Small Business

This report discusses the access of U.S. small businesses to equity capital financing and describes the Small Business Administration's Office of Advocacy (SBA-OA) estimate of their perceived needs for equity capital financing. GAO studied recent trends in small business equity capital financing and the potential effects of market practices and securities law regulations on such financing. From the results of this study, SBA-OA estimated that about 10 percent of the businesses started in a year would need equity capital, as well as about 25 percent of faster growing small businesses. Available data are insufficient for updating the estimate of small businesses' equity capital needs, but indicate for the 1994-1999 period that the level of small business equity financing increased dramatically. The equity capital formation in the unregulated equity capital market is affected by market practices, which reflect the efforts of investors and other market participants to maximize returns and to manage risks on investments. In addition to simplifying registrations and exemptions, federal and state governments have tried to reduce the regulatory burden and costs for small businesses seeking equity capital financing in the regulated securities markets.

GAO noted that: (1) markets that provide equity capital financing to U.S. small businesses include informal, unregulated markets and regulated securities markets; (2) the primary providers of private equity capital in informal, unregulated markets are "business angel" investors and venture capital funds; (3) small businesses that raise equity capital in regulated securities markets do so through private placement of securities and public offering of securities; (4) in 1996, SBA-OA sponsored a study to estimate the need of small businesses for equity capital; (5) from the results of this study, SBA-OA estimated that about 10 percent of the businesses started in a year would need equity capital, as well as about 25 percent of faster growing small businesses; (6) available data are insufficient for updating the estimate of small businesses' equity capital needs, but indicate for the 1994-1999 period that the level of small business equity financing increased dramatically; (7) however, the extent to which the recent increases in equity financing have helped to fill the unmet need suggested by SBA-OA's 1996 estimate is not clear; (8) in the 1994-1999 period, high-tech companies had the widest use of venture capital, initial public offering (IPO), and private placement financing; (9) equity capital formation in the unregulated equity capital market is affected by market practices, which reflect efforts of investors and other market participants to maximize returns and manage risks on investments; (10) the results of GAO's analysis of IPO offerings indicate that the average total cost to conduct a small business IPO during 1994-1999 was bout 10 percent of total offering proceeds, while the average total cost for a large business IPO was about 8 percent; and (11) in addition to simplified registration and exemption initiatives, states and the federal government have initiated actions to help reduce the regulatory burden and costs for small businesses seeking equity capital financing in the regulated securities markets.