On March 5, 2024, the House will consider capital formation related legislation, H.R. 2799.  This was originally introduced in April 2023 and reported out in July 2023.  It is comprised of 19 separate bills.  The House Financial Services Committee heard testimony on these bills in 2023, access my testimony on several of these bills.

The bills include various measures that relate to the public markets, including bills that would:

• Clarify that a company’s market capitalization, for purposes of testing the significance of an acquisition or disposition and determining whether a target company’s financial statements are required, may include the value of all shares of stock, including preferred stock and nontraded common shares that are convertible into, or exchangeable for, traded common shares;
• Provide an extension of certain exemptions and reduced disclosure requirements for companies that were EGCs and would continue to meet all other requirements for EGCs except for the five-year restriction. This title also increases the maximum threshold amounts to qualify as an EGC to $1.5 billion and removes the disqualification for large accelerated filers;
• Expand the provision for research reports in Section 2(a)(3) of the Securities Act to include research reports about any issuer that undertakes a proposed public offering of securities (the current provision only offers limited protection for EGC research reports);
• Exclude QIBs and IAIs from the record holder count for mandatory registration under the Section 12(g) Exchange Act threshold;
• Expand WKSI eligibility by updating the WKSI definition to apply to all companies that otherwise satisfy the WKSI definition with a public float of $250 million, rather than the current public float of $700 million; and
• Raise the thresholds and remove overlap in the definitions to qualify as a smaller reporting company, accelerated filer, and large accelerated filer.  It also exempts certain low-revenue issuers from being required to have their management’s assessment of the effectiveness of internal control over financial reporting attested to, and reported on, by an independent auditor, as required by SOX Section 404(b).

There are also a number of provisions that address the private capital markets, including bills that would:

• Direct the SEC to finalize its 2020 proposed exemption from broker registration requirements for “finders” who help issuers raise capital in private markets from accredited investors;
• Amend the Investment Advisers Act of 1940 to increase the exemption from registration threshold for advisers to small private funds to reflect changes in inflation;
• Modify the Qualifying Venture Capital Fund Exemption under Section 3(c)(1) of the Investment Company Act by increasing the cap on aggregate capital contributions and uncalled capital commitments from $10 million to $150 million. This title would also increase the allowable number of beneficial owners in a qualifying venture capital fund from 250 to 600;
• Amend the Securities Act to allow small issuers to conduct a micro-offering free of mandated disclosures or filings. Under this bill, issuers that conduct a micro-offering would remain subject to the antifraud provisions of the federal securities laws;
• Increase the amount that companies can raise under Regulation A from $50 million to $150 million. It would also require the SEC to adjust this amount for inflation every two years to the nearest $10,000;
• Requires the SEC to revise the definition of a qualifying investment, for purposes of the exemption from registration for venture capital fund advisers under the Investment Advisers Act to include an equity security issued by a qualifying portfolio company. It also requires the SEC to revise the definition of a qualifying investment to include an investment in another venture capital fund;
• Preempts state regulation of secondary transactions involving crowdfunding vehicles and clarifies legal liability for crowdfunding portals. It also increases the allowable aggregate amount companies can raise in any 12-month period from $5 million to $10 million and allows all non-accredited investors to invest up to 10% of the greater of their annual income or net worth.  Finally, this bill allows investment companies to participate in crowdfunding offerings and increases the offering size threshold under which an issuer may meet its financial statement requirements;
• Amend the Securities Act to preempt state blue sky laws for off-exchange secondary trading in companies that make available current public information, including information required by Regulation A;
• Expand Securities Act Rule 701 to allow gig workers to receive equity compensation for their services or goods. This legislation would also preempt state law to prevent gig workers from being presumed as employees due to their wage rates or offered benefits;
• Amend the Securities Act to permit an individual to invest in private issuers upon acknowledging the investment risks;
• Amend the Investment Company Act to allow for a closed-end fund to invest up to all its assets in private funds; and
• Expand the “accredited investor” definition to include individuals receiving individualized investment advice or individualized investment recommendations with respect to a private offering from a professional who qualifies as an accredited investor.

See the text of the bill, the Committee’s report, and information about the meeting.

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