[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.

           *       *       *       *       *       *       *


                                  
