[House Report 112-327]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 112-327
======================================================================
PRIVATE COMPANY FLEXIBILITY AND GROWTH ACT
_______
December 12, 2011.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Bachus, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 2167]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 2167) to amend the Securities Exchange Act of
1934 to change the threshold number of shareholders for
required registration under that Act, having considered the
same, report favorably thereon with an amendment and recommend
that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Private Company Flexibility and Growth
Act''.
SEC. 2. THRESHOLD FOR REGISTRATION.
Section 12(g)(1) of the Securities Exchange Act of 1934 (15 U.S.C.
78l(g)(1)) is amended by striking ``shall--'' and all that follows
through the first instance of ``register'' and insert ``shall, within
120 days after the last day of its first fiscal year ended on which the
issuer has total assets exceeding $10,000,000 and a class of equity
security (other than an exempted security) held of record by 1,000
persons, register''.
SEC. 3. EMPLOYEES.
Section 12(g)(5) of the Securities Exchange Act of 1934 (15 U.S.C.
78l(g)(5)) is amended by adding at the end the following: ``For
purposes of determining whether an issuer is required to register a
security with the Commission pursuant to paragraph (1), the definition
of `held of record' shall not include securities held by persons who
received the securities pursuant to an employee compensation plan in
transactions exempted from the registration requirements of section 5
of the Securities Act of 1933.''.
SEC. 4. COMMISSION RULEMAKING.
The Securities and Exchange Commission shall revise the definition of
``held of record'' pursuant to section 12(g)(5) of the Securities
Exchange Act of 1934 (15 U.S.C. 78l(g)(5)) to implement the amendment
made by section 2. The Commission shall also adopt safe harbor
provisions that issuers can follow when determining that holders of
their securities received the securities pursuant to an employee
compensation plan in transactions that were exempt from the
registration requirements of section 5 of the Securities Act of 1933.
Purpose and Summary
H.R. 2167, the ``Private Company Flexibility and Growth
Act,'' raises the threshold for mandatory registration under
the Securities Exchange Act of 1934 (the ``Exchange Act'') from
500 shareholders to 1,000 shareholders for all companies and
excludes securities held by shareholders who received such
securities under employee compensation plans from the
calculation. Raising the shareholder threshold would eliminate
one impediment to capital formation for small companies.
Background and Need for Legislation
Capital formation is necessary for job creation. Companies
obtain capital through borrowing or equity financing. Because
banks have tightened their lending standards in the wake of the
economic crisis, there is less credit available to fund growth.
Accordingly, equity financing, in which investors purchase
ownership stakes in a company in exchange for a share of the
company's future profits, is an increasingly essential means of
providing small companies with the capital they need to grow
and create jobs. Unfortunately, regulations such as the
Exchange Act's shareholder threshold inhibit capital formation.
Section 12(g) of the Exchange Act requires issuers to
register equity securities with the Securities and Exchange
Commission (SEC) if those securities are held by 500 or more
record holders and the company has total assets of more than
$10 million. After a company registers with the SEC under
section 12(g), it must comply with all of the Exchange Act's
reporting requirements, which include filing annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and proxy statements on schedule 14A. The shareholder
threshold--which has not been adjusted since it was adopted in
1964--has become an impediment to capital formation for small
startup companies that are innovative and create jobs.
At a legislative hearing on H.R. 2167 held by the
Subcommittee on Capital Markets and Government Sponsored
Enterprises on September 21, 2011, Barry Silbert, Chief
Executive Officer of SecondMarket, Inc., explained that the 500
shareholder threshold ``has created a disincentive for private
companies to hire new employees, or acquire other businesses
for stock, as these private companies are fearful of taking on
too many shareholders.'' Mr. Silbert also testified that the
current threshold ``discourages companies from providing stock
option-based compensation to employees, removing one of the
great economic incentives attracting the country's best and
brightest employees to startups.''
Hearings
On September 21, 2011, the Subcommittee on Capital Markets
and Government Sponsored Enterprises held a hearing entitled
``Legislative Proposals to Facilitate Small Business Capital
Formation and Job Creation,'' to consider H.R. 2167 and four
other bills. The following witnesses testified:
Ms. Meredith Cross, Director, Division of
Corporation Finance, U.S. Securities and Exchange
Commission
Mr. Vincent Molinari, Founder and Chief
Executive Officer, GATE Technologies LLC
Mr. Barry E. Silbert, Founder and Chief
Executive Officer, SecondMarket, Inc.
Mr. Matthew H. Williams, Chairman and
President, Gothenburg State Bank, on behalf of the
American Bankers Association
Mr. William D. Waddill, Senior Vice
President and Chief Financial Officer, OncoMed
Pharmaceuticals, Inc., on behalf of the Biotechnology
Industry Organization
Mr. A. Heath Abshure, Commissioner, Arkansas
Securities Department on behalf of the North American
Securities Administrators
Ms. Dana Mauriello, President, ProFounder
Committee Consideration
The Subcommittee on Capital Markets and Government
Sponsored Enterprises met in open session on October 5, 2011,
and ordered H.R. 2167, as amended, favorably reported to the
full Committee by voice vote.
