H.R. 2357, Accelerating Access to Capital Act, as amended

H.R. 2357

Accelerating Access to Capital Act, as amended

Sponsor
Rep. Ann Wagner

Date
September 8, 2016 (114th Congress, 2nd Session)

Staff Contact
John Huston

Floor Situation

On Thursday, September 8, 2016, the House will begin consideration of H.R. 2357, the Accelerating Access to Capital Act, under a structured rule. The bill was introduced on May 15, 2015, by Rep. Ann Wagner (R-MO) and was referred to the Committee on Financial Services, which ordered the bill reported on June 20, 2015 by a vote of 33 to 24. The House will consider the Rules Committee Print 114-62, which combines the text of H.R. 2357 – Accelerating Access to Capital Act, H.R. 4850 – Micro Offering Safe Harbor Act, and H.R. 4852 – Private Placement Improvement Act of 2016, as ordered reported.

Bill Summary

H.R. 2357 makes various changes to how small businesses and companies register securities with the Securities and Exchange Commission (SEC) to reduce the regulatory burden on these companies and to encourage investment.

Title I –Accelerating Access to Capital Act (H.R. 2357, as reported)

This title would make it easier for businesses to file registration statements with the SEC in order to sell securities to the public. Specifically, the bill would expand the availability of Form S-3, a simplified securities registration form, to smaller reporting companies, thus lowering compliance costs associated with a securities offering.

Title II – Micro Offering Safe Harbor Act (H.R. 4850, as reported)

Under the federal securities laws, any offering and sale of securities must either be registered or exempt from registration. Exempt transactions still are generally subject to certain reporting requirements and the anti-fraud provisions of the federal securities laws. H.R. 4850 would provide a new exempt transaction for so-called “micro-offerings,” providing small businesses with a cost-effective way to raise early stage capital to growth their business.  H.R. 4850 would allow small businesses to operate with confidence that they are not in violation of the law when making a securities offering if all of the following requirements are met:

  • Each purchaser has a substantive pre-existing relationship with an officer, director or shareholder with 10 percent or more of the shares of the issuer;
  • The issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer that are sold in reliance on the exemption during the 12-month period preceding the transaction; and
  • The aggregate amount of all securities sold by the issuer does not exceed $500,000 over a 12-month period.Additionally, the Title II would prohibit a bad actor from participating in a micro-offering.

Title III – Private Placement Improvement Act (H.R. 4852, as reported)

The title eliminates certain filing requirements for companies before they can sell securities to accredited investors and makes a single notice of sales sufficient for exemption from regulation under SEC Regulation D (Reg D), which is three rules that provide exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC.. The bill also revises the definition of “accredited investor”[1] to include “knowledgeable employees” of private funds with respect to an offering of the private fund.

Click here for a section-by-section analysis of the bill.

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[1] Under current law, the term accredited investor is defined in Rule 501 of Regulation D, and generally includes individuals with significant wealth and most businesses that are valued over $5 million.

Background

Background on Title I – Accelerating Access to Capital Act (H.R. 2357, as reported)

The cost of securities regulation continues to fall heaviest on smaller companies, many of which still having difficulty to access capital to grow their businesses and create jobs. Beyond the costs that directly burden smaller companies, the stifling regulatory environment resulting from the regulatory overreaction to the financial crisis has restricted bank and other traditional financing options for these smaller companies.

The bill reduces the burdens of SEC registration by amending the SEC’s Form S– 3 registration statement to allow smaller public companies with a class of common equity securities listed and registered on a national securities exchange or with a public float of $75 million or more to register primary securities offerings exceeding one-third of the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant.[1] H.R. 2357 would also allow smaller reporting companies without a class of common equity securities listed and registered on a national securities exchange to register primary securities offerings up to one-third of their public float.

