Exempting Transactions with Accredited Investors From Certain SEC Prohibitions (H.R. 1839)

What is H.R. 1839?

(Updated July 19, 2017)

This bill would exempt certain investment transactions from prohibitions within the Securities Act of 1933 that are related to interstate commerce to facilitate investment in startups. The exemption would apply when:

• All purchasers are considered accredited investors by the Securities and Exchange Commission (SEC) — meaning that they meet certain income or net worth requirements;

• If the securities are being offered through a general solicitation or advertising and the sales are made through a platform available only to accredited investors.

The exemption would be denied for transactions where the seller is:

• An issuer of the securities, or the issuer’s subsidiary or parent;

• A securities dealer;

• An underwriter acting on behalf of the issuer, its subsidiaries, or parent, which receives compensation from the issuer related to the sale.

There is an existing exemption for investors who buy securities through a private placement that allows them to resell those securities publicly after a holding period that was granted by the SEC and codified into law. This bill essentially codifies into law the same regulatory exemption that exists allowing the sale of restricted securities via private placement.

Argument in favor

Making this exemption — which is already being utilized through regulatory regimes — into law would provide clarity for both investors and businesses that are trying to offer ownership in their company through private markets.

Argument opposed

The SEC shouldn’t allow accredited investors to make these sort of investment transactions. If businesses need to access capital, or shareholders want to sell their stock, they should use the existing mechanisms available to them.

Impact

Accredited investors and businesses looking to privately purchase or sell stock, and the SEC.

Cost of H.R. 1839

The CBO estimates that implementing this bill would cost less than $500,000 over the 2016-2020 period.

Additional Info

In-Depth: Sponsoring Rep. Patrick McHenry (R-NC) noted the need for strong secondary markets to facilitate transactions between investors and businesses: “Secondary markets are among the most important arenas for entrepreneurs seeking capital, but the lack of liquidity in these markets has limited their viability as a tool for growing companies. 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.”

Nelson Griggs, a board member of Nasdaq Private Market LLC, explained in an op-ed in VentureBeat: why this legislation would improve the status quo for people who hold shares or stock options in privately-held companies:

“this [reform] amounts to good growth: more startups able to conserve their resources, employ new and retain talented employees, raise and expend capital, and time their public offering on their terms. In addition, the proposed legislation will result in increased income and capital gains tax paid at the state and federal levels as options are exercised and shares are sold.”

The House Financial Services Committee passed this legislation unanimously on a vote of 58-0.

Media:

• Sponsoring Rep. Patrick McHenry (R-NC) Press Release
• CBO Cost Estimate
• Small Business & Entrepreneurship Council (In Favor)
• VentureBeat (In Favor)

Summary by Eric Revell
(Photo Credit: Flickr user AndreasPike)