Investment crowdfunding may finally get the fixes that advocates have long called for. On Wednesday, a sweeping collection of bipartisan bills known collectively as the JOBS Act 3.0 passed the House of Representatives with broad support. The package now moves to the Senate.
Sponsored by House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Ranking Member Maxine Waters (D-CA), the “JOBS and Investor Confidence Act of 2018,” as it is officially called, contains several pieces of legislation that could dramatically boost the fledgling crowdfunding market.
They include allowing crowd investors to pool their money into funds or special purpose vehicles; extending the ability to “test the waters” as allowed under Regulation A to additional security offerings; allowing the creation of venture exchanges to trade crowdfunded securities; and, clarifying SEC rules so that startups can pitch their ideas and businesses at “demo days” and similar events without running afoul of securities laws.
In addition, JOBS Act 3.0 contains bills that would modernize the accredited investor definition to include individuals who, via their education or job experience, can evaluate investment opportunities but may not meet the financial threshold of the current definition, and clarify that family offices and their clients are accredited investors under Regulation D.
Other bills call for research into the unique challenges faced by rural businesses in accessing capital, the provision of investment research for small issuers, and the use of virtual currencies and online marketplaces for unsavory purposes such as sex or drug trafficking. There are also bills that ease rules for credit unions and non-bank financial institutions and help individuals build credit.
“JOBS Act 3.0 focuses on key pain points in the regulatory process, and provides new solutions and directs research so that our capital markets are the most modern and efficient for entrepreneurs and investors alike,” said Karen Kerrigan, president & CEO of the Small Business & Entrepreneurship Council (SBE Council), which has advocated for many of the changes.
There were some notable omissions, however. There was no mention in the copious bills of lifting the amount that can be raised by companies under Regulation Crowdfunding, or of raising or eliminating the limits on how much accredited investors can invest under that same exemption.
If the JOBS Act 3.0 package is approved by the Senate and becomes law, it would fulfill a longtime wishlist of crowdfunding and small business advocates. However, similar efforts have fizzled in the past.
The following are some of the key bills that relate to crowdfunding and small business capital raising. The full list of 32 bills contained in the JOBS Act 3.0 package can be found here.
H.R. 79, Helping Angels Lead Our Startups (HALOS) Act – Sponsored by Rep. Steve Chabot (R-OH) and cosponsored by Rep. Kyrsten Sinema (D-AZ), this bill defines an “angel investor group” and clarifies a regulation issued by the Securities and Exchange Commission (SEC) to ensure that startups have the opportunity to make a presentation to interested parties without running afoul of the securities laws.
H.R. 435, The Credit Access and Inclusion Act of 2017 – Sponsored by Rep. Keith Ellison (D-MN) and cosponsored by Rep. Robert Pittenger (R-NC), the bill amends the Fair Credit Reporting Act (FCRA) to authorize an entity, including the Department of Housing and Urban Development (HUD) to furnish data to consumer reporting agencies regarding an individual’s history of on-time payments with respect to a lease, or contracts for utilities and telecommunications services.
H.R. 477, Small Business Mergers, Acquisitions, Sales & Brokerage Simplification Act of 2017 – Sponsored by Rep. Bill Huizenga (R-MI) and cosponsored by Rep. Brian Higgins (D-NY), the bill alleviates costs to small business owners by simplifying the securities registration system for mergers and acquisition brokers who help transfer the ownership of small, privately held companies. It also disqualifies “bad actors” from utilizing the simplified process and does not allow transactions involving shell companies.
H.R. 1585, Fair Investment Opportunities for Professional Experts Act – Sponsored by Reps. David Schweikert (R-AZ) and cosponsored by Reps. French Hill (R-AR), Carolyn Maloney (D-NY) and Kyrsten Sinema (D-AZ), H.R. 1585 modernizes the definition of accredited investor so those who do not have a high income or high net worth but do have the education and job experience to evaluate investment risks and merits can participate in the growth of promising companies. This change will provide more Americans with greater investment opportunities and enable the businesses they invest in to create more jobs.
H.R. 1645, Fostering Innovation Act – Sponsored by Rep. Kyrsten Sinema (D-AZ) and cosponsored by Rep. Trey Hollingsworth (R-IN), the “Fostering Innovation Act of 2017” amends Section 404(b) of the Sarbanes-Oxley Act (SOX) to extend the exemption to comply with the law for certain low-revenue emerging growth companies (EGCs) that would otherwise lose their exempt status at the end of the five-year period that applies under current law.
