H. Rept. 112-206 - 112th Congress (2011-2012)
September 14, 2011, As Reported by the Financial Services Committee

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House Report 112-206 - SMALL COMPANY CAPITAL FORMATION ACT OF 2011




[House Report 112-206]
[From the U.S. Government Printing Office]


112th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    112-206

======================================================================



 
              SMALL COMPANY CAPITAL FORMATION ACT OF 2011

                                _______
                                

 September 14, 2011.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

         Mr. Bachus, from the Committee on Financial Services, 
                        submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 1070]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 1070) to amend the Securities Act of 1933 to 
authorize the Securities and Exchange Commission to exempt a 
certain class of securities from such Act, having considered 
the same, report favorably thereon with an amendment and 
recommend that the bill as amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Small Company Capital Formation Act of 
2011''.

SEC. 2. AUTHORITY TO EXEMPT CERTAIN SECURITIES.

  (a) In General.--Section 3(b) of the Securities Act of 1933 (15 
U.S.C. 77c(b)) is amended--
          (1) by striking ``(b) The Commission'' and inserting the 
        following:
  ``(b) Additional Exemptions.--
          ``(1) Small issues exemptive authority.--The Commission''; 
        and
          (2) by adding at the end the following:
          ``(2) Additional issues.--The Commission shall by rule or 
        regulation add a class of securities to the securities exempted 
        pursuant to this section in accordance with the following terms 
        and conditions:
                  ``(A) The aggregate offering amount of all securities 
                sold within the prior 12-month period in reliance on 
                the exemption added in accordance with this paragraph 
                shall not exceed $50,000,000.
                  ``(B) The securities may be offered and sold 
                publicly.
                  ``(C) The securities shall not be restricted 
                securities within the meaning of the Federal securities 
                laws and the regulations promulgated thereunder.
                  ``(D) The civil liability provision in section 
                12(a)(2) shall apply to any person offering or selling 
                such securities.
                  ``(E) The issuer may solicit interest in the offering 
                prior to filing any offering statement, on such terms 
                and conditions as the Commission may prescribe in the 
                public interest or for the protection of investors.
                  ``(F) The Commission shall require the issuer to file 
                audited financial statements with the Commission 
                annually.
                  ``(G) Such other terms, conditions, or requirements 
                as the Commission may determine necessary in the public 
                interest and for the protection of investors, which may 
                include--
                          ``(i) a requirement that the issuer prepare 
                        and electronically file with the Commission and 
                        distribute to prospective investors an offering 
                        statement, and any related documents, in such 
                        form and with such content as prescribed by the 
                        Commission, which shall include a description 
                        of the issuer's business operations, its 
                        financial condition, its corporate governance 
                        principles, its use of investor funds, and 
                        other appropriate matters; and
                          ``(ii) disqualification provisions under 
                        which the exemption shall not be available 
                        based upon the disciplinary history of the 
                        issuer or its predecessors, affiliates, 
                        officers, directors, underwriters, or other 
                        related persons, which shall be substantially 
                        similar to the disqualification provisions 
                        contained in the regulations adopted in 
                        accordance with section 926 of the Dodd-Frank 
                        Wall Street Reform and Consumer Protection Act 
                        (15 U.S.C. 77d note).
          ``(3) Limitation.--Only the following types of securities may 
        be exempted under a rule or regulation adopted pursuant to 
        paragraph (2): equity securities, debt securities, and debt 
        securities convertible or exchangeable to equity interests, 
        including any guarantees of such securities.
          ``(4) Periodic disclosures.--Upon such terms and conditions 
        as the Commission determines necessary in the public interest 
        and for the protection of investors, the Commission by rule or 
        regulation may require an issuer of a class of securities 
        exempted under paragraph (2) to make available to investors 
        periodic disclosures regarding the issuer, its business 
        operations, its financial condition, its corporate governance 
        principles, its use of investor funds, and other appropriate 
        matters, and also may provide for the suspension and 
        termination of such a requirement with respect to that issuer.
          ``(5) Adjustment.--Not later than 2 years after the date of 
        enactment of the Small Company Capital Formation Act of 2011 
        and every 2 years thereafter, the Commission shall review the 
        offering amount limitation described in paragraph (2)(A) and 
        shall increase such amount as the Commission determines 
        appropriate. If the Commission determines not to increase such 
        amount, it shall report to the Committee on Financial Services 
        of the House of Representatives and the Committee on Banking, 
        Housing, and Urban Affairs of the Senate on its reasons for not 
        increasing the amount.''.
  (b) Treatment as Covered Securities for Purposes of NSMIA.--Section 
18(b)(4) of the Securities Act of 1933 (15 U.S.C. 77r(b)(4)) is 
amended--
          (1) in subparagraph (C), by striking ``; or'' at the end and 
        inserting a semicolon; and
          (2) by redesignating subparagraph (D) as subparagraph (E), 
        and inserting after subparagraph (C) the following:
                  ``(D) a rule or regulation adopted pursuant to 
                section 3(b)(2) and such security is--
                          ``(i) offered or sold through a broker or 
                        dealer;
                          ``(ii) offered or sold on a national 
                        securities exchange; or
                          ``(iii) sold to a qualified purchaser as 
                        defined by the Commission pursuant to paragraph 
                        (3).''.
  (c) Conforming Amendment.--Section 4(5) of the Securities Act of 1933 
is amended by striking ``section 3(b)'' and inserting ``section 
3(b)(1)''.

