By Mark S. Nelson, J.D.
The House Financial Services Committee reported a trio of capital formation bills that seek to extend the IPO on-ramp for emerging growth companies (EGCs), study why analysts tend not to cover smaller companies, and require the SEC to study how Form 10-Q can be streamlined. The IPO on-ramp extension bill was the only one that produced any controversy at the markup session, although it is possible that some version of a Democratic amendment to that bill could later emerge on the House floor.
IPO on-ramp. The Helping Startups Continue to Grow Act (H.R. 6130), sponsored by Rep. Keith Rothfus (R-Pa), would lengthen the IPO on-ramp for EGCs from five years to 10 years by adding the definition of “recent emerging growth company” to both the Securities Act and the Exchange Act. The bill also would make numerous edits to the Securities Act and the Exchange Act to allow recent EGCs to continue to take advantage of numerous exemptions available to EGCs regarding streamlined financial disclosures, draft registration statements, and exemptions from executive compensation disclosures. The bill was reported by a vote of 32-24.
Representative Rothfus said the bill would address the problem of EGCs losing their EGC status solely because of the five-year time limit but would allow these firms to keep their EGC status if they otherwise still meet the requirements for EGCs contained in the federal securities laws. Chairman Jeb Hensarling (R-Texas) noted that many EGCs are biotechnology firms that may not start generating revenues within the current five-year limit on EGC status.
Meanwhile, Rep. Keith Ellison (D-Minn) offered an amendment that would have added a requirement that a recent EGC had not acquired a company or merged with another company during the prior five-year period. Representative Ellison said the amendment was needed to counteract forces of market concentration, which he said could account for some of the decline in new IPOs. The amendment was defeated by voice vote after Chairman Hensarling urged a no vote, although the chairman agreed with some of Rep. Ellison’s comments and said further work on the amendment could occur as the bill moves to the House floor.
SEC studies. In other action, the House FSC approved the Modernizing Disclosures for Investors Act (H.R. 5970), sponsored by Rep. Ann Wagner (R-Mo). The bill was initially intended to direct the SEC to streamline reporting on Form 10-Q by allowing certain issuers to elect to use a short form of disclosure, but a substitute amendment that would require the SEC only to study the matter was approved 56-0. Likewise, the Improving Investment Research for Small and Emerging Issuers Act (H.R. 6139), sponsored by Rep. Bill Huizenga (R-Mich), won approval by a 58-0 vote. The bill would direct the SEC to study the reasons why investment analysts avoid coverage of smaller companies. Both the Wagner and Huizenga bills would require the SEC to report its findings to Congress.