did Not Apply for Majority of Asian, Black, Hispanic and Native Owners Did Not
Federal Assistance Think They Were Eligible vs Almost Half of White Business
PO 00000
% o f respond ents Owners Who Did Not Need Assistance
% of resp o nden ts
Asian
Frm 00239
(fl • 2Q6)
~ Black
C: (n a 421}
~
Fmt 6601
j
"§ Hl'lpank
(n= 156)
",1:''" 233
Sfmt 6601
~
(r_
Native
-2- (n-<55)
c.
C.
..:
0
z
K:\DOCS\HBA035.100
White
"i5 (n• 923)
#-
To~I
(n" 1,761}
■ Did Not. Think My Bus.mess wos Elig1blt
■ Not oble to ftnd o finondal lnstirution ro proc~s•
■ White (n• 4, 179) ■ Hispanic (n=879) ■ Asian (n"" 893)
■ Did not nffd osslsronce
■ NotNe(n=179) ■ Block (n• 2,208)
TERRI
■ All Businesses (n• 8,328)
Source: PPS Small Business Survey in partnership w ith National ACE, US Black Chambers, and US Hispanic Chamber of Commerce (October- November 2020)
~ - - - - - - - - ->» frHil@ Q6: Hove you applied for any federal financial assistance from any of the following sources? (Select all that apply)
REIMAG I NE MAIN STREET @Oft Q9: Why haven't you applied for federal financial assistance~
Insert offset folio 202 here 43965.202
VerDate Nov 24 2008
20:21 Apr 18, 2021
What Do We Think Needs to Happen?
Jkt 095071
PO 00000 • Get the virus under control so that demand returns
Frm 00240
• In the meantime, provide flexible and sufficient Federal relief for small businesses and
support for credit markets to ensure capital available for Main Street recovery
Fmt 6601
• Improve data driven insights into segments of small businesses and their workers
234
Sfmt 6601 • Mobilize effective support for small businesses, the people who work for them and
the communities that they serve
K:\DOCS\HBA035.100
• Support innovation of financial products and distribution channels to reach small
businesses in communities of color at scale
TERRI
Insert offset folio 203 here 43965.203
VerDate Nov 24 2008
20:21 Apr 18, 2021
- • Questions? Contact Us
Jkt 095071
PO 00000
Frm 00241
Fmt 6601
Chris Landrigan
235
Sfmt 6601
chris@publicprivatestrategies.com
K:\DOCS\HBA035.100
TERRI
Insert offset folio 204 here 43965.204
236
Insert offset folio 205 here 43965.205
VerDate Nov 24 2008 20:21 Apr 18, 2021 Jkt 095071 PO 00000 Frm 00242 Fmt 6601 Sfmt 6601 K:\DOCS\HBA035.100 TERRI
VerDate Nov 24 2008
20:21 Apr 18, 2021
Broad Geographic Coverage
Jkt 095071
• Survey respondents represent all 50 states and three territories (Puerto Rico, Guam
PO 00000
and the Northern Mariana Islands)
• >1,000 respondents in California, Texas
• >500 respondents in Florida, Georgia
Frm 00243
• At least 300 respondents in Maryland, North Carolina, Illinois, Michigan,
Pennsylvania and Ohio
Fmt 6601
Top 5 States of Respondents
237
n= 8,328
Sfmt 6601
K:\DOCS\HBA035.100
VA
5%
TERRI
~ - - - - - - - - - ->» fiHillil Source: PPS Smal! Business Surv'.=y in partnershii::i ":ilh Nali~na l ACE, US Black Chambers, and US Hispanic Chamber of Commerce (October -November 2020)
1
REIMAGINE MAIN STREET Q37: Please provide the following demographic 1nformat1on L(l
~-------~@□~
Insert offset folio 206 here 43965.206
VerDate Nov 24 2008
20:21 Apr 18, 2021
- • Rough Parity Between Male and Female Respondents
Jkt 095071
% of respondents
n=B,328
PO 00000
Frm 00244
