Earlier this summer, on May 22, 2014, the Financial Services Committee of the House of Representatives approved eight bills relating to issuer disclosures, public and private capital raising, the liquidity of restricted securities and SEC regulations generally. These bills, if enacted into law, would incrementally ease the many burdens imposed by the current securities regulatory regime.
The Disclosure Modernization and Simplification Act and the Small Business Investment Company Advisers Relief Act were both unanimously approved, while the other bills were generally approved by fairly narrow margins.
No corresponding bills are currently scheduled to be taken up in the Senate Banking Committee.
The Disclosure Modernization and Simplification Act (H.R. 4569) would require the SEC to:
- permit issuers to include a summary page in their annual reports on Form 10-K;
- revise Regulation S-K to further scale back or eliminate disclosure requirements for smaller issuers, including emerging growth companies, accelerated filers and smaller reporting companies; and
- eliminate duplicative, overlapping, outdated and unnecessary requirements.
In addition, the bill would require the SEC to conduct another study of Regulation S-K, to issue a report of its findings and recommendations to Congress and to propose rules to implement its recommendations. The study would be required to determine how to modernize and simplify Regulation S-K to reduce the costs and burdens of compliance on issuers, eliminate boilerplate language and static requirements, evaluate methods of information delivery and presentation, and explore methods to discourage repetition and the disclosure of immaterial information.
H.R. 4569 directs the SEC to ensure that all material information continues to be provided to investors, and to preserve the completeness and comparability of information across registrants. The Committee approved the bill by a vote of 56-0.
Advisers to Small Business Investment Companies
The Small Business Investment Company (SBIC) Advisers Relief Act (H.R. 4200) would ensure that an investment adviser that relies on either the venture capital fund adviser exemption or the private fund adviser exemption from registration under Section 203A of the Investment Adviser’s Act of 1940 will not be required to register if it also acts as an investment adviser to one or more SBICs. The bill would also preempt any state registration requirements for investment advisers that solely advise SBICs. H.R. 4200 was approved in Committee by a 59-0 vote.
Private Offerings and Restricted Securities
The Private Placement Improvement Act (H.R. 4570) is directed at preempting the adoption of certain regulations that the SEC has proposed that would affect offerings pursuant to Rule 506 of Regulation D. These measures were proposed the same day that the Commission adopted final rules, mandated by the JOBS Act, to eliminate the prohibition on general solicitation and advertising in offerings under Rule 506. The bill would:
- direct the SEC to require only a single notice of sales on Form D, which would be required not earlier than the date of the first sale of securities in the offering;
- preclude the SEC from adopting rules that condition the availability of the Rule 506 exemptions on the filing of a Form D;
- preclude the SEC from adopting rules that require issuers to submit written general solicitation materials to the Commission in offerings that rely on Rule 506(c);
- preclude the SEC from extending the requirements of Rule 156, which describes when information in sales literature by a registered investment company could be fraudulent or misleading under the federal securities laws, to sales literature of private funds; and
- direct the SEC to amend the definition of “accredited investor” to include, for Rule 506 offerings by private funds, employees of those private funds (or of advisers to those private funds) who are knowledgeable about those funds.
The Startup Capital Modernization Act (H.R. 4565) includes further amendments to the Commission’s small issues exemptive authority under Section 3(b)(1) of the Securities Act designed to make the exemptions under this section more useful, and provides for a new statutory resale exemption for securities that are resold only to accredited investors. Specifically, the Bill would:
- increase the offering amount cap under Section 3(b)(1) from $5 million to $10 million (Section 3(b)(1) provides the statutory basis for the existing (“Tier 1”) Regulation A exemption and the exemptions provided by Rules 504 and 505 of Regulation D);
- provide for the preemption of state securities laws for securities issued under Section 3(b)(1) where the securities are offered or sold on a national securities exchange;
- clarify that states retain jurisdiction with respect to unlawful conduct by issuers and custodians in connection with a Regulation A offering (including a “Tier 2” offering of up to $50 million pursuant to Section 3(b)(2) after the SEC adopts implementing rules);
- exclude securities issued pursuant to Regulation A (including Tier 1 and Tier 2) from the holders of record calculation for purposes of Section 12(g), provided that the issuer has filed audited financial statements with the Commission and is in compliance with the periodic disclosure requirements under Regulation A; and
- create a new exemption from registration under Section 4(a)(7) of the Securities Act for the resale of securities in which all purchasers are accredited investors.
The proposed Section 4(a)(7) exemption is similar to the so-called “Section 4(a)(1½) exemption” insofar as it would permit the resale of restricted securities under certain circumstances without the need to comply with the conditions of Rule 144. The proposed exemption, however, is broader than “Section 4(a)(1½);” for example, it would expressly permit general solicitation so long as the seller takes “reasonable steps to verify” (as understood in connection with offerings under Section 506(c)) that all purchasers are accredited investors and it would allow sales to all accredited investors without regard to their sophistication.
The Restricted Securities Relief Act (H.R. 4554) would require the SEC to reduce the holding period under Rule 144 from six months to 90 days and to make Rule 144 available for resales of restricted securities of issuers that were previously shell companies (such as companies that went public through a reverse merger) beginning two years after the issuer files a Form 8-K stating that it is no longer a shell company. In addition, the bill would provide for the preemption of state securities laws for securities offered or sold pursuant to Rule 144A.
The Encouraging Employee Ownership Act (H.R. 4571) would require the SEC to amend the compensation benefit plan exemption provided by Rule 701 of the Securities Act. Under Rule 701, issuers seeking to rely on Rule 701 are required to provide certain disclosures, such as a summary of the plan, risk factors, and financial statements, to investors if the aggregate sales price or amount of securities sold exceeds $5 million in a 12 month period; the bill would require the SEC to increase this threshold to $20 million and to index this threshold for inflation.
The Small Business Freedom to Grow Act (H.R. 4568) would allow smaller reporting companies to “forward incorporate by reference” information contained in their periodic reports under the Exchange Act into registrations statements on Form S-1. In addition, the bill would make shelf registration on Form S-3 available to smaller reporting companies that have at least one class of equity securities listed and registered on a national securities exchange (assuming that they satisfy the eligibility requirements under General Instruction I.A., including the 12-month reporting history requirement), and would remove the national securities exchange listing requirement for primary offerings of securities that do not exceed one-third of an issuer’s public float.
Duplicative or Inconsistent Regulations and Orders
The Financial Regulatory Clarity Act (H.R. 4466) would require the SEC (the bill also imposes similar requirements on other financial regulators), when issuing a new final regulation or order, to reconcile the regulation or order with any inconsistent or duplicative existing federal regulation, and to recommend to Congress any federal laws that should be repealed or amended and to report to Congress any duplicative, inconsistent or conflicting regulation or order of another federal financial regulator.