House Passes Creating Financial Prosperity For Business And Investors Act
Posted by Securities Attorney Laura Anthony | February 7, 2017 Tags: , , , , , , , , , , , , , ,

ABA Journal’s 10th Annual Blawg 100

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On December 5, 2016, the U.S. House of Representatives passed the Creating Financial Prosperity for Businesses and Investors Act (H.R. 6427) (the “Act”), continuing the House’s pro-business legislation spree. The Act is actually comprised of six smaller acts, all of which have previously been considered and passed by the House in 2016. The Act is comprised of: (i) Title I: The Small Business Capital Formation Enhancement Act (H.R. 4168); (ii) Title II: The SEC Small Business Advocate Act (H.R. 3784); (iii) Title III: The Supporting American’s Innovators Act (H.R. 4854); (iv) Title IV: The Fix Crowdfunding Act (H.R. 4855); (v) Title V: The Fair Investment Opportunities for Professionals Experts Act (H.R. 2187); and (vi) Title VI: The U.S. Territories Investor Protection Act (H.R. 5322).

Title I: The Small Business Capital Formation Enhancement Act (H.R. 4168)

This Act requires the SEC to respond to the findings and recommendations of the SEC’s annual Government-Business Forum on Small Business Capital Formation, which forum I attended in 2016 and found very interesting and productive. The Act would require the SEC to respond to recommendations by issuing a public statement evaluating the finding or recommendation and indicating what action the SEC intends to take as a result. Currently, the SEC is required to hold the annual Government-Business Forum to review the current status of problems and programs related to small business capital formation. The SEC is also required to prepare summaries of the Forum and any findings made by the Forum but is not required to comment or take a position on same.

The SEC is already legally required to review and respond to findings of the Investor Advisory Committee but currently is not required to take this additional step related to the small business forum. As with the Investor Advisory Committee, the SEC’s action on recommendations could be simply to review the matter further, conduct a study, consider or propose a rule change, or the SEC could state that it is taking no action at all. The Act does not limit, direct or require any particular response, just that a response be made. This Act was originally passed as part of the Financial Choice Act.

Title II: The SEC Small Business Advocate Act (H.R. 3784)

This legislation establishes the Office for Small Business Capital Formation within the SEC to assist small businesses and their investors in resolving problems and to provide a forum to identify issues and propose changes to statutes, regulations and rules to benefit small businesses and their investors and generally facilitate capital formation. The SEC would be required to review and respond to any recommendations by the committee. However, like similar rules, including the proposed H.R. 4168, the SEC’s response could be to review the matter further, conduct a study, consider or propose a rule change, or the SEC could state that it is taking no action at all.

The new Office for Small Business Capital Formation would be responsible for planning and holding the annual Government-Business Forum on Small Business Capital Formation. The new office would also analyze the effects of new and proposed rules on small businesses. The purpose would be to create an office in the SEC that would advocate for rule and policy changes on behalf of small businesses and their investors.  In order to give the office independence in its role, the office would provide its reports directly to various committees of Congress without review or oversight by the SEC itself.

The legislation also establishes the SEC Small Business Advisory Committee to provide the SEC with advice on rules, regulations and policies related to capital formation, securities trading, public reporting and corporate governance for emerging, privately held and smaller reporting companies with less than $250 million in public float. This new SEC Small Business Advisory Committee would essentially replace the voluntarily created SEC Advisory Committee on Small and Emerging Companies. The Advisory Committee on Small and Emerging Companies was last renewed by the SEC Chair and Commissioners on September 24, 2015 for a period of two years and accordingly, unless renewed again, will dissolve later this year.

As a reminder, the Advisory Committee on Small and Emerging Companies was organized by the SEC to provide advice on SEC rules, regulations and policies regarding “its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation” as related to “(i) capital raising by emerging privately held small businesses and publicly traded companies with less than $250 million in public market capitalization; (ii) trading in the securities of such businesses and companies; and (iii) public reporting and corporate governance requirements to which such businesses and companies are subject.”

The SEC would have the same mandate to review and respond to recommendations by the new committee. My prior blog discussing this act is HERE.

Title III: The Supporting America’s Innovators Act (H.R. 4854)

This legislation creates a new small “qualifying venture capital fund” under the Investment Company Act of 1940 and increases the current registration exemption under Section 3(c)(1) of the Investment Company Act to allow for up to 250 investors in such qualifying venture capital fund. Currently Section 3(c)(1) of the Investment Company Act exempts pooled funds, such as hedge funds, from registering under the Act as long as they have fewer than 100 equity holders. There is no limit on the amount of invested capital in a fund to qualify for the 3(c)(1) exemption. H.R. 4854 would create a new class of pooled fund, called a “qualifying venture capital fund,” which would be defined as any venture fund with $10 million or less of invested capital and allow up to 250 investors in such fund.

