House Passes Bills Designed to Facilitate Capital Formation

By Cydney Posner

This past week, the House passed several bills designed to facilitate capital formation. While they all still require votes in the Senate, they all passed by wide margins and, therefore, may have quite a head of steam behind them.

On November 3, the House passed H.R. 2940, the Access to Capital for Job Creators Act, which would amend Section 4(2) to add ‘‘whether or not such transactions involve general solicitation or general advertising." Ok then, that should change a few things. The bill would also require the SEC to amend Reg D to remove the prohibition against general solicitation or general advertising for private offerings under Rule 506 if all purchasers of the securities are accredited investors. (See my article of 9/15/11.) The rules must also require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using methods as determined by the SEC. The bill passed the House by a vote of 413 to 11.

On the same date, the House also passed H.R. 2930, the Entrepreneur Access to Capital Act (see my article of 9/14/11), which would provide exemptions for crowdfunding. This bill amends Section 4 of the Securities Act to exempt transactions involving the issuance of securities in an aggregate annual amount of $1 million or less or, if audited financials are provided, $2 million or less. The bill would require that either an intermediary or, if there is no intermediary, the issuer, warn investors of the speculative nature, risks and restrictions applicable to the securities and take reasonable measures to reduce the risk of fraud, provide specified information to the SEC, question investors on their investing competence, perform a background check on the issuer's principals (intermediaries only), make available on its website a means for investor to communicate with the issuer or, for intermediaries, for investors to communicate with each other, withhold capital until a threshold amount is raised, outsource cash management functions, maintain proper books and records and refrain from offering investment advice. Notices provided to the SEC would be sent to state regulators. There would be a one-year holding period. The SEC would be required to issue rules on disqualification provisions. Holders purchasing securities under this exemption would not be considered "holders" for purposes of the 500-shareholder threshold to register under the Exchange Act and these securities would be treated as "covered securities " under NSMIA (preempting state law). This bill passed by a vote of 407 to 17.

On November 2, the House passed H.R 1070, the Small Company Capital Formation Act of 2011, http://www.gpo.gov/fdsys/pkg/BILLS-112hr1070eh/pdf/BILLS-112hr1070eh.pdf (see my article of 9/14/11), by a vote of 421 to 1. This bill would amend Section 3(b) of the Securities Act to require the SEC to exempt as a class of securities, any equity securities, debt securities and debt securities convertible or exchangeable to equity interests, including any guarantees, where the aggregate amount offered and sold within the prior 12-month period in reliance on the exemption would not exceed $50 million. (The current Reg A amount limitation is $5 million.) The securities may be offered and sold publicly and would not be "restricted securities," Section 12(a)(2) would not apply. The issuer could solicit interest in the offering prior to filing any offering statement and must file audited financial statements annually. The SEC could adopt additional measures to protect investors, such as requiring that an offering statement be filed, mandating periodic disclosure filings and imposing disqualification requirements. The offering amount limitation could be adjusted every two years. These securities would also be treated as "covered securities " under NSMIA. The bill would require the Comptroller General to study the impact of state blue sky laws on Reg A offerings.

Also on November 2, the House passed by a vote of 420 to 2, H.R. 1965, which would, among other things, raise the Exchange Act registration threshold for banks and bank holding companies. The bill would also require the Chief Economist and Director of Corp Fin to jointly conduct a study, including a cost-benefit analysis, of shareholder registration thresholds generally, evaluating whether it is advisable to increase the asset threshold, index the asset threshold to a measure of inflation, increase the shareholder threshold, change the shareholder threshold to be based on the number of beneficial owners or create new thresholds based on other criteria. The report to Congress on the study would be due in two years.

What does that mean for H.R. 2167, the Private Company Flexibility and Growth Act (see my articles (2) of 6/14/11), which would increase the total-assets threshold from $1 million to $10 million, and the holders-of-record threshold from 500 to 1,000 persons (excluding employees and accredited investors from the count), before companies would be required to register under the Exchange Act? That bill was ordered to be reported by voice vote from committee on October 26. Does the House intend to delay acting on an increase in the thresholds for registration generally until the Corp Fin report has been received? According to the sponsoring Congressman's office, they do not expect that this bill will be up for a vote until later this year or early next year (and if you see reports that this bill has passed already, they are not accurate).

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