House Panel Approves Startup Bills, Paving Way For Floor Votes
Washington, October 26, 2011 | Ryan Minto (202-225-2576)
By Andrew Ackerman and Alan Zibel
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--In a rare display of bipartisan agreement Wednesday, a U.S. House panel approved four bills that aim to make it easier for small businesses to raise money, clearing the way for the full House to vote on the measures next week.
The bills approved by the House Financial Services Committee are designed to help small businesses and startups tap sources of capital other than just banks, and remove regulations that make it hard for small-business owners to find outside investment.
If signed into law, the changes could provide a modest boost to the struggling economy by helping some smaller firms grow, though they face an uncertain path in the Senate.
"Bipartisanship is not dead," said Rep. Patrick McHenry (R., N.C.) "When we're talking about securities regulation and access to capital, we all see the same things and we can come to a consensus."
One bill, introduced by McHenry, would let people invest up to $10,000 in start-ups over the Internet--a concept called "crowd funding"---without the firm having to register first with the Securities and Exchange Commission. The total investment would be capped at $1 million generally or $2 million if issuers release annual audited financial statements.
Another bill, introduced by Majority Whip Kevin McCarthy (R., Calif.), would mandate the SEC allow small, private companies to use direct mail or advertisements to solicit private offerings from wealthy investors. The SEC currently has a "general solicitation" ban that effectively limits potential investors to those that have a pre-existing relationship with a startup, which critics see as a barrier to capital formation.
A third bill, by Rep. David Schweikert (R., Ariz.), would raise to 1,000 the number of shareholders "of record" that closely held companies can have before they are required to register with the SEC. The current threshold of 500, which has tripped up companies such as Facebook, has not been adjusted since 1964. Under Schweikert's bill, employee-held shares of startup stock would not count toward the cap.
The fourth measure, introduced by Rep. Jim Himes (D., Conn.), would increase that number of shareholders to 2,000 for small banks.
In addition to bipartisan support the bills are expected to enjoy in the full House, President Barack Obama included some of the proposals in the job-creation plan that he released last month.
The crowd funding measure had been the most contentious of the proposals and obtained support from Democrats after several amendments that would require a warning about the risk of investing in startups as well as a ban for anyone who has been found guilty of securities fraud from issuing such securities.
In addition, crowd funding websites, or the issuer, would have to provide the SEC a basic notice of the offering. The SEC would then have to make that information available to state securities regulators, who would have the authority to sue crowd-funding fraudsters.
Rep. Maxine Waters (D., Calif.), who frequently clashes with Republicans, said she was "extremely pleased" with the changes to the legislation designed to protect investors, and the discussion was far friendlier than has been the case in a panel where partisanship and acrimony are far more common.
While both sides hailed the spirit of bipartisanship, Rep. Spencer Bachus (R., Ala.), the financial services panel's chairman, took a dig at the Obama administration, invoking the federal government's investment in failed solar power company Solyndra LLC. Allowing the private sector to take the risk of investing in new firms is "a much better approach" than having such investment led by the government, he said.
In a political climate where the two parties have shown little inclination to work together to craft a job-creation strategy, there don't appear to be any similar efforts underway in the Senate. A Senate Democratic leadership aide said there were no current plans to bring up similar legislation in the Senate.
-Andrew Ackerman and Alan Zibel, Dow Jones Newswires; 202-569-8390; firstname.lastname@example.org.
--Corey Boles contributed to this story.