[House Report 114-726]
[From the U.S. Government Publishing Office]


114th Congress    }                                    {        Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                    {       114-726

======================================================================



 
               PRIVATE PLACEMENT IMPROVEMENT ACT OF 2016

                                _______
                                

 September 6, 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. 4852]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4852) to direct the Securities and Exchange 
Commission to revise Regulation D relating to exemptions from 
registration requirements for certain sales of securities, 
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 Placement Improvement Act of 
2016''.

SEC. 2. REVISIONS TO SEC REGULATION D.

  Not later than 45 days following the date of the enactment of this 
Act, the Securities and Exchange Commission shall revise Regulation D 
(17 C.F.R. 501 et seq.) in accordance with the following:
          (1) The Commission shall revise Form D filing requirements to 
        require an issuer offering or selling securities in reliance on 
        an exemption provided under Rule 506 of Regulation D to file 
        with the Commission a single notice of sales containing the 
        information required by Form D for each new offering of 
        securities no earlier than 15 days after the date of the first 
        sale of securities in the offering. The Commission shall not 
        require such an issuer to file any notice of sales containing 
        the information required by Form D except for the single notice 
        described in the previous sentence.
          (2) The Commission shall make the information contained in 
        each Form D filing available to the securities commission (or 
        any agency or office performing like functions) of each State 
        and territory of the United States and the District of 
        Columbia.
          (3) The Commission shall not condition the availability of 
        any exemption for an issuer under Rule 506 of Regulation D (17 
        C.F.R. 230.506) on the issuer's or any other person's filing 
        with the Commission of a Form D or any similar report.
          (4) The Commission shall not require issuers to submit 
        written general solicitation materials to the Commission in 
        connection with a Rule 506(c) offering, except when the 
        Commission requests such materials pursuant to the Commission's 
        authority under section 8A or section 20 of the Securities Act 
        of 1933 (15 U.S.C. 77h-1 or 77t) or section 9, 10(b), 21A, 21B, 
        or 21C of the Securities Exchange Act of 1934 (15 U.S.C. 78i, 
        78j(b), 78u-1, 78u-2, or 78u-3).
          (5) The Commission shall not extend the requirements 
        contained in Rule 156 to private funds.
          (6) The Commission shall revise Rule 501(a) of Regulation D 
        to provide that a person who is a ``knowledgeable employee'' of 
        a private fund or the fund's investment adviser, as defined in 
        Rule 3c-5(a)(4) (17 C.F.R. 270.3c-5(a)(4)), shall be an 
        accredited investor for purposes of a Rule 506 offering of a 
        private fund with respect to which the person is a 
        knowledgeable employee.

                          PURPOSE AND SUMMARY

    Introduced by Rep. Scott Garrett on March 23, 2016, H.R. 
4852, the ``Private Placement Improvement Act of 2016,'' would 
direct the Securities and Exchange Commission (SEC) to revise 
Regulation D, relating to exemptions from registration 
requirements for certain sales of securities, in six prescribed 
ways:
           eliminate the requirement to file a Form D 
        as a prerequisite to gaining Rule 506's safe harbor;
           require the SEC to notify states' securities 
        commissions of the information contained in the Form Ds 
        filed on EDGAR;
           prohibit the SEC from conditioning the 
        availability of an exemption pursuant to Rule 506 of 
        Regulation D on the issuer's filing with the SEC a Form 
        D;
           prohibit the SEC from requiring issuers 
        conducting Rule 506(c) offerings to file its general 
        solicitation materials (but not prohibiting the SEC 
        from requesting such materials in certain situations);
           exempt private funds from the requirements 
        of Rule 156; and
           revise the definition of ``accredited 
        investor'' in Rule 501(c) to include ``knowledgeable 
        employees'' of private funds for Rule 506 purposes with 
        respect to an offering of the private fund.
    H.R. 4852 would facilitate a more streamlined and cost-
effective process for companies to raise capital through 
private offerings in order to grow and create more jobs.

