Week ending November 10, 2017
H.R.2201 – Micro Offering Safe Harbor Act
H.R. 2201 amends the Securities Act of 1933 (Securities Act) to exempt certain micro-offerings from the Act’s registration requirements. An issuer of securities would not violate the Act when making a non-public securities offering if all of the following requirements are met:
(1) each purchaser has a substantive pre-existing relationship with an officer, director, or shareholder with 10 percent or more of the shares of the issuer;
(2) the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer that are sold in reliance on the exemption during the 12-month period preceding the transaction; and
(3) the aggregate amount of all securities sold by the issuer does not exceed $500,000 over a 12-month period.
“Under current law, the Securities and Exchange Commission (SEC) prohibits the sale or delivery of securities that have not been registered with the agency. Some transactions are exempt from this prohibition. H.R. 2201 would expand the exemption to include the sale of securities that meet certain criteria regarding the number of purchasers and aggregate offering amount sold by the issuer in a 12-month period. The bill also would exempt such transactions from state regulation of securities offerings.” – cbo
The exempted micro-offerings must meet all of the following requirements:
the purchaser has a substantive pre-existing relationship with the issuer, during the 12-month period preceding the transaction there are no more than 35 purchasers relying on the exemption, and the amount of all securities sold by the issuer (including any amount sold in reliance upon the exemption) during the 12-month period preceding the transaction does not exceed $500,000.
(Full text of H.R. 2201 congress.gov)
Sponsor: Rep. Emmer, Tom [R-MN-6] (Introduced 04/27/2017)
Status: Passed House /
VOTES and FLOOR ACTION
On Passage: On passage Passed by the Yeas and Nays: 232 – 188 (Roll no. 622)
An amendment, offered by Mr. Emmer, numbered 1 printed in House Report 115-401 to amend the bill to not allow the exemption to be available for those who have been disqualified under the “bad actor” disqualification standard of section 230.506(d) of title 17, Code of Federal Regulations, providing an additional layer of investor protection in the bill. On agreeing to the Emmer amendment; Agreed to by voice vote
Motion to recommit:
Text of the motion:
COST AND IMPACT
Cost to the taxpayers: Under H.R. 2201, CBO expects only a relatively small number of securities transactions would be covered under the expanded exemption that are not currently covered by other existing exemptions. As a result, and on the basis of information from the SEC, CBO estimates that implementing H.R. 2201 would have no significant effect on the agency’s costs to update, monitor, and enforce regulations. Moreover, the SEC is authorized to collect fees sufficient to offset its annual appropriation; therefore, CBO estimates that the net effect on discretionary spending would be negligible, assuming appropriation actions consistent with that authority.
Pay-as-you-go requirements: Enacting H.R. 2201 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.
Regulatory and Other Impact: H.R. 2201 would preempt state laws that govern state-level registration of security offerings by exempting some security offerings from state registration and regulation. Issuers would be exempt from registering such securities if each purchaser of the security has a pre-existing relationship with the officer of the issuer, the offering has 35 or fewer purchasers, and the aggregate amount of securities sold by the issuer does not exceed $500,000 in a 12-month period. The preemption would be a mandate as defined in the Unfunded Mandate Reform Act (UMRA) because it would limit the authority of states to apply their own laws and regulations. However, CBO estimates that the preemption itself would impose no duty on states that would result in additional spending or a loss of revenues.
Dynamic Scoring: CBO estimates that enacting H.R. 2201 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028.
Tax Complexity: Not applicable to this bill.
Earmark Certification: Data not available
Duplication of programs: Data not available
Direct Rule-Making: Data not available
Advisory Committee Statement: Data not available
Budget Authority: Data not available
Constitutional Authority: Assumed.
More Bill Information:
H.R. 2201, the so-called “Micro-Offering Safe Harbor Act of 2017” would put investors at risk by allowing companies to sell unregistered securities without important guardrails that normally apply to such transactions. Specifically, the bill eliminates all of the existing investor protections for unregistered securities offerings, provided that:
(1) the securities are sold to investors with a substantive pre-existing relationship with individuals affiliated with the company;
(2) there are 35 or fewer purchasers of the offered securities; and (3) the company has not sold more than $500,000 of securities in the year prior to the transaction.
Federal securities laws generally prohibit a company from selling its securities unless it either registers them with the Securities and Exchange Commission (SEC), or qualifies for an exemption. Because unregistered offerings are subject to reduced disclosure requirements and often involve illiquid securities, these exemptions include protections intended to mitigate risks to investors.
For example, the SEC’s Regulation Crowdfunding and Regulation A permit small businesses to raise capital via unregistered securities offerings, provided that the businesses supply investors with important disclosures about the offerings. Both exemptions also include limitations on the dollar amount of securities an individual investor can purchase. Similarly, Regulation D exempts certain offerings from registration with the SEC, but imposes limitations on solicitation and the financial sophistication and risk-tolerance of purchasers. H.R. 2201 leaves out the investor protections characteristic of these exemptions.
One particularly troubling aspect of H.R. 2201 is that unregistered securities purchased under the exemption would not be characterized as “restricted,” and could thus be sold off to other investors immediately. As history demonstrates, the failure to restrict resale of unregistered securities could expose investors to abusive “pump and dump” schemes.
Previously, Rule 504 of Regulation D permitted a company to generally solicit and sell up to $1 million in unregistered securities without any restrictions on resale. In 1999, however, the SEC revised Rule 504 to prohibit general solicitation and establish a holding period for those securities unless the offering meets certain state law requirements. The revisions followed SEC findings that “the freely tradable nature of these securities may have facilitated some later fraudulent secondary transactions in the over-the-counter markets for securities of `microcap’ companies.”
Additionally, state securities regulators, who often have primary regulatory responsibility over small, local securities offerings, have raised serious concerns with H.R. 2201. For example, the North American Securities Administrators Association stated that the bill’s failure to disqualify “bad actors” would allow investors to be sold private securities by “persons having been convicted of crimes or subject to one or more previous state enforcement actions, without any disclosure to the investor, and without any notice to state or federal regulators.”
Democrats do not support creating statutory exemptions that leave investors vulnerable to fraud and repeated exploitation by bad actors. For these reasons, we oppose H.R. 2201.
Wm. Lacy Clay.
Ruben J. Kihuen.
Michael E. Capuano.
Carolyn B. Maloney.
Gregory W. Meeks.
Nydia M. Velazquez.
Stephen F. Lynch.
Daniel T. Kildee.
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