CONGRESSIONAL MARKUP REPORT

DATE OF MARKUP: October 26, 2011

SUBJECT: “Markup of H.R. 1965, H.R. 2167, H.R. 2930, and H.R. 2940”

COMMITTEE: House Financial Services

REPORT BY: Paul J. Tortora Jr., Esq.

Overview

On October 26, 2011, the House Financial Services Committee held a markup on job creation and capital formation legislation. This included:

§  H.R. 1965, to amend the securities laws to establish certain thresholds for shareholder registration, and for other purpose, sponsored by Rep. Jim Himes (D-CT)

§  “Private Company Flexibility and Growth Act” (H.R. 2167) sponsored by Rep. David Schweikert (R-AZ) which would amend the Securities Exchange Act of 1934 to increases the total assets threshold from $1 million to $10 million, and the class of equity security holders of record threshold from 500-750 to 1,000 persons.

§  “Entrepreneur Access to Capital Act” (H.R. 2930) sponsored by Rep. Patrick McHenry (R-NC) which would amend the securities laws to provide for registration exemptions for certain crowdfunded securities.

§  “Access to Capital for Job Creators Act” (H.R. 2940) sponsored by Majority Whip Kevin McCarthy (R-CA) that would direct the SEC to eliminate the prohibition against general solicitation as a requirement for a certain exemption under Regulation D.

The Committee reported to the full House favorably on: (1) H.R. 1965, to amend the securities laws to establish certain thresholds for shareholder registration, by voice vote; (2) H.R. 2167, the Private Company Flexibility and Growth Act, by voice vote; (3) H.R. 2930, the Access to Capital for Job Creators Act , as amended, by voice vote; and (4) H.R. 2940, the Access to Capital for Job Creators Act, by voice vote.

Bills Considered

H.R. 1965 – To amend the securities laws to establish certain thresholds for shareholder registration, and for other purposes

– Introduced by Rep. Jim Himes (D-CT)

The Committee reported favorably on H.R. 1965 by voice vote.

Representative Jim Himes (D-CT) stated that this legislation would raise the shareholder threshold for a company to go public from 500 to 2,000 for banks and bank holding companies. He stated that the bill would also increase the assets threshold for filing from $1 million to $10 million. He stated that he is not concerned about exempting more banks from registration because they already exist in a heavily regulated environment.

H.R. 2167 - Private Company Flexibility and Growth Act

– Introduced by Representative David Schweikert (R-AZ)

The Committee reported favorably on H.R. 2167 by voice vote.

Representative David Schweikert (R-AZ) stated that his bill would raise the shareholders of record threshold to 1,000 for SEC reporting and exempt employees from counting towards this number.

Amendments Rejected

Representative Brad Miller (D-NC) stated that he supports the fundamental purpose of this legislation but he thinks that it makes too big of a jump. He offered an amendment to set the registration threshold at either 1000 shareholders or 500 non-accredited shareholders. Rep. Blaine Luetkemeyer (R-MO) stated that this amendment defeats the purpose of the legislation. Chairman Spencer Bachus (R-AL) agreed with Rep. Luetkemeyer and stated that the purpose of this legislation is to allow greater investments in small companies. The amendment was rejected by a recorded vote of 33-23 along party lines.

Amendments Withdrawn

Representative David Schweikert (R-AZ) offered an amendment to increase the shareholder threshold for SEC registration from 1000 to 2000. He stated that this amendment is being offered to bring the bill in conformity with Rep. Jim Himes (D-CT) bill. He stated that this is something that the SEC has been looking at doing for a while. After objection from Ranking Member Barney Frank (D-MA), Chairman Spencer Bachus (R-AL) asked Rep. Schweikert to withdraw his amendment to preserve the committee‘s consensus on the bill. Rep. Schweikert agreed to withdraw his amendment.

Representative Michael Capuano (D-MA) stated that hidden investors need to count toward the shareholder threshold. He stated that it currently cannot be known how many people are investing through a special purpose vehicle or broker-dealer since they count as one investor. Chairman Spencer Bachus (R-AL) stated that this amendment would take the law in the opposite direction. He stated that we would be getting the exact opposite result that we’re looking for. He stated “I think this is a terrible amendment.” Rep. Capuano withdrew the amendment after Rep. David Schweikert (R-AZ) agreed to work with him to address his concerns.

H.R. 2930 - Entrepreneur Access to Capital Act

– Introduced by Rep. Patrick McHenry (R-NC)

The Committee reported favorably on H.R. 2930, as amended, by voice vote.

Representative Patrick McHenry (R-NC) stated that many regulations inhibit liquidity and create more problems than they solve.He stated that SEC regulations prohibiting general solicitation have acted as a barrier to crowdfunding developing and flourishing in the United States.

Amendments Adopted

Representative Patrick McHenry (R-NC) offered an amendment to substitute his bill with another draft. He stated that the new draft adds a section that create requirements for intermediary and issuers. He stated that the changes address many of the concerns raised by Committee members and enhance investor protection. The amendment was adopted by voice vote.

Representative Carolyn Maloney (D-NY) offered an amendment that would require issuers to file notice with the SEC and states. She stated that this would enhance investor protection. Rep. Patrick McHenry (R-NC) stated that he supports this amendment and that he believes that it improves the bill. The amendment was adopted by voice vote.

Representative Steve Stivers (R-OH) offered an amendment to reduce the issuance cap from $5 million to $1 million. The amendment was adopted by voice vote.

Representative Al Green (D-TX) offered an amendment that would disqualify bad actors from participating in crowdfunding. He stated that the amendment prohibits persons convicted of state or federal securities law violations from participation in crowdfunding offers. Rep. Michael Grimm (R-NY), the amendment’s co-sponsor, stated that this is a common sense amendment and urged the Committee to adopt it. Rep. Carolyn Maloney (D-NY) stated that this amendment will prevent criminals from doing further damage to the American economy and improves the bill. The amendment was adopted by voice vote.

Representative Ed Perlmutter (D-CO) offered an amendment that would prohibit the preemption of state law except for registration filing. He stated that amendment is still in draft form and the exact wording of the amendment is to be worked out in coming weeks but it would be crafted to preserve the states authority over manipulation and anti-fraud cases. Rep. Patrick McHenry (R-NC) stated that he supports the amendment. Ranking Member Barney Frank (D-MA) stated that this amendment goes a long way towards alleviating his concerns with this bill. Rep. Mel Watt (D-NC) held up a letter written to him by North Carolina Secretary of State Elaine Marshall in support of the amendment and offered it into the record. The amendment was adopted by voice vote.

H.R. 2940 - Access to Capital for Job Creators Act

– Introduced by Majority Whip Kevin McCarthy (R-CA)

The Committee reported favorably on H.R. 2940 by voice vote.

Majority Whip Kevin McCarthy (R-CA) stated that this bill removes the regulatory ban that prevents small, privately held companies from using advertisements to solicit investors for private offerings. He argued that this ban has limited the ability of small businesses to raise capital.

Ranking Member Barney Frank (D-MA) stated that while he is in general agreement with NASAA on preserving the authority of state securities regulators, he doesn’t share their objection to this bill.

Chairman Spencer Bachus (R-AL) stated that the best way to create revenue is to create jobs and that’s really what all of today’s bills. He stated that members of the committee are concerned about investors losing their money. He said that his response to this is that “it’s their money.” He stated that all investments carry risk.