                  BACKGROUND AND NEED FOR LEGISLATION

    Title II of the Jumpstart Our Business Startups Act (JOBS 
Act) (Public Law No: 112-106) makes it easier for startups to 
market their companies and sell their securities to investors. 
The Securities Act of 1933 requires that offers to sell 
securities must either be registered with the SEC or 
specifically exempted from such registration. One such 
exemption from the Securities Act is Regulation D Rule 506, 
which allows companies to offer securities for sale as long as 
they do not market their securities through general 
solicitations or advertising. Title II extends this exemption 
to securities marketed through a general solicitation or 
advertising so long as the issuer verifies that purchasers of 
the securities are ``accredited investors.''
    Title II of the JOBS Act required the SEC to write and 
implement rules by July 4, 2012. The SEC missed that deadline, 
and instead proposed a rule for notice and comment in August 
2012. On July 10, 2013, the SEC ultimately adopted a final rule 
to implement Title II of the JOBS Act and expand the exemption 
for general solicitation under Rule 506.
    But at the same SEC open meeting, the SEC voted 3-2 to 
propose a separate rule that would impose new regulatory 
requirements on small companies seeking to use Rule 506 to 
raise capital. The proposed requirements are inconsistent with 
Congress's intent to make it easier for startups and small 
companies to raise capital. The SEC's rule proposal would 
impose burdensome requirements on companies seeking to use Rule 
506's exemption, such as requiring companies to submit 
additional Form D filings both in advance of offerings and 
after offerings have closed (bringing the total number of Form 
D filings from 1 to 3), and to file written general 
solicitation materials on an ongoing basis. The proposal would 
also impose the severe penalty of a one-year disqualification 
from using Rule 506 if a company failed to satisfy the Form D 
filing requirements, even if the failure was unintentional. The 
SEC has not yet acted on this rule proposal.
    The ``Private Placement Improvement Act of 2016'' prevents 
the SEC from continuing down this inappropriate path. The bill 
prohibits the SEC from finalizing its proposed rule. Moreover, 
H.R. 4852 ensures that the SEC will implement Regulation D 
consistent with the intent of Congress.
    In a June 2016 letter to Chairman Hensarling, the U.S. 
Chamber of Commerce cited the need for this legislation:

        Title II of the JOBS Act directed the SEC to revise its 
        rules to lift the ban on general solicitation for a 
        private securities offering under Rule 506 of 
        Regulation D. Unfortunately, simultaneous with the 
        SEC's final rule, the SEC proposed a rule that would 
        impose unnecessary and burdensome obligations on 
        issuers seeking to take advantage of Rule 506. This 
        proposal, which remains pending, threatens to eliminate 
        the very benefits the JOBS Act brought to small 
        issuers. H.R. 4852 would prevent the SEC from 
        implementing this proposal so that companies can invest 
        in productive efforts, not compliance with unnecessary 
        obligations that don't benefit investors. The bill 
        would also update Rule 506(c) to permit an issuer to 
        file a single Form D with the SEC, which then would 
        distribute it to each state's respective securities 
        commission. Streamlining regulatory filings is 
        consistent with the spirit of the JOBS Act and would 
        enhance the ability of small companies to focus limited 
        resources on running the business and creating jobs.

    Additionally, former SEC Commissioner Paul Atkins noted the 
importance of this legislation in testimony before the Capital 
Markets and Government Sponsored Enterprise Subcommittee in 
April 2016: ``I believe that H.R. 4852, introduced by Chairman 
Garrett, is critically important to remove the regulatory 
uncertainty currently holding many issuers back from utilizing 
general solicitation under Rule 506(c) as Congress originally 
intended. H.R. 4852 would prevent the SEC from implementing the 
most burdensome provisions of its Reg D.''

                                HEARINGS

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Enterprises held a hearing 
examining matters relating to H.R. 4852 on April 14, 2016.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
June 16, 2016, and ordered H.R. 4852 to be reported favorably 
to the House as amended by a recorded vote of 33 ayes to 26 
nays (recorded vote no. FC-119), a quorum being present. An 
amendment offered by Mr. Garrett was agreed to 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. The 
sole recorded vote in committee was a motion by Chairman 
Hensarling to report the bill favorably to the House as 
amended. That motion was agreed to by a recorded vote of 33 
ayes to 26 nays (Record vote no. FC-119), 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. 4852 
increases access to capital for regulated entities by 
prohibiting the SEC from imposing unnecessary regulatory 
burdens on Regulation D issuers.

   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, August 1, 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. 4852, the Private 
Placement Improvement Act of 2016.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                            Mark P. Hadley,
                                         (For Keith Hall, Director)
    Enclosure.

H.R. 4852--Private Placement Improvement Act of 2016

    Under current law, the Securities and Exchange Commission 
(SEC) prohibits the sale or delivery of securities that have 
not been registered with the SEC. Certain transactions are 
exempt from that prohibition but are subject to certain 
reporting requirements. H.R. 4852 would amend those 
requirements. H.R. 4852 also would prohibit the SEC from 
expanding certain reporting requirements and limit how the SEC 
uses the current information it collects.
    On the basis of information provided by the SEC about the 
agency's current reporting requirements, CBO estimates that 
implementing H.R. 4852 would have no significant effect on the 
agency's costs to change current rules. Moreover, 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. Enacting 
H.R. 4852 would not affect direct spending or revenues; 
therefore, pay-as-you-go procedures do not apply.
    CBO estimates that enacting H.R. 4852 would not increase 
net direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2027.
    H.R. 4852 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 Stephen Rabent. 
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. 4852 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. 4852 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. 4852 contains no directed 
rulemaking.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1: Short title

    This section cites H.R. 4852 as the ``Private Placement 
Improvement Act of 2016.''

