[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]