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Bachus panel moves 'Facebook rule' to House floor

by William McConnell | Published October 27, 2011 at 11:31 AM

The House Financial Services Committee passed legislation Wednesday, Oct. 26, that would increase the number of shareholders most privately held companies may have without being required to register with the Securities and Exchange Commission to 1,000 from 500.

For banks and bank holding companies, the limit would be raised to 2,000.

The measure was among four the committee approved to make it easier for small and startup companies to raise capital.

Venture capitalists and bankers have pushed for an increase in the shareholder limit for years, although the issue gained a lot of political traction after Facebook Inc. was forced to cancel a private fundraising by Goldman Sachs Group Inc. amid allegations that they were trying to circumvent the rule.

SEC Chairwoman Mary Schapiro has said addressing the shareholder limit is the top priority of a small business capital advisory committee she has created. However, Financial Services Committee Chairman Spencer Bachus, R-Ala., said the SEC isn't moving fast enough. "They continue to lawyer-up over there and not make decisions," he said.

Companies object to the limit, which hasn't been raised since 1964, because it often forces them to begin making public financial disclosures and absorb the expenses associated with preparing and auditing their books according to SEC requirements.

There's been no action on companion measures in the Senate.

All four measures passed after Republicans included amendments from Democrats that clarified the changes do not prevent state securities officials from enforcing their anti-fraud statutes.

Republicans also agreed to work with Massachusetts Democrat Rep. Michael Capuano, who sought to include an amendment that would close an exemption allowing shares held in street name by a broker-dealer or a special purpose vehicle with many investors from counting as a single investor. Capuano said the exemption can be used to create a "de facto public company that no one knows anything about."

Bill sponsor Rep. David Schweikert, R-Ariz., said he sympathized with Capuano's goal but insisted there can be legitimate reasons for allowing the investment funds to count as a single investor. Capuano withdrew his amendment after Schweikert pledged to get input from the SEC before the bill goes to the House floor and craft an amendment that preserves legitimate uses of special purpose vehicles while preventing them from being used solely to circumvent the cap.

Also passed by the committee were bills allowing advertisement and promotion of "general solicitations" to accredited investors -- those with $250,000 in annual income or $1 million in assets not counting a home. The committee also approved a measure permitting companies to use the Internet to engage in "crowdfunding" of initial public offerings and securities issues of $5 million or less. Crowdfunding is a method for pooling many small amounts of money from a large group of investors.

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Bachus panel moves 'Facebook rule' to House floor

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