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Congress rushes to help smaller companies raise funds more easily.
Alix Stuart, CFO Magazine
December 1, 2011
Lawmakers have a slew of holiday gifts for small companies as Congress races to open fund-raising avenues for private firms in yet another attempt to jump-start the economy. In early November, the House of Representatives passed four bills addressing hot-button issues for companies eager to access equity markets without the expense and regulatory red tape of a formal initial public offering. The Securities and Exchange Commission is ramping up similar efforts (see "Smoothing the IPO Path").
"The SEC has the ability to make rules here, but we're in such dire straits, Congress is saying that we can't wait," says Gary Markoff, an attorney with Sherin and Lodgen in Boston. The bills propose a number of different capital-raising possibilities:
• The Small Company Formation Act (HR 1070), introduced by David Schweikert (R–Ariz.), would enable companies to raise as much as $50 million through a Reg A offering, which allows a business to register shares without a full-blown IPO and with less-onerous SEC reporting requirements. The current limit for a Reg A offering is $5 million, but the method is rarely used today, because of the burden of accompanying state securities regulations.
• The Entrepreneurial Access to Capital Act (HR 2930), introduced by Patrick McHenry (R–N.C.), would allow businesses to raise up to $1 million (or $2 million, for those with audited financials) through crowd-funding — collecting small amounts of money from a large group of investors — without registering with the SEC. As with Reg A offerings, few companies currently offer securities via crowd-funding, due to regulatory restrictions. Under the terms of this bill, investors would not have to be accredited by the SEC.
• The Access to Capital for Job Creators Act (HR 2940), introduced by Kevin McCarthy (R–Calif.), would require the SEC to revise Reg D (which provides three exemptions from securities registration requirements) so that companies could market unregistered offerings to accredited investors on a widespread basis, beyond the "family and friends" marketing that is currently permitted. The bill's sponsors argue that the current system significantly limits the pool of potential investors by requiring them to have an existing relationship with the company.
Eliminating the ban on advertising and solicitation, they say, will allow companies to use both online and offline forums to reach potential investors. Because this would involve only accredited investors, with their presumably greater understanding of risk, the bill's proponents argue that lifting the restriction on solicitation and advertising makes sense.
• HR 1965, introduced by James Himes (D–Conn.), would amend the securities laws to establish certain thresholds for shareholder registration. The legislation would aid small banks by allowing them to have up to 2,000 shareholders without being subject to SEC reporting rules, an increase from the current limit of 500. The bill also calls for an SEC study on shareholder limits.
While the four House bills were born out of a common desire to improve access to capital for growing companies, they may not all meet with equal success in the Senate. Geoffrey Perusse, an attorney with Allen Matkins, says he expects the crowd-funding bill to pass, possibly with additional modifications, like restricting trading of shares for a longer period and a requirement that all shares be limited to one class.
Attorney Markoff is concerned that the proposals, as written, may not go far enough to protect consumers. "The ideas are excellent, but we've got to do it in a careful, considered way to avoid threats to the public," he says. At press time, no dates were set for the Senate to consider the bills.