In the recent State of the Union address, President Obama called on Congress to pass a legislative package intended to stimulate small businesses and improve their ability to raise capital. If Congress heeds his call, small companies may soon be able to raise up to $50 million in a 12-month period without undergoing a traditional initial public offering (IPO).
The Small Company Capital Formation Act of 2011 (H.R. 1070) was passed by the House of Representatives in early November by a nearly unanimous and bipartisan majority of 421-1. H.R. 1070 would amend the Securities Act of 1933 to allow a company to offer and sell up to $50 million of its securities during a 12-month period, pursuant to certain terms and conditions under a special exemption from registration. If this legislation is enacted, a new type of offering would be created as a replacement for Regulation A offerings, which are currently capped at $5 million. The legislation as drafted would require that securities be offered and sold publicly, but cannot be restricted. An identical version of the bill was introduced in the Senate (S. 1540) last year but has yet to make it past committee.
Companies using this new offering would be required to file an offering statement, likely similar to current Form 1-A, with the Securities and Exchange Commission (SEC). However, the company would be allowed to solicit interest in the offering prior to the filing of this statement. Annually thereafter, companies would be required to file audited financial statements, and the SEC would be given the power to require certain disclosures periodically regarding the company and its business operations, financial condition, corporate governance principles, and use of investor funds.
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