Title IV: The Fix Crowdfunding Act (H.R. 4855)

From the time the SEC published the final Regulation Crowdfunding rules and regulations on October 30, 2015, the regulatory framework has met with wide criticism, including that the process is too costly considering the $1 million raise limitation. The most commonly repeated issues with the current structure include: (i) the $1 million annual minimum is too low to adequately meet small business funding needs; (ii) companies cannot “test the waters” in advance of or at the initial stages of an offering; and (iii) companies cannot currently use a Special Purchase Vehicle (SPV) in a crowdfunding offering. The Fix Crowdfunding Act only addresses one of these three complaints.

The Fix Crowdfunding Act would also allow for the use of special purpose vehicles (SPV’s) in the fundraising process. The Act would allow for SPV’s by amending the Investment Company Act of 1940 to add a newly defined “crowdfunding vehicle” which is limited by its organizational and charter documents to one that acquires, holds and disposes of securities of a single issuing company in one or more crowdfunding transactions conducted under Section 4(a)(6) and Regulation Crowdfunding.

In addition, the newly defined “crowdfunding vehicle” would need to meet the following requirements: (i) have only one class of securities; (ii) neither the vehicle nor any person associated with the vehicle can receive any compensation in connection with the purchase, holding or sale of securities of the investment target; (iii) the vehicle can only purchase securities issued in a transaction under Section 4(a)(6) and Regulation Crowdfunding; (iv) both the crowdfunding vehicle and investment target must remain current in their respective disclosure obligations under Regulation Crowdfunding; and (v) the crowdfunding vehicle must be advised by either a state or federally registered investment advisor (RIA).

A crowdfunding SPV will be exempt from the current per-investor investment limits under Regulation Crowdfunding (i.e., (a) if either annual income or net worth is less than $100,000, the investment limitation is the greater of $2,000 or 5% of the lesser of annual income or net worth; or (b) if both annual income and net worth are equal to or greater than $100,000, the investment limitation is 10% of the lesser of annual income or net worth). However, investments into the crowdfunding SPV would remain subject to the per-investor limitations.

It is thought that an SPV structure helps protect the smaller investors by allowing them to pool funds together with larger investors in an entity that offers separate protections than the offering company itself. The SPV structure has become prevalent in Rule 506(c) offerings where the company is utilizing a platform to advertise and attract investors. However, under Rule 506(c), which is limited to accredited investors, it has not been problematic for SPV’s to stay within the current exemptions to registration under the Investment Company Act of 1940 by having fewer than 100 investors.

The Fix Crowdfunding Act also modifies the current exemption from the Exchange Act Section 12(g) registration requirements under Regulation Crowdfunding. The Exchange Act and Regulation Crowdfunding currently provide that security holders who acquired their securities in a crowdfunded offering are not counted for purposes of the registration threshold, provided that the issuer is current in its required annual reports and has engaged a transfer agent for its securities. The Fix Crowdfunding Act would remove the annual report and transfer agent conditions if the issuer had a public float for the last semi-annual period of less than $75 million, or if the public float is zero for such period annual revenues of less than $50 million in the most recently completed fiscal year.

One of my colleagues in the world of corporate finance, Dara Albright, wrote a great letter to Representative McHenry supporting the Fix Crowdfunding Act. Ms. Albright’s letter can be read HERE.

Title V: The Fair Investment Opportunities for Professionals Experts Act (H.R. 2187)

This legislation amends the definition of “accredited investor” under the Securities Act of 1933 to include: (i) persons whose individual net worth, together with their spouse, exceeds $1,000,000, adjusted for inflation, excluding the value of their primary residence; (ii) persons with an individual income greater than $200,000, or $300,000 for joint income, both adjusted for inflation; (iii) any person currently licensed or registered as a broker or investment adviser by the SEC, FINRA, an equivalent SRO, or state securities regulator; and (iv) persons whom the SEC determines have demonstrable education or job experience to qualify as having professional subject-matter knowledge related to a particular investment (FINRA or an equivalent self-regulatory organization must verify the person’s education or job experience).

My prior blog discussing this act is HERE.

Title VI: The U.S. Territories Investor Protection Act (H.R. 5322)

This legislation amends the Investment Company Act to terminate an exemption for investment companies located in Puerto Rico, the Virgin Islands and other territories of the United States. Currently an exemption applies for entities located in these territories that limits sales of securities to residents of the particular territory in which they operate. The Act contains a three-year phase-in safe harbor.

