The
House Financial Services has marked up and approved a number of pieces of
securities legislation most of which are designed to enhance capital formation
and some of which appear to have strong bi-partisan support. Rep. Jeb
Hensarling (R-TX), the Chairman of the full Financial Services Committee, said
that many of the bills are a follow up on the JOBS Act and are aimed at job
creation. It is not a question of regulation or de-regulation, said Chairman
Hensarling, it is a question of doing smart regulation. Initially, all of the
measures were approved by voice vote, but the Committee conducted a recorded
vote today. In a statement,
Chairman Hensarling, noting the bi-partisan support garnered by many of these
bill, urged the Senate to take them up and pass these regulatory relief
measures.
SBIC Advisers Relief Act. One of the most strongly bi-partisan pieces of legislation
approved by the Committee is the SBIC Advisers Relief Act, H.R. 4200,
introduced by Rep. Blaine Luetkemeyer (R-MO), which would amend the Investment Advisers
Act to reduce unnecessary regulatory costs and eliminate duplicative regulation
of investment advisers to small business investment companies. The vote to
approve was 56-0.
Specifically
H.R. 4200 would allow advisers to venture capital funds to continue to be exempt
reporting advisers if they also advise a small business investment company
fund. The measure would also prevent the inclusion of the assets of a small
business investment company fund in the SEC registration calculation of assets
under management for those advisers that advise private funds in addition to small
business investment company funds.
Currently,
an adviser to a venture capital fund is exempt from SEC registration and an
adviser to a small business investment company is exempt from registration.
But, an adviser to both a venture capital fund and a small business investment
company is not exempt. The legislation would exempt from SEC registration an
investment adviser that advises both a venture capital fund and a small business
investment company. H.R. 4200, which would fix an unintended consequence of the
Dodd-Frank Act, has strong bi-partisan support. It is backed by Rep. Maxine
Waters (D-CA), the Committee’s Ranking Member. A co-sponsor of H.R. 4200, Rep.
Carolyn Maloney (D-NY), said that the measure restores the access of small
businesses to broad investment advice and capital without compromising investor
protection.
Disclosure Modernization and Simplification
Act. Similarly, this measure, H.R. 4569,
is a strongly bi-partisan measure that was approved by the Committee by a 59-0
vote. It would direct the SEC to permit issuers to submit, on Form 10-K annual
reports, a summary page to make annual disclosures easier to understand for
current and prospective investors. The measure was introduced by Rep. Scott
Garrett (R-NJ), Chair of the Capital Markets Subcommittee, who noted that the
summary page would have cross-references to the annual report to aid investors
in navigating what can be lengthy annual reports. The bill would also direct
the SEC, within 180 days of enactment, to tailor Regulation S-K’s disclosure
rules as they apply to emerging growth companies and smaller issuers and to
eliminate other duplicative, outdated, or unnecessary disclosure rules as they
apply to these smaller issuers. H.R. 4569 would also direct the SEC to identify
and implement additional reforms to Reg. S-K to simplify and modernize SEC disclosure rules.
The
Committee approved an amendment offered by Rep. Maloney that would require the
SEC to consult with the Investor Advisory Committee when studying Regulation
S-K.
Encouraging Employee Ownership Act. The Committee also approved the Encouraging Employee
Ownership Act, H.R. 4571, by a vote of 36-23. Five Democrats on the Committee
voted for the bill. Introduced by Rep. Randy Hultgren (R-Il), the measure would
amend SEC Rule 701, originally adopted in 1988 under Section 3(b) of the
Securities Act and last updated in 1998. Under current law, if an issuer sells,
in the aggregate, more than $5 million of securities in any consecutive
12-month period, the issuer is required to provide additional disclosures to
investors, such as risk factors, the plans under which offerings are made, and
certain financial statements. The legislation would require the SEC to increase
that threshold to $20 million. Rep. Hultgren noted that support for this effort
to expand the utility of Rule 701 can be found in the SEC’s Government-Business
Forum on Small Business Capital Formation Final Reports for 2001, 2004-2005 and
2013.
The
legislation aims to encourage the idea of letting employees own a stake in
company they are part of.. Ownership is a great incentive, noted the sponsor.
Rule 701 mandates disclosure. The SEC arbitrarily set the threshold at $5
million, noted Rep. Hultgren. It is
costly to prepare disclosures
just so a company can offer stock to employees, noted Rep. Hultgren. The bill,
in addition to raising the threshold from 5 to 20 years would also adjust it
for inflation every five years
Small Business Freedom to Grow Act. This measure, H.R. 4568, introduced by Rep. Ann Wagner
(R-MO), was also approved by the Committee on a bi-partisan vote of 32-26. H.R.
