Four bills designed to help entrepreneurs raise capital are pending before Congress. Three of the bills were passed by the U.S. House of Representatives and sent to the Senate in early November with nearly unanimous bipartisan support. The fourth bill, HR 2167 - Private Company Flexibility and Growth Act, remains before the House of Representatives.

HR 2930 - Entrepreneur Access to Capital Act

HR 2930 would exempt "crowd-funded financings" from securities registration requirements. Crowd-funded financings are financings involving a company raising a small amount of money from numerous investors. Startup companies that are looking to raise funds from friends and family in a seed round, or that otherwise have an interest in raising funds from numerous unaccredited investors, could find this exemption useful. The bill as currently written includes the following key provisions:

  • The Securities Act of 1933 would be amended to add a new Section 4(6) exempting from the registration requirements transactions involving the sale of up to $1 million in restricted securities by a company every 12 months, or up to $2 million in restricted securities by a company every 12 months if the company provides potential investors with audited financial statements.
  • A company could use this exemption to raise from any one investor up to $10,000 or 10% of the investor's annual income, whichever is lower, in a 12-month period.
  • A company relying on this exemption would be required to meet certain disclosure requirements, including informing investors of the target offering amount, and must deposit all funds with a qualified third-party custodian that will hold them until the company has raised at least 60% of the target amount.
  • After one year, under Section 4(6) the securities purchased by an investor in the crowd-funded financing could be resold without restriction. During the first-year period, securities could be sold to accredited investors without restriction.
  • Securities sold to investors under Section 4(6) would be disregarded when determining whether the company has 500 or more shareholders of a class of equity securities and therefore could be obligated under Section 12(g) of the Securities Exchange Act of 1934 to register the securities and provide periodic reports of information as if it were a public company.
  • Securities sold in an offering under Section 4(6) would be added to the list of covered securities in Section 18 of the Securities Act of 1933 and would therefore be exempt from state blue sky registration requirements.

A modified but less favorable version of this legislation was introduced in the Senate. As introduced, S 1791 – Democratizing Access to Capital Act of 2011 would be less useful than HR 2930 because it would limit investment amounts to $1,000 per investor every 12 months, cap the total amount raised at $1 million every 12 months, and require all funds to be raised through a crowd-funding intermediary. The Senate bill also changes the state blue sky filing and fee requirements from those in HR 2930.

Take Away: HR 2930 would enable companies to raise money from unaccredited investors without triggering the complex federal and state registration requirements.

HR 2940 - Access to Capital for Job Creators Act

HR 2940 would eliminate the current restriction on general solicitation or advertising when marketing a private offering of unregistered securities under Rule 506 if all purchasers of securities in the offering are accredited investors.

Take Away: This bill would remove a significant limitation on startup companies seeking angel financing by allowing the open solicitation of investors and circulation of materials without registering the securities.

HR 1070 - Small Company Capital Formation Act of 2011

HR 1070 would permit unregistered public offerings of up to $50 million of unrestricted stock every 12 months by creating a new exemption under Section 3(b) of the Securities Act of 1933.

A company relying on this exemption would need to file audited financial statements with the Securities and Exchange Commission annually and would need to provide potential investors with an offering memorandum that includes audited financial statements, a description of the company's business operations, financial condition, corporate governance principles, planned use of funds, and other matters prescribed by the SEC. The offering memorandum would need to be updated periodically.

The bill leaves some key details of the exemption to be determined by the SEC, including whether an offering under this new federal exemption would be exempt from state blue sky registration and notice filing requirements.

Take Away: Given the significant information disclosure requirements and the possibility of continuing state registration requirements, this bill appears to provide only a limited benefit for most startup companies.

HR 2167 - Private Company Flexibility and Growth Act

Section 12(g) of the Securities Exchange Act of 1934 currently obligates a company that has more than $1 million in assets and 500 or more shareholders of a class of equity securities to register the securities and provide periodic reports of information as if it were a public company.

HR 2167 would increase the registration and reporting threshold from 500 shareholders of a class of equity securities to a new limit of 1,000. Perhaps more significantly, shareholders who are accredited investors or who received their equity securities in an exempt offering under an employee compensation plan would not be counted toward these thresholds.

Take Away: This bill would help mature private companies that are bumping up against the 500 shareholder limit and would otherwise need to comply with public company disclosure requirements. For example, a company would no longer be forced to file with the SEC because it has more than 500 stock option holders.


Additional Information You can find the full text of HR 2930 - Entrepreneur Access to Capital Act here. You can find the full text of HR 2940 - Access to Capital for Job Creators Act here. You can find the full text of HR 1070 - Small Company Capital Formation Act of 2011 here. You can find the full text of HR 2167 - Private Company Flexibility and Growth Act here. You can find the full text of S ‑ 1791, Democratizing Access to Capital Act of 2011, here. You can find discussions of other recent cases, laws, regulations, and rule proposals of interest to startup companies on our website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.