CONGRESSWOMAN ELISE STEFANIK
On Tuesday, July 5, 2016 the House will consider H.R. 4854, the Supporting America’s Innovators Act of 2016. The bill was introduced on March 23, 2016, by Rep. Patrick McHenry (R-NC) and was referred to the Committee on Financial Services, which ordered the bill reported as amended by a vote of 57-2 on June 16, 2016.
H.R. 4854 raises the limit on the number of individuals who can invest in certain venture capital funds before those funds must register as “investment companies” under the Investment Company Act of 1940. Section 3(c)(1) of the Investment Company Act currently limits the number of investors in an investment company fund to 100 for the fund to be exempt from registration with the SEC.
H.R. 4854 would amend the cap currently contained in the Act to allow 500 investors in a “qualified venture capital fund.” The bill would generally define a “qualifying venture capital fund” to be any venture capital fund that does not purchase more than $10 million in securities of any one issuer, adjusted for inflation. Thus, for example, H.R. 4854 would permit angel funds – which allow accredited investors to invest in business startups – to obtain capital from a greater number of investors.
Access to financial capital is vital for entrepreneurs seeking to start up, operate or expand businesses. At the same time, according to the Committee on Financial Services “gaining access to capital has remained a significant challenge for many small businesses.” The passage of the Dodd-Frank Act as well as the increased volume and complexity of financial regulations has made the situation worse as capital became increasingly hard to access from banks and various capital market players. “And while conditions have improved somewhat in recent years, many entrepreneurs continue to struggle with accessing the capital they need to compete and grow.”
The JOBS Act of 2012 was intended to encourage funding of United States small businesses by easing various securities regulations, raising the cap on investors in a privately-held company from 500 to 2,000 investors before requiring SEC registration. However, the limit on the number of investors acting as a coordinated group to invest in a company remained at 100, where it has been since 1940.
According to the Committee on Financial Services, “With online fundraising and general solicitation becoming more common because of the JOBS Act, companies are bumping up against the limit more frequently.” H.R. 4854 parallels the JOBS Act. As the JOBS Act permitted up to 2,000 individuals to invest in private companies, H.R. 4854 allows investment LLCs to obtain the backing of up to 250 individuals without having to register under the Investment Company Act, in an attempt to promote capital formation at the earliest stages in a private company’s life cycle.
According to the bill’s sponsor: “Today, small businesses–particularly those in rural America–face immense challenges raising capital as traditional lenders have greatly reduced small business lending. To confront this challenge, we must harness technology and encourage innovative forms of capital formation to fill the void.”
 See Rep. Patrick McHenry, “Press Release – McHenry Capital Formation Bills Pass Committee,” June 16, 2016.
A Congressional Budget Office (CBO) cost estimate is currently unavailable.
For questions or further information please contact John Huston with the House Republican Policy Committee by email or at 6-5539.