                          Purpose and Summary

    H.R. 1070, the Small Company Capital Formation Act, raises 
the offering threshold for companies exempted from registration 
with the U.S. Securities and Exchange Commission (SEC) under 
Regulation A from $5 million--the threshold set in the early 
1990s--to $50 million. Raising the offering threshold helps 
small companies gain access to capital markets without the 
costs and delays associated with the full-scale securities 
registration process. H.R. 1070 provides the SEC with the 
authority to increase the threshold and requires the SEC to re-
examine the threshold every two years and report to Congress on 
its decisions regarding adjustment of the threshold.

                  Background and Need for Legislation

    Section 3 of the Securities Act of 1933 authorizes the SEC 
to exempt small securities offerings from registration. Under 
Section 3, the SEC promulgated Regulation A, which exempts 
public offerings of less than $5 million in any 12-month 
period. The SEC set the threshold at $5 million in 1992, where 
it has remained.
    Congress originally authorized the SEC to set the Section 3 
threshold at $100,000. It has raised the limit several times 
since: to $300,000 in 1945; to $500,000 in 1972; to $1,500,000 
in 1978; and to $2,000,000, also in 1978. Before 1980, each 
time that Congress raised the statutory limit, the SEC promptly 
exercised its authority and raised the Regulation A threshold. 
Congress established the current level of $5,000,000 in 1980, 
but the SEC waited 12 years, until 1992, before raising the 
Regulation A threshold to the statutory limit authorized by 
Congress.
    Since the SEC set the Regulation A threshold at $5 million 
in 1992, issuers and market participants have pointed out that 
the offering threshold has been too low to justify the costs of 
going public under Regulation A. In addition, inflation, which 
has risen approximately 165% since 1980, when Congress gave the 
SEC the authority to set the Regulation A offering threshold, 
has further exacerbated the imbalance between costs and 
benefits. Between 1995 and 2004, companies have used Regulation 
A only 78 times; in 2010, only three times. The low number of 
Regulation A filings--each for the maximum amount of $5 
million--demonstrates that a revision to Regulation A is 
necessary. To increase the use of Regulation A offerings and 
help make capital available to small companies, Representative 
Schweikert introduced H.R. 1070, which increases the offering 
threshold to $50 million.
    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises held a legislative hearing on H.R. 1070 
on March 16, 2011. At that hearing, David Weild, Senior 
Advisor--Capital Markets Group, Grant Thornton LLP, testified 
about the benefits of increasing the Regulation A offering 
threshold:

