The House Capital Markets Subcommittee held a hearing to
examine seven pieces of legislation designed to eliminate impediments to
capital formation. H.R. 1800, the Small Business Credit Availability Act, would
amend Section 60 of the Investment Company Act to allow business development
companies (BDCs) to purchase, acquire, and hold securities of or other
interests in an investment advisers or advisors to investment companies and
allow BDCs to issue more than one class of senior security which is a stock.
H.R. 1800 would also amend Section 61(a) of the Investment Company Act to
reduce the ratio of assets to debt from 200% to 150%. Finally, H.R. 1800 would
direct the SEC to revise its rules and forms to allow business development
companies to use the streamlined securities offering provisions available to
other registrants under the Securities Acts. Among these revisions, H.R. 1800
directs the SEC to revise Rules 418 and 14a-101 under the Securities Acts, and
Rule 103 under Regulation FD, which are not explicitly included in H.R. 31, the
Next Steps for Credit Availability Act, introduced by Rep. Nydia Velazquez
(D-NY), is substantially similar to H.R. 1800 except that it does not direct
the SEC to revise Rules 418 and 14a-101 and Regulation FD Rule 103.
Introduced by Rep. Mick Mulvaney (R-SC), H.R. 1973, the
Business Development Company Modernization Act would amend Section 2(a)(46)(B)
and Section 60 of the Investment Company Act to allow BDCs to purchase,
acquire, or hold securities or other interests in the business of registered
investment advisers, advisors to investment companies, and other “eligible
portfolio companies” as defined in the Investment Company Act, including
certain financial services companies. On June 12, 2013, Joseph Ferraro of
Prospect Capital testified that by eliminating outdated limitations, H.R. 1973
would bring small- to medium-sized financial services businesses into the
family of “eligible assets,” thus removing an obstacle to their growth and
increasing the flow of BDC dollars into these new and expanding U.S.
businesses.
Gary Wunderlich, CEO of Wunderlich Securities, testifying on behalf of the Securities Industry
and Financial Markets Association said supports efforts to modernize regulation
of Business Development Companies as contemplated in the three bills under
discussion. Since their creation, BDCs have been subject to regulation under
the Investment Company Act subjecting them to certain statutory safeguards
covering such areas as diversification, leverage, compliance and valuation. The
BDC structure was created to promote public vehicles as a means to bring
capital to small and medium sized businesses and by regulation, noted Mr.
Wunderlich, adding that 70% of BDCs investments must be in private or small cap
companies.
The JOBs Act provided for an onramp for Emerging Growth
Companies to access the IPO market and has also created a framework for
crowdfunding to bring capital to early stage entrepreneurs in much smaller
increments. But SIFMA believes that more can be done to promote the flow of
capital to private companies that are big enough to need larger amounts of
capital to reach the next stage of their development but are still
years away from an IPO. BDCs offer one such critical source
of capital to eligible companies, said SIFMA.. BDC's have been active issuers
in the last few years as they see opportunity to bring funds to attractive
companies that are struggling to find capital at a reasonable cost from other
sources.
SIFMA also believes that some incremental flexibility in the asset coverage ratio should be provided to BDCs to allow them to better fulfill their mission while at the same time maintaining sufficient safeguards to protect investors such as enhanced disclosure requirements, capital structure limitations, corporate governance and compliance requirements, affiliate transaction limitations and restrictions on leverage, all of which are applicable to BDCs by virtue of their being subject to compliance with the 1940 Act and which are incremental to the safeguards applicable to other public companies.
Introduced by Rep. Bill Huizenga (R-MI), H.R. 2274, the
Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act,
would amend Section 15(b) of the Securities Exchange Act to create a simplified
SEC registration system for M&A brokers. Specifically, H.R. 2274 would
allow M&A brokers to register with the SEC by filing an electronic notice
which would be made publicly available on the SEC’s website. A properly
completed electronic notice of registration would become effective immediately
upon receipt by the SEC, except that SEC approval of such notice would be
required if the M&A broker, or a person associated with the M&A broker,
is subject to suspension or revocation of registration, a statutory
disqualification, or a disqualification under SEC rules pursuant to the
Dodd-Frank Act. H.R. 2274 would also require M&A brokers to make certain
disclosures to clients as may be required by the SEC including, but not limited
to, a description of the M&A broker and its affiliates, associated persons,
fees, and any conflicts of interest.
In addition, H.R. 2274 would direct the SEC to tailor its
rules governing M&A brokers by taking into account the nature of the transactions in
which M&A brokers are involved, the involvement of the parties to such
transactions, and the limited scope of the activities of M&A brokers. Under
H.R. 2274, an M&A broker would be prohibited from receiving, holding,
transferring, or having custody of client funds or securities in connection
with the transfer of an eligible privately held company and would not to be
able to engage on behalf of an issuer in a public securities offering. H.R.
