CONGRESSWOMAN ELISE STEFANIK
On Wednesday, November 2, 2011, the House is scheduled to consider H.R. 1070, the Small Company Capital Formation Act of 2011, under a suspension of the rules requiring a two-thirds majority for passage. H.R. 1070 was introduced by Rep. David Schweikert (R-AZ) on March 14, 2011, and was referred to the House Committee on Financial Services.
H.R. 1070 would amend the Securities Act of 1933 to direct the Securities and Exchange Commission (SEC) to exempt from its regulation a class of securities for which the aggregate offering amount is between $5 million and $50 million, subject to specified terms and conditions.
The bill would authorize the SEC to:
1. Require an issuer of such exempted class of securities to make periodic disclosures available to investors regarding the issuer, its business operations, its financial condition, and its use of investor funds; and
2. Provide for the suspension and termination of such a requirement with respect to that issuer.
Additionally, the bill would require the SEC to:
1. Review and increase biennially such offering amount limitation, as appropriate; and
2. Report to certain congressional committees on its reasons for not increasing the amount if it determines not to do so.
Under Section 3 of the Securities Act of 1933, the SEC is authorized to exempt small securities offerings from registration. Pursuant to Section 3, the SEC promulgated Regulation A, which exempts public offerings of less than $5 million in any 12-month period. Initially, Congress authorized the SEC to set the Section 3 threshold at $100,000. The limit has been raised multiple times, and in 1992 the SEC set the threshold at $5 million.
According to the House Committee on Financial Services, “Since the SEC set the Regulation A threshold at $5 million in 1992, issuers and market participants have pointed out that the offering threshold has been too low to justify the costs of going public under Regulation A.” Further, “inflation, which has risen approximately 165% since 1980, when Congress gave the SEC the authority to set the Regulation A offering threshold, has further exacerbated the imbalance between costs and benefits.”
Regulation A was used by companies only 78 times between 1995 and 2004. It was used only 3 times in 2010. As the Financial Services Committee notes, “The low number of Regulation A filings--each for the maximum amount of $5 million--demonstrates that a revision to Regulation A is necessary.”
H.R. 1070, the Small Company Capital Formation Act, is intended to increase the use of Regulation A offerings and help make capital available to small companies. The bill would raise the offering threshold for companies exempted from registration with the SEC under Regulation A from $5 million – the threshold set in the early 1990s – to $50 million. The bill also provides the SEC with the authority to increase the threshold and requires the SEC to re-examine the threshold every two years and report to Congress on its decisions regarding adjustment of the threshold.
Amending Regulation A would grant small companies access to capital and permit greater investment in these companies – which will foster economic growth and job creation.
The Congressional Budget Office (CBO) estimates that implementing H.R. 1070 would cost about $2 million over the 2012-2016 period, assuming appropriation of the necessary funds. CBO further estimates that the SEC would incur additional costs for staffing and overhead as a result of the expected additional securities offerings exempt from the registration requirement, but those discretionary costs would be less than $500,000 in any year during that period. Enacting this legislation would not affect direct spending or revenues, therefore pay-as-you-go procedures do not apply.
By prohibiting states from requiring issuers of some securities to register the securities with the state, or to pay registration fees prior to issuance, H.R. 1070 would impose an intergovernmental mandate as defined in the Unfunded Mandates Reform Act (UMRA). The cost of the mandate would be the amount of fee revenue that states would be precluded from collecting. The CBO estimates that forgone revenues would be small and would not exceed the threshold established in UMRA for intergovernmental mandates ($71 million in 2011, adjusted annually for inflation).