House Republicans have embraced at least one proposal in President Barack Obama’s jobs package: changing the rules to make it easier for closely held companies to raise money without going public.
Republicans have already lined up with hearings and bills to support expanding exemptions from U.S. Securities and Exchange Commission rules for companies trying to raise capital, and two lawmakers introduced legislation yesterday.
The idea was contained in a single line from the president’s speech to Congress last week, where he pledged “to cut away the red tape that prevents too many rapidly-growing start-up companies from raising capital and going public.”
“While there may be disagreements about the broader Obama proposals, one thing we can all agree on is the need to alleviate the burden of onerous SEC regulations for those small businesses looking to access capital,” said House Majority Whip Kevin McCarthy.
Currently, closely held companies are restricted from offering more than $5 million in securities or advertising such securities unless they register the offering with the SEC.
The legislative proposals include: exempting the practice of “crowdfunding” or soliciting small investments from the public, often over the Internet or through social media; raising the size of exempted securities offerings to $50 million from $5 million; and allowing companies to advertise the offering.
Representative Patrick McHenry, a North Carolina Republican, released a bill yesterday that would permit crowdfunding to finance new businesses by permitting companies to accept and pool donations up to a certain level. McHenry, chairman of a House Oversight and Government Reform subcommittee, held a hearing on the issue yesterday.
It was not clear whether or when the proposals might be voted on in the full House, or whether the Democrat-led Senate would consider them as well.
The new attention comes as smaller firms struggle to raise money amid regulatory and economic pressures. Secondary markets, where private shares of companies are bought and sold, have surged as the 2002 Sarbanes-Oxley Act and last year’s Dodd-Frank Act have made accessing public markets more expensive.
The White House, in a blog post the night of Obama’s speech, laid out the initiatives, which include raising the cap on public offerings to $50 million from the current level of $5 million and easing restrictions on crowdfunding.
Representative David Schweikert, an Arizona Republican, has introduced a bipartisan measure to do that -- increase the registration exemption over a 12-month period. The Financial Services Committee has approved the bill.
Representative Anna Eshoo, a California Democrat who has pushed for the change in order to spur the venture capital market in her district, last year called the proposal “a jobs program, with good jobs that are focused on the cutting edge of innovation, creating new products, new markets and additional growth for our economy.”
Senator Jon Tester, a Montana Democrat, this week introduced a similar proposal with Pennsylvania Republican Pat Toomey. Tester and Toomey, who both serve on the Senate Banking Committee, said they will push the measure in their chamber.
In addition, McCarthy, a California Republican, has introduced a bill that would permit “general solicitations” of accredited investors.
The SEC is able to make some of the changes without legislation and has embarked on a broad review, ordered by Chairman Mary Schapiro, to find ways to streamline and update rules on registration and reporting.
Meredith Cross, director of the SEC’s division of corporation finance, said in testimony prepared for McHenry’s hearing that the agency will “continue to consider and, if appropriate, implement changes to its existing rules to reduce regulatory burdens while maintaining important investor protections.” She noted that registration exemptions “present an enticing opportunity for the unscrupulous.”
The SEC also is facing pressure from Republican Representative Darrell Issa of California, chairman of the Oversight and Government Reform Committee, to loosen the shareholder cap for closely held firms like Facebook Inc. and Twitter Inc. Schweikert and Issa, along with Representative Jim Himes, a Connecticut Democrat, have spearheaded legislation that would increase the cap on shareholders to 1,000 before companies would have to file public financial statements. It currently stands at 500.
The agency is considering a possible concept release -- the first stage in developing ideas for new rules -- that would relax restrictions on the solicitations, Cross said in her testimony.
McHenry, who said he applauded the president’s inclusion of crowdfunding in his proposal, complained that the SEC “has resisted calls to modernize securities regulations to meet the needs of today’s economy.”
“Fixing this mess will not occur overnight,” McHenry said. “But we must find new and modern means for capital formation to ignite our struggling economy.”
McHenry, who also serves on the Financial Services Committee, is pushing to raise the cap on crowdfunding to $5 million with individual investors limited to $10,000 or 10 percent of the investor’s annual income. The threshold is higher than the $1 million level laid out in the Sept. 8 White House blog post by Aneesh Chopra, the administration’s Chief Technology Officer and Tom Kalil, deputy director for policy in the White House Office of Science and Technology Policy.
The rise of social networks has opened a door to new ways to access funds for smaller firms, lawmakers and companies said. Two advertising executives using Facebook and Twitter solicitations attracted more than $200 million in pledges in their effort to buy Pabst Brewing Co. Before they could collect and bid on the company, they were forced to shutter the BuyaBeerCompany.com website by the SEC. The agency said the two men violated federal law by failing to register the offering before seeking to raise the $300 million they said they needed to buy the company.
McHenry, at his hearing, cited the case as one of the reasons he drafted his bill.
House Republicans are scheduled to keep the pressure on next week, when the Financial Services Committee hosts its own hearing on Obama’s proposals with the support of both Democrats and Republicans on the committee.
The day after Obama’s speech, Representative Barney Frank, the top Democrat on the Financial Services Committee, requested a hearing on the topic in a letter to Representative Spencer Bachus of Alabama, the Republican chairman of the panel. Bachus, in a Sept. 13 reply to Frank, a Massachusetts Democrat, said a subcommittee hearing had already been in the works and would occur next week.
“While Republicans and Democrats don’t seem to agree on much these days, they do agree that entrepreneurs hold the key to a bright economic future,” Chopra and Kalil wrote in their blog post.