[House Report 115-576]
[From the U.S. Government Publishing Office]


115th Congress   }                                      {      Report
                        HOUSE OF REPRESENTATIVES
 2d Session      }                                      {     115-576

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



 
               ACCELERATING ACCESS TO CAPITAL ACT OF 2017

                                _______
                                

 February 23, 2018.--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. 4529]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4529) to direct the Securities and Exchange 
Commission to revise Form S-3 so as to add listing and 
registration of a class of common equity securities on a 
national securities exchange as an additional basis for 
satisfying the requirements of General Instruction I.B.1. of 
such form and to remove such listing and registration as a 
requirement of General Instruction I.B.6. of such form, having 
considered the same, report favorably thereon without amendment 
and recommend that the bill do pass.

                          PURPOSE AND SUMMARY

    On December 1, 2017, Representative Ann Wagner introduced 
H.R. 4529, the ``Accelerating Access to Capital Act of 2017'', 
to amend the Securities and Exchange Commission's (SEC) Form S-
3 registration statement for smaller reporting companies that 
have a class of common equity securities listed and registered 
on a national securities exchange. The bill allows these 
companies to register primary securities offerings exceeding 
one-third of the aggregate market value of voting and non-
voting common equity held by non-affiliates of the registrant. 
It also allows smaller reporting companies without a class of 
common equity securities listed and registered on a national 
securities exchange to register primary securities offerings up 
to one-third of their public float.