Background on Title II – Micro Offering Safe Harbor Act (H.R. 4850, as reported)

Although small companies are at the forefront of technological innovation and job creation, they often face significant obstacles in obtaining funding in the capital markets. These obstacles are often attributable to the proportionately larger burden that securities regulations—written for large public companies—place on small companies when they seek to go public. H.R. 4850 would establish a “micro offering” exemption under the Securities Act of 1933, and provide small businesses the confidence needed to know that they are not violating the law when raising early-stage capital.

According to the bill sponsor, the bill will enable “Entrepreneurs […] to more easily launch their startups and existing businesses will have better prospects for growth. By simply clarifying an old law, more small businesses will raise capital through non-public offerings, easing the burdens of red-tape, onerous paperwork, and the threat of lawsuits.”[2]

Background on Title III – Private Placement Improvement Act (H.R. 4852, as reported)

Title II of the Jumpstart Our Business Startups (JOBS) Act (Pub. Law 112-206) makes it easier for startups to market their securities. The Securities Act of 1933 requires that offers to sell securities must either be registered with the SEC or specifically exempted from such registration. One such exemption is Regulation D Rule 506, which allows companies to offer securities for sale as long as they do not market their securities through general solicitations or advertising. Title II extends this exemption to securities marketed through a general solicitation or advertising so long as the issuer verifies that purchasers of the securities are “accredited investors”[3]

Title II of the JOBS Act required the SEC to write and implement rules by July 4, 2012. The SEC missed that deadline, and instead proposed a rule for notice and comment in August 2012.  On July 10, 2013, the SEC ultimately adopted a final rule to effectuate Title II of the JOBS Act, but at the same meeting, the SEC voted on a partisan 3-2 vote to propose a separate rule that would impose new regulatory requirements on small companies seeking to use Regulation D Rule 506 to raise capital.  According to the Committee, the proposed requirements are inconsistent with Congress’s intent to make it easier for startups and small companies to raise capital.  H.R. 4852 would prevent the SEC from acting to finalize this rule proposal.

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[1] See House Report 114-506 at 2.
[2] See Rep. Tom Emmer Press Release, “Emmer Introduces Micro Offering Safe Harbor Act,” March 23, 2016.
[3] Under current law, the term accredited investor is defined in Rule 501 of Regulation D, and generally includes individuals with significant wealth and most businesses that are valued over $5 million.

Cost

A Congressional Budget Office cost estimate for the Rules Committee Print 114-62 is not currently available; however, cost estimates for bills contained within the Rules Committee Print are below.

H.R. 2357, Accelerating Access to Capital Act of 2015, as reported (Title I)—CBO estimates enacting the bill would cost about $1 million in fiscal year 2016 to complete a rulemaking process as required under the bill. Under current law the SEC is authorized to collect fees sufficient to offset its appropriation each year; therefore, we estimate that the net cost to the SEC would be negligible, assuming appropriation action consistent with that authority. CBO estimates that enacting the bill would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.

H.R. 4850, Micro Offering Safe Harbor Act, as reported, (Title II)—CBO estimates  CBO estimates that implementing H.R. 4850 would have no significant effect on the agency’s costs to update, monitor, and enforce regulations. Moreover, the SEC is authorized to collect fees sufficient to offset its annual appropriation; therefore; CBO estimates that the net effect on discretionary spending would be negligible, assuming appropriations actions consistent with that authority. Enacting H.R. 4850 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.

CBO estimates that enacting H.R. 4850 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2027.

H.R. 4852 – Private Placement Improvement Act of 2016 (Title III)—A CBO cost estimate is currently not available.

Amendments

  1. Rep. Rob DeSantis (R-FL) – This amendment requires companies to publically disclose if they engage in business within Iran or with the government of Iran.
  2. Rep. Ruben Hinojosa (D-TX) – This amendment limits unaccredited investor purchasers to 35, and limits the amount they may invest to $5,000. Issuers of exempted securities must provide updated disclosure documents to purchasers.

Additional Information

For questions or further information please contact John Huston with the House Republican Policy Committee by email or at 6-5539.