Are the floodgates ready to open? When the JOBS Act was signed into law in 2012, it laid the groundwork for new forms of small business capital, like crowdfunding, to take hold. Since then, a number of bills have sought to build on that foundation, yet very few have made it into law.
That could be about to change. With an incoming administration that is determined to shake things up, lawmakers are dusting off a variety of bills that, taken together, promise to further transform the small business capital landscape.
Here’s a roundup of some of the key pieces of legislation that will be moved to the front burner in the coming year.
Helping Angels Lead Our Startups Act (HALOS) – One of the first bills out of the gate is the HALOS Act, which was reintroduced on January 4 by a bipartisan group of legislators. HALOS would clarify rules for “demo days” and other events where entrepreneurs pitch their companies to potential investors. Currently, pitch events operate in a gray area that risk running afoul of “general solicitation” prohibitions. The bill would exempt demo days and other such events from being considered general solicitation under Regulation D to protect startups from inadvertently violating this rule. UPDATE: the HALOS Act passed the House on Jan. 10 by a vote of 344 to 73.
Impact: Would remove the ambiguity around pitch events, making them a more effective forum for connecting entrepreneurs and investors.
Financial Services Innovation Act (aka “regulatory sandbox”) – Introduced by Patrick McHenry (R-NC) last fall, the Financial Services Innovation Act will get a serious hearing this year. Its objective is to promote responsible innovation by allowing financial startups to experiment with new models—without fear that regulators will pounce. The bill is sometimes referred to as the “American regulatory sandbox” after a similar law established in the UK in May 2016.
The US law would create a Financial Services Innovation Office (FSIO) in each of 12 agencies charged with financial oversight, including the Securities & Exchange Commission (SEC), Consumer Financial Protection Bureau (CFPB), Federal Trade Commission (FTC) and Farm Credit Agency (FCA). Startups could petition the appropriate office to waive or modify rules that pertain to a new product or service, as long as it serves the public and does not pose financial risk to the system or consumers. The agency would then have 30 days to accept or deny the petition. If the petition is accepted, the agency and the business would enter into an Enforceable Compliance Agreement, or ECA, that would establish a compliance plan. The ECA would be applicable across regulatory agencies and state lines.
The FSIO system would replace the current practice of requesting a “no action” letter from regulators, a lengthy and, many say, flawed process. The Financial Services Innovation Act could be used by fintech startups as well large and small banks and credit unions. For more information, see this FSIO Explainer PDF put together by McHenry’s staff.
Impact: Could encourage more innovation and experimentation in financial services and help regulators be a partner, rather than foe, in the innovation process.
Fix Crowdfunding Act
Perhaps the most closely watched bill will be another McHenry effort that is intended to fix flaws in the final Regulation Crowdfunding exemption. He first floated the bill before Regulation CF even took effect. But it was a watered down version that ultimately was passed by the House.
That version allowed Special Purpose Vehicles (SPVs) which would let small investors be grouped into one legal entity to simplify a startup’s “cap table,” and clarified the threshold at which public reporting requirements are triggered. But it was missing many features that crowdfunding advocates had hoped for, including increasing the amount that companies can raise under the exemption, allowing them to “test the waters” for investor interest before they commit to the expense of a Reg CF offering, and clarifying the responsibilities and liabilities of funding portals.
Now, with an incoming President Trump, McHenry is likely to reintroduce a more robust bill that will address a longer list of grievances.
Impact: Would give Reg CF a much-needed boost and make it more attractive to issuers.
Small Business Capital Formation Enhancement Act
Passed with broad bipartisan support in the House last February, this bill would require the SEC to act on recommendations arising from the agency’s annual Small Business Capital Formation Forum. The event has been an important forum for raising and debating ideas for improving capital access for small businesses, yet the recommendations developed at the forum and presented to the SEC are often ignored by the agency.
Impact: Would amplify the ideas and recommendations of small business advocates and introduce a measure of accountability into the SEC rule-making process.
The bills are part of a broader agenda of regulatory reform that Congress is expected to take up. “There are a lot of great bills that we support,” says Karen Kerrigan, president & CEO of the Small Business & Entrepreneurship Council in Washington DC. “The challenge will be on the Senate side,” which has a lot on its plate, including confirmation hearings, she added.
At least one small business-friendly bill has made it into law already: In late 2016, Congress passed H.R. 3784, known as the SEC Small Business Advocate Act. It establishes an Office of the Advocate for Small Business Capital Formation at the SEC, a long held goal of small business advocates. Sam Guzik, an attorney who first suggested the idea, expects the head of the new SEC office to be selected this year. But with three current vacancies on the commission, “when this year is an open question,” he says