Wednesday, October 26, 2011

Legislation Allowing General Solicitation under SEC Rule 506 of Reg D Approved by House Financial Services Committee

Legislation 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 has been approved by the full Financial Services Committee and sent to the House floor. The Access to Capital for Job Creators Act, HR 2940, would thereby remove the regulatory ban that prevents small, privately held companies from using advertisements to solicit investors. The legislation was approved by a voice vote, with no amendments offered.

Currently, the SEC regulation allows companies to raise capital as long as they do not market their securities through general solicitations or advertising. This prohibition has been interpreted to mean that potential investors must have an existing relationship with the company. In the view of Committee Chairman Spencer Bachus, requiring potential investors to have an existing relationship with the company unnecessarily limits the pool of investors and severely restricts the ability of small companies to raise capital. HR 2940 would require the SEC to revise its rules to permit general solicitation in offerings under Rule 506 of Regulation D. The legislation mandates that the revised SEC rules allowing a general solicitation under Regulation D must require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors using methods determined by the Commission

HR 2940 is sponsored by Rep. Kevin McCarthy (R-CA), who said that restrictions on the manner in which capital may be raised stem from Depression-era regulations that are clearly outdated, they not only predate Twitter and Facebook, he said, but cell phones and color television. According to Rep. McCarthy, this specific regulatory obstacle, Rule 506 of Regulation D, is actively preventing job creation, which is why he introduced legislation to repeal what the lawmaker called ``this burdensome solicitation prohibition.’’ In his view, the Access to Capital for Job Creators Act will help entrepreneurs and small business owners access the capital they need to be innovative, dynamic, and ultimately, help create jobs.