          The United States stock market, once the envy of the 
        world, has suffered a devastating decline in numbers of 
        small initial public offerings (IPOs). Our research and 
        analysis of relevant data strongly demonstrates that 
        small businesses and entrepreneurs cannot access the 
        capital they need to grow and create jobs. The United 
        States is losing more public companies from our listed 
        stock exchanges than we are replacing with new IPOs. 
        When measured by number of listed companies, America's 
        stock exchanges are declining, while those of other 
        developed nations are increasing. It is imperative that 
        Congress, regulators and stakeholders in the debate 
        evaluate and take action to increase the number of U.S. 
        publicly listed companies. . . . [P]assage of the 
        proposed Reg A bill is a necessary first step in a 
        campaign to bring back the small IPO, generate jobs and 
        revitalize the U.S. economy.

    Small companies are critical to economic growth in the 
United States. Amending Regulation A to make it viable for 
small companies to access capital will permit greater 
investment in these companies, resulting in economic growth and 
jobs. By reducing the regulatory burden and expense of raising 
capital from the investing public, H.R. 1070 will boost the 
flow of capital to small businesses and fuel America's most 
vigorous job-creation machine. Regulation A offerings can also 
help entrepreneurial businesses attract private capital at 
lower costs than might be feasible in an initial public 
offering using full SEC registration procedures.

                                Hearings

    On March 16, 2011, the Subcommittee on Capital Markets and 
Government Sponsored Enterprises held a hearing entitled 
``Legislative Proposals to Promote Job Creation, Capital 
Formation, and Market Certainty,'' at which H.R. 1070 was one 
of the proposals discussed. The following witnesses testified:
        
 Mr. Kenneth A. Bertsch, President and CEO, 
        Society of Corporate Secretaries & Governance 
        Professionals
        
 Mr. Tom Deutsch, Executive Director, American 
        Securitization Forum
        
 Ms. Pam Hendrickson, Chief Operating Officer, 
        The Riverside Company
        
 Mr. Damon Silvers, Policy Director and Special 
        Counsel, AFL-CIO
        
 Mr. David Weild, Senior Advisor, Grant 
        Thornton, LLP
        
 Mr. Luke Zubrod, Director, Chatham Financial

                        Committee Consideration

    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises met in open session on May 3 and 4, 2011, 
and ordered H.R. 1070, as amended, favorably reported to the 
full Committee by voice vote.
    The Committee on Financial Services met in open session on 
June 22, 2011, and ordered H.R. 1070, as amended, favorably 
reported to the House by voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto.
    On June 22, 2011, the Committee on Financial Services met 
in open session and ordered H.R. 1070, as amended, favorably 
reported to the House by voice vote.
    During consideration of H.R. 1070 by the Committee, the 
following amendments were considered:
    1. An amendment offered by Mr. Frank, no. 1c, to an 
amendment in the nature of a substitute offered by Mr. 
Schweikert, no. 1, to remove the broker-dealer exemption from 
all fifty states' securities laws for selling Regulation A 
offerings, was not agreed to by a record vote of 20 yeas and 26 
nays (Record vote no. FC-43).

