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Small-Business Bills Advance In U.S. House Panel

October 6, 2011
The article below from Dow Jones Newswire talks about Congresswoman Waters' Financial Services Subcommittee on Capital Markets and Government Enterprises markup hearing yesterday.

Small-Business Bills Advance In U.S. House Panel

-By Andrew Ackerman; Dow Jones Newswires; 202-569-8390; andrew.ackerman@dowjones.com

WASHINGTON (Dow Jones)--A House panel Wednesday advanced a series of bills that aim to make it easier for small businesses to access capital, though some of the measures, such as allowing entrepreneurs to use so-called "crowd-funding" techniques to raise small amounts of cash from a large number of people, were approved along party lines.

The bills now move from a subcommittee to the full House Financial Services Committee, where lawmakers may vote on them later this month. The full House is expected to take up at least some of the bills by year's end. Companion legislation has yet to be introduced in the Senate.

Though the Securities and Exchange Commission is already conducting a wide-ranging review of how it might ease restrictions on its rules governing capital-raising, House Republicans argue the legislation is needed now to jump-start the economy and create jobs.

Broad efforts at easing restrictions are bipartisan and received support from President Obama in his jobs speech last month. But state securities regulators worry about provisions that would pre-empt them from reviewing small offerings and warn there are not enough measures to protect investors in some of the proposals.

The crowd-funding bill, introduced by Rep. Patrick McHenry (R., N.C.), would allow an unlimited number of people to contribute a total of $5 million to a crowd-funded start-up, with individual contributions capped at $10,000, or 10% of their annual incomes.

The rise of the Internet has allowed creative artists, nonprofits and entrepreneurs to use crowd-funding techniques. But SEC rules currently bar companies from issuing shares in exchange for capital without first registering with the agency.

Democrats including Obama have indicated conceptual support for the idea, but it isn't controversy-free. The measure cleared the subcommittee 18-to-14 without any Democratic support.

Rep. Jim Himes (D., Conn.) said in an interview ahead of Wednesday's vote that the crowd-funding bill is "intriguing" but needs "a lot of fundamental work" to ensure investor protections.

"I used to do credit underwriting and sell securities and I just know that the key is really kicking the tires and looking under the hood," Himes said. "An ability to reach out to someone 3,000 miles away to me seems to really be an invitation to fraud and to scams."

Rep. Scott Garrett (R., N.J.), chairman of the subcommittee, said he would work to resolve Democrats' concerns before the bill comes before the full committee.

Another bill that cleared the committee without Democratic support is intended to expand the small-business reporting exemptions under the 2002 Sarbanes-Oxley Act. Drafted by Rep. Stephen Fincher (R., Tenn.), it would increase the market-capitalization threshold for firms to be exempt from having an independent auditor report on their internal controls to $500 million from $75 million.

Democrats have expressed reluctance to weaken Sarbanes-Oxley.

A third bill, approved by the subcommittee by voice vote, would require the SEC to allow small, private companies to use direct mail or advertisements to solicit private offerings from investors. The measure was introduced by House Majority Whip Kevin McCarthy (R., Calif.).

Currently, a "general solicitation" ban prevents small companies from advertising private stock or bond sales beyond "accredited investors," or those who meet a series of criteria, such as individuals with a net worth of at least $1 million excluding the value of their homes.

The subcommittee approved an amendment by Rep. Maxine Waters (D., Calif.) that would direct the SEC to establish rules that issuers who verify investors in such transactions are accredited.

State security regulators have warned against the McCarthy legislation as originally drafted. In a letter to lawmakers this week, Massachusetts Secretary of State William Galvin warned "cases and textbooks are replete with examples of stock promoters that have drummed up demand for their offerings through publicly, widely circulated rumors, and aggressive marketing."

"Because securities are complex and intangible property, retail investors are especially vulnerable to such publicity and hype," Galvin wrote, stressing against provisions that would exempt these and crowd-funded offerings from regulatory review.

The panel also signed off on a bill, introduced by Rep. David Schweikert (R., Ariz.) that would increase to 1,000 from 500 the cap on shareholders before closely-held companies would have to register with the SEC. The current cap, which has tripped up new companies such as Facebook, is 499 and has not been adjusted since 1964.

A related measure, also cleared by the panel and introduced by Himes, would raise the shareholder cap to 2,000 for small banks.