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From Securities Regulation Daily, October 6, 2015

House tells SEC to fix disclosure rules, vote coming on private resales

By Mark S. Nelson, J.D.

The House was poised to vote on a raft of bills that includes a few items for the securities world. One bill that tells the SEC to do more to streamline and modernize its disclosure rules passed under a suspension of the rules. But another bill that would open secondary markets for the private resale of restricted securities by codifying the so-called Rule 4(a)(1-1/2) exemption, and which seemed headed down the same fast track as the first bill, was briefly put on hold so a recorded vote could be taken. That vote had not yet occurred as of publication.

Representative Scott Garrett (R-NJ), Chairman of the House Financial Services Committee’s Subcommittee on Capital Markets and Government Sponsored Enterprises, urged members to pass both the Reforming Access for Investments in Startup Enterprises Act of 2015 or RAISE Act (H.R. 1839) and the Disclosure Modernization and Simplification Act of 2015 (H.R. 1525). Garrett, who sponsored the disclosure reform bill, said it would help trim overgrown securities regulations. Representative Carolyn Maloney (D-NY) told members that both bills have strong bi-partisan support.

A third bill (H.R. 3032), which had been set for a vote this week, appeared to have been removed from the schedule of Majority Leader Kevin McCarthy (R-Cal). The bill, sponsored by Kyrsten Sinema (D-Ariz), would amend the Exchange Act to repeal an outdated reporting duty of the SEC’s under the Right to Financial Privacy Act of 1978. The bill had sailed through the Financial Services Committee with overwhelming support in July.

Private resales. Representative Patrick T. McHenry (R-NC) introduced the RAISE Act in order to amend the Securities Act to deal with the private resale of restricted securities. The bill would work much like the so-called Rule 4(a)(1-1/2) exemption. Rule 144 already provides a similar exemption for the public resale of restricted securities.

Representative Garrett told members the Jumpstart Our Business Startups (JOBS) Act was a “huge success” even if it created an initial public offering on-ramp that is now in tension with regulations that make it hard for some shareholders in startups to exit their positions in these companies. He said the RAISE Act will help create a more liquid secondary market for startup firms’ shares. Representative Maloney noted the bill has “strong bi-partisan support” to codify a “rule” that now depends on varied law firm opinion practice.

Representative McHenry, the RAISE Act’s sponsor, agreed with Rep. Maloney that current Rule 4(a)(1-1/2) transactions rely on SEC no-action relief and ad hoc industry practices. He also acknowledged the efforts of Ranking Member Maxine Waters (D-Cal) to get the amended bill through the Financial Services Committee.

The substitute version was agreed to during a July markup session and reported by the Financial Services Committee by a recorded vote of 58-0. The updated bill clarifies that each purchaser must be an accredited investor and bars the use of general advertising or solicitation (the prior version would have permitted general advertising and solicitation via a platform accessed only by accredited investors).

The amended bill also includes informational requirements, provides for issuer and bad actor disqualifications, requires the issuer to be engaged in business (not just a blank check company or bankrupt entity), and provides that a transaction must not be in respect of an unsold allotment to a broker-dealer as underwriter.

This past June, the SEC’s Advisory Committee on Small and Emerging Companies recommended that the Commission “formalize” the Rule 4(a)(1-1/2) exemption. The committee observed that the JOBS Act, which enables small companies to remain private longer, also can make it harder for these firms to generate public liquidity, a situation that can hinder the JOBS Act’s capital formation and job creation goals.

Representative McHenry touted the RAISE Act’s liquidity-enhancing features when he first introduced the bill in April. “My bill is a narrow and straightforward fix which, if enacted, would provide more liquidity thereby facilitating growth for investors and entrepreneurs participating in secondary markets.”

Information overload. Companies that file reports with the SEC may benefit from future revamps of Form 10-K and Regulation S-K mandated by the Disclosure Modernization and Simplification Act of 2015. The bill would direct the SEC to allow filers to include a summary page in their Forms 10-K if they provide cross-references to related materials in the filing. Moreover, the bill would require the SEC to cut outmoded provisions from Regulation S-K, and to rework the existing regulation so it scales better for emerging growth companies and other smaller issuers.

The Commission also would have to engage in a larger modernization and simplification effort after consulting with the agency’s Investor Advisory Committee and Advisory Committee on Small and Emerging Companies. The agency must report the results of a related study to Congress. The bill was reported out of the Financial Services Committee in May by a unanimous recorded vote.

Representative Garrett recalled today that Congress and regulators made a fundamental decision more than 80 years ago to create a body of securities laws premised on issuers’ disclosure obligations to investors. But Garrett said the regulations implementing these laws had grown over the decades since enactment to the point that investors now face “information overload.” According to Rep. Maloney, regulations must “evolve” with markets. She said Rep. Garrett’s bill offers the SEC the flexibility to target easy projects first, and then to go after bigger streamlining targets.

MainStory: TopStory BrokerDealers ExchangesMarketRegulation FormsFilings JOBSAct PrivatePlacements PublicCompanyReportingDisclosure SecuritiesOfferings

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