The Committee on Financial Services met in open session on
October 26, 2011 and ordered H.R. 2167, as amended, favorably
reported to the House by voice vote.
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.
On October 26, 2011, the Committee on Financial Services
met in open session and ordered H.R. 2167, as amended,
favorably reported to the House by voice vote.
During consideration of H.R. 2167 by the Committee, the
following amendment was considered:
1. An amendment offered by Mr. Miller of NC, no. 1, to
restrict the number of non-accredited investors to 500 persons,
was not agreed to by a record vote of 23 yeas and 33 nays
(Record vote no. FC-51).
RECORD VOTE NO. FC-51
----------------------------------------------------------------------------------------------------------------
Representative Aye Nay Present Representative Aye Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus..................... ........ X ......... Mr. Frank (MA)... X ........ .........
Mr. Hensarling................. ........ X ......... Ms. Waters....... X ........ .........
Mr. King (NY).................. ........ X ......... Mrs. Maloney..... X ........ .........
Mr. Royce...................... ........ X ......... Mr. Gutierrez.... X ........ .........
Mr. Lucas...................... ........ X ......... Ms. Velazquez.... X ........ .........
Mr. Paul....................... ........ X ......... Mr. Watt......... X ........ .........
Mr. Manzullo................... ........ X ......... Mr. Ackerman..... ........ ........ .........
Mr. Jones...................... ........ X ......... Mr. Sherman...... X ........ .........
Mrs. Biggert................... ........ X ......... Mr. Meeks........ X ........ .........
Mr. Gary G. Miller (CA)........ ........ ........ ......... Mr. Capuano...... X ........ .........
Mrs. Capito.................... ........ X ......... Mr. Hinojosa..... ........ ........ .........
Mr. Garrett.................... ........ X ......... Mr. Clay......... X ........ .........
Mr. Neugebauer................. ........ X ......... Mrs. McCarthy ........ ........ .........
(NY).
Mr. McHenry.................... ........ X ......... Mr. Baca......... X ........ .........
Mr. Campbell................... ........ X ......... Mr. Lynch........ X ........ .........
Mrs. Bachmann.................. ........ ........ ......... Mr. Miller (NC).. X ........ .........
Mr. McCotter................... ........ X ......... Mr. David Scott X ........ .........
(GA).
Mr. McCarthy (CA).............. ........ X ......... Mr. Al Green (TX) X ........ .........
Mr. Pearce..................... ........ X ......... Mr. Cleaver...... X ........ .........
Mr. Posey...................... ........ X ......... Ms. Moore........ X ........ .........
Mr. Fitzpatrick................ ........ X ......... Mr. Ellison...... X ........ .........
Mr. Westmoreland............... ........ X ......... Mr. Perlmutter... X ........ .........
Mr. Luetkemeyer................ ........ X ......... Mr. Donnelly..... X ........ .........
Mr. Huizenga................... ........ X ......... Mr. Carson....... X ........ .........
Mr. Duffy...................... ........ X ......... Mr. Himes........ ........ X .........
Ms. Hayworth................... ........ X ......... Mr. Peters....... X ........ .........
Mr. Renacci.................... ........ X ......... Mr. Carney....... X ........ .........
Mr. Hurt....................... ........ X .........
Mr. Dold....................... ........ X .........
Mr. Schweikert................. ........ X .........
Mr. Grimm...................... ........ X .........
Mr. Canseco.................... ........ X .........
Mr. Stivers.................... ........ X .........
Mr. Fincher.................... ........ X .........
----------------------------------------------------------------------------------------------------------------
The following amendments and motion were also considered by
the Committee:
1. An amendment offered by Mr. Capuano, no. 2, to include
beneficial shareholders in the calculation of the threshold for
registration; and to require the Securities and Exchange
Commission to revise the definition of ``beneficial holder'' or
``beneficially held'' to include multiple shareholders invested
in a single special purpose vehicle, was offered and withdrawn.
2. An amendment offered by Mr. Schweikert, no. 3, to change
the shareholder registration threshold from 1,000 to 2,000
persons, was offered and withdrawn.
3. A motion offered by Mr. Bachus to move the previous
question on H.R. 2167 was agreed to by voice vote.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held hearings and
made findings that are reflected in 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 establishes the
following performance related goals and objectives for this
legislation:
The objective of H.R. 2167, the ``Private Company
Flexibility and Growth Act,'' is to raise the threshold for
mandatory registration under the Securities Exchange Act of
1934 (the ``Exchange Act'') from 500 shareholders to 1,000
shareholders for all companies and excludes securities held by
shareholders who received such securities under employee
compensation plans from the threshold. In raising the
shareholder threshold, the bill would eliminate one impediment
to capital formation for small companies.