                                              RECORD VOTE NO. FC-43
----------------------------------------------------------------------------------------------------------------
         Representative             Aye       Nay     Present     Representative      Aye       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus.....................  ........        X   .........  Mr. Frank (MA)...        X   ........  .........
Mr. Hensarling.................  ........        X   .........  Ms. Waters.......        X   ........  .........
Mr. King (NY)..................  ........  ........  .........  Mrs. Maloney.....  ........  ........  .........
Mr. Royce......................  ........        X   .........  Mr. Gutierrez....  ........  ........  .........
Mr. Lucas......................  ........        X   .........  Ms. Velazquez....        X   ........  .........
Mr. Paul.......................  ........  ........  .........  Mr. Watt.........        X   ........  .........
Mr. Manzullo...................  ........        X   .........  Mr. Ackerman.....        X   ........  .........
Mr. Jones......................  ........        X   .........  Mr. Sherman......        X   ........  .........
Mrs. Biggert...................  ........        X   .........  Mr. Meeks........  ........  ........  .........
Mr. Gary G. Miller (CA)........  ........        X   .........  Mr. Capuano......        X   ........  .........
Mrs. Capito....................  ........        X   .........  Mr. Hinojosa.....  ........  ........  .........
Mr. Garrett....................  ........        X   .........  Mr. Clay.........  ........  ........  .........
Mr. Neugebauer.................  ........        X   .........  Mrs. McCarthy            X   ........  .........
                                                                 (NY).
Mr. McHenry....................  ........        X   .........  Mr. Baca.........  ........  ........  .........
Mr. Campbell...................  ........        X   .........  Mr. Lynch........        X   ........  .........
Mrs. Bachmann..................  ........        X   .........  Mr. Miller (NC)..        X   ........  .........
Mr. McCotter...................  ........        X   .........  Mr. David Scott          X   ........  .........
                                                                 (GA).
Mr. McCarthy (CA)..............  ........  ........  .........  Mr. Al Green (TX)        X   ........  .........
Mr. Pearce.....................  ........  ........  .........  Mr. Cleaver......        X   ........  .........
Mr. Posey......................  ........        X   .........  Ms. Moore........        X   ........  .........
Mr. Fitzpatrick................  ........        X   .........  Mr. Ellison......        X   ........  .........
Mr. Westmoreland...............  ........  ........  .........  Mr. Perlmutter...        X   ........  .........
Mr. Luetkemeyer................  ........        X   .........  Mr. Donnelly.....        X   ........  .........
Mr. Huizenga...................  ........        X   .........  Mr. Carson.......  ........  ........  .........
Mr. Duffy......................  ........  ........  .........  Mr. Himes........        X   ........  .........
Ms. Hayworth...................  ........  ........  .........  Mr. Peters.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Mr. Carney.......        X   ........  .........
Mr. Hurt.......................  ........        X   .........
Mr. Dold.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Mr. Grimm......................  ........        X   .........
Mr. Canseco....................  ........        X   .........
Mr. Stivers....................  ........  ........  .........
Mr. Fincher....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    2. An amendment offered by Ms. Velazquez, no. 1e, to an 
amendment in the nature of a substitute offered by Mr. 
Schweikert, no. 1, to expand Regulation A offerings to include 
securities offered by a small business investment company, was 
not agreed to by a record vote of 24 yeas and 27 nays (Record 
vote no. FC-44).

