A bill, H.R. 3978, that includes various disparate measures passed in the House of Representatives by a vote of 271 to 145. Among the measures included in H.R. 3978 are the Fostering Innovation Act of 2017, about which we have previously written, which amends Sarbanes-Oxley Section 404(b) attestation requirements extending the exemption available to EGCs for a longer period—until the earlier of ten years after the EGC went public, the end of the fiscal year in which the EGC’s average gross revenues exceed $50 million, or when the EGC qualifies with the SEC as a large accelerated filer. In addition, H.R. 3978 includes the National Securities Exchange Regulatory Parity Act, which modernizes Section 18 of the Securities Act.
On November 15, the House Financial Services Committee approved 23 bills, which included various bills that facilitate capital formation and reduce certain regulatory requirements. Chairman of the Committee, Jeb Hensarling, stated that these bills “…will provide smaller businesses with greater access to the capital markets so those businesses can grow and create jobs.” The following were included among the approved bills:
- H.R. 4263, the Regulation A+ Improvement Act, which proposes to increase the amount that companies can offer and sell under SEC Regulation A, Tier II, from $50 million to $75 million. The bill passed 37-23.
- H.R. 4015, the Corporate Governance Reform and Transparency Act of 2017, which provides for the registration of proxy advisory firms with the SEC, disclosure of proxy firms’ potential conflicts of interest and codes of ethics, and the disclosure of proxy firms’ methodologies for formulating proxy recommendations and analyses. The bill passed 40-20.
- H.R. 4248, which proposes to repeal Section 1502 of the Dodd-Frank Act, and would require public companies to disclose in annual reports filed with the SEC whether the company sources “conflict minerals” from the Democratic Republic of Congo and its nine neighboring countries. The bill passed 32-27.
- H.R. 4267, the Small Business Credit Availability Act, which proposes to amend the Investment Company Act of 1940 in order to require the SEC to streamline the offering, filing, and registration processes for BDCs. The bill also increases a BDCs’ ability to deploy capital to businesses by reducing its asset coverage ratio—or required ratio of assets to debt—from 200% to 150% if certain requirements are met. The bill passed 58-2.
- H.R. 4279, the Expanding Investment Opportunities Act, which directs the SEC to amend its rules to enable closed-end funds that meet certain requirements to be considered “well-known seasoned issuers” (WKSIs) and to conform the filing and offering regulations for closed-end funds to those of traditional operating companies. The bill passed 58-2.
- H.R. 4281, the Expanding Access to Capital for Rural Job Creators Act, which proposes to amend the Securities Exchange Act of 1934 to have the SEC’s Advocate for Small Business Capital Formation identify any unique challenges to rural area small businesses when identifying problems that small businesses have with securing access to capital. H.R. 4281 also requires that the annual report made by the SEC’s Small Business Advocate include a summary of any unique issues encountered by rural area small businesses. The bill passed 60-0.
On July 27, 2017, Ranking Member of the House Committee on Financial Services, Congresswoman Maxine Waters, introduced the Bad Actor Disqualification Act of 2017. This draft legislation directs the SEC to implement more rigorous and public processes for granting waivers that restore certain benefits to bad actors. These benefits include reduced oversight, reduced disclosure requirements and limited liability. The current draft of the bill specifically requires:
- that the waiver process be conducted and voted on at the Commission level, rather than staff level;
- that the SEC consider whether granting a waiver would protect investors, be in the public’s interest and promote market integrity;
- that the SEC to publish notice and allow for public comment on whether a particular waiver will be approved or denied; and
- that the SEC create a public database of all disqualified actors and keep complete/public records of all waiver requests.
This legislation follows the Congresswoman’s previous legislation from 2015 aimed at reforming the SEC’s waiver approval process, which was in response to a 2014 study that concluded that 82% of waivers were granted to financial firms in the last 11 years.
The full text of the bill can be found here.
The House Financial Services Committee met on Tuesday, July 25, 2017 and approved four bipartisan bills. Among them, H.R. 2864, the Improving Access to Capital Act, was approved by the Committee by a vote of 59-0.