Companies obtain capital through borrowing or equity
financing. Because banks have tightened their lending standards
in the wake of the economic crisis, there is less credit
available to fund growth. Accordingly, equity financing, in
which investors purchase ownership stakes in a company in
exchange for a share of the company's future profits, is an
increasingly essential means of providing small companies with
the capital they need to grow and create jobs. The regulations
such as the Exchange Act's shareholder threshold inhibit
capital formation.
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 Estimate
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, October 28, 2011.
Hon. Spencer Bachus,
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. 2167, the Private
Company Flexibility and Growth Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 2167--Private Company Flexibility and Growth Act
Under current law, companies with assets greater than $10
million that have issued a class of security held by more than
500 people must register securities with the Securities and
Exchange Commission (SEC) if those securities are to be traded
on a registered exchange. H.R. 2167 would amend the statute to
set the asset limit at greater than $10 million for any issuer
(the limit under current law is specified in SEC regulations)
and to raise the threshold for ownership of an entity's stock
to 1,000 persons. The bill would exclude persons who received
stock as part of an employee compensation plan from the number
of persons holding a security when determining whether the
stock-ownership threshold has been met.
Based on information from the SEC, CBO estimates that
implementing H.R. 2167 would have a negligible impact on the
SEC's workload, and any change in agency spending that is
subject to appropriation would not be significant. Enacting
H.R. 2167 would not affect direct spending or revenues;
therefore, pay-as-you-go procedures do not apply.
H.R. 2167 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of state, local, or tribal
governments.
The CBO staff contact for this estimate is Susan Willie.
This estimate was approved by Theresa Gullo, 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. 2167 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section provides a short title to the bill by citing
it as the ``Private Company Flexibility and Growth Act.''
Section 2. Threshold for registration
This section amends section 12(g) of the Securities
Exchange Act of 1934 (the ``Exchange Act'') by raising the
threshold for mandatory registration under the Exchange Act
from 500 shareholders to 1,000 shareholders for all companies.
Section 3. Employees
This section provides that persons who received securities
under employee compensation plans shall not count against the
shareholder threshold cap in section 12(g) of the Exchange Act.
Section 4. Commission rulemaking
This section requires the SEC to issue regulations to
revise the definition of ``held of record'' pursuant to section
12(g)(5) of the Exchange Act and to adopt safe harbor
provisions that issuers can follow when determining that
holders of their securities received the securities pursuant to
an employee compensation plan.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
REGISTRATION REQUIREMENTS FOR SECURITIES
Sec. 12. (a) * * *
* * * * * * *
(g)(1) Every issuer which is engaged in interstate commerce,
or in a business affecting interstate commerce, or whose
securities are traded by use of the mails or any means or
instrumentality of interstate commerce [shall--
[(A) within one hundred and twenty days after the
last day of its first fiscal year ended after the
effective date of this subsection on which the issuer
has total assets exceeding $1,000,000 and a class of
equity security (other than an exempted security) held
of record by seven hundred and fifty or more persons;
and
[(B) within one hundred and twenty days after the
last day of its first fiscal year ended after two years
from the effective date of this subsection on which the
issuer has total assets exceeding $1,000,000 and a
class of equity security (other than an exempted
security) held of record by five hundred or more but
less than seven hundred and fifty persons,
[register] shall, within 120 days after the last day of its
first fiscal year ended on which the issuer has total assets
exceeding $10,000,000 and a class of equity security (other
than an exempted security) held of record by 1,000 persons,
register such security by filing with the Commission a
registration statement (and such copies thereof as the
Commission may require) with respect to such security
containing such information and documents as the Commission may
specify comparable to that which is required in an application
to register a security pursuant to subsection (b) of this
section. Each such registration statement shall become
effective sixty days after filing with the Commission or within
such shorter period as the Commission may direct. Until such
registration statement becomes effective it shall not be deemed
filed for the purposes of section 18 of this title. Any issuer
may register any class of equity security not required to be
registered by filing a registration statement pursuant to the
provisions of this paragraph. The Commission is authorized to
extend the date upon which any issuer or class of issuers is
required to register a security pursuant to the provisions of
this paragraph.
* * * * * * *
(5) For the purposes of this subsection the term ``class''
shall include all securities of an issuer which are of
substantially similar character and the holders of which enjoy
substantially similar rights and privileges. The Commission may
for the purpose of this subsection define by rules and
regulations the terms ``total assets'' and ``held of record''
as it deems necessary or appropriate in the public interest or
for the protection of investors in order to prevent
circumvention of the provisions of this subsection. For
purposes of this subsection, a security futures product shall
not be considered a class of equity security of the issuer of
the securities underlying the security futures product. For
purposes of determining whether an issuer is required to
register a security with the Commission pursuant to paragraph
(1), the definition of ``held of record'' shall not include
securities held by persons who received the securities pursuant
to an employee compensation plan in transactions exempted from
the registration requirements of section 5 of the Securities
Act of 1933.
* * * * * * *