The Republican agenda is moving ahead to unwind much of the Obama Administration’s legislative and regulatory achievements. The first attempt to repeal the Affordable Care Act failed. Next up is raising the debt ceiling, tax reform and Dodd-Frank appeal. (I question how much Congress can take on at one time.)
Jeb Hensarling, Chairman of the House Financial Services Committee, had a law he was ready to move forward with and now has a second version in a discussion draft. 
There are good things in the Financial CHOICE Act of 2017.
General solicitation
It narrows the meaning of general solicitation. Section 452 provides that a presentation at the following is not an act of general solicitation:
- College or University
- Non-profit
- Angel investor group
- Venture forum, or
- trade association
provided the advertising for the event does not reference a securities offering, and the event sponsor does provide investment advice to attendees, does not charge a fee other than for administrative costs, and the issuer limits the information provided.
Clearly, this is trying to get the regulatory regime in line with industry practice for venture capital. Issuers don’t want to be engaged in general solicitation, but the definition is too narrow.
Venture exchange
The bill contemplates the creation of marketplace for buyers and sellers of venture securities. The issuer would not have gone through an IPO. It must have a market cap of at less than $1 billion. It seems strange to use the definition of a market cap, when there is no existing market for the securities.
Regulation D and Form D
The bill slams the door on the SEC’s proposed changes to Form D. Those changes have been sitting on the SEC’s agenda for over two years.
Accredited Investor
Section 860 of the bill changes the definition of “Accredited Investor.” It keeps the two current brightline tests of income and net worth. I think those are key tests given the illiquid nature of private placements. It fixes those standards and removes Dodd-Frank’s requirement that the SEC adjust the amounts every four years.
The bill adds in a third test, allowing anyone licensed as a broker or investment adviser to also be an “accredited investor.” It adds a fourth test, allowing the SEC to create a regulatory regime for individuals to prove that the knowledge, education or job experience to allow them to invest in private placements.
We have seen from SEC Acting Commissioner Piwowar that he on board with opening up the definition of accredited investor.
Private equity fund exemption
The bigger change for private equity funds and probably for real estate funds is that it exempts “private equity fund” managers from the registration and reporting obligations of the Investment Advisors Act.
As you might expect, the bill does not take the time to define “private equity fund.” It gives the SEC six months to issue a rule for the definition.
The arguments are that private equity should be treated like venture capital. Private equity does not pose systemic risk. Private equity investors are generally sophisticated. The SEC would be more effective focusing its exam efforts on retail investment advisers.
What next?
Obviously this bill is a long way from being enacted. Chairman Hensarling is working on the pitch and has come up with the Top 10 wins for American People with the Financial Choice Act.
Sources:
A small nit, Congress spelt “advisor” as “adviser” in the Investment Company Act.