4568 would amend the SEC Form S-1
registration statement to allow a smaller reporting company to incorporate by
reference any documents the company files with the SEC after the effective date
of the Form S-1. The bill would also amend the SEC’s Form S-3 registration
statement to allow a smaller reporting company with a class of common equity
securities listed and registered on a national securities exchange to register
a primary securities offering exceeding one-third of the company’s public
float. Finally, the legislation would further amend the Form S-3 registration
statement to allow a smaller reporting company without a class of common equity
securities listed and registered on a national securities exchange to register
a primary securities offering not exceeding one-third of the company’s public
float.
Private Placement Improvement Act. This piece of legislation, H.R. 4570, was approved by the
Committee on a partisan vote of 31-28. It is an effort to return the removal of
the general solicitation in Rule 506 to the original intent of Congress when it
passed the JOBS Act to eliminate the general solicitation requirement. In July
2013, the SEC implemented the JOBS Act by adopting a rule lifting the ban on
general solicitation and advertising for certain private securities offerings
under Rule 506 of Regulation D.
According to Chairman Garrett, who introduced H.R. 4570, in addition to
lifting the ban on general solicitation and advertising, the SEC issued a
separate rule proposal not called for by Congress that would impose a number of
new regulatory requirements on small companies seeking to utilize amended Rule 506
to raise capital, including proposals to submit additional Form D filings to
the SEC in advance and at the conclusion of an offering, and to file written
general solicitation materials with the SEC. Under the SEC’s rule proposal, an
issuer could also be disqualified by the SEC from using Rule 506 for one year
based on a failure to comply with the Form D filing requirements.
Startup Capital Modernization Act. Similarly, the Committee approved the Startup Capital
Modernization Act, H.R. 4565 by a partisan vote of 31-28. Iintroduced by Rep.
Patrick McHenry (R-NC), Chair of the Oversight Subcommittee, which is designed
to allow small businesses to better use regulation A. The bill builds on the
JOBS Act, which raised Tier 1 Regulation A offerings to 50 million. H.R. 4565
would reform and improve Regulation A securities offerings by increasing the
maximum amount of a single public offering under Tier 2 Regulation A from $5
million to $10 million. The measure would also clarify the preservation of
state enforcement authority with respect to an issuer, intermediary, or any
other person or entity using the exemption from registration under Regulation
A. Under the bill, the SEC is directed to exempt securities acquired under Tier
1 and Tier 2 Regulation A offerings from Sec. 12(g) of the Securities Exchange Act if the issuer provided
potential investors with audited financial statements. The Securities Act would
be amended to add the resale of any securities acquired in an exempted transaction
to the list of exempted transactions as long as certain conditions are met.
Restricted Securities Relief Act. The Committee also approved the Restricted Securities
Relief Act, H.R. 4554, by a partisan vote of 29 to 28. Introduced by Rep. Mick
Mulvaney (R-SC), which would amend SEC Rule 144 to redu.ce from six months to three
months the mandatory holding period before which restricted securities issued
by an SEC reporting company may be resold to the public. H.R. 4554 would also
amend Rule 144 to allow the public resale of restricted securities originally
issued by a shell company starting two years after the date on which the
company files a Form 8-K with the SEC disclosing that it is no longer a shell
company. Finally, H.R. 4554 would amend Section 18(b) of the Securities Act to
include in the definition of “covered securities” exempt from state regulation
any security offered or sold in compliance with Rule 144A. Rep. Mulvaney noted
that the provisions in the measure reducing
the holding period from six months to three months and providing for shell
company relief are based on recommendations in the SEC’s Government-Business
Forum on Small Business Capita Formation Final Report for 2012.
Rep.
Mulvaney noted that it is appropriate to reduce the Rule 144 holding period in
light of the need to increase liquidity and the increasing speed of information
being disseminated into the markets. He also noted that Canada has made the
change to a three-month holding period.
The
Ranking Member opposes H.R. 4554, noting that the SEC reduced the holding
period from two years to six months, which is proper. The bill would also
encourage PIPE transactions.
Financial Regulatory Clarity Act. Finally, the Committee approved the Financial Regulatory
Clarity Act, H.R. 4466, by a bi-partisan vote of 34-25. Co-sponsored by Rep.
Shelley Moore Capito (R-WV), Chair of the Financial Institutions Subcommittee
and Rep. Gregory Meeks (D-NY). The measure would require the SEC, CFTC, FDIC,
OCC and the Fed to assess whether any newly proposed regulation or order
conflicts with, duplicates or is inconsistent with existing federal
regulations, and address any overlap or duplication before issuing the final
rulemaking. The bill would also require the SEC, CFTC and the other regulators
to evaluate whether existing regulations are outdated, and to submit a report
to Congress making recommendations for repealing or amending any conflicting,
inconsistent, duplicative, or outdated laws or regulations within 60 days of a
proposed rulemaking.