Other 2016 House Legislation

Earlier in 2016 I wrote about: (i) H.R. 1675 – the Capital Markets Improvement Act of 2016, which has 5 smaller acts embedded therein; (ii) H.R. 3784, establishing the Advocate for Small Business Capital Formation and Small Business Capital Formation Advisory Committee within the SEC; and (iii) H.R. 2187, proposing an amendment to the definition of accredited investor. See my blog HERE.

In early July, the House passed H.R. 2995, an appropriations bill for the federal budget for the fiscal year beginning October 1.  No further action has been taken. The 259-page bill, which is described as “making appropriations for financing services and general government for the fiscal year ending September 30, 2017, and for other purposes” (“House Appropriation Bill”), contains numerous provisions reducing or eliminating funding for key aspects of SEC enforcement and regulatory provisions. My discussion on this provision can be read as part of my blog on the Financial Choice Act, a link to which is below.

On September 8, 2016, the House passed the Accelerating Access to Capital Act. Unlike many of the House bills that passed in 2016, this one gained national attention, including an article in the Wall Street Journal. The Accelerating Access to Capital Act is actually comprised of three bills: (i) H.R. 4850 – the Micro Offering Safe Harbor Act; (ii) H.R. 4852 – the Private Placement Improvement Act; and (iii) H.R. 2357 – the Accelerating Access to Capital Act. See my blog HERE.

On September 13, 2016, the House passed the Financial Choice Act, which is an extreme anti-regulation act that would dramatically change the current SEC regime and dismantle a large portion of the Dodd-Frank Act. Read my blog on the Financial Choice Act HERE.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

Follow me on Facebook, LinkedIn, YouTube, Google+, Pinterest and Twitter.

Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

This information is not intended to be advertising, and Legal & Compliance, LLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.

© Legal & Compliance, LLC 2017


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House Continues To Push For Reduced Securities Regulation
Posted by Securities Attorney Laura Anthony | October 4, 2016 Tags: , , , , , , ,

House Appropriations Bill

The House continues its busy activity of passing legislation designed to reduce securities and market regulations. In early July, the House passed H.R. 2995, an appropriations bill for the federal budget for the fiscal year beginning October 1st. No further action has been taken.  The 259-page bill, which is described as “making appropriations for financing services and general government for the fiscal year ending September 30, 2017, and for other purposes” (“House Appropriation Bill”), contains numerous provisions reducing or eliminating funding for key aspects of SEC enforcement and regulatory provisions.

Earlier this year, I wrote this BLOG about three House bills that will likely never be passed into law. The 3 bills include: (i) H.R. 1675 – the Capital Markets Improvement Act of 2016, which has 5 smaller acts imbedded therein; (ii) H.R. 3784, establishing the Advocate for Small Business Capital Formation and Small Business Capital Formation Advisory Committee within the SEC; and (iii) H.R. 2187, proposing an amendment to the definition of accredited investor. None of the bills have been passed by the Senate as of yet.

The new House Appropriations Bill also contains the text of H.R. 3784, establishing the Advocate for Small Business Capital Formation and Small Business Capital Formation Advisory Committee within the SEC. The Bill prohibits the SEC from expending any funds under the Dodd-Frank act or to finalize, issue or implement any rule related to the disclosure of political contributions, contributions to tax-exempt organizations, or dues paid to trade associations.

The Bill also requires the Director of the Office of Management and Budget to submit a report to the Committees on Appropriations for both the House and Senate detailing the costs of implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

The Financial Choice Act

The House Financial Services Committee has also drafted The Financial Choice Act, which has not yet been passed by the House. This Act is as extreme as the current presidential election and likely will never go further than its publication by the House Financial Services Committee. The Executive Summary for the Financial Choice Act lists the following seven key principles of the Act:

Economic growth must be revitalized through competitive, transparent, and innovative capital markets;

Every American, regardless of their circumstances, must have the opportunity to achieve financial independence;

Consumers must be vigorously protected from fraud and deception as well as the loss of economic liberty;

Taxpayer bailouts of financial institutions must end and no company can remain too big to fail;

Systemic risk must be managed in a market with profit and loss;

Simplicity must replace complexity, because complexity can be gamed by the well-connected and abused by the Washington powerful; and

Both Wall Street and Washington must be held accountable.

The Act focuses on dismantling Dodd-Frank. On the bank-specific side, the Act would eliminate bank prohibitions on capital distributions and limitations on mergers, consolidations, or acquisitions of assets or control to the extent these limitations relate to capital or liquidity standards or concentrations of deposits or assets.

Related to bailouts, the Act would in summary:

Repeal the authority of the Financial Stability Oversight Council to designate firms as systematically important financial institutions (i.e., too big to fail).

