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In addition to its recent approval of an overhaul of SEC's Regulation A (which Pres. Obama recently announced he supported), the House Financial Services Committee, led by Chairman Spencer Bachus (R-AL) and Vice Chair David Schweikert (R-AR) held a hearing this week on additional bills that have been proposed to help smaller businesses raise capital. Bottom line: all good! A number of these ideas come out of the SEC's own Small Business Forum recommendations. Quick summary of the proposals:
1. Broaden 404(b) exemption. Exempting any company with under $500 million in market capitalization from the onerous requirement to have an auditor attest to the adequacy of financial controls in a public company pursuant to Sarbanes-Oxley Act Section 404(b). Currently only smaller reporting companies with under $75 million in market cap are exempt. The proposal also says that companies between $500 million and $1 billion don't have to do auditor attestation for their first five years as a public company, and allows a shareholder vote for any company of any size to opt out of 404(b) compliance.
2. Higher threshold to go public. Require companies to become public reporting companies only if they have more than 1,000 shareholders of record. Currently it is 500 shareholders. The bill also exempts from counting towards the 1,000 shareholders those who are accredited investors or received their shares through an employee compensation plan. This accredited exemption is a potentially big deal. The bill also directs the SEC to provide a safe harbor for determining who is accredited - great idea!
3. Crowd funding gets an exemption. A company would not need to register an offering to raise up to $5 million per year to investors putting in the lower of $10,000 each or 10% of their annual income - whether or not they are accredited and regardless of how many.
4. Lifting ban on general solicitation. One of the bills would direct the SEC to change its rules under Regulation D to permit "general solicitation and advertising" for an offering conducted under SEC Rule 506, if all purchasers are accredited investors.
Will all these bills become law? Who knows. We are entering the silly season of Presidential politics when much in Congress slows or halts. The Regulation A initiative has for sure received some major momentum, and if it goes through as is, it would be a (good) watershed moment in small business regulation. Congrats in particular to Rep. Schweikert and the whole committee for focusing on issues affecting companies that create 70-80% of all new jobs.
For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog by David N. Feldman, Esq., Partner of Richardson & Patel LLP. David is considered one of the leading experts on reverse mergers and is the author of Reverse Mergers and Other Alternatives to a Traditional IPO: Second Edition (Bloomberg Press 2006). His practice focuses on corporate and securities matters and general representation of public and private companies, investment banks, private equity firms and high net worth individuals.
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