                                              RECORD VOTE NO. FC-44
----------------------------------------------------------------------------------------------------------------
         Representative             Aye       Nay     Present     Representative      Aye       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus.....................  ........        X   .........  Mr. Frank (MA)...        X   ........  .........
Mr. Hensarling.................  ........        X   .........  Ms. Waters.......        X   ........  .........
Mr. King (NY)..................  ........  ........  .........  Mrs. Maloney.....        X   ........  .........
Mr. Royce......................  ........        X   .........  Mr. Gutierrez....  ........  ........  .........
Mr. Lucas......................  ........        X   .........  Ms. Velazquez....        X   ........  .........
Mr. Paul.......................  ........  ........  .........  Mr. Watt.........        X   ........  .........
Mr. Manzullo...................  ........        X   .........  Mr. Ackerman.....        X   ........  .........
Mr. Jones......................  ........        X   .........  Mr. Sherman......        X   ........  .........
Mrs. Biggert...................  ........        X   .........  Mr. Meeks........  ........  ........  .........
Mr. Gary G. Miller (CA)........  ........        X   .........  Mr. Capuano......        X   ........  .........
Mrs. Capito....................  ........        X   .........  Mr. Hinojosa.....        X   ........  .........
Mr. Garrett....................  ........        X   .........  Mr. Clay.........        X   ........  .........
Mr. Neugebauer.................  ........        X   .........  Mrs. McCarthy            X   ........  .........
                                                                 (NY).
Mr. McHenry....................  ........        X   .........  Mr. Baca.........  ........  ........  .........
Mr. Campbell...................  ........        X   .........  Mr. Lynch........        X   ........  .........
Mrs. Bachmann..................  ........        X   .........  Mr. Miller (NC)..        X   ........  .........
Mr. McCotter...................  ........        X   .........  Mr. David Scott          X   ........  .........
                                                                 (GA).
Mr. McCarthy (CA)..............  ........  ........  .........  Mr. Al Green (TX)        X   ........  .........
Mr. Pearce.....................  ........  ........  .........  Mr. Cleaver......        X   ........  .........
Mr. Posey......................  ........        X   .........  Ms. Moore........        X   ........  .........
Mr. Fitzpatrick................  ........        X   .........  Mr. Ellison......        X   ........  .........
Mr. Westmoreland...............  ........  ........  .........  Mr. Perlmutter...        X   ........  .........
Mr. Luetkemeyer................  ........        X   .........  Mr. Donnelly.....        X   ........  .........
Mr. Huizenga...................  ........        X   .........  Mr. Carson.......        X   ........  .........
Mr. Duffy......................  ........        X   .........  Mr. Himes........        X   ........  .........
Ms. Hayworth...................  ........  ........  .........  Mr. Peters.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Mr. Carney.......        X   ........  .........
Mr. Hurt.......................  ........        X   .........
Mr. Dold.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Mr. Grimm......................  ........        X   .........
Mr. Canseco....................  ........        X   .........
Mr. Stivers....................  ........  ........  .........
Mr. Fincher....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    The following amendments and motions were also considered 
by the Committee:
    1. An amendment offered by Mr. Ackerman, no. 1a, to an 
amendment in the nature of a substitute offered by Mr. 
Schweikert, no. 1, to require issuers to file annual audited 
financial statements with the Securities and Exchange 
Commission, was agreed to by voice vote.
    2. An amendment offered by Mr. Schweikert, no. 1bi, to an 
amendment offered by Mr. Frank, no. 1b, to treat the prospectus 
for a Regulation A offering to be subject to liability under 
section 12(a)(2) of the Securities Act of 1933 instead of 
section 11 of the Act, was agreed to by voice vote.
    3. An amendment offered by Mr. Frank, no. 1b, as amended by 
an amendment offered by Mr. Schweikert, no. 1bi, to an 
amendment in the nature of a substitute offered by Mr. 
Schweikert, no. 1, to treat a prospectus for a Regulation A 
offering to be subject to liability under section 12(a)(2) of 
the Securities Act of 1933, was agreed to by voice vote.
    4. An amendment offered by Ms. Velazquez, no. 1d, to an 
amendment in the nature of a substitute offered by Mr. 
Schweikert, no. 1, to expand Regulation A offerings to include 
securities offered by a small business investment company, was 
offered and withdrawn.
    5. A motion offered by Mr. Frank, to move the previous 
question on H.R. 1070, was agreed to by voice vote.
    6. An amendment in the nature of a substitute offered by 
Mr. Schweikert, no. 1, as amended by an amendment offered by 
Mr. Ackerman, no. 1a, and an amendment offered by Mr. Frank, 
no. 1b, as amended by an amendment offered by Mr. Schweikert, 
no. 1bi, to make technical and clarifying changes, to enhance 
investor protections, to treat a prospectus for a Regulation A 
offering to be subject to liability under section 12(a)(2) of 
the Securities Act of 1933, and to clarify that Regulation A 
offerings are exempt from state securities laws only if they 
are listed on an exchange, offered by a broker dealer, or sold 
to a qualified purchaser, was agreed to by voice vote.
    7. A motion offered by Mr. Garrett, to move the previous 
question on H.R. 1070, was agreed to by voice vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    H.R. 1070, the Small Company Capital Formation Act, 
increases the offering threshold for companies exempted from 
SEC registration under Regulation A from $5 million to $50 
million. The purpose of the change is to help small issuers, 
such as venture-capital backed companies, gain access to 
funding without the costs and delays associated with the full-
scale securities registration process. The legislation provides 
the SEC with the authority to increase the threshold and 
requires the SEC to re-examine the threshold every two years 
and report to Congress on decisions regarding the adjustment of 
the threshold.
    The objective of H.R. 1070 is to make Regulation A into a 
viable channel for small companies to access capital, which 
will permit greater investment in these companies, resulting in 
economic growth and jobs. Small companies are critical to 
economic growth in the United States. By reducing the 
regulatory burden and expense of raising capital from the 
investing public, H.R. 1070 will boost the flow of capital to 
small businesses and fuel America's most vigorous job-creation 
machine. Regulation A offerings can also help entrepreneurial 
businesses attract private capital by providing companies with 
additional working capital at reduced costs than might be 
feasible when compared with an initial public offering using 
full SEC registration.

