Senate Bills Introduced to Facilitate Capital Formation

By Cydney Posner

Last week, two senators introduced Senate versions of two bills already introduced in the House. (See my article of 11/7/11.) Both bills have been referred to committee. S.1824, the "Private Company Flexibility and Growth Act," , introduced by Senator Pat Toomey with bi-partisan co-sponsors, would raise the threshold for company registration under the Exchange Act to $10M in total assets and a class of equity security (other than an exempted security) held of record by 2,000 persons, excluding from the definition of "held of record" securities held by persons who received them under an employee compensation plan in transactions exempted from Securities Act registration. The SEC would be required under the bill to adopt safe harbor provisions for determining whether holders of securities received them in exempt employee plan transactions. The comparable House bill, HR 2167, which has not yet passed the House, uses a 1,000-person threshold but, as amended in the House, has a comparable exclusion for employee plan securities.

Also last week, Senator John Thune introduced S. 1831, the ‘‘Access to Capital for Job Creators Act,'' which would amend Section 4(2) of the Securities Act to make the exemption available "whether or not such transactions involve general solicitation or general advertising." (Query how much consideration these legislators have given to the impact of this change on the basic 4(2) exemption generally??) The bill would also require the SEC to revise Rule 506 of Reg D to provide that the prohibition against general solicitation or general advertising contained in Rule 502(c) would be inapplicable to the Rule 506 exemption, provided that all purchasers of the securities are accredited investors. Issuers would need to take reasonable steps to verify, in accordance with methods prescribed by the SEC, that purchasers are in fact accredited. This bill is the same as H.R. 2940, which has already passed the House.

In addition, in September, Senators Jon Tester and Bill Toomey introduced S. 1544, the "Small Company Capital Formation Act of 2011," the Senate counterpart to HR 1070, which was just approved in the House. The Senate bill has been referred to committee. Both of these bills 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 into or exchangeable for 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, would not be "restricted securities," and would not be subject to Section 12(a)(2) liability. The issuer could solicit interest in the offering prior to filing any offering statement (on terms prescribed by the SEC) and would be required to 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 to the extent they were either (i) offered or sold on a national securities exchange or (ii) offered or sold to a qualified purchaser as defined by the SEC. The bills would require the Comptroller General to study the impact of state blue sky laws on Reg A offerings.