[House Report 114-509]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 114-509
======================================================================
HELPING ANGELS LEAD OUR STARTUPS ACT
_______
April 19, 2016.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4498]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4498) to clarify the definition of general
solicitation under Federal securities law, having considered
the same, report favorably thereon without amendment and
recommend that the bill do pass.
PURPOSE AND SUMMARY
Introduced on February 9, 2016, by Representatives Chabot,
Hurt, Sinema and Takai, H.R. 4498 the, ``Helping Angels Lead
Our Startups'' (HALOS) Act builds on the success of the
bipartisan Jumpstart Our Business Startups (JOBS) Act (Pub. L.
No. 112-106). The HALOS Act furthers the JOBS Act's mission to
promote access to investment capital for small companies and
ensure that startups can continue to connect with angel
investors. H.R. 4498 defines an angel investor for purposes of
the Federal securities laws and clarifies the definition of
general solicitation contained in the Securities Act of 1933
(Securities Act) to ensure that startups have the opportunity
and ability to discuss their products and business plans at
certain events, known as ``demo days'' where there is no
specific investment offering.
BACKGROUND AND NEED FOR LEGISLATION
Title II of the JOBS Act makes it easier for startup
enterprises to market their securities to a larger pool of
investors. The Securities Act requires that offers to sell
securities must either be registered with the Securities and
Exchange Commission (SEC) or specifically exempted from such
registration. One such exemption is Rule 506 of Regulation D,
which allows companies to offer securities for sale to up to 35
non-accredited investors and an unlimited number of accredited
investors (with accredited investors self-verifying their
status) as long as the company does not market its securities
through general solicitations or advertising. Title II of the
JOBS Act extended this exemption to securities marketed through
a general solicitation or advertising so long as the issuer
takes steps to verify that all purchasers of the securities are
``accredited investors.''
When the SEC implemented Title II of the JOBS Act, the
final rule classified events held by angel investors as general
solicitations, thus requiring entrepreneurs and startups to
verify accredited investor status. This process can be
burdensome and jeopardizes educational and economic development
events like ``demo days''--where startups may interact with
angel investors and venture capitalists.
Angel investors are wealthy individuals who often are
actively involved in the startups they back, and who typically
are not professional investors. According to the Angel Capital
Association (ACA), angel investors deployed $24.1 billion in
capital in 2014 which is an increase from $17.6 billion in
2009. As a result, angel investors have now surpassed venture
capitalists as the largest funding source for startup
enterprises in the United States. Angel investors, like venture
capitalists, fund early-stage entrepreneurs and serve as
mentors or outside directors of startups.
Access to such potential investors is important; in 2014,
as previously noted, angels invested approximately $24.1
billion in over 73,000 startups, and companies such as Amazon,
Costco, Facebook, Google, and Starbucks were all initially
funded by angel investors. ``Demo days'' existed prior to the
JOBS Act as investors self-certified their accredited investor
status, but steps taken by the SEC to implement the Act have
created uncertainty as to whether this preexisting practice may
continue. H.R. 4498 ensures that angel funding remains
available to startups by defining the term ``angel investor
group'' and exempting angel investor events from being
considered a general solicitation.
On February 15, 2016, the ACA's Executive Director noted in
a blog post that, ``Demo Days have been an important part of
the entrepreneurial financing process for literally decades,
often with lead sponsorship by federal, state and local
government entities for the purpose of economic development.
Thousands of these events have been held annually.'' The ACA
further noted in the same blog post that the HALOS Act removes
the uncertainty of the SEC's actions to implement Title II of
the JOBS Act as ``requiring verification of accredited
investors for these events creates a new burden for
participating entrepreneurs and makes investors less likely to
invest in participating companies because they are concerned
about the requirements of the SEC rule.''
Specifically, H.R. 4498 defines an ``angel investor group''
and clarifies that the Securities Act's general solicitation
limitations do not apply to a presentation, communication, or
event conducted on behalf of an issuer at an event sponsored by
certain organizations; where any advertising for the event does
not reference any specific offering of securities by the
issuer; or where no specific information regarding an offering
of securities by the issuer is communicated or distributed by
or on behalf of the issuer.
On December 2, 2015, Chris Mathieu, the Chief Financial
Officer of Horizon Technology Finance, testified before the
Subcommittee on Capital Markets and Government Sponsored
Enterprises in support of H.R. 4498 and noted that:
The HALOS Act provides essential protection for trade
associations that facilitate such meetings between
investors and fund managers, and would be greatly
helpful in cultivating small business capital
formation. More importantly, it provides protection for
fund managers engaged in meeting potential investors at
these events.
HEARINGS
The Committee on Financial Services' Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing examining matters relating to H.R. 4498 on December 2,
2015.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
March 2, 2016, and ordered H.R. 4498 to be reported favorably
to the House without amendment by a recorded vote of 44 yeas to
13 nays (record vote no. FC-100), a quorum being present.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole record vote in Committee was a motion by Chairman
Hensarling to report the bill favorably to the House without
amendment. That motion was agreed to by a recorded vote of 44
yeas to 13 nays (record vote no. FC-100), a quorum being
present.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 4498
will provide business start-ups with greater access to capital
by ensuring that they are not prohibited from participating in
``demo days'' sponsored by certain entities.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
COMMITTEE COST ESTIMATE
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 15, 2016.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4498, the Helping
Angels Lead Our Startups Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall.
Enclosure.
