The SEC’s Division of Economic and Risk Analysis just published three new reports that provide the public with information on capital formation and beneficial ownership of qualifying private funds. They are designed to offer key information on the capital market, specifically focusing on private funds.

The first two papers analyze the Regulation A and Crowdfunding markets and provide valuable information on how capital is being raised in the US, particularly by smaller issuers. One key piece of information shared – which underscores the importance of these methods for raising capital – is that during the periods reviewed (2015 to 2024 for Regulation A; 2016 to 2024 for Regulation Crowdfunding) more than $10 billion was raised.

The third paper offers an analysis of beneficial ownership concentration and fund outcomes for qualifying hedge funds (QHFs) and their advisers from 2013 to 2023, and it provides information on the interaction of beneficial ownership concentration, portfolio liquidity, investor liquidity, fund leverage, performance, and margins.

“Today’s reports provide key information on the capital markets,” said Robert Fisher, Acting Chief Economist and Director of the SEC’s Division of Economic and Risk Analysis. “Understanding how capital is being raised and the interaction of ownership concentration with fund outcomes for private funds informs not only the Commission but the public about essential parts of our markets.”

The three reports issued were:

Regulation A Market analysis

The analysis evaluates a decade of Regulation A, offering statistics on the state of the Regulation A offering exemption over the past decade. It documents the level of offering activity and reported proceeds as well as the characteristics of issuers and offerings relying on this exemption. There were more than 1,400 offerings during this period seeking an aggregate of more than $28 billion in capital.

Approximately $9.4 billion in proceeds was reported by more than 800 issuers. A typical Regulation A issuer was relatively small and young, and most issuers had not yet established a record of profitability.

Crowdfunding Under the JOBS Act analysis

This report provides an analysis of offering activity in the Title III securities-based crowdfunding market between May 16, 2016, (effective date of Regulation Crowdfunding) and December 31, 2024. During this period, there were more than 8,400 offerings initiated by more than 7,100 issuers, excluding withdrawn offerings. The offerings sought a total of approximately $560m based on the target (minimum) amount.

However, almost all offerings had a minimum-maximum format and accepted oversubscriptions up to a higher maximum. In the aggregate, the maximum amount sought in these offerings was approximately $8.4 billion. Based on the analysis of Electronic Data Gathering, Analysis, and Retrieval (EDGAR) filings during this period, there were more than 3,800 offerings where issuers reported proceeds; in total, they reported approximately $1.3 billion in proceeds.

The crowdfunding exemption has continued to gain momentum over time and serves small and early-stage companies seeking access to capital, often for the first time. The median issuer had approximately $80,000 in total assets, including $13,000 in cash, $60,000 in debt, and $10,000 in revenue, and three employees.

Beneficial Ownership Concentration and Fund Outcomes for Qualifying Hedge Funds analysis

This report provides statistics describing the relationship between beneficial ownership concentration and fund outcomes for QHFs and their advisers from 2013 to 2023. Over this period, concentrated funds exhibited faster growth than unconcentrated funds. Concentrated funds hold more liquid assets and offer more liquidity to investors relative to unconcentrated funds, though both portfolio and investor liquidity have declined over the sample period.

In addition, the gross return of unconcentrated funds is on average 1.2% higher than concentrated funds, but their net return is only 0.1% higher indicating that, on average, the gross performance advantage of unconcentrated funds is offset by higher margins.

Why we care

Let’s focus on ownership concentration first. It plays a crucial corporate governance role as owners with significant shareholdings to exert a notable impact on how an organization operates and manages. The results of its analysis can have substantial implications for regulatory bodies in the market, because they assist in helping investors and regulators appreciate why an expansion of investors’ investment portfolios can be beneficial to fund performance.

Studies have shown that due to the impact of shareholders, the companies with a high level of ownership concentration are more likely to make less efficient investment decisions, whereas the companies with a low level of ownership concentration tend to make more efficient investment because the latter ones are more insightful about their market potential and are subject to less shareholder pressure.

But studies also show that firms with concentrated ownership structures and small boards present higher debt levels, possibly due to a lower risk aversion and fewer conflicts of interest between shareholders and between shareholders and managers.

Since the results were mixed on ownership concentration, let’s look at crowdfunding. Crowdfunding generally refers to the use of the internet by small businesses to raise capital through limited investments from a large number of investors. 

Title III of the JOBS Act established crowdfunding provisions that allow early-stage businesses to offer and sell securities. The SEC subsequently adopted Regulation Crowdfunding to implement the crowdfunding provisions of the JOBS Act. FINRA’s role is to oversee and examine crowdfunding portals to ensure that they comply with federal securities laws, Regulation Crowdfunding and FINRA rules. The fact that it has gained momentum over time and serves small and early-stage companies seeking access to capital, often for the first time, means it’s meeting its stated objectives.

Regulation A is a SEC exemption that allows companies to offer and sell securities to the public without a full registration process, offering a streamlined path for raising capital, particularly for smaller or earlier-stage companies. Results from the Regulation A analysis – that most issuers had not yet established a record of profitability after a decade – is not surprising given the maturity of most of the firms using it. But these results will be instructive over time in analyzing how well the streamlined capital-raising rules aided small, young firms to compete in the marketplace.