Securities Regulation Daily Financial Services Committee approves slew of capital formation bills
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Thursday, June 16, 2016

Financial Services Committee approves slew of capital formation bills

By John M. Jascob, J.D., LL.M.

The House Financial Services Committee has reported out a string of bills that sponsors claim will boost the economy by offering small businesses more options for raising capital while reducing regulatory burdens on entrepreneurs. The committee approved bills by wide margins that would increase certain financial thresholds for small issuers using equity crowdfunding and raise the limit on the number of investors who can invest in certain qualified venture capital funds. The lawmakers also unanimously approved a bill to enhance the protection of senior investors by shielding certain financial institutions from liability when reporting suspected fraud.

The lawmakers generally divided along partisan lines, however, on closer votes approving bills that would create a safe harbor for "micro" securities offerings and direct the SEC to make adjustments to Regulation D. The committee also voted in favor of legislation that would require the SEC to engage in enhanced cost-benefit analysis and require proxy advisory firms to register with the SEC.

Fix Crowdfunding Act (H.R. 4855). The committee voted 57-2 to approve the Fix Crowdfunding Act, which increases the financial thresholds before crowdfunding issuers become subject to Exchange Act reporting. The bill also permits single purpose funds to utilize equity crowdfunding.

Although relatively little opposition was expressed during the mark up session, NASAA issued a comment letter prior to the mark up, urging the committee to take a wait and see approach concerning the SEC's regulations. NASAA reminded the lawmakers that the rules have been in effect for less than a month. Given the lack of data on what changes are necessary or useful, NASAA encouraged Congress to evaluate any proposed changes after the federal exemption has been in effect for a year.

Supporting America’s Innovators Act of 2016 (H.R. 4854). By an identical 57-2 vote, the committee approved the Supporting America’s Innovators Act of 2016. The bill seeks to enhance angel investors’ ability to provide critical funding to small businesses and entrepreneurs needing investment capital by raising to 250 the number of individuals who can invest in certain "qualified venture capital funds" before those funds must register as investment companies under the Investment Company Act.

Micro Offering Safe Harbor Act (H.R. 4850). By a 34-25 vote, the committee approved the Micro Offering Safe Harbor Act, which would amend the Securities Act to exempt certain micro-offerings from federal registration. Under the proposed amendments, issuers could rely on a statutory safe harbor for private offerings, provided that each purchaser has a substantive pre-existing relationship with an owner; there are 35 or fewer purchasers; and the total amount of the offering does not exceed $500,000.

Representative Tom Emmer (R-Minn), who introduced the bill, stated that the bill is designed to clarify and enhance the Securities Act’s existing private offering exemption. By taking advantage of this safe harbor, small companies can raise small amounts of early start-up capital with confidence, without having to spend excessive amounts on attorney’s fees to determine whether an offering fits within the exemption.

Ranking Member Maxine Waters (D-Calif), however, argued that the exemption was not only unwarranted but potentially dangerous. Although she applauded the bad actor provisions inserted in the bill, she felt that the protections for small investors did not go far enough. In addition, Waters believes that the absence of any prohibition against resale of the securities would create a loophole for public offerings of the securities, and even scams.

Private Placement Improvement Act of 2016 (H.R. 4852). Introduced by Rep. Scott Garrett (R-N.J.), the Private Placement Improvement Act of 2016 seeks to remove certain additional restrictions proposed by the SEC when the Commission adopted rules under Title II of the JOBS Act to permit general solicitation in Rule 506 offerings. Among other things, the bill would require the SEC to amend the Form D filing requirements to require the issuer to file the form no earlier than the date of first sale. The bill would also prohibit the Commission from conditioning the availability of the Rule 506 exemption on the filing of Form D.

Garrett said that the SEC’s proposed restrictions have been fueled by special interests, while noting that only three percent of the capital raised in the Regulation D market under the new rules has come from offerings that conducted general solicitations. Ranking Member Waters countered by saying that the bill was yet another example of a concerted effort to undermine the SEC and tie its hands. Nevertheless, the committee approved the bill by a 33-26 vote.

Senior$afe Act of 2016 (H.R. 4538). The committee found common ground, however, in unanimously approving the Senior$afe Act of 2016. Introduced by Rep. Kyrsten Sinema (D-Ariz), the bill provides that certain employees of a covered financial institution that receive training in identifying and reporting the suspected exploitation of a senior to regulatory agencies would not incur liability, provided that the disclosure was made in good faith and with reasonable care. NASAA strongly supported the bill, which it regards as complimentary to the model legislation approved by the NASAA membership in January to address issues faced by broker-dealers and investment adviser firms when confronted with suspected financial exploitation of seniors and other vulnerable adults.

Other bills approved by the committee include the following:

Corporate Governance Reform & Transparency Act of 2016 (H.R. 5311). Passed by a 41-18 vote, the bill requires SEC registration for proxy advisory firms, the disclosure of potential conflicts of interest and a code of ethics, and the public availability of methodologies used to formulate proxy recommendations and analyses.

National Securities Exchange Regulatory Parity Act of 2016 (H.R. 5421). Passed by a vote of 47-12, the bill eliminates specific references to national securities exchanges contained in Securities Act Section 18(b) and instead provides a blue sky exemption for any security listed on any national securities exchange registered with the SEC with approved listing standards.

SEC Regulatory Accountability Act (H.R. 5429). Passed by a 34-25 vote, the bill requires the SEC to follow Executive Order 13579, which outlines enhanced cost-benefit analysis requirements. The bill also requires a review of existing SEC regulations.

U.S. Territories Investor Protection Act of 2016 (H.R. 5322). Passed by a 59-0 vote, the bill terminates an exemption for investment companies located in Puerto Rico, the Virgin Islands, and other U.S. possessions that sell their shares only to the residents of the territory or possession in which they operate.

MainStory: TopStory Enforcement ExchangesMarketRegulation InvestmentAdvisers InvestmentCompanies JOBSAct PrivatePlacements SecuritiesOfferings

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