CONGRESSWOMAN ELISE STEFANIK
On Friday, November 4, 2011, the House is scheduled to complete consideration H.R. 2930, the Entrepreneur Access to Capital Act, under a rule. The rule would provide for one hour of debate equally divided and controlled by the chair and ranking minority member of the Committee on Financial Services. Additionally, the rule makes in order and provides ten minutes of debate for each of the six amendments printed in Part A of the Rules Committee report accompanying H.Res. 453, as well as providing for one motion to recommit with or without instructions. The bill was introduced by Rep. Patrick McHenry (R-NC) on September 14, 2011, and referred to the Committee on Financial Services. On October 26, 2011, a mark-up was held and the bill was reported by voice vote.
The legislation would amend the Securities Act of 1933 to establish an exemption from the requirement that certain securities be registered with the Securities Exchange Commission (SEC). Specifically, the bill would exempt securities from registration requirements if:
In order to qualify for this exemption, the bill would also require issuers or intermediaries acting between issuers and investors to provide certain information and risk disclosures to investors, such as warnings of the speculative nature generally applicable to investments in startups, emerging businesses, and small issuers. The bill would also require issuers or intermediaries to provide information about the issuer and offering to the SEC, in addition to providing continuous investor-level access to the intermediary's website and maintaining such books and records as the SEC deems appropriate.
Additionally, the bill would require the SEC to develop regulations to implement this new authority and to set out actions that would disqualify certain individuals from issuing securities under the exemption.
This bill is part of a package of legislation intended to improve small businesses’ access to capital. Specifically, H.R. 2930 would improve capital formation by expanding equity financing options. The traditional alternative method, a commercial bank loan, is increasingly difficult in light of tightened lending standards following the financial crisis of 2008-09. Capital formation is necessary for business expansion and therefore job creation and sustained economic growth.
According to the Committee on Financial Services, “crowdfunding” is an increasingly popular method of capital formation, where, according to SEC Chairman Mary Schapiro, "groups of people pool money, typically comprised of very small individual contributions, to support an effort by others to accomplish a specific goal." Current SEC regulations impede this innovative and lower-risk form of financing, by prohibiting general solicitation and advertisements for non-registered offerings and capping the number of shareholders for non-registered companies at 500. This bill would remove SEC restrictions that prevent “crowdfunding” so entrepreneurs can raise equity capital from a large pool of small investors who may or may not be considered “accredited” by the SEC.
The Congressional Budget Office (CBO) estimates that implementing H.R. 2930 would have a negligible impact on the SEC’s workload, and any change in agency spending that is subject to appropriation would not be significant. Enacting H.R. 2930 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.
Amendment No. 1—Rep. McHenry (R-NC): This amendment would make technical corrections and would also require the issuer to state a target offering amount and a deadline to reach the target offering amount. Additionally, the amendment would require that the Securities and Exchange Commission is provided a notice upon completion of the offering, which shall include the aggregate offering amount and the number of purchasers. The amendment would also clarify the disqualification provision to ensure that both issuers and intermediaries, as well as their predecessors, affiliates, officers, directors, or persons fulfilling similar roles, are disqualified from the exemption established in this bill should they have a history of committing securities fraud.
Amendment No. 2—Reps. Fincher (R-TN) and Sherman (D-CA): This amendment would index to inflation the $1 million and $2 million aggregate annual amounts raised through the issue of the securities as authorized in the bill. The index for inflation would be measured by the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics.
Amendment No. 3—Rep. Quayle (R-AZ): This amendment would index the $10,000 individual investment cap set in the bill to inflation.
Amendment No. 4—Rep. Velazquez (D-NY): This amendment would require crowdfunding intermediaries to disclose their method of compensation to potential investors.
Amendment No. 5—Rep. Barrow (D-GA): This amendment would require the Securities Exchange Commission to establish a website that provides the public with crowdfunding website safety tips for investing in securities described under section 4(6).
Amendment No. 6—Reps. Perlmutter (D-CO) and McHenry (R-NC): This amendment would clarify the states’ right to enforce securities laws with respect to fraud, deceit, and unlawful conduct.