Repeal Title II of Dodd-Frank and replace it with new bankruptcy code provisions specifically designed to accommodate large, complex financial institutions. Title II of Dodd-Frank is the orderly liquidation authority, granting authority to the federal government to obtain receivership control over large financial institutions; and

Repeal Title VIII of Dodd-Frank, which gives the Financial Stability Oversight Council access to the Federal Reserve discount window for systematically important financial institutions (i.e., gives the federal government the money to bail out financial institutions) as well as the authority to conduct examinations and enforcement related to risk management;

Related to accountability from financial regulators, the Act would:

Make all financial regulatory agencies subject to the REINS Act related to appropriations and place all such agencies on an appropriations process subject to bipartisan control;

Require all financial regulators to conduct a detailed cost-benefit analysis for all proposed regulations (provisions analogous to this are already required, but this would be more extreme);

Reauthorize the SEC for a period of 5 years with funding, structural and enforcement reforms (i.e., dismantle the current SEC and replace it with a watered-down version);

“Institute significant due-process reforms for every American who feels that they have been the victim of a government shakedown.”

Repeal the Chevron Deference doctrine.  Under this doctrine, a court must defer to an agency’s interpretation of statues and rules.

Demand greater accountability and transparency from the Federal Reserve; and

Abolish the Office of Financial Research.

Under the heading “[U]leash opportunities for small businesses, innovators, and job creators by facilitating capital formation”, the Act would:

Repeal multiple sections of Dodd-Frank, including the Volker Rule (which restricts U.S. banks from making speculative investments, including proprietary trading, venture capital and merchant bank activities);

Repeal the SEC’s authority to either prospectively or retroactively eliminate or restrict securities arbitration;

Repeal non-material specialized disclosure; and

Incorporate more than two dozen committee- or House-passed capital formation bills, including H.R. 1090 – Retail Investor Protection Act (prohibiting certain restrictions on investment advisors), H.R. 4168 – Small Business Capital Formation Enhancement Act (requiring prompt SEC action on finding of the annual SEC government business forum), H.R. 4498 – Helping Angels Lead Our Startups Act (directing the SEC to amend Regulation D expanding the allowable use of solicitation and advertising), and H.R. 5019 – Fair Access to Investment Research Act (expanding exclusion of research reports from the definition of an offer for or to sell securities under the Securities Act).

Thoughts

The House regulatory activity gives insight into the behind-the-scenes political pressure facing the SEC in recent years. We have seen the most dramatic changes in capital formation regulations and technological developments in the past 30 years, if not longer. Significant capital-formation changes include: (i) the creation of Rule 506(c), which came into effect on September 23, 2013, and allows for general solicitation and advertising in private offerings where the purchasers are limited to accredited investors; (ii) the overhaul of Regulation A, creating two tiers of offerings which came into effect on June 19, 2015, and allows for both pre-filing and post-filing marketing of an offering, called “testing the waters”; (iii) the addition of Section 5(d) of the Securities Act, which came into effect in April 2012, permitting emerging-growth companies to test the waters by engaging in pre- and post-filing communications with qualified institutional buyers or institutions that are accredited investors; and (iv) Title III crowdfunding, which came into effect May 19, 2016, and allows for the use of Internet-based marketing and sales of securities offerings.

At the same time, we have faced economic stagnation since the recession, a 7-year period of near-zero U.S. interest rates and negative interest rates in some foreign nations, nominal inflation and a near elimination of traditional bank financing for start-ups and emerging companies. If bank credit was available for small and emerging-growth companies, it would be inexpensive financing, but it is not and I do believe that Dodd-Frank and over-regulation are directly responsible for this particular problem.

Small companies and start-ups are the backbone of the American economy, and without investment in these companies, our economy will continue to be stagnant or worse: we could have another recession. These companies are relying almost exclusively on the sale of securities to investors (both private and public, debt and equity) for financing, all of which is under the supervision of the SEC.

The SEC is then balancing its ability to support the U.S. economy by facilitating capital formation for small and emerging companies while at the same time protecting investors from fraud and dealing with the pressure of extreme divergent political views. Something has to give, and I suspect that we will continue to see dramatic changes in the regulatory environment for the foreseeable future while this economic revolution plays out.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host ofLawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

Follow me on Facebook, LinkedIn, YouTube, Google+, Pinterest and Twitter.

Download our mobile app at iTunes.

Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

This information is not intended to be advertising, and Legal & Compliance, LLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.

© Legal & Compliance, LLC 2016


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  • Contact Information

    Laura Anthony, Attorney
    Legal & Compliance, LLC
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