HR 6427, a potentially important piece of financial services related legislation, has been passed by the US House of Representatives by a vote of 391-2. Entitled "The Creating Financial Prosperity for Businesses and Investors Act," the bill aggregates six House Financial Services Committee measures that each previously passed the House with bipartisan support.
The bill is seen as a move by Republican leadership, particularly newly re-elected Financial Services Committee Chairman Jeb Hensarling (R- TX), to promote capital formation and remove barriers to growth faced by small businesses and startups. While there is no guarantee the Senate will approve the Bill, the House would not be trying to get something to the Senate unless there was at least some chance for it to get through. Observers have even suggested that individual pieces of HR 6427 – which is more or less a compilation of prior bills approved by the House – may get through the Senate in the wake of the House’s recent and overwhelmingly bi-partisan approval.
Of particular relevance to financial services industry practitioners are the following portions of the bill:
- New SEC office and committee focused on small business: Title II would establish the Office for Small Business Capital Formation within the SEC to assist small businesses and their investors to resolve significant problems with the SEC or self-regulatory organizations and identify issues and propose changes to statutes, regulations, and rules to benefit small businesses and their investors and facilitate capital formation. It would also establish the SEC Small Business Advisory Committee to provide the SEC with advice on capital formation, securities trading, public reporting, and corporate governance for emerging, privately held businesses and smaller public companies.
- Increase in investor limit for qualifying venture capital funds: Title III of the bill would amend the Investment Company Act of 1940 (1940 Act), to allow "qualifying venture capital funds" to avoid registration under the Act until they amass 250 investors. A QVCF, as defined, would not be able to purchase more than $10 million in securities in any one issuer, adjusted for inflation.
- Amendments to crowdfunding law: Title IV of the bill would amend aspects of the "crowdfunding" provisions contained in the Jumpstart Our Business Startups Act (known as the JOBS Act). It would amend the 1940 Act as well as the Securities Act of 1933, to permit special purpose vehicles to acquire securities of qualifying issuers, and raise the threshold for registering the securities of crowdfunding issuers under the Securities Exchange Act of 1934 to $75 million ($50 million for issuers that have previously not reported any revenues).
- Expansion of the definition of "accredited investor": Title V of the bill would amend the definition of "accredited investor" found in Regulation D adopted under the 1933 Act to add inflation adjustment provisions to the current $1 million net worth and $200,000 ($300,000 jointly), income requirements, and to add two new categories of accredited investors: (i) persons with a current securities-related license; and (ii) persons whom the SEC determines by rulemaking to have demonstrable education or job experience to qualify as having professional subject-matter knowledge related to a particular investment. Notably, the Financial Industry Regulatory Authority (FINRA) or another self-regulatory organization would be required to verify the person’s education or job experience.
- Elimination of the 1940 Act exemption for funds located in Puerto Rico, the Virgin Islands and other US territories and possessions: Title VI of the bill would amend the 1940 Act to terminate an exemption for investment companies located in Puerto Rico, the Virgin Islands and any other possession of the United States that sell their shares only to the residents of the territory or possession in which they operate. The bill would establish a three-year safe harbor for funds that currently enjoy this exemption. Furthermore, the bill would authorize the SEC to further delay the effective date of this change for specific funds for up to three additional years.