Friday, May 22, 2015

House Committee Approves 13 Capital Formation Bills

By John M. Jascob, J.D.

The House Financial Services Committee voted Wednesday night to approve 13 bills designed to create jobs by stimulating capital formation by Main Street businesses. The Committee approved seven of the bills by unanimous vote, with four others passing by wide margins. The lawmakers divided largely on partisan lines, however, with regard to legislation that would reduce registration burdens on smaller companies and create a federal exemption for mergers and acquisition brokers.

“We still have millions and millions of our fellow countrymen, hardworking moderate-income taxpayers, who find themselves with stagnant to lower paychecks; bank accounts that are less than before the great economic crisis—and they need more jobs, better jobs, and you can’t have more and better jobs without more and better capital formation,” said Committee Chairman Jeb Hensarling (R-Tex) in a news release.

Ex-Im dust up and Waters’ concerns. During Wednesday’s mark-up session, much of the discussion focused not on the bills under consideration, but on the renewal of the charter of the Export-Import Bank (see the Securities Regulation Daily wrap-up for May 20, 2015). In addition to chastising the Republican majority for failing to consider legislation to renew the Bank’s charter, Ranking Member Maxine Waters (D-Cal) also took the Committee leadership to task for advancing certain proposals that, in her view, may unintentionally reduce transparency and undermine investor confidence.

“I’m concerned that these changes may make it harder for investors, analysts, regulators and the public to evaluate the investment potential of certain companies,” Waters said. “I’m also wary of how this patchwork of bills will interact with one another and with current regulatory efforts. A piecemeal approach may unnecessarily eliminate valuable investor protections, and thereby undermine investor confidence and hamper the very goal that these proposals are designed to achieve: promoting capital formation.”

Short-form registration. Waters comments may have been directed in part to the Accelerating Access to Capital Act (H.R. 2357), which the Committee passed by a 33-24 vote. Introduced by Rep. Ann Wagner (R-Mo), the bill would direct the SEC within 45 days of enactment to revise Form S–3 so as to provide issuers with common shares listed on a national securities exchange an additional basis for satisfying the eligibility requirements for short-form registration. The vote fell strictly along partisan lines, with all of votes in favor coming from the Republican side of the aisle.

Exemption for M&A brokers. Lawmakers also generally divided along party lines with respect to the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act (H.R. 686), which would create a federal registration exemption for certain brokers facilitating merger and acquisition deals that involve a transfer of securities. Thirty-four Republicans and two Democrats approved the bill, with all 24 opposing votes coming from Democrats. The two Democrats supporting the measure were Rep. John Delaney (D-Md) and Rep. Kyrsten Sinema (D-Ariz).

State securities regulators had criticized the bill for failing to include a provision disqualifying “bad actors” from the registration exemption. In a letter submitted Wednesday to the Committee leadership, NASAA President William Beatty wrote that NASAA continues to recognize a valid basis for a federal statutory exemption, noting that state securities regulators have proposed their own model exemption at the state level after working closely with the American Bar Association, M&A practitioners, and other stakeholders. NASAA declines to support H.R. 686, however, until Congress restores the bad-actor disqualification and the prohibition on shell transactions that had been included in earlier versions of the bill introduced in the 113th Congress, Beatty wrote.

XBLR tagging. NASAA had also opposed provisions of the Small Company Disclosure Simplification Act (H.R. 1965), which would exempt, for a five-year period, emerging growth companies and other smaller companies from using eXtensible Business Reporting Language (XBRL) in financial statements and other periodic reports filed with the SEC. NASAA observed that the effect of the legislation would be to exclude the XBRL filing requirements for more than 60 percent of all public companies. The Financial Services Committee disagreed, however, approving the bill by a vote of 44-11.

Other capital formation bills. The remaining ten bills passed by the Committee generally received wide bi-partisan support. A summary drawn from information provided by the Committee follows, with the tally of the vote for each bill included in parentheses.