Monday, October 17, 2011

Chairman Bachus Urges Deficit Reduction Committee to Include Capital Formation Bills in Legislation, Like Crowdfunding and Raising Reg A Exemption

Pursuant to the Budget Control Act, the leadership of the House Financial Services Committee has made a number of legislative recommendations to the Joint Select Committee to Reduce the Deficit to facilitate capital formation and reduce regulatory burdens. In a letter to Joint Select Committee Co-Chairs Senator Patty Murray and Rep. Jeb Hensarling (R-TX), Chairman Bachus and FSC leaders reasoned that the facilitation of capital formation and the reduction of excessive regulatory burdens will enable small and medium-sized companies to make the investments necessary to create jobs and grow the economy, thereby increasing incomes and federal revenues and reducing the federal deficit. Rep. Hensarling is also the Deputy Chairman of the Financial Services Committee.

Section 401(b)(3) of the Budget Control Act allows each Committee of the House and Senate to transmit deficit reducing recommendations to the Joint Committee. Under the Act, the Joint Committee has until November 23, 2011 to produce legislation lowering the deficit; and Congress must vote the legislation up or down without amendment by December 23, 2011.

Specifically, Chairman Bachus recommends the inclusion of the Small Company Capital Formation Act, HR 1070, which encourages small companies to access the capital markets by creating a less burdensome process for raising capital. The legislation increases the offering threshold for companies exempted from SEC registration under SEC Regulation A from $5 million, a threshold set in the early 1990s, to $50 million. The draft legislation is sponsored by Rep. David Schweikert (R-AZ). HR 1070 was favorably reported to the full House in June and is endorsed by the Obama Administration.

While companies issuing securities under Regulation A must provide the SEC with an offering statement including an offering circular and exhibits and a notification, they do not have to submit audited financial statements and are not subject to periodic reporting requirements. Chairman Bachus noted that smaller companies considering raising capital could benefit from Regulation A because raising capital under a Regulation A exemption is less costly and time consuming than using a conventional IPO subject to onerous reporting and registration requirements.

Chairman Bachus also asked the Supercommittee to include the crowdfunding legislation approved by a House panel that would promote capital formation through groups of people pooling money in small contributions to support an effort by others to accomplish a specific goal. Current SEC regulations impede this innovative and lower-risk form of financing by prohibiting general solicitation and advertisements for non-registered offerings and capping the number .

Crowdfunding is an innovative and lower-risk form of financing that enables several individuals to pool money to invest in a particular company. The Entrepreneurial Access to Capital Act, HR 2930 is sponsored by Rep. Patrick McHenry (R-NC), who noted that new ideas are needed to help provide small businesses and entrepreneurs with the ability to create jobs. HR 2930 creates an exemption from SEC registration for crowdfunding. The legislation, which is similar to proposals advanced by the Obama Administration, would exempt offerings of up to $5 million so long as an individual’s investment is no more than the lesser of $10,000 or 10 percent of the investor’s annual income. Chairman Bachus urged the Joint Select Committee to consider HR 2930 as one way to reduce the deficit by enhancing economic growth. The legislation would exempt crowdfunding from shareholder caps and it also preempts state laws.

The Joint Select Committee was also urged to include in its legislation a bill that would reduce the deficit by removing the general solicitation prohibition in SEC Rule 506 under Regulation D and allowing small businesses to attract capital from accredited investors nationwide and globally, in order to grow their company, which has been approved by the House Capital Markets Subcommittee. The Access to Capital for Job Creators Act, HR 2940, introduced by Rep. Kevin McCarthy (R-CA), is primarily designed to eliminate the cost burden associated with SEC registration that small businesses face. HR 2940 would require the Commission to revise its rules to permit general solicitation in offerings under Rule 506 of Regulation D. The legislation was approved by voice vote.

Additionally, Chairman Bachus said it would reduce the deficit and enhance growth to include in the legislation a bill approved by the House Capital Markets Subcommittee expanding the exemption from Sarbanes-Oxley Section 404(b), which requires an independent audit of a company’s assessment of its internal controls as a component of its financial statement audit, beyond the $75 million public float provided by the Dodd-Frank Act to a $350 million public float. Representative Stephen Fincher (R-TN) introduced the legislation, which is broadly consistent with recommendations by the President’s Council on Jobs and Competitiveness allowing companies with market valuations below $1 billion to opt out of Section 404 compliance. Supporters of increasing the $75 million cap believe that duplicative audit requirements hinder many companies from going public, noted Rep. Fincher, and going public provides opportunities for companies to raise desperately needed capital in order to expand, reinvest, and create jobs.

The Joint Committee is also asked to consider legislation approved by the Financial Services Committee exempting private equity fund advisers from SEC registration so long as the fund does not employ leverage that is greater than a ratio of 2-1. Specifically, the Small Business Capital Access and Job Preservation Act (H.R. 1082), sponsored by Rep. Robert Hurt (R-VA), exempts advisers to private equity funds that have not borrowed and that do not have outstanding a principal amount in excess of twice their funded capital commitments.

Finally, Chairman Bachus asks for Joint Committee consideration of two bills, both of which received bi-partisan approval, increasing the number of investors permitted to hold shares in either a company or a community bank before the organization is required to register with the SEC or “go public.” Currently, both banks and private companies are subject to a 500 investor threshold, which limits the amount of capital they can raise before they must comply with the reporting requirements associated with SEC registration. Both pieces of legislation would modify Section 12(g) of the Securities Exchange Act. The Private Company Flexibility and Growth Act (H.R. 2167), sponsored by Rep. David Schweikert (R-AZ) increases the number of shareholders that can invest in a private company from 500 to 1,000. It also exempts employees from that count. H.R. 1965, sponsored by Rep. Jim Himes (D-Conn), increases the number of shareholders permitted to invest in a community bank from 500 to 2,000. Both bills were approved by a voice vote in the Capital Markets Subcommittee.

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