           New Budget Authority, Entitlement Authority, and 
                            Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 13, 2011.
Hon. Spencer Bachus,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1070, the Small 
Company Capital Formation Act of 2011.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                      Douglas W. Elmendorf,
                                                          Director.
    Enclosure.

H.R. 1070--Small Company Capital Formation Act of 2011

    Under current law, companies issuing securities with an 
aggregate offering amount that is less than $5 million are not 
required to register the offering with the Securities and 
Exchange Commission (SEC). H.R. 1070 would increase that 
threshold from $5 million to $50 million for issuances that 
meet certain conditions, including filing an audited financial 
statement with the SEC each year. The bill would require the 
SEC to review this threshold every two years and increase the 
amount as it determines appropriate.
    Based on information from the SEC, CBO estimates that 
implementing H.R. 1070 would cost about $2 million over the 
2012-2016 period, assuming appropriation of the necessary 
funds. The SEC would incur additional costs for staffing and 
overhead as a result of the expected additional securities 
offerings exempt from the registration requirement, but those 
discretionary costs would be less than $500,000 in any year 
during that period. Enacting H.R. 1070 would not affect direct 
spending or revenues; therefore, pay-as-you-go procedures do 
not apply.
    H.R. 1070 would impose an intergovernmental mandate as 
defined in the Unfunded Mandates Reform Act (UMRA) by 
prohibiting states from requiring issuers of some securities to 
register the securities with the state, or to pay registration 
fees, prior to issuance. The cost of the mandate would be the 
amount of fee revenue that states would be precluded from 
collecting. Based on information from the SEC, states, and 
industry sources, CBO estimates that forgone revenues would be 
small and would not exceed the threshold established in UMRA 
for intergovernmental mandates ($71 million in 2011, adjusted 
annually for inflation).
    H.R. 1070 contains no private-sector mandates as defined in 
UMRA.
    The CBO staff contacts for this estimate are Susan Willie 
(for federal costs) and Elizabeth Cove Delisle (for the impact 
on state and local governments). This estimate was approved by 
Theresa Gullo, Deputy Assistant Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 1070 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section provides a short title to the bill by citing 
it as the ``Small Company Capital Formation Act of 2011.''

Section 2. Authority to exempt certain securities

    This section amends Section 3 of the Securities Act of 1933 
and provides that the Securities and Exchange Commission shall 
add a class of exempt securities with the following 
characteristics: (1) the aggregate offering amount of all 
securities sold within the prior 12-month period in reliance on 
the exemption shall not exceed $50 million; (2) the securities 
may be offered and sold publicly; (3) the securities shall not 
be restricted securities within the meaning of the Federal 
securities laws; and (4) the securities must be either equity 
securities, debt securities, or debt securities convertible or 
exchangeable to equity interests.
    This section allows the issuer to solicit interest in the 
offering prior to filing any offering statement, on such terms 
and conditions as the SEC may prescribe in the public interest 
or for the protection of investors. The SEC shall require 
issuers to submit an audited financial statement annually.
    This section also gives the SEC the authority to set forth 
other terms and conditions for these offerings, which may 
include (1) a requirement that the issuer of the securities 
prepare and electronically file with the SEC and distribute to 
investors an offering statement and (2) disqualification 
provisions under which the exemption shall not be available.
    This section subjects Regulation A prospectuses to 
liability under section 12(a)(2) of the Securities Act of 1933.
    This section also allows the SEC to require the issuer to 
make available to investors periodic disclosures regarding the 
issuer, its business operations, its financial condition, its 
corporate governance principles, and its use of investor funds.
    This section requires the SEC to review the offering amount 
every two years and to increase the amount as the SEC 
determines appropriate. If the SEC determines not to increase 
the amount, it shall report to the Committee on Financial 
Services of the House and the Committee on Banking, Housing and 
Urban Affairs of the Senate on its reasons for not increasing 
the amount.
    This section exempts securities issued using Regulation A 
from state securities laws that are offered or sold through a 
broker or dealer; offered or sold on a national securities 
exchange; or sold to a qualified purchaser as defined by the 
SEC.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                         SECURITIES ACT OF 1933

