Tag: Access to Capital for Job Creators Act

New Financial Legislation Takes Another Step

Four bills made their way through the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Financial Services Committee last week and this week were approved by the full  Financial Services Committee .

The Congress had to throw in some attacks against the Securities and Exchange Commission.
“We cannot wait for the SEC to act when millions of Americans are out of work and small businesses can’t access capital because of outdated regulations.  Small business accounts for the majority of new jobs created in the U.S.  The Committee took action today and passed common-sense ideas that will promote jobs,” said Financial Services Chairman Spencer Bachus. “Capital formation is essential for a robust economy. The bills approved today provide the modernized regulatory environment that is needed to help small businesses create jobs.”
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Some New Financial Legislation is Moving Along

Four bills made their way through the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Financial Services Committee.

The Private Company Flexibility and Growth Act, introduced by Rep. David Schweikert, raises the shareholder threshold for mandatory registration with the SEC from 500 to 1,000 shareholders. I’m surprised it’s not called the Google/Facebook Act. The 500 shareholder limit is most famous for forcing Google to go public and is close to forcing Facebook to do the same.

The Access to Capital for Job Creators Act removes the regulatory ban that prohibit general solicitation and advertising in private placements. There were two amendments to the bill during the mark-up session. Maxine Waters (D-CA) included and amendment that the revised SEC rules allowing a general solicitation under Regulation D must require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors using methods determined by the SEC. Scott Garrett (R-NJ) included an amendment that Section 4(2) of the Securities Act be revised to add the language: “whether or not such transactions involve general solicitation or general advertising.”

The Entrepreneur Access to Capital Act permits “crowdfunding” to finance new businesses by allowing companies to accept and pool donations up to $5 million without registering with the SEC. It would limit individual investments to the lesser of $10,000 or 10% of an investor’s annual income. An amendment requiring a notice filing with the SEC was rejected as was an amendment that would have barred felons from being involved.

The Small Company Job Growth and Regulatory Relief Act would expand the exemptions available to small companies from the Section 404(b) auditor attestation reporting requirements to small and mid-size companies with a market capitalization of less than $500 million. The exemption is currently at the $75 million cap set by the Dodd-Frank Act. During the mark-up, the House panel amended the bill to lower the market float from $500 million to $350 million.

Will these go anywhere? The votes seemed to very partisan with Republicans voting yes and Democrats voting no. That does not bode well for moving up the chain through the house, through the Senate and on to the President’s desk.  However, President Obama has already indicated an interest in the crowdfunding idea.

These are not the grand, sweeping changes of Dodd-Frank. These are small tweaks to the regulations on the capital markets.

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Lifting the Ban on General Solicitation

From a  securities compliance perspective, when you  see an advertisement or an email seeking capital for an investment opportunity there is most likely a problem. Now there is a bill in Congress that would change that view.

When selling a security, you need to register the security or find an appropriate exemption from registration. Most likely a private fund or an entrepreneur would try to fall under one of the exemptions under Regulation D. If the company is seeking over $1,000,000 they are prohibited from offering to sell the securities “by any form of general solicitation or general advertising“. Before asking someone to make an investment, you need to have a preexisting, substantive relationship.

“The types of relationships with offerees that may be important in establishing a general solicitation has not taken place are those that would enable the issuer (or a person acting on its behalf) to be aware of the financial circumstances or sophistication of the person with whom the relationship exists or that otherwise are of some substance and duration.” Mineral Lands Research & Marketing Corp., S.E.C. No-Action Letter, 1985 WL 55694 (Dec. 4 1985).

Representative Kevin McCarthy (R-CA) introduced the Access to Capital for Job Creators Act (HR 2940) which require the Securities and Exchange Commission to revise its rules to permit general solicitation in offerings under Rule 506 of Regulation D.

In my view, I don’t think there should be an elimination of the ban on general advertising and general solicitation. That would just expose large segments of the population to potential securities fraud. Currently, ads for investment opportunities are red flags for state and federal regulators.

However, I do think it needs to a little easier for entrepreneurs to raise capital. The SEC should offer some better guidance on the limitation. They could also offer some programs and safe harbors. I assume the SEC is waiting for someone to approach them with examples. They continue to be too underfunded and too understaffed to be proactive.

Will the Access to Capital for Job Creators Act be enacted? I doubt that it would pass in its current form. It takes away some investor protection and warning system for securities regulators. That would seem a bad position when the country is stealing trying to recover from the massive losses of 2008.

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