Friday, October 21, 2011

Full Financial Services Committee to Vote on Legislation on Crowdfunding, 500-Shareholder Threshold and Regulation D

The Financial Services Committee will vote on a package of bills next week that will reduce SEC regulatory barriers to spur small business growth and job creation. The bills the Committee will mark up represent an opportunity for Republicans and Democrats to find common ground on ways to create jobs, said Committee Chairman Spencer Bachus (R-ALA).

The full Committee will consider crowdfunding legislation 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, said Chairman Bachus.

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. The legislation would exempt crowdfunding from shareholder caps and it also preempts state laws.

The Committee will also vote on legislation reducing 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. 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.’

Chairman Bachus said that the Committee will also consider two bills 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.