The House Financial
Services Committee has marked up and reported out three pieces of legislation
that would ease the regulation of business development companies, create a tick
size pilot program for emerging growth companies, and reform the regulation of
M&A brokers. All three are part of an initiative to enhance capital
formation. Committee Chair Jeb Hensarling (R-TX) said that these three bills,
combined with other bills the Committee will soon consider in a subsequent mark
up, will be bundled together to comprise a JOBS Act 2.0.
Business development companies. Business development companies are
closed-end investment companies that invest in and lend to small- and
medium-sized private companies rather than large public companies, thereby
filling a market niche that some commercial banks have abandoned. As a result,
many small and medium-sized businesses have been able to obtain financing,
which has supported their growth and which might not otherwise have been
available to them.
In 1980, Congress
authorized the creation of business development companies by amending the
Investment Company Act, but Congress has not updated the statute since 1980. In
the intervening years, the regulatory framework has created challenges for
business development companies seeking to raise and deploy capital and, in
turn, to satisfy their Congressional mandate to lend to small and medium-sized
companies.
In an effort to reform
the regulation of business development companies, the Committee approved the
Small Business Credit Availability Act, H.R. 1800. Introduced by Rep. Michael
Grimm (R-NY), H.R. 1800 would amend Section 60 of the Investment Company Act to
allow business development companies to purchase, acquire, or hold securities
or other interests in investment advisers or advisors to investment companies,
and allow them to issue more than one class of senior security which is a
stock. H.R. 1800 also amends Section 61(a) of the Investment Company Act to
reduce the ratio of assets to debt that business development companies are
required to maintain from 200% to 150%. Finally, H.R. 1800 directs 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 Act.
Much of the
modernization of securities regulation that occurred in 2005 by way of
Securities Offering Reform largely did not apply to business development
companies. As a result, SIFMA noted in recent testimony before the Committee
that many unnecessary obstacles remain in place today so that business
development companies are unable to efficiently access the markets and, in
turn, provide much needed capital to middle market companies. SIFMA supports
efforts to align the regulation for business development companies more closely
with that of other public companies.
Most business development companies are RICs
(Regulated Investment Companies) under the federal tax code and as a result are
required to dividend out substantially all of their net income for tax
purposes. Thus, business development companies are required to come to the
public markets more regularly to raise capital in order to grow. The inability
to utilize some of the built- in efficiencies in securities regulation for
frequent corporate issuers, such as incorporating previously filed
information by reference, creates
unnecessary burdens.
Tick size pilot program. The Committee also unanimously marked up
and approved the Small Cap Liquidity Reform Act, H.R. 3448., which would allow small emerging
growth companies to enter a five year pilot program that would
give them the ability to quote and trade stocks in 5 and 10 cent increments
instead of just pennies. The increased tick size maximizes their liquidity, giving them access to capital that
the penny tick size does not foster.
Introduced by Rep. Sean
Duffy (R-WI), and co-sponsored by Rep. John Carney (D-DE), H.R. 3448 would provide for an optional pilot program
administered by the SEC allowing certain JOBS Act emerging growth companies
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 company’s board of directors
so elects, $.10. The bill allows covered emerging growth companies to change
the tick size of their stock from $.05 to $.10 or from $.10 to $.05 one time
during the pilot program. It also allows companies to opt out of the program.
By providing flexibility
in tick size for smaller issuers, the bill aims to improve market quality and
increase liquidity in their shares, thereby promoting capital formation.
An amendment offered by
Rep. Duffy, and approved during the mark up, provides that if an emerging growth
company opts out of program, the SEC must notify all venues on which the
company is traded. Another Duffy Amendment approved in the mark up would give the
SEC discretion to determine where in the 5 and 10 cent increments the stock may
be traded. An amendment offered by Rep. Carney would clarify that the intent is
to apply the safe harbor provision in the bill solely to the decision to expand
the tick size for the company. The intent is to ensure that the safe harbor is
not too broad, while at the same time sufficient to protect the company from
shareholder suits.
Small Business Mergers, Acquisitions, Sales, and Brokerage
Simplification Act, The Committee also approved by a unanimous 57-0
vote, H.R. 2274, the Small Business
Mergers, Acquisitions, Sales, and Brokerage Simplification Act, which would
amend Section 15(b) of the Securities Exchange Act to establish a streamlined and commonsense approach that allows for the
sale of small and mid-size businesses while maintaining the necessary
safeguards, protecting jobs and allowing for continued economic growth.
Sponsored by Rep. Bill Huizenga (R-MI), H.R. 2274 would reform the regulation
of M&A brokers.
Rep. Huizenga noted that current federal law
treats the sale of a small privately held business, as if it were a Wall Street
investment firm selling securities of a public company. The legislation
establishes a streamlined and commonsense approach that allows for the sale of
small and mid-size businesses while maintaining the necessary safeguards,
protecting jobs and allowing for continued economic growth.