R Street study examines potential sources of capital for small businesses
WASHINGTON (June 23, 2015) – Loosening qualified retirement plan rules to allow some investment in state-regulated securities could pave the way for many more small businesses to gain access to much-needed capital, according to a new study from the R Street Institute.
Authored by R Street Associate Fellow Oren Litwin, “Freeing investor capital for small business,” examines the challenges small businesses face as bank credit has become significantly more difficult to access and venture capital remains focused largely on the high-tech and biomedical industries.
Congress looked to address these problems with the JOBS Act of 2012, which looked to open more avenues to “crowdsource” investment to small businesses. Indeed, just this past week, the Securities and Exchange Commission finalized rules governing so-called “Regulation A+” issues. However, the SEC has been slow to implement the JOBS Act in full, and overly burdensome regulations likely will continue to keep away all but the wealthiest investors.
Litwin proposes looking to states that have set up secondary markets for small, entirely local securities as potentially a significant source of new small business capital. For instance, modest changes to the Employee Retirement Income Security Act could allow up to 10 percent of a 401(k) participant’s assets to be invested in intrastate securities that have a liquid secondary market. The fiduciaries and employers who administer 401(k) plans would decline to offer such options if they were deemed ill-suited to plan members.
In addition to allowing more capital to flow to small businesses, the rule change would also stimulate state officials and private companies to improve their intrastate markets to make them compliant and attractive to investors.
“One can imagine a virtuous cycle of investing,” Litwin wrote. “Improved institutions lead to increased investing, leading to more liquidity and more capital flowing to companies, which leads to more companies listing their shares, which leads to increased investing.”