The bill proposes to amend Regulation A to remove the requirement that an issuer not be subject to certain reporting requirements under the Securities Exchange Act of 1934, immediately before an offering. The bill also proposes to amend Tier 2 offering reporting requirements under the Securities Exchange Act of 1933.
The legislation was introduced in an effort to allow for a streamlined SEC review process and promote capital raising for smaller reporting companies. The full bill text can be found here.
On July 18, 2017, the House Subcommittee on Capital Markets, Securities and Investments held a hearing and heard testimony regarding the regulatory burdens facing public companies in the United States that may result in diminishing the appeal for privately held companies of undertaking an IPO. The testimony focused principally on the requirements arising from the Sarbanes-Oxley Act, including auditor attestation, and the requirements arising from the Dodd-Frank Act. Given that many private companies are less focused on disclosure burdens, it is a shame that almost all of the dialogue regarding the decline in the number of IPOs and the decline in the number of public companies in the United States has been limited to the same few themes. Many private companies are more focused on other considerations, such as the availability of research coverage, liquidity in their stocks should they choose to become listed companies, short-termism and the pressures arising from the need to focus on each successive earnings announcement, litigation exposure, and a variety of issues that are broader than those considered by the witnesses.
Here is a link to the key takeaways: https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=402173.
On Wednesday, March 22, 2017 at 2 p.m. ET, the House Financial Services Committee’s Subcommittee on Capital Markets, Securities, and Investment will hold a hearing entitled “The JOBS Act at Five: Examining Its Impact and Ensuring the Competitiveness of the U.S. Capital Markets”.
The Subcommittee aims to examine the impact of the JOBS Act on the U.S. capital markets, on capital formation, job creation, and economic growth. Additionally, the Subcommittee plans to identify issues and propose solutions to issues that are currently impeding the competitiveness of the U.S. capital markets.
The hearing will include testimony from the following witnesses:
- Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council;
- Brian Hahn, Chief Financial Officer, GlycoMimetics, Inc.;
- Andy Green, Managing Director of Economic Policy, Center for American Progress;
- Edward Knight, Executive Vice President and General Council, NASDAQ OMS; and
- Thomas Quaadman, Vice President, U.S. Chamber of Commerce.
The hearing will be streamed live on the House Financial Services Committee’s website.
This summer, the House Financial Services Committee passed the Main Street Growth Act, which calls for legislative changes to promote the formation of venture exchanges. The idea that securities exchanges specially designed for trading smaller and younger firms might be a useful addition to U.S. equity markets has been on people’s minds at the SEC and Congress since the SEC Advisory Committee on Small and Emerging Companies proposed it in March 2013.
Both the committee recommendation and the bill, however, are skeletal in nature. Neither do much to address the liquidity and investor-protection concerns that give some lawmakers and regulators pause. In a forthcoming essay, I set out a template for venture-exchange regulation that deals directly with these issues.
Contrary to some commentators, I argue that the best way to support liquidity is not by regulating tick sizes. Rather, I propose market microstructure rules that mandate fully transparent call-auction trading and limit trading to the listing exchange. The primary virtue of this structure is that it would concentrate liquidity on certain venues and at certain times.
Some also propose limiting venture exchanges to accredited investors. Because this would compromise liquidity, however, I contend that a better approach would be to require that the exchanges provide a warning that investing in venture-exchange companies is very risky, only suitable for sophisticated investors, and could result in total losses.
I argue that the most efficient and effective way to protect investors who participate despite these warnings would be to deemphasize ex ante regulation, in particular, mandated disclosure, much of which venture-exchange investors would likely ignore, and instead emphasize ex post regulation, in particular, SEC enforcement of the rules against securities fraud, market manipulation, and insider trading. Finally, rules could mandate venture-exchange listing standards that eliminate the smallest and youngest firms, and require that platforms engage in a substantive review of each company that seeks to list before allowing them to do so. These steps would mitigate the risks, yet leave these markets open to everyone.