                  BACKGROUND AND NEED FOR LEGISLATION

    Allowing a greater number of smaller reporting companies to 
use the SEC's Form S-3 for securities offerings will reduce 
overly burdensome compliance costs associated with filing 
redundant paperwork and allow eligible companies to focus more 
resources on growing their businesses.
    The Form S-3 is currently available to companies with a 
public float--e.g., the amount of shares not held by private 
shareholders or employees--of at least $75 million and a 
reporting history with the SEC of at least 12 months. 
Additionally, smaller reporting companies with a security 
traded on a national securities exchange may use Form S-3 but 
are limited to offerings that do not exceed one-third of their 
public float in a given year.
    Filing a Form S-3 is more efficient than the more 
burdensome Form S-1. The Form S-3 is a short-form registration 
statement that allows forward incorporation by reference, as 
well as ``off-the-shelf'' offerings. Allowing forward 
incorporation by reference enables the company to simply, after 
the Form's effective date, reference any further documentation 
on the original Form S-3 document. Otherwise, companies must 
refile the registration form or file a post-effective 
amendment, which often results in the company having to delay 
any further security issuances and incur additional, 
unnecessary legal costs. In other words, using Form S-3 not 
only allows companies to avoid unnecessary compliance costs, 
but forward market incorporation and shelf registration lends 
to an efficiency that helps companies maximize market 
opportunities, and make it more likely that they will conduct 
more registered securities offerings.
    Expanding the use of Form S-3 as provided in H.R. 4529 is 
long overdue. The original public float requirement for 
companies eligible to use Form S-3 to register primary 
offerings was $150 million. In 1992, the SEC reduced the 
minimum float threshold to the current $75 million based on an 
analysis of trading markets. In 2006, the SEC's Advisory 
Committee on Smaller Public Companies recommended that all 
reporting companies, regardless of public float or exchange-
traded status, should be allowed to use Form S-3. The next 
year, the SEC proposed to expand the use of Form S-3 to all 
reporting companies, regardless of public float or exchange-
traded status, and would have also imposed a 20% cap of public 
float on the amount of securities to be offered. The SEC 
determined that expanding Form S-3 eligibility was appropriate 
because most public filings now being filed on the SEC's 
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) 
database, allows widespread and direct accessibility to company 
disclosure. Ultimately, the SEC's final rule limited the Form 
S-3 to only companies traded on a national securities exchange 
but raised the cap to one-third of public float. In adopting 
the 2007 rule, the SEC stated that ``extending Form S-3 short-
form registration to additional issuers should enhance their 
ability to access the public securities markets.'' After all, 
the ``inability of these companies to utilize [Form S-3] 
limited their capacity to access the public securities markets 
and, because of the cost and lack of flexibility associated 
with [Form S-1], they either did not file registration 
statements . . . or were limited in the number that they 
filed.'' Furthermore, the SEC estimated that the offering 
reforms made in its 2007 release, including expanded Form S-3 
eligibility, would decrease the compliance burden for companies 
by approximately 10,375 hours of in-house company personnel 
time (valued at $1,816,000) and approximately $12,450,000 for 
the services of outside professionals.
    More recently, expanding the use of Form S-3 for all 
smaller reporting companies was a recommendation included in 
the SEC's Government-Business Forum on Small Business Capital 
Formation Final Report for 2012. At a Financial Services 
Subcommittee on Capital Markets hearing in 2014, Brian Hahn, 
Chief Financial Officer of GlycoMimetics, Inc., testifying on 
behalf of Biotechnology Industry Organization, confirmed the 
SEC's observations in 2007, when he noted that a reform like 
this ``would increase the pool of companies eligible to use 
Form S-3 to register for an offering. Form S-3 is the most 
simplified SEC registration form, and utilizing it to conduct 
an offering contributes to the cost-savings goals of emerging 
companies.'' He continued that expanding access to Form S-3 
``would increase small companies' access to public funds in an 
efficient and cost-effective manner that will stimulate capital 
formation.''
    Further, during a 2015 Capital Markets Subcommittee 
hearing, David Weild, CEO of Weild & Co., testified that, ``the 
flexibility, speed and costs savings afforded by Form S-3 
`Shelf Registrations' helps corporate issuers to improve their 
cost of equity capital.''
    One of the SEC's most important missions is to facilitate 
capital formation, though the Obama Administration largely 
neglected this mission in favor of extraneous and highly 
politicized regulatory undertakings. The current SEC Chairman, 
Jay Clayton, has stressed that a key part of his agenda is 
facilitating capital formation for all companies, which will 
provide expanded opportunities for investors, help grow the 
economy, facilitate innovation, and further job creation.
    While the SEC has the statutory authority to enact many of 
these provisions unilaterally, earlier this year, the SEC did 
act to help facilitate capital formation by extending 
confidential filings to all companies, a provision that was 
included in H.R. 10, the Financial CHOICE Act. In addition to 
implementing CHOICE Act provisions, the Committee encourages 
the SEC to review the recommendations it has collected, 
including those from the Government Business Forum on Small 
Business Capital Formation, and act on those most likely to 
help small businesses access the capital markets so they can 
innovate, grow, and provide economic opportunities for their 
communities. Additionally, the Committee urges the Commission 
to act quickly to hire a Small Business Advocate to run the 
Office of the Advocate for Small Business Capital Formation 
pursuant to the SEC Small Business Advocate Act signed into law 
by President Obama in December 2016.
    The SEC's near-term agenda may not accommodate the 
expansion of the Form S-3 to a larger group of companies that 
meet the conditions of the Form. If the SEC cannot act, it is 
incumbent upon Congress to Act to assist the SEC meet the 
entirety of its statutory mission. H.R. 4529 is a measured 
legislative response to address the inequities between large 
and small issuers. It is important to note that H.R. 4529 does 
not relieve any issuer of its obligations to file periodic and 
annual reports with the SEC. H.R. 4529 does not exempt these 
issuers from registration under the Securities Exchange Act of 
1934. Also, in order to be eligible to use Form S-3, a company 
must have timely filed 12 months of reports beforehand. 
Finally, H.R. 4529 does not eliminate or inhibit the SEC's 
ability to pursue securities fraud actions against a company, 
who takes advantages of the Form S-3 expansion, when H.R. 4529 
becomes law.

                                HEARINGS

    The Committee on Financial Services held hearings examining 
matters relating to H.R. 4529 on April 26, 2017, and April 28, 
2017.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
December 12, 2017, and December 13, 2017, and ordered H.R. 4529 
to be reported favorably to the House without amendment by a 
recorded vote of 34 yeas to 26 nays (Record vote no. FC-124), 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 recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 34 yeas to 26 nays 
(Record vote no. FC-124), 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. 4529 
will help facilitate capital raising efforts by small 
businesses by extending shelf registration statements to small 
reporting companies.

   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.

                 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, February 16, 2018.
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. 4529, the 
Accelerating Access to Capital Act of 2017.
    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,
                                                          Director.
    Enclosure.

