By Mark S. Nelson, J.D.
The House once again passed the Helping Angels Lead Our Startups (HALOS) Act, a bill sponsored by Steve Chabot (R-Ohio) that seeks to clarify the general solicitation rules targeted by the Jumpstart Our Business Startups (JOBS) Act regarding demo days events. The bill also would clarify what it means to be an angel investor (H.R. 79). The latest version of the HALOS Act passed by a vote of 344-73. In the last Congress, the House passed a version (Report No. 114-509) of the bill by a similar margin, but the equivalent Senate bill languished.
Amendments defeated. The bill faced little drama beyond an attempt to add investor protection provisions via two amendments, which ultimately faltered by similar margins on separate recorded votes. Representative Nydia Velazquez (D-NY) sought to ensure that attendees at demo days events receive information about the nature of the event. The amendment also would have clarified that attendance at these events is not by itself a preexisting relationship. The existence of a preexisting relationship is a key part of SEC guidance for some aspects of Regulation D.
Another amendment, offered by William "Lacy" Clay Jr. (D-Mo) on behalf of House Financial Services Committee Ranking Member Maxine Waters (D-Cal) would have disallowed the bill’s favorable treatment to blank check companies and it would have limited fees that can be collected by event sponsors.
House FSC Chairman Jeb Hensarling (R-Tex) told members on the floor that the HALOS Act would clarify existing law and create jobs to grow the economy. Co-sponsor Kyrsten Sinema (D-Ariz) echoed Hensarling’s observation that the bill has wide bipartisan support.
Not a general solicitation. The JOBS Act lifted the ban on general solicitation in some Regulation D Rule 506 offerings, but the HALOS Act seeks to push the SEC to adopt an amendment to the current ban on general solicitation in other offerings conducted under Regulation D Rule 502(c) that may apply to certain events commonly attended by issuers seeking to raise capital. Specifically, the Commission would have to provide that “demo days” events sponsored by, among others, angel investor groups, enjoy an exception from the ban.
Lawmakers promoting the bill argued that it will clarify the status of demo days while existing SEC guidance can be read to raise doubts over whether the verification requirement in Regulation D applies to these events. A pair of no-action letters (Michigan Growth Capital Symposium; Citizen VC) and a set of Compliance and Disclosure Interpretations (Securities Act Rules C&DIs) issued by the SEC’s Division of Corporation Finance spurred lawmakers’ worries. Members who opposed passage of the HALOS Act said it lacked sufficient investor protections.
Other requirements imposed by the bill for these events would include that advertising not mention specific securities offerings and that the sponsor not provide investment recommendations or advice to those in attendance. But a rule of construction limits the Commission’s mandate to amendments for presentations and communications and not purchases or sales. The required regulatory changes would need to be made within six months of enactment.
Elsewhere, the bill would define “angel investor group” to mean a group of accredited investors who invest their own capital in early-stage companies; who hold regular meetings and adhere to a process for making investments; and who are not associated or affiliated with brokers, dealers, or investment advisers.