Patrick McHenryChairman

Washington, October 26, 2011 - The Financial Services Committee approved four bills today that remove regulatory obstacles to capital formation so small businesses can grow and create jobs.

The bills, approved with bipartisan support, change and update Securities and Exchange Commission (SEC) regulations to promote, rather than hinder, small business access to equity financing.

As a result of the economic crisis and struggling economy, more small businesses are relying upon equity financing to obtain credit.  Equity financing allows investors to purchase ownership stakes in a company in exchange for a share of the company’s future profits.  The tightening of bank lending standards has made equity financing all the more important as a means of providing small companies with the capital they need to grow and create jobs. 

While the SEC is charged with promoting capital formation, it has not taken action to help small companies. For example, the SEC has yet to implement recommendations received in 2010 from its Forum on Small Company Capital Formation. Instead of implementing these recommendations, the SEC opted to create yet another advisory panel.

“We cannot wait for the SEC to act when millions of Americans are out of work and small businesses can’t access capital because of outdated regulations.  Small business accounts for the majority of new jobs created in the U.S.  The Committee took action today and passed common-sense ideas that will promote jobs,” said Financial Services Chairman Spencer Bachus. “Capital formation is essential for a robust economy. The bills approved today provide the modernized regulatory environment that is needed to help small businesses create jobs.”

The following bills were approved by the Committee on Wednesday:

H.R. 2940, the Access to Capital for Job Creators Act, sponsored by Rep. Kevin McCarthy (R-CA)
H.R. 2940 removes the regulatory ban that prevents small, privately held companies from using advertisements to solicit investors. The bill was approved by a voice vote.

Rep. McCarthy said, “Restrictions on the manner in which capital may be raised stem from Depression-era regulations that are clearly outdated – they not only predate Twitter and Facebook, but cell phones and color television. This specific regulatory obstacle, Rule 506 of Regulation D of the Securities Act of 1933, is actively preventing job creation, which is why I’ve introduced legislation to repeal this burdensome solicitation prohibition. My bill, the Access to Capital for Job Creators Act, will help entrepreneurs and small business owners access the capital they need to be innovative, dynamic, and ultimately, become the thing our economy needs most right now: job creators.”

Background:  An SEC regulation allows companies to raise capital as long as they do not market their securities through general solicitations or advertising.  This prohibition has been interpreted to mean that potential investors must have an existing relationship with the company.

Requiring potential investors to have an existing relationship with the company unnecessarily limits the pool of investors and severely restricts the ability of small companies to raise capital.

H.R. 2930, the Entrepreneur Access to Capital Act, sponsored by Rep. Patrick McHenry (R-NC)
H.R. 2930 removes SEC restrictions on “crowdfunding” so entrepreneurs can raise capital from a large pool of small investors who may or may not be considered “accredited” by the SEC. The legislation was approved by a voice vote.

Rep. McHenry said, “Outdated regulations are getting in the way of innovative ideas making it from the dinner table to the production line.  This legislation will give small businesses and entrepreneurs access to the capital they need to expand, compete, and -- most importantly -- hire.”

Background:  “Crowdfunding” is a technique that raises money to fund a business through relatively small dollar contributions from a large number of people through social networking, either in-person or on the Internet.  SEC rules prohibiting such general solicitation are a barrier to crowdfunding.

H.R. 2930 permits “crowdfunding” to finance new businesses by allowing companies to accept and pool donations up to $1 million without having to register with the SEC.

H.R. 1965, sponsored by Rep. Jim Himes (D-CT)
H.R. 1965 would raise the bank shareholder threshold for SEC registration from 500 to 2,000.  The threshold has not been adjusted since 1964. The legislation was approved by a voice vote.

Background:  Companies that have $10 million in assets and 500 shareholders are currently required to register with the SEC.  These companies are therefore subject to the SEC’s reporting requirements.  While the asset threshold has been increased over the years to $10 million from the $1 million level initially set in 1964, the 500 shareholder requirement has never been updated.

H.R. 1965 updates the federal securities laws to ensure that smaller community banks are not required to register with the SEC and comply with burdensome reporting requirements that are intended for larger corporations.

H.R. 2167, the Private Company Flexibility and Growth Act, sponsored by Rep. David Schweikert (R-AZ)
H.R. 2167 raises the threshold for mandatory registration with the SEC from 500 shareholders to 1,000 shareholders for all companies.  It also excludes accredited investors and securities held by shareholders who receive such securities under employee compensation plans from the 1,000 shareholder threshold. The bill was approved by a voice vote.

Rep. Schweikert said, “Burdensome regulation cannot grow the economy nor can it create jobs. My bill provides relief to small businesses by removing an impediment to capital formation by raising the shareholder threshold for mandatory registration with the SEC from 500 to 1,000 shareholders. This regulation severely limits the growth stages for companies, which need time and flexibility to develop. This bi-partisan bill will help entrepreneurs grow their business, remain competitive, and most importantly, create jobs.”  

Background:  Section 12(g) of the Securities Exchange Act of 1934 requires issuers to register equity securities with the SEC if those securities are held by 500 or more shareholders and the company has total assets of more than $10 million.  After a company registers with the SEC under Section 12(g), it must comply with all of the Exchange Act’s reporting requirements.

The current threshold discourages companies from providing stock option-based compensation to employees, removing one of the great economic incentives used to attract well-qualified employees to small business startups.