The House Financial Services Committee has marked up and approved six securities-related bills, several of which are aimed at improving small business capital formation. The bills generally received broad bipartisan support, although a bill to increase the size of offerings to employees under Rule 701 generated some disagreement. Earlier in the day, versions of the bills were also approved by voice votes in the Senate Banking Committee.
"Drowning in regulations." Committee Chairman Jeb Hensarling (R-Tex) opened the session by describing small businesses as the "heart and soul" of the nation’s economy. According to Hensarling, small businesses are "drowning in regulations." "These bills will help level the playing field so more Americans who have a good idea, determination and a dream of financial independence get the opportunity to succeed," Hensarling said.
Ranking Member Maxine Waters (D-Cal) praised the bipartisan efforts of the Committee, noting that most of the bills were the product of "healthy collaboration and dialogue." She expressed concern, however, about the bills being rushed to mark-up, without hearings being held for the benefit of newer committee members and the investing public. Waters also expressed concerns about which versions would be moving to the House floor, given that other versions have been included in the Financial CHOICE Act, the Republicans’ planned alternative to the Dodd-Frank Act.
Supporting America’s Innovators Act. The Committee approved by a 54-2 vote the Supporting America’s Innovators Act of 2017 (H.R. 1219), which would amend the registration exemption under the Investment Company Act for qualifying venture capital funds by increasing the investor limitation from 100 to 250 persons. The bill’s co-sponsor, Rep. Patrick McHenry (R-N.C.), said that the bill would make it easier for small investors to tap into the capital provided by angel investors, while providing angel investors with greater opportunities for diversification. Co-sponsor Nydia Velazquez (D-N.Y.) called the bill a "vote for America’s entrepreneurs" that would help catalyze investments in women-owned businesses.
Fair Access to Investment Research Act. The Fair Access to Investment Research Act (H.R. 910) also garnered wide bi-partisan support, passing the Committee by a 56-2 vote. The bill would direct the SEC to provide a safe harbor for research reports that cover exchange traded funds (ETFs) so that these reports are not considered "offers" under Securities Act Section 5. Representative Bill Foster (D-Ill) said that the legislation would benefit consumers because ETFs are complicated products which most investors lack the time and ability to understand by themselves. Representative Carolyn Maloney (D-N.Y.) said that the enormous growth in the assets invested in ETFs warrants making this additional research available to investors, and said that the bill would in no way weaken existing investor protections.
Small Business Capital Formation Enhancement Act. Introduced by Reps. Bruce Poliquin (R-Maine) and Juan Vargas (D-Cal), the Small Business Capital Formation Enhancement Act (H.R. 1312) requires the SEC to respond to any findings and recommendations put forth by the SEC’s annual Government-Business Forum on Small Business Capital Formation. Representative Poliquin said that the bill simply asks the SEC to report what actions the Commission might take with regard to the recommendations coming out of the forum, a forum which the Commission is required by law to hold. The Committee approved the measure by a 58-0 vote.
U.S. Territories Investor Protection Act. The Committee also unanimously passed by a 58-0 vote the U.S. Territories Investor Protection Act (H.R. 1366), which amends the Investment Company Act to end an exemption for investment companies located in Puerto Rico, the Virgin Islands, and any other possession of the United States. Currently, these investment companies are exempt provided that they sell their shares only to the residents of the territory or possession in which they operate. Representative Waters said the exemption no longer "hold[s] water" in light of abuses by UBS and other mainland firms involving these investment vehicles.
Securities and Exchange Commission Overpayment Credit Act. Likewise, Committee members unanimously approved a measure that allows national securities exchanges registered with the SEC to offset previous overpayments against future fees, under a 10-year statute of limitations. The bill, the Securities and Exchange Commission Overpayment Credit Act (H.R. 1257), applies only to those overpayments made prior to the legislation’s date of enactment. The bill's proponents noted instances in which exchanges had overpaid their fees in an abundance of caution, rather than risk an enforcement action for underpayment. The SEC, however, has not refunded these overpayments, claiming that the Commission lacked the statutory authority to do so.
Encouraging Employee Ownership Act of 2017. Finally, the Committee passed by a 48-11 margin the Encouraging Employee Ownership Act of 2017 (H.R. 1343), which would require the SEC to increase the threshold for exempt offerings to employees under Rule 701 from $5 million to $10 million and index the amount for inflation every five years. Under current law, if an issuer sells more than $5 million of securities in any consecutive 12-month period, the issuer is required to provide additional disclosures to investors.
Committee members wrangled over the importance of these disclosures. Co-Sponsor John Delaney (D-Md) said that many small companies simply will not offer stock to their employees if the disclosures are required, fearing that confidential information about their businesses will fall into the hands of competitors. Representative Waters, however, issued a "reminder of Enron" to the Committee, warning about the possible deleterious effects on employees who overweight their retirement portfolios in their employers’ stock.
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