On Monday, the House of Representatives passed the Creating Financial Prosperity for Businesses and Investors Act (H.R. 6427) (the “Act”) by a vote of 398 to 2. The Act is actually a compilation of six measures that were previously considered and passed by the House in 2016, but that have thus far seen no action in the Senate. Here is a summary of each piece of legislation, along with links to our prior coverage and to the actual text of each provision.
The Small Business Capital Formation Enhancement Act
Existing law requires the SEC to hold “an annual Government-business forum to review the current status of problems and programs relating to small business capital formation,” to invite other relevant federal agencies to participate, and to prepare summaries of the forum and any findings made by the forum for participants in the forum and appropriate committees of Congress. (15 U.S.C. 80c-1). The Small Business Capital Formation Enhancement Act would go a step further by requiring the SEC to review the findings and recommendations of the forum and, in the event that the forum submits a finding or recommendation to the SEC, to “promptly” respond by issuing a public statement evaluating the finding or recommendation and indicating what action, if any, the SEC intends to take in as a result. Presumably, the SEC action could be to further study a particular matter, or to consider and propose a rule change, or to take no action at all. The government-business forum has in the past recommended concepts that were included in the JOBS Act. I’m not sure this bit of legislation, which adds all of 50 words to the end of an existing statute relating solely to SEC procedure, is quite worthy of its grand title.
The SEC Small Business Advocate Act
This piece of legislation would amend the Exchange Act to create a new Office of the Advocate for Small Business Capital Formation within the SEC. This new office would be charged with planning and executing the annual Government-Business Forum on Small Business Capital Formation and would also interface with small businesses to understand significant regulatory problems they may be having and advocate within the SEC for rule or policy changes to address those problems. The office would also analyze the effect of newly proposed rules or regulations on small businesses. The office would be headed by an individual appointed by the SEC (but not an employee of the SEC) and would produce an annual report on its activities that would be provided directly to various committees of Congress without any review or oversight by the SEC. The SEC would also be required to adopt procedures ensuring an SEC response to any proposals from the office within three months of receipt.
The legislation would create the Small Business Capital Formation Advisory Committee, which would be tasked with providing the SEC with advice on the SEC’s rules, regulations, and policies relating to capital raising, trading in securities, and public reporting and corporate governance requirements, in each case with respect to privately held small businesses and public companies with a public float of less than $250 million. However, any advice regarding any aspect of the SEC’s enforcement program is expressly excluded from the scope of the committee’s mandate. The SEC would be required to assess the recommendations from the committee and publicly disclose any action the agency takes as a result of those recommendations. The committee would be made up primarily of persons representing small business interests who would be appointed by the SEC to four-year terms. The legislation includes procedural rules for the working of the committee and provisions relating to salaries and reimbursement of travel expenses.
The Supporting America’s Innovators Act
There is currently an exemption from classification as an investment company for purposes of the Investment Company Act of 1940 for an issuer not involved in a public offering of its securities whose outstanding securities (other than short-term paper) are held by fewer than 100 persons. The Supporting America’s Innovators Act would raise the number of holders to 250 for purposes of this exemption, but only for companies that meet the new definition of “qualifying venture capital fund.” A qualifying venture capital fund would be defined as any venture fund (as defined under the Investment Advisers Act of 1940) with $10 million or less in invested capital, with that threshold amount subject to annual adjustment by the SEC to reflect changes in the Consumer Price Index.
The Fix Crowdfunding Act
The Fix Crowdfunding Act is designed to do two things: (1) provide a way for companies to receive the benefits of crowdfunding without having to deal with a large number of direct equity holders, and (2) change the conditional exemption from counting securities sold in a crowdfunded offering towards the Exchange Act registration thresholds.
The legislation would amend the Investment Company Act of 1940 to newly define “crowdfunding vehicle” to mean an entity whose purposes is limited by its charter documents to acquiring, holding, and disposing of the securities of a single issuer in one or more crowdfunding transactions conducted under Section 4(a)(6) of the Securities Act and Regulation Crowdfunding, and which meets the following requirements:
- It must have only one class of securities;
- Neither the crowdfunding vehicle itself nor any associated person of the crowdfunding vehicle may receive any compensation in connection with the purchase, holding, or sale of securities of the investment target;
- The securities of the crowdfunding vehicle must have been issued in a crowdfunding transaction under Section 4(a)(6) and Regulation Crowdfunding in which the investment target was a co-issuer;
- Both the crowdfunding vehicle and the investment target must be current in their respective disclosure obligations under Regulation Crowdfunding; and
- The crowdfunding vehicle must be advised by an investment adviser registered under the Investment Advisers Act of 1940 or registered in its home state.
A crowdfunding vehicle would be exempt from the investment caps that apply to individual investors in crowdfunding offerings (the greater of $2,000 or 5% of the lesser of income or net worth if either income or net worth is below $100,000 OR 10% of income or net worth up to $100,000 if the lesser of income or net worth is equal to or greater than $100,000). In other words, the actual crowdfunding could occur in the crowdfunding vehicle, which could then make an investment into the target as a single investor.
The Exchange Act and related rules generally require an issuer to register its securities if it meets certain thresholds relating to its total assets or the number of its security holders. Section 12(g)(6) of the Exchange Act and Regulation Crowdfunding currently provide that security holders who acquired their securities in a crowdfunded offering don’t have to be counted for purposes of the registration threshold, PROVIDED, that the issuer is current on its required annual reports and it has engaged a transfer agent for its securities. The Fix Crowdfunding Act would remove the conditional nature of the exemption (annual report and transfer agent) if the issuer had a public float for the last semi-annual period of at least $75 million, or (if the public float is $0 for such period) annual revenues of less than $50 million in the most recently completed fiscal year.
If you’re interested in the way this piece of legislation has evolved since its initial proposal and additional context, you should check out this article from Crowdfund Insider.
The Fair Investment Opportunities for Professional Experts Act
This legislation codifies the accredited investor definition (which is currently set forth in Rule 501 under the Securities Act) and adds two additional categories of accredited investors: (1) any person currently licensed or registered as a broker or investment adviser by the SEC, FINRA, an equivalent SRO, or state securities regulator, and (2) any person that is determined by SEC rule or regulation to have “demonstrable education or job experience to qualify such person as having professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by the Financial Industry Regulatory Authority or an equivalent self-regulatory.” Of course, the scope of education-or-job-experience prong of the definition would be subject to rulemaking, which would likely be affected by numerous factors, including the political climate at the time of the rulemaking and the directive of the executive administration at the time.
The U.S. Territories Investor Protection Act
Section 6(a)(1) of the Investment Company Act of 1940 currently exempts any company organized or created under the laws of, and having its principal place of business in, Puerto Rico, the Virgin Islands, or any other possession of the U.S. The U.S. Territories Investor Protection Act would remove this exemption, thus subjecting companies in U.S. territories to the Investment Company Act to the same extent as U.S. companies. The legislation provides for a three year phase out period for companies that were covered by the exemption on the date it is enacted and allows the SEC to further delay application to such companies for an additional three-year period in its discretion.
Check out the text of the measure.