Fmt 6601
238
Sfmt 6601
K:\DOCS\HBA035.100
TERRI
~ - - - - - - - - -»> lillillill
REIMAGINE MAIN STREET lilDlill
Insert offset folio 207 here 43965.207
VerDate Nov 24 2008
20:21 Apr 18, 2021
Respondents Skew Older
Jkt 095071
% of Respondents
PO 00000
n=S,328
Frm 00245
Fmt 6601
Sfmt 6601
- 239
2
K:\DOCS\HBA035.100 -
Age 18-24 Age25-34 Age35 • 44 Age 45 • 54 Age55 • 64 Age 65 and Over
■ Asian n=893 ■ Hispanic n= 879 ■ While n=4, l 69
TERRI ■ Black n=2,208 ■ Nativ e n=l 79
~ - - - - - - - - - - » > @@@ Source: PPS Small Business Survey in partnership with National ACE, US Black Chambers, and US Hispanic Chamber of Commerce (October-November 2020)
REIMAGINE MAIN STREET o 3 l:Howoldareyou? 22
@Olil
Insert offset folio 208 here 43965.208
VerDate Nov 24 2008
20:21 Apr 18, 2021
Broad Range of Industries Represented in Sample
Jkt 095071 % of respondents
n= 8,328 ~ - - --Water, environment and public
PO 00000
facilities management (1)
- - - - --Manufacturing (9)
Frm 00246
Other(31) - - ~
Fmt 6601
-+- - - Wholesale and Retail (9) 240
Sfmt 6601
Non-Profit (1) - - - -~
Culture, sports and - -----.J Transport (3)
entertainment (including restaurants) (2)
K:\DOCS\HBA035.100
Hospitaliry (2)
Health and Social Work (6) ~,
~ - - -~ IT and Software (6)
Education (4) - - - -- - ~ .
Residential se,vices, repair - - - - - - - -- ~ - --Financial Services (2)
and other services (3)
Real Estale (2)
Scientific research and
technological services (5)
TERRI
~ - - - - - - - - - ->» @liHil Sour~e: PPS Small Busi.ness Survey i~ partnersh ip with National ACE, US Black Chambers, and US Hispanic Chamber of Commerce (October-November 2020) _ ,
REIMAGINE MAIN STREET 030.Whatbestdescnbesyourbusinesstype? )-J
~-------~@□@
Insert offset folio 209 here 43965.209
VerDate Nov 24 2008
20:21 Apr 18, 2021
Jkt 095071
Top 5 Industries by Race/Ethnicity of the Respondent
Asian Black Hispanic Native White Total
PO 00000
IT & Tech Services Construction Construction Construction Construction Construction
(12%) (10%) (21%) (24%) (14%) (13%)
Frm 00247 Health and Social Wholesale & Retail f',1cJn, C, C [lJr r1r~ ''" JnUICl( I r r1~ Wholesale & Retail
Wholesale & Retail (9%) (7%) I 1''07 I I
I 01 (9%)
(10%)
Fmt 6601 Wholesale & Retail "·11 f le viii l Wholesale & Retail Wholesale & Retail
; v?'J
241
(8%) (8%) (10%)
0
Sfmt 6601
"
I IT & Tech Services
(8%)
IT & Tech Services
(5%)
Health and Social
(7%)
IT & Tech Services
4%
IT & Tech Services
(6%)
Construction I
K:\DOCS\HBA035.100
(8%)
I
Transport &
Logistics
(6%)
I Health and Social
4%
I IT & Tech Services
(4%)
I Health and Social
(4%)
I Health and Social
(6%)
TERRI
~ - - - - - - - - - » > @@@ ness Survey i~ partnership w ith National ACE, US Black Chambers, and US Hispanic Chamber of Commerce (October -November 2020)
Source: PPS Small Busi_
REIMAGINE MAIN STREET Q30:What bestdescnbesyourbus1ness type~ ..1 •l
lrlQ6: Does not include "Other" ranging from 23% -34%
Insert offset folio 210 here 43965.210
File and source
- File
- supporting-small-and-minority-owned-businesses-through-the-pandemic-ho-fc9190c7.pdf
- Size
- 152,861,965 bytes
- SHA-256
- fc9190c7e7d8cb0425c05346ad4cb2fd73da30b39904bf982bfb7e810a4acc27
- Original
- www.govinfo.gov