The Securities and Exchange Commission appears set to relax its "500 shareholder rule," which requires registration with the agency when a company's shareholder base exceeds that number. At the same time, Congress is batting around new proposals on the subject. Something may even pass.
The question is what the new registration threshold will be and whether Congress and the SEC will make other changes to laws and rules affecting capital formation. Several proposals have been introduced on both sides of Capitol Hill to complement rule reviews under way at the SEC. President Obama is considering his own proposals as well.
House Republicans have offered more than a half-dozen pieces of legislation, some with bipartisan support, and hope to act on a few this fall. One House GOP initiative would eliminate any bar on solicitation made to "accredited investors," those with $250,000 in annual income or $1 million in assets not counting a private residence.
Two others would make tailored changes, such as an increase in the 500 limit to 1,000, but also exempt accredited investors. An alternative bill simply would increase the threshold to a total of 2,000. A third bill would exempt companies with less than $500 million in assets from some Sarbanes-Oxley requirements and allow companies with up to $1 billion in assets to opt out of SOX rules by shareholder vote.
Still others would pre-empt state securities laws and exempt offerings of community banks from the 500 limit, which they argue is a bar to raising capital for small institutions.
In the Senate, three or four pieces of legislation are also under consideration, some of which are Senate versions of House bills.
The SEC has announced plans to unveil a "concept rule release" covering possible changes. Testifying at a panel of the House Financial Services Committee, Meredith Cross, director of the Division of Corporation Finance, said the agency would seek comment on several ideas. Among them would be an increase in the 500 limit and changes that could open the door to peer-to-peer financing and crowdfunding, two strategies for pooling small amounts of money from a large group of investors, as well as promotion of sales of stock over the Internet.
"The staff is considering next steps, including a possible concept release for the commission to seek the public's input on the advisability and the costs and benefits of retaining or relaxing the restrictions on general solicitation," Cross said. The SEC, she added, wanted comments on whether to lift the curb on general solicitation; on substitute protections that might be needed to retain protections and on the types of investors who would be most vulnerable if solicitation was relaxed.
Lastly, Obama, announcing his debt-reduction plans, endorsed changes. "The administration will work with the Securities and Exchange Commission to conduct a comprehensive review of securities regulations from the perspective of these small companies to reduce the regulatory burdens on small business capital formation in ways that are consistent with investor protection, including expanding crowdfunding opportunities and increasing mini-offerings," the plan says.
Michael Zuppone, chair of Paul Hastings LLP's securities and capital markets practice, expects action. "The momentum is there," he says. "The Senate, the House and the administration are all on board, and that is a unique confluence."
Paul Merski, senior vice president and chief economist for the Independent Community Bankers of America, says there are two factors driving Capitol Hill. First, Congress is under pressure to boost the economy by eliminating employment-stifling over-regulation. Second, acting on regulations could be far easier for Congress than alternatives such as tax cuts."Regulatory relief doesn't cost anything. It doesn't increase the hole in the deficit. It's a lot easier than cutting the payroll tax and having to replace the revenue," he says.
Walter Van Dorn, a partner in SNR Denton's corporate practice, however, is skeptical that big changes are around the corner. He notes that discussion of changing the 500 shareholder rule arose earlier this year when Goldman, Sachs & Co. and Facebook Inc. canceled a private $1.5 billion stock offering because of the SEC registration threshold.
"My instinct is that a lot of this is politics," he says. "Even if the SEC does a concept release, it's likely to be followed by workshops before any changes actually take place." Van Dorn's prognosis: "I'm not holding my breath that we will see real laws changed."
Ira Teinowitz covers financial regulation for The Deal magazine.