2274 would require the SEC to work with the states to establish uniform and
consistent standards of training, experience, competence, and other qualifications for M&A brokers, as
well as to develop the form and content of the electronic notice of
registration.
Arkansas Securities Commissioner Heath Abshure, speaking for
the NASAA, said that state securities administrators generally support the
targeted, well-balanced provisions of H.R. 2274, the Small Business Mergers,
Acquisitions, Sales, and Brokerage Simplification Act. This legislation would establish a simplified
and streamlined registration process for broker-dealers engaged solely in the
business of effecting the transfer or sale of privately held companies. NASAA
is optimistic that this legislation will encourage registration and regulatory
compliance by M&A brokers. The M&A industry has worked with NASAA in
developing the proposal that is contained in H.R. 2274. The group welcomes its
introduction and look forward to supporting the legislation in the 113th
Congress.
Tom Quaadman, testifying for the Center for Capital Markets
Competitiveness described H.R. 2274 as a common sense reform that should help
entrepreneurs avail themselves of expert assistance in selling their business
and realizing the full value of their enterprise, thereby providing further
incentives for aspiring entrepreneurs to push forward with their ideas. By
facilitating M&A activity, it would provide another source of capital for
smaller companies.
Rep. Sean Duffy (R-WI) has circulated a discussion draft of
legislation to amend Section 11A(c)(6) of the Exchange Act to provide for an
optional pilot program administered by the SEC allowing certain Emerging Growth
Companies (EGCs), a category of issuers recently established in Title I of the
Jumpstart Our Business Startups (JOBS) Act with a stock price above $1.00 to
increase the tick size at which their stocks are quoted and traded from $.01 to
$.05, or, if the EGC’s board of directors so elects, $.10. The discussion draft
would allow covered EGCs to change the tick size of their stock from $.05 to
$.10 or from $.10 to $.05 one time during the pilot program, as it would also
allow EGCs to opt out of the program.
The Capital Markets Center believes that the draft legislation
proposed by Representative Duffy would help ensure a market structure that
supports capital formation for all public companies. However, the Center asked
that a provision be added to the bill providing safe harbor to insulate management and directors from
liability in exercising the option to choose a tick size. Without such a safe
harbor, reasoned the Center, companies may not avail themselves of the
opportunity to participate in the pilot program and an opening to help smaller
public companies may be lost.
Rep. Robert Hurt (R-VA) has circulated a
discussion draft to provide an optional exemption for EGCs and non-accelerated
filers from SEC rules requiring registrants to file their financial statements
in an interactive data format known as eXtensible Business Reporting Language
(XBRL). The discussion draft would direct the SEC to revise its rules in
accordance with the XBRL exemption.
Rep. Stephen Fincher (R-TN) has circulated a discussion
draft of legislation to change registration requirements for EGCs. The
discussion draft reduces from 21 to five the number of days that an EGC must
have a confidential registration statement on file with the SEC before the EGC may
conduct a road show. The discussion draft also clarifies that an issuer that
had been an EGC when it filed its confidential registration statement but
ceased to be an EGC before its initial public offering will be treated as an
EGC through the date of its IPO. The discussion draft requires the SEC to
revise its general instructions on Form S-1 to indicate that a registration
statement filed (or submitted for confidential review) by an issuer before its
IPO may omit financial information for historical periods otherwise required by
regulation S–X. Finally, the discussion draft allows EGCs to submit a
confidential draft registration statement to the SEC for any follow-on
securities offerings after its IPO.
Describing as laudable Congressman Fincher’s discussion
draft which would modify existing regulation of EGCs, Gary Wunderlich, CEO of
Wunderlich Securities, testifying on behalf of the Securities Industry and
Financial Markets Association said SIFMA supports of each of the four provisions in the draft. Section
1 amends the Securities Act to reduce the quiet period requirements from 21
days to 5 days for public filing prior to public offerings by EGC’s. Currently,
an EGC must file its registration statement publicly and must refrain from
marketing the securities through its underwriters or otherwise for 21 days.
SIFMA supports a significant reduction in the quiet period as contemplated in
the bill
.
Sections 2 and 3 of the Discussion Draft add clarity and
efficiency to two areas of securities regulation without impairing investor
protection, testified SIFMA. Section 2
provides a grace period for a change in status of an EGC by allowing an issuer
that qualifies as an EGC at the time of the filing of its confidential registration
statement for review to continue to be treated as an EGC through the date on
which it consummates its initial public offering. Section 3 is designed to simplify
the financial statement disclosure requirements for EGC’s. Currently an EGC
must include the previous two years of audited financials when it files its
registration statement for review. The last provision in the Fincher bill
extends the ability for EGC’s to file a confidential registration statement not only for their initial public offering but also for a
follow-on offering.