In previous posts we have discussed possible changes to SEC rules that would ease capital raising for small businesses. Now, with the introduction of two recent bills designed to improve the ability to raise capital, Congress is getting in on the action.
Lifting the Ban on General Solicitation
Recently, the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House of Representatives approved a bill that would remove the restrictions on “general solicitation” in private securities offerings. The bill, titled The Access to Capital for Job Creators Act (HR 2940), has been referred to the House Financial Services Committee for consideration.
Under current SEC rules, companies seeking to raise capital are generally prohibited from seeking investors by means of a “general solicitation.” This means that the company cannot approach potential investors unless a principal of the company or an agent of the company has a substantive, pre-existing relationship with that investor. Accordingly, even if the company knows that the investor is, for example, listed on the Forbes 400 list of the world’s wealthiest individuals, the company cannot approach the investor about investing in the offering unless there is a pre-existing relationship.
The bill directs the SEC to eliminate the ban on general solicitation and advertising with respect to offerings conducted under Rule 506 of Regulation D. This is the exemption that is most typically used by companies conducting private offerings. If the bill were to pass and become law, it would eliminate one of the biggest impediments to raising capital in private offerings. In addition, since investors would still be required to be “accredited,” we believe the bill would not significantly impact investor protection.
A New Exemption for Crowdfunding
A second bill, titled The Entrepreneur Access to Capital Act (HR 2930) would establish an exemption under the federal securities laws for sales of certain “crowdfunded” securities. The term “crowdfund” typically refers to the raising of funds in small amounts from a large group of contributors.
This bill would amend the Securities Act of 1933 to allow companies to raise up to $5 million from sales of securities if ”individual investments in the securities are limited to an aggregate annual amount equal to the lesser of (i) $10,000; and (ii) 10 percent of the investor’s annual income.” Importantly, the bill provides that investors who purchase securities under the crowdfunding exemption would not be counted toward the 500 owner cap (above which requires public reporting). Finally, the bill contains a provision pre-empting any state law to the contrary – an extremely important feature given the large differences in laws from state to state.
Both bills would go a long way toward improving the ability of small businesses to raise capital and create new jobs. Although the Obama administration has expressed some support for a crowdfunding bill (without offering any details), both bills face an uncertain future – especially in the Senate.
-Wythe Michael
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