TITLE I--SHORT TITLE

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                          EXEMPTED SECURITIES

  Sec. 3. (a) * * *
  [(b) The Commission]
  (b) Additional Exemptions.--
          (1) Small issues exemptive authority.--The Commission 
        may from time to time by its rules and regulations, and 
        subject to such terms and conditions as may be 
        prescribed therein, add any class of securities to the 
        securities exempted as provided in this section, if it 
        finds that the enforcement of this title with respect 
        to such securities is not necessary in the public 
        interest and for the protection of investors by reason 
        of the small amount involved or the limited character 
        of the public offering; but no issue of securities 
        shall be exempted under this subsection where the 
        aggregate amount at which such issue is offered to the 
        public exceeds $5,000,000.
          (2) Additional issues.--The Commission shall by rule 
        or regulation add a class of securities to the 
        securities exempted pursuant to this section in 
        accordance with the following terms and conditions:
                  (A) The aggregate offering amount of all 
                securities sold within the prior 12-month 
                period in reliance on the exemption added in 
                accordance with this paragraph shall not exceed 
                $50,000,000.
                  (B) The securities may be offered and sold 
                publicly.
                  (C) The securities shall not be restricted 
                securities within the meaning of the Federal 
                securities laws and the regulations promulgated 
                thereunder.
                  (D) The civil liability provision in section 
                12(a)(2) shall apply to any person offering or 
                selling such securities.
                  (E) The issuer may solicit interest in the 
                offering prior to filing any offering 
                statement, on such terms and conditions as the 
                Commission may prescribe in the public interest 
                or for the protection of investors.
                  (F) The Commission shall require the issuer 
                to file audited financial statements with the 
                Commission annually.
                  (G) Such other terms, conditions, or 
                requirements as the Commission may determine 
                necessary in the public interest and for the 
                protection of investors, which may include--
                          (i) a requirement that the issuer 
                        prepare and electronically file with 
                        the Commission and distribute to 
                        prospective investors an offering 
                        statement, and any related documents, 
                        in such form and with such content as 
                        prescribed by the Commission, which 
                        shall include a description of the 
                        issuer's business operations, its 
                        financial condition, its corporate 
                        governance principles, its use of 
                        investor funds, and other appropriate 
                        matters; and
                          (ii) disqualification provisions 
                        under which the exemption shall not be 
                        available based upon the disciplinary 
                        history of the issuer or its 
                        predecessors, affiliates, officers, 
                        directors, underwriters, or other 
                        related persons, which shall be 
                        substantially similar to the 
                        disqualification provisions contained 
                        in the regulations adopted in 
                        accordance with section 926 of the 
                        Dodd-Frank Wall Street Reform and 
                        Consumer Protection Act (15 U.S.C. 77d 
                        note).
          (3) Limitation.--Only the following types of 
        securities may be exempted under a rule or regulation 
        adopted pursuant to paragraph (2): equity securities, 
        debt securities, and debt securities convertible or 
        exchangeable to equity interests, including any 
        guarantees of such securities.
          (4) Periodic disclosures.--Upon such terms and 
        conditions as the Commission determines necessary in 
        the public interest and for the protection of 
        investors, the Commission by rule or regulation may 
        require an issuer of a class of securities exempted 
        under paragraph (2) to make available to investors 
        periodic disclosures regarding the issuer, its business 
        operations, its financial condition, its corporate 
        governance principles, its use of investor funds, and 
        other appropriate matters, and also may provide for the 
        suspension and termination of such a requirement with 
        respect to that issuer.
          (5) Adjustment.--Not later than 2 years after the 
        date of enactment of the Small Company Capital 
        Formation Act of 2011 and every 2 years thereafter, the 
        Commission shall review the offering amount limitation 
        described in paragraph (2)(A) and shall increase such 
        amount as the Commission determines appropriate. If the 
        Commission determines not to increase such amount, it 
        shall report to the Committee on Financial Services of 
        the House of Representatives and the Committee on 
        Banking, Housing, and Urban Affairs of the Senate on 
        its reasons for not increasing the amount.