H.R. 4529--Accelerating Access to Capital Act of 2017

    Under current law, companies that sell securities must 
register their offerings with the Securities and Exchange 
Commission (SEC). Certain companies that meet various 
requirements may use a simplified registration form. H.R. 4529 
would expand eligibility to use the simplified registration 
form.
    Using information from the SEC, CBO estimates that 
implementing H.R. 4529 would cost less than $500,000 over the 
2018-2022 period for the agency to update its registration 
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 appropriation actions consistent with 
that authority.
    Enacting H.R. 4529 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply.
    CBO estimates that enacting H.R. 4529 would not increase 
net direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2028.
    H.R. 4529 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA).
    If the SEC increases fees to offset the costs associated 
with implementing the bill, H.R. 4529 would increase the cost 
of an existing mandate on private entities required to pay 
those fees. Using information from the SEC, CBO estimates that 
the incremental cost of the mandate would fall well below the 
annual threshold for private-sector mandates established in 
UMRA ($156 million in 2017, adjusted annually for inflation).
    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

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      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

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    DUPLICATION OF FEDERAL PROGRAMS

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   DISCLOSURE OF DIRECTED RULEMAKING

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed 
rulemakings: The Committee estimates that the bill requires one 
directed rulemaking to direct the SEC to revise Form S-3.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This section cites H.R. 4529 as the ``Accelerating Access 
to Capital Act of 2017.''

Section 2. Expanded eligibility for use of Form S-3

    This section directs the SEC to revise Form S-3 to permit 
securities to be registered if the primary securities offerings 
exceed one-third of the aggregate market value of voting and 
non-voting common equity held by non-affiliates of the 
registrant and to permit smaller reporting companies without a 
class of common equity securities listed and registered on a 
national securities exchange to register primary securities 
offerings up to one-third of their public float.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 4529 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 Rules of the House of Representatives.

                             MINORITY VIEWS

    H.R. 4529 would dangerously expand the type of companies 
that are eligible to use the Securities and Exchange 
Commission's short-form registration statement (Form S-3) to 
register their securities before selling them to the general 
public. Current restrictions for companies using Form S-3, 
which are based on size and whether they are traded on an 
exchange, ensure that they have timely information available to 
the public, ample liquidity, and strong corporate governance 
standards. By removing these restrictions, H.R. 4529 would 
allow small, little-known companies to avoid SEC staff review 
and invite accounting fraud, market manipulation, insider 
trading, and sales of artificially inflated stock
    Unlike Form S-1, the SEC's general registration statement, 
Form S-3 is a streamlined form that allows eligible companies 
to sell their securities as they wish over the course of three 
years, without having to file and seek SEC approval for 
separate registration statements. These ``shelf offerings'' 
provide companies with considerable flexibility in how they 
sell their shares, allowing them to take advantage of changes 
in the markets and other factors.
    In exchange for this flexibility, companies must meet 
certain restrictions designed to protect investors. In 
particular, companies must have consistently filed their public 
reporting forms for one year and either (1) have at least $75 
million in common equity or (2) be listed on an exchange and 
sell no more than one-third of the value of their common equity 
in a year.
    According to the SEC, these restrictions ensure that the 
investing public has sufficient and timely information about 
these companies, making multiple registration statements 
unnecessary. For example, companies with more than $75 million 
in common equity are more widely followed by research analysts, 
while exchange-traded companies with less than $75 million must 
meet exchange listing standards that ensure liquidity and 
strong corporate governance standards.
    H.R. 4529 ignores these common-sense restrictions and would 
allow non-exchange traded companies, regardless of size, to 
sell up to 1/3 of the value of their common equity using Form 
S-3. If a company is traded on an exchange, the bill would 
allow it to sell an unlimited number of shares using Form S-3, 
again regardless of size.
    Democratic witnesses have testified before the Committee 
that such an expansion of Form S-3 would allow companies to 
avoid SEC staff review and risk increased fraud and market 
manipulation, particularly for non-exchange traded companies. 
According to Professor Mercer Bullard of the University of 
Mississippi School of Law, previous studies have found that 80% 
of manipulation cases involved non-exchange traded stocks, and 
a positive correlation between lower disclosure requirements 
and the likelihood of manipulation. Professor John Coffee from 
the Columbia Law School also testified that such a change to 
Form S-3 ``invites potential disaster and investor confusion.''
    According to the Consumer Federation of America (CFA), 
``the most likely, and perhaps the best outcome, if this 
legislation is adopted, is that the market simply will not 
accept such offerings, and thus it will do nothing to promote 
capital formation.'' The CFA has also noted that ``this bill 
increases the risk of fraud and misconduct without offering any 
benefits to justify that added risk.''
    For all of these reasons, we oppose H.R. 4529.

                                   Maxine Waters.
                                   Daniel T. Kildee.
                                   Michael E. Capuano.
                                   Nydia Velazquez.
                                   Emanuel Cleaver.
                                   Stephen F. Lynch.
                                   Joyce Beatty.
                                   Juan Vargas.
                                   Carolyn B. Maloney.
                                   Al Green.
                                   Gwen Moore.
                                   Brad Sherman.

                                  [all]