H.R. 4498, Helping Angels Lead Our Startups (HALOS) Act

H.R. 4498

Helping Angels Lead Our Startups (HALOS) Act

Date
April 27, 2016 (114th Congress, 2nd Session)

Staff Contact
John Huston

Floor Situation

On Wednesday, April 27, 2016, the House will begin consideration of H.R. 4498, the Helping Angels Lead Our Startups (HALOS) Act, under a rule. H.R. 4498 was introduced on February 9, 2016, by Rep. Steve Chabot (R-OH) and was referred to the Committee on Financial Services, which ordered the bill reported by a vote of 44 to 13[1] on March 2, 2016.

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[1] See House Report 114-509 at 4.

Bill Summary

H.R. 4498 amends the Securities Act of 1933 to clarify that certain startup companies are able to give presentations about their company and host certain types of events, like a “demo day,” without violating certain SEC investment solicitation bans. The bill attempts to ensure that startup companies do not inadvertently violate SEC regulations governing general solicitation of potential investors.

 

Background

Under the Securities Act of 1933, any offer to sell securities must either be registered with the Securities and Exchange Commission (SEC) or meet an exemption. SEC Regulation D contains three general rules for providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC.[1] One such exemption is Rule 506 of Regulation D, which allows companies to offer securities for sale up to 35 non-accredited investors and an unlimited number of accredited investors, as long as the company does not market its securities through general solicitations or advertising.

On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was enacted, which among other things, extended the Rule 506 exemption to securities marketed through a general solicitation or advertising so long as the issuer takes steps to verify that all purchasers of the securities are “accredited investors.” This provision, in effect, makes it easier for certain startup enterprises to market their securities to a larger pool of investors or angels.[2]

Angel investors are general wealthy individuals who are often actively involved in the startups they back, and are not typically professional investors. In 2014, angels invested approximately $24 billion in over 73,000 startups and are responsible for 90 percent of the equity investment that startups receive. Corporations like Amazon, Costco, Facebook, Google, and Starbucks were all first funded by angel investors[3]

However, in implementing the JOBS Act, the SEC classified events held by angel investors as general solicitations, thus requiring entrepreneurs and startups to verify everyone in attendance during such events is an accredited investor. According to the Committee, this can be burdensome and jeopardizes educational and economic development events like “demo days” – where startups may interact with angel investors and venture capitalists but do not solicit investors to purchase an equity interest in the company.[4] H.R. 4498 establishes the definition of an “angel investor group” for purposes of the Federal Securities laws and exempts these demo days and related events from being considered a general solicitation under Regulation D to protect startups from inadvertently violating this rule.

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[1] See SEC website, Regulation D Offerings
[2] See House Report 114-509
[3] See White House Website, Fact Sheet: President Obama Announces New Commitments from Investors, Companies, Universities, and Cities to Advance Inclusive Entrepreneurship at First-Ever White House Demo Day
[4] See House Report 114-509

Cost

The Congressional Budget Office (CBO) estimates that the net effect of enacting H.R. 4498 on discretionary spending would be negligible, assuming appropriations actions consistent with that authority. Pay-as-you-go procedures do not apply because enacting H.R. 4498 would not affect direct spending or revenues. CBO estimates that enacting H.R. 4498 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year period beginning in 2027.

Amendments

  1. Rep. Maxine Waters (D-CA)—The amendment limits the types of fees “demo day” sponsors can collect, limits attendance at “demo days” to only individuals with financial sophistication, and requires an issuer to be a real business.

Additional Information

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