Wednesday, November 02, 2011

House Overwhelmingly Passes Legislation Raising 500-Shareholder Threshold and Increasing Regulation A Threshold

The House of Representatives overwhelming passed two pieces of legislation increasing the 500-shareholder threshold for community banks and raising the SEC Regulation A exemption to $50 million, making it easier for small businesses to access capital so they can invest and hire. The legislation passed with strong bipartisan support. According to Financial Services Committee Chairman Spencer Bachus (R-Ala), the legislation will lower regulatory barriers and help small businesses grow and create jobs.

The Small Company Capital Formation Act, HR 1070, introduced by Rep. David Schweikert (R-AR) will make it easier for small businesses to go public by increasing the offering threshold for companies exempted from SEC registration from $5 million to $50 million. The SEC is authorized to raise the threshold, said Chairman Bachus, but has not done so for almost two decades. HR 1070 also directs the GAO to conduct a study on the impact of State blue sky laws on offerings made under Regulation A and report to Congress on the results of the study within three months of enactment. H.R. 1070 was approved by a vote of 421 to 1.

Over the years, Regulation A offerings have steadily declined. Between 1995 and 2004, small businesses used Regulation A only 78 times; and in 2010 small businesses used Regulation A only three times.

H.R. 1965, introduced by Rep. Jim Himes (D-Conn) modifies regulations concerning registration and deregistration of small bank holding companies under the securities laws. H.R. 1965 would raise the bank shareholder threshold for SEC registration from 500 to 2,000. The threshold has not been adjusted since 1964. The legislation was approved by a vote of 420 to 2.

The House took up the measures under a suspension of the rules. HR 1965 increases the number of investors permitted to hold shares in 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. The legislation would modify Section 12(g) of the Securities Exchange Act.

HR 1070 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.

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.