H.R. 2364, Investing in Main Street Act – Sponsored by Rep. Judy Chu (D-CA) and cosponsored by Rep. Stephen Knight (R-CA), the bill amends the Small Business Investment Act by increasing the percentage a financial institution or federal savings association can invest in a small business investment company (SBIC) to 15 percent and require the financial institution or the federal savings association to be approved by their federal regulator prior to investing more than five percent.
H.R. 3903, Encouraging Public Offerings Act of 2017 – Sponsored by Rep. Ted Budd (R-NC) and cosponsored by Rep. Gregory Meeks (D-NY), the “Encouraging Public Offerings Act of 2017” amends the Securities Act of 1933 to expand to all public companies certain provisions of Title I of the Jumpstart Our Business Startups (JOBS) Act, which previously applied only to an EGC. Specifically, the legislation allows issuers to submit to the SEC for confidential review, before publicly filing, draft registration statements for Initial Public Offerings (IPOs) and for follow-on offerings within one year of an IPO. Additionally, this bill allows all companies to “test-the-waters” before filing an IPO, which means they may meet with qualified institutional buyers and other institutional accredited investors to gauge those investors’ interest in the offering.
H.R. 4281, Expanding Access to Capital for Job Creators Act – Sponsored by Rep. Ruben Kihuen (D-NV) and cosponsored by Rep. Alex Mooney (R-WV), the “Expanding Access to Capital for Rural Job Creators Act” amends the Securities Exchange Act of 1934 to have the SEC’s Advocate for Small Business Capital Formation identify any unique challenges to rural area small businesses when identifying problems that small businesses have with securing access to capital. H.R. 4281 also requires that the annual report made by the SEC’s Small Business Advocate include a summary of any unique issues encountered by rural area small businesses.
H.R. 4566, Alleviating Stress Test Burdens to Help Investors Act (Secs. 2 and 3) – Sponsored by Rep. Bruce Poliquin (R-ME), the section of this legislation to be included in JOBS Act 3.0 amends the Dodd-Frank Wall Street Reform and Consumer Protection Act to exempt nonbank financial institutions not primarily regulated by either a federal banking agency or the Federal Housing Finance Agency from the Dodd-Frank Act’s mandatory company-run stress-testing requirements. Additionally, the bill clarifies that the SEC and the Commodity Futures Trading Commission retain their authority to issue regulations to require nonbank financial companies to conduct periodic analysis of the financial condition of such companies under adverse economic conditions.
H.R. 5288, Common Sense Credit Union Capital Relief Act – Sponsored by Rep. Bill Posey (R-FL) and cosponsored by Rep. Denny Heck (D-WA), the bill delays the effective date of the rule used by the National Credit Union Administration titled “Risk-Based Capital” from 2019 to 2021.
H.R. 5877, Main Street Growth Act – Sponsored by Rep. Tom Emmer (R-MN), the “Main Street Growth Act” amends the Securities Exchange Act of 1934 to allow for the registration of venture exchanges with the SEC to provide a venue that is tailored to the needs of small and emerging companies and offers qualifying companies one venue in which their securities can trade.
H.R. 6139, Improving Investment Research for Small and Emerging Issuers Act – Sponsored by Rep. Bill Huizenga (R-MI) and cosponsored by Rep. Maxine Waters (D-CA), the bill requires the SEC to carry out a study to evaluate the issues affecting the provision of and reliance upon investment research into small issuers and pre-IPO companies, including EGCs and other small issuers.
H.R. 6319, Expanding Investment in Small Businesses Act – Sponsored by Rep. Randy Hultgren (R-IL), the “Expanding Investment in Small Businesses Act” requires the SEC to study whether the current diversified fund limit threshold for mutual funds constrains their ability to take meaningful positions in small-cap companies.
H.R. 6380, Crowdfunding Amendments Act – Sponsored by Reps. Patrick McHenry (R-NC) and Maxine Waters (D-CA), the “Crowdfunding Amendments Act” allows crowdfunding investors to pool their money together into a fund that is advised by a registered investment advisor.