SBHCs are a special type of public holding company created to facilitate the financing and support of small businesses. SBHCs are intended to be public companies and, somewhat like a mutual fund, can serve as a collective investment vehicle to invest in other companies. However, while mutual funds have to invest at least 85% of their assets in publicly traded securities (stocks and bonds by companies listed on the stock market), an SBHC invests in and owns a large number of small, private (not public) businesses. Think of them as a public venture capital company or mutual fund for small businesses. This allows the average person, not just wealthy investors, to invest in something that resembles a VC fund. Public SBHC investors can freely sell their shares, just as with any other public company.

Inherent Public Benefit

Small businesses are the backbone of local economies in the United States and around the world. They create more jobs than all other sectors combined (big business, government, non-profit, etc.) and yet often struggle to survive due to lack of capital, expertise and other resources that are commonly available to large businesses. SBHCs are designed to solve that problem by bringing the resources available to public companies down to local small businesses. By providing those resources to small businesses, SBHCs are helping them to survive, grow, create more jobs and in general better serve their communities. Thus SBHCs inherently provide a broad public benefit by their very existence and efforts.

Sustainability and Triple Bottom Line

An SBHC can go even further by incorporating the concepts of sustainability and triple bottom line, i.e., making sure the whole enterprise is not only financially successful, but socially and environmentally as well.

The push to make businesses more socially and environmentally responsible is gaining traction worldwide. In the U.S., we see two overt expressions of this. The first are those companies that become certified as B Corporations(over 1,700 worldwide as of Aug 2016) and the second is a new form of statutorily defined corporation called a benefit corporation. As of Aug 2016, more than 3,000 such corporations have been formed in the nearly 30 states in the U.S. that have adopted such corporate statutes. B Corporations and benefit corporations represent a natural constituency for an SBHC that wishes to incorporate sustainability throughout its enterprise.

An SBHC that fully embraces sustainability will be helping to not only foster small businesses in general, but will be moving them as a group towards a more inclusive form of capitalism that will better serve all stakeholders – employees, managers, owners, customers, suppliers, the community in general and the world we live in.

How SBHCs Work

SBHCs gather small and mid-size companies together into an entity large enough to be a public company. So instead of investing in an individual small company, investors invest in the public SBHC, which then invests in many small businesses at one time. It spreads the risk, provides liquidity, and facilitates recouping the original investment plus a healthy return.

SBHCs Are Flexible

They can provide access to funding for a wide spectrum of companies including startup, growth and even mature small and mid-size companies. Investments can be individualized for each company. SBHCs can mimic crowdfunding, yet also act like a investment fund, a holding company and a commercial lender rolled into one.

SBHCs represent a whole new set of options for funding small businesses, whether by a crowdfunding portal (only recently approved by the SEC) or other means. In fact, they may be better than the most idealized version of crowdfunding, and almost certainly better than what was left after the SEC completed its rulemaking on Title III. The same is true for conventional VC funds, angel funds, etc. SBHCs are better, their rules are already in place and they can be used today.