H.R. 4498--Helping Angels Lead Our Startups Act
The Securities and Exchange Commission (SEC) exempts
certain sellers of securities from registering their securities
with the SEC and from related filing and disclosure
requirements under Regulation D. Private offerers of securities
who are exempt under Regulation D are not allowed to engage in
general solicitation or general advertising for their
securities unless the purchasers of the securities meet
specific requirements. H.R. 4498 would expand the manner in
which securities issuers who qualify for exemptions under
Regulation D can solicit and advertise their securities.
CBO estimates that implementing H.R. 4498 would cost less
than $1 million for personnel and administrative costs to
revise SEC rules. However, 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 appropriations actions consistent
with that authority.
Pay-as-you-go procedures do not apply because enacting H.R.
4498 would not affect direct spending or revenues. CBO
estimates that enacting H.R. 4498 would not increase net direct
spending or on-budget deficits in any of the four consecutive
10-year periods beginning in 2027.
H.R. 4498 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) and would not affect
the budgets of state, local, or tribal governments.
If the SEC increases fees to offset the costs of
implementing the bill, H.R. 4498 would increase the cost of an
existing mandate on private entities required to pay those
fees. Based on information from the SEC, CBO estimates that the
aggregate cost of the mandate, if imposed, would be minimal and
fall well below the annual threshold for private-sector
mandates established in UMRA ($154 million in 2016, adjusted
annually for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Logan Smith (for the private-sector
mandate). The estimate was approved by H. Samuel Papenfuss,
Deputy Assistant Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
H.R. 4498 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
DUPLICATION OF FEDERAL PROGRAMS
Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015),
the Committee states that no provision of H.R. 4498 establishes
or reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015),
the Committee states that H.R. 4498 contains one directed
rulemaking.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1: Short title
This section cites H.R. 4498 as the ``Helping Angels Lead
Our Startups Act'' or the ``HALOS Act.''
Section 2: Definition of angel investor group
This section defines an ``angel investor group'' as any
group that: is composed of accredited investors; holds regular
meetings and has specific procedures for making investment
decisions; and is not affiliated with brokers, dealers, or
investment advisors.
Section 3: Clarification of general solicitation
This section requires the SEC to revise Rule 506 of
Regulation D to clarify that general solicitation limitations
do not apply to a presentation, communication, or event
conducted on behalf of an issuer at an event (1) sponsored by
certain organizations, (2) where any advertising for the event
does not reference any specific offering of securities by the
issuer, (3) and where no specific information regarding an
offering of securities by the issuer is communicated or
distributed by or on behalf of the issuer. This section also
limits the SEC's actions to amend the requirements of
Regulation D with respect to presentations and communications,
and not with respect to purchases or sales.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
H.R. 4498 does not repeal or amend any section of a
statute. Therefore, the Office of Legislative Counsel did not
prepare the report contemplated by clause 3(e)(1)(B) of rule
XIII of the House of Representatives.
MINORITY VIEWS
The Jumpstart Our Business Startups Act (or the ``JOBS
Act,'' P.L. 112-106) was signed into law in 2012 with the goal
of expanding opportunities for small business capital
formation. Democrats in Congress played a critical role in
ensuring that the JOBS Act included modest investor
protections, to balance out some of the capital markets
deregulatory provisions in the Act. Indeed, Democrats believe
that capital formation is only possible when investors have
confidence that markets are transparent and fair.
H.R. 4498, or the Helping Angels Lead Our Startups Act
(``HALOs Act''), runs contrary to Democrats' goals under the
JOBS Act, by undoing one investor protection put forward under
Title II of the Act. This investor protection, included in the
JOBS Act pursuant to a Democratic amendment, requires that
companies, which sell securities in the private markets by
advertising or soliciting buyers from the general public, to
take ``reasonable steps'' to verify that the purchasers of
their securities are, in fact, ``accredited investors''--a
special category of individuals deemed sophisticated enough
under securities laws to need less protection in the
marketplace.
The HALOs Act repeals that requirement when companies
solicit their offerings at sales events (also called ``demo
days,'' ``venture fairs'' or ``pitch days'') that are sponsored
by a governmental entity, a college or university, a nonprofit
organization, an angel investor group, a trade association, or
a venture forum or venture capital association.
This exemption raises investor protection concerns since
these sales events constitute private securities offerings that
are not subject to the heightened oversight by the Securities
and Exchange Commission (``SEC'') and state securities
regulators and have less legal recourse for purchasers. For
example, under H.R. 4498 companies, including not only startups
but established businesses and hedge funds, could pass out
fliers on a college campus advertising their ``hot new equity
offering.'' Individuals on the college campus could walk into
the pitch, and purchase the offering on the spot with little to
no understanding of the risks associated with the investment.
Under the JOBS Act, this type of transaction would be
permitted, but would require verification that the buyer has
sufficient income or assets to meet the SEC's standards to be
considered an accredited investor. Under H.R. 4498, companies
would not be required to take reasonable steps for verification
of accredited investor status.
Finally, the SEC has already provided limited,
administrated relief for sales events, recognizing that
facilitating more tight-knit ``pitch days'' may, in some
circumstances, be prudent. Under that relief, for example,
companies, need only to have a pre-existing, substantive
relationship with the potential buyers hearing their pitch, or
must have contacted the potential buyers though a personal
network before the pitch, in order to avoid the verification
requirement.
Had H.R. 4498 merely codified this existing SEC relief, the
Minority would not have opposed the legislation. However, given
the expanded exemptions provided in the bill, and the investor
protection concerns they raised, the Minority opposed the
passage of H.R. 4498.
Maxine Waters.
[all]