The essay is forthcoming as a chapter in the Handbook on Law and Entrepreneurship (Gordon Smith & Christine Hurt eds., Cambridge Univ. Press 2017).
Jeff Schwartz is a professor in the S.J. Quinney College of Law at the University of Utah.
On September 13, 2016, the House Financial Services Committee of the United States House of Representatives (the “FSC”) formally released H.R. 5983, the “Financial CHOICE Act” (the “CHOICE Act”). While the CHOICE Act has largely been viewed through a financial regulatory lens, as the first major concerted effort to provide an alternative to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) as a way to end “Too Big to Fail,” the CHOICE Act, as currently drafted, would also repeal a number of the specialized disclosure provisions that were contained in the Dodd-Frank Act and subsume “JOBS Act 2.0” capital formation measures that have largely been presented to date as standalone bills.
This alert provides an overview of the sections of the CHOICE Act that would impact U.S. securities laws, which are contained in Title IV and Title X of the CHOICE Act.
Read our client alert.
Click here to view our chart entitled “Capital Formation Bills Reflected in the CHOICE Act.”
On September 12, 2016, the United States Chamber of Commerce’s Center for Capital Markets Competitiveness hosted a webinar to discuss the policy recommendations outlined in its report titled “A Plan to Reform America’s Capital Markets” (the “Report”). The Report provides policy recommendations for the next administration and Congress to reform the capital markets in order to address current inefficiencies and inadequacies in the regulation and government oversight of the capital markets. The Report includes a number of recommendations relating to financial services regulation, which are not the subject of this blog post. With respect to capital formation, the Report addresses the following:
Financial reporting, corporate governance, and disclosure effectiveness: The Report recommends establishing consistent definitions of “materiality” and rules of procedure for the SEC, the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB), and developing a disclosure framework to more clearly present pertinent information to investors. The Report asks that the SEC initiate changes to Exchange Act Rule 14a-8 and modernize shareholder resubmission thresholds. The Report also advocates the repeal of rules unrelated to the SEC’s mission, including the SEC’s conflict minerals rule, resource extraction rule, and pay ratio disclosure rule, and recommends the re-proposal of the SEC’s pay-for-performance rule and clawback rule. In addition, the Report calls for the creation of a Financial Reporting Forum, composed of SEC, FASB, and PCAOB representatives, as well as investors and businesses, tasked with identifying and addressing emerging financial reporting issues.
Capital formation and FinTech: The Report discusses the success of the JOBS Act in enabling more efficient investment for smaller companies and emerging growth companies (EGCs) and recommends passing “JOBS Act 2.0” and related bills that promote capital formation and help increase access to capital for small businesses. The Report also advocates the creation of a congressional bi-cameral committee, comprised of members of the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs, to study the current FinTech landscape and provide policy and legislative recommendations to both Houses of Congress.
A copy of the Report is available here.
H.R. 2357, the Accelerating Access to Capital Act, was passed by the House on Thursday, September 8, 2016 by a vote of 236-178. The bill contains three important pieces of legislation designed to facilitate the access to capital for small and emerging companies.
H.R. 2357 proposes to direct the Securities and Exchange Commission to revise Form S-3 so as to permit securities to be registered pursuant to General Instruction I.B.1. of the form if either: (1) the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant is $75 million or more, or (2) the registrant has at least one class of common equity securities listed and registered on a national securities exchange.
The two bills incorporated into H.R. 2357 are H.R. 4850, the Micro Offering Safe Harbor Act, which proposes to amend the Securities Act of 1933 to exempt certain micro-offerings from the Act’s registration requirements, and H.R. 4852, the Private Placement Improvement Act of 2016, which proposes to direct the SEC to revise the filing requirements of Regulation D to require an issuer that offers or sells securities in reliance upon a certain exemption from registration to file, no earlier than the date of first sale of such securities, a single notice of sales containing the information required by Form D for each new offering of securities.
House Financial Services Committee Chairman Jeb Hensarling commended the work of the House and noted in a press release that “[w]e must have capital formation if we’re going to have a healthy economy”.