Should Small Businesses be Allowed to Sell Non-Public Stock Under Certain Circumstances? (H.R. 2201)

What is H.R. 2201?

(Updated August 20, 2019)

This bill would exempt certain micro-offerings from state regulation of securities offerings and federal prohibitions related to interstate solicitation. It would allow small businesses to offer non-public securities if: each investor has a substantive pre-existing relationship with an owner; if there are 35 or fewer purchasers; or the amount doesn’t exceed $500,000.

Current law prohibits the sale of securities that haven’t been registered with the Securities and Exchange Commission (SEC), although certain exemptions are allowed. This bill would enact an additional exemption.

Argument in favor

This bill would make it easier for entrepreneurs to launch startups, create jobs, and grow the economy. The exemption is tailored narrowly enough to protect investors.

Argument opposed

This bill would expose investors to unnecessary risk by granting companies an exemption to sell securities without the normal safeguards.

Impact

Investors; small businesses; states; and the SEC.

Cost of H.R. 2201

The CBO estimates that enacting this bill would have a negligible impact on the budget.

Additional Info

In-Depth: Sponsoring Rep. Tom Emmer (R-MN) introduced this bill to help small businesses raise capital by adding a new exemption to the Securities Act that defines what “non-public offerings” are allowed:

“Entrepreneurs will be able to more easily launch their startups and existing businesses will have better prospects for growth. By simply clarifying an old law, more small businesses will raise capital through non-public offerings, easing the burdens of red-tape, onerous paperwork, and the threat of lawsuits. Congress has much more work to do to fully unleash the American economic engine and this legislation is one of many steps I will take to help Minnesotans achieve the American Dream. With labor force participation at an all time low and many families still having less income than they had before the 2008 economic collapse, it is my duty to do everything I can to get America's economy firing on all cylinders.”

House Democrats have expressed opposition to this bill on the grounds that it would “put investors at risk by allowing companies to sell unregistered securities without important guardrails that normally apply to such transactions.” In the bill’s committee report, they wrote:

“One particularly troubling aspect of H.R. 2201 is that unregistered securities purchased under the exemption would not be characterized as “restricted,” and could thus be sold off to other investors immediately. As history demonstrates, the failure to restrict resale of unregistered securities could expose investors to abusive “pump and dump” schemes.”

This legislation passed the House Financial Services Committee on a 34-26 vote and has the support of five Republican cosponsors in the House. This legislation was included as an amendment to the Financial CHOICE Act, which passed the House in June on a 233-186 vote.

Media:

• Sponsoring Rep. Tom Emmer (R-MN) Press Release (Previous Version)
  
• House Financial Services Committee Report
  
• CBO Cost Estimate