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House Panel Backs Bills to Ease Rules for Closely Held Firms

November 08, 2011

(Updates with Cantor statement in eighth paragraph.)

Oct. 26 (Bloomberg) -- A U.S. House panel approved measures aimed improving the ability of closely held firms to raise money by loosening Securities and Exchange Commission rules.

With bipartisan support, the House Financial Services Committee approved four bills, including a measure that would allow firms to have up to 1,000 shareholders without triggering an initial public offering, increasing the threshold from 500. The legislation will next be voted on by the full House.

“These bills all address small businesses,” Representative Spencer Bachus, an Alabama Republican and the chairman of the panel, said today. “You have to have capital for job creation.”

House Republicans are promoting legislation to help startups and smaller firms raise money amid regulatory hurdles and tighter lending standards following the 2008 credit crisis. Shares of such companies are being traded on secondary markets that have emerged since the cost of going public increased under the Sarbanes-Oxley Act of 2002 and last year’s Dodd-Frank Act.

The panel also approved by voice vote measures that would allow banks to remain closely held until they reach 2,000 shareholders, an exemption for so-called crowdfunding up to $1 million and the removal of a ban on closely held companies soliciting funding from accredited investors.

Accessing Credit

“It has become increasingly difficult to access credit in today’s marketplace,” said Representative Patrick McHenry, a North Carolina Republican. “We hear this regularly from small businesses in our districts.”

The effort drew bipartisan support after President Barack Obama, in a September address to Congress, pledged to “cut away the red tape” negatively affecting small businesses. The SEC, which has voiced concerns about the effect of the bills on investor protection, is in the midst of a broad review of registration and reporting rules.

House Majority Leader Eric Cantor, a Virginia Republican, said in a statement today the bills would “help business owners and entrepreneurs access a broader spectrum of investors and will ease the regulatory burdens that growing small businesses face.”

The committee approved two bills to allow closely held companies to boost the number of shareholders without going public. The panel approved by voice vote a bill by Representative David Schweikert, an Arizona Republican, to increase the shareholder threshold to 1,000, and approved by voice vote a bill by Representative Jim Himes, a Connecticut Democrat, to increase to 2,000 the shareholder threshold for closely held banks.

Accredited Investors

Schweikert pulled an amendment to increase the threshold in his bill to 2,000 shareholders at the request of Bachus. The amendment was opposed by the panel’s Democrats.

The panel also approved by voice vote a measure to remove the private company ban on general solicitation of so-called accredited investors, those deemed sufficiently sophisticated to understand offerings. The bill, sponsored by California Republican Representative Kevin McCarthy, is now cleared for House floor consideration.

Panel Republicans and Democrats said they were on the cusp of compromise over an Obama-backed idea to permit so-called crowdfunding, when activists or entrepreneurs seek to finance new businesses by soliciting public donations, often over the Internet.

State Regulators

McHenry, the North Carolina Republican, has sponsored a bill that would permit companies to accept and pool donations. The measure drew opposition from Democrats during the Oct. 5 subcommittee consideration of the measure, including Himes and Representative Maxine Waters of California. The lawmakers voiced concerns over investor protections and the rights of state securities regulators to enforce fraud laws.

McHenry and his staff addressed the concerns by incorporating in a substitute amendment new provisions aimed at bolstering investor protections and SEC oversight of any issuance, McHenry said today.

Lawmakers also approved a reduction in the cap on the amount of money that can be raised through crowdfunding, to $1 million from $5 million. The change aligns the measure with the cap proposed by the Obama administration; the committee approved the measure today by voice vote.

The changes to the bill “certainly make the bill more attractive and alleviates many of my concerns,” said Waters, who opposed the bill earlier this month.

Lawmakers committed to continue working on an amendment clarifying the rights of state securities regulators to enforce fraud and manipulation laws with respect to crowdfunding.

“Assuming we get this conceptual agreement worked out I believe we have a bill that is going to be very broadly supported,” said Representative Barney Frank of Massachusetts, the senior Democrat on the panel.

--Editors: Maura Reynolds, Lawrence Roberts

To contact the reporter on this story: Phil Mattingly in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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