Section 2: Revisions to SEC Regulation D

    This section directs the Securities and Exchange Commission 
(SEC) to revise the filing requirements of Regulation D to 
require an issuer that offers or sells securities in reliance 
upon a certain exemption from registration to file, no earlier 
than the 15 days after the date of the first sale of such 
securities, a single notice of sales containing the information 
required by Form D for each new offering of securities. The SEC 
shall not: (1) require the issuer to file any notice of sales 
containing the information required by Form D except for this 
single notice; (2) condition the availability of the Rule 506 
exemption upon the filing of a Form D or similar report; or (3) 
require issuers to submit written general solicitation 
materials in connection with a limited offering subject to Rule 
506, except when it requests such materials pursuant to 
specified authority.
    This section also directs the SEC to revise a specified 
rule, regarding a Rule 506 offering of a private fund, to 
characterize as an accredited investor a ``knowledgeable 
employee'' of that private fund or the fund's investment 
adviser. Additionally, this section prohibits the SEC from 
extending private funds the requirements governing investment 
company sales literature.

                             MINORITY VIEWS

    H.R. 4852 places limits on the Securities and Exchange 
Commission's (SEC) ability to finalize investor protections 
proposed in 2013. Specifically, H.R. 4852 places a number of 
prohibitions on the SEC, including barring it from requiring 
issuer pre-filing of a simple notice form when they sell 
unregistered securities, to imposing rules that stipulate how 
private funds are required to portray past income and losses to 
investors, and others. Because of these concerns, Democrats on 
the Committee unanimously voted against H.R. 4852, as well as 
identical legislation in the 113th Congress.
    Democrats worked with Republicans to lift the ban on 
general solicitation and advertising under the Jumpstart Our 
Business Startups (JOBS) Act of 2012. Under Section 201(a) of 
the Act, issuers were afforded the opportunity to sell 
unregistered securities under a new Rule 506(c) exemption using 
means of solicitation and advertising. This includes publishing 
ads in newspapers and magazines, using public websites and 
emails, broadcasting communications over television and radio, 
and hosting seminars where attendees have been invited by 
general solicitation or general advertising.
    When the SEC implemented this provision in July of 2013, 
the Commission proposed alongside that regulatory relief some 
very simple investor protections. The thinking expressed by the 
SEC Chair and certain SEC Commissioners at the time was that, 
if Congress and the Commission were going to end a decades-long 
prohibition on general solicitation and advertising, it would 
be appropriate to also move forward on several proposed 
amendments to enhance investor protection.
    To date, the SEC has not finalized those proposed 
amendments; H.R. 4852 would prevent the SEC from ever doing so. 
Specifically, the bill would impede the Commission from 
requiring companies to file a simple notification form before 
using general solicitation or advertising to sell their 
unregistered securities--a crucial step to alert regulators to 
the existence of these unregistered offerings. H.R. 4852 would 
also prohibit the SEC from requiring companies to file their 
advertising materials with the SEC--a measure that would give 
regulators a view into potential misleading statements made by 
issuers. Finally, the bill would stop the SEC from applying the 
same rules that apply to mutual funds to hedge funds and 
private equity finds in terms of how they report performance of 
their fund to investors when they use the Rule 506(c) 
exemption.
    The Democratic witness at the hearing in which this bill 
was considered, Mr. William Beatty, Washington State Securities 
Division Director, testified that the North American Securities 
Administrators Association (``NASAA'') opposes this bill as 
well as ``any action by Congress to diminish the ability of the 
SEC to undertake prudent steps to limit the risks to investors 
resulting from the lifting of the ban on general solicitation. 
Further, it would be a mistake for Congress to weaken the few 
existing investor protections in Rule 506, as this bill would 
in important ways.'' Mr. Beatty furthered testified that 
NASAA's concern is informed by the fact that Rule 506 fraud was 
the second most common type of fraud reported by their state 
members.
    H.R. 4852 is likewise opposed by the Consumer Federation of 
America, as well as Americans for Financial Reform.
    Because this legislation would tie the hands of the SEC, 
and prevent them from finalizing certain investor protections 
which are in the public interest, the Minority opposes H.R. 
4852.

                                   Maxine Waters.
                                   Denny Heck.
                                   Keith Ellison.
                                   Emanuel Cleaver.
                                   Gwen Moore.
                                   Stephen F. Lynch.
                                   Al Green.
                                   Joyce Beatty.
                                   Wm. Lacy Clay.
                                   Ruben Hinojosa.
                                   Juan Vargas.

                                  [all]