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                         EXEMPTED TRANSACTIONS

  Sec. 4. The provisions of section 5 shall not apply to--
          (1) * * *

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          (5) transactions involving offers or sales by an 
        issuer solely to one or more accredited investors, if 
        the aggregate offering price of an issue of securities 
        offered in reliance on this paragraph does not exceed 
        the amount allowed under [section 3(b)] section 3(b)(1) 
        of this title, if there is no advertising or public 
        solicitation in connection with the transaction by the 
        issuer or anyone acting on the issuer's behalf, and if 
        the issuer files such notice with the Commission as the 
        Commission shall prescribe.

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SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.

  (a) * * *
  (b) Covered Securities.--For purposes of this section, the 
following are covered securities:
          (1) * * *

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          (4) Exemption in connection with certain exempt 
        offerings.--A security is a covered security with 
        respect to a transaction that is exempt from 
        registration under this title pursuant to--
                  (A) * * *

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                  (C) section 3(a), other than the offer or 
                sale of a security that is exempt from such 
                registration pursuant to paragraph (4), (10), 
                or (11) of such section, except that a 
                municipal security that is exempt from such 
                registration pursuant to paragraph (2) of such 
                section is not a covered security with respect 
                to the offer or sale of such security in the 
                State in which the issuer of such security is 
                located[; or];
                  (D) a rule or regulation adopted pursuant to 
                section 3(b)(2) and such security is--
                          (i) offered or sold through a broker 
                        or dealer;
                          (ii) offered or sold on a national 
                        securities exchange; or
                          (iii) sold to a qualified purchaser 
                        as defined by the Commission pursuant 
                        to paragraph (3).
                  [(D)] (E) Commission rules or regulations 
                issued under section 4(2), except that this 
                subparagraph does not prohibit a State from 
                imposing notice filing requirements that are 
                substantially similar to those required by rule 
                or regulation under section 4(2) that are in 
                effect on September 1, 1996.

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                      MINORITY VIEWS ON H.R. 1070

    There is consensus on the Committee that the Securities and 
Exchange Commission (SEC) should raise the exemption limit for 
Regulation A (``Reg A'') security offerings, as the current 
rule with a limit of $5 million is little used by issuers due 
to the small size of issuances permitted. Last year, when we 
were in the majority, we sent a letter to the SEC recommending 
that the SEC raise the exemption limit. Likewise, H.R. 1070 
would provide small and medium companies the ability to offer 
securities up to $50 million publicly without the full cost of 
a registered offering, potentially expanding their access to 
capital beyond the private offerings many now use.
    During the markup, Democrats made some improvements to H.R. 
1070. The Ackerman amendment, for example, provides investors 
with audited financial statements on an annual basis. Another 
Democratic amendment affords investors legal recourse for 
misstatements made in prospectuses. The Majority has also 
offered to work with Democrats on other issues such as 
permitting Small Business Investment Companies to issue 
Regulation A securities.
    There was one contentious issue that arose during the 
markup that had nothing to do with the principle of an 
exemption limit increase, but instead with new language 
preempting state law. This language preempts state securities 
law for Regulation A securities offered or sold by a broker or 
dealer, creating a class of security not subject to state level 
review, but which will not receive adequate attention at the 
federal level. Regulation A securities are sometimes high-risk 
offerings that may be susceptible to fraud, making the 
protections provided by state review essential. To address 
these concerns, the Democrats offered an amendment to clarify 
that state securities would only be preempted if the Regulation 
A security is sold on an exchange or sold only to a qualified 
purchaser. While that amendment was defeated, we will continue 
to work to ensure that the final bill provides adequate 
oversight.

                                   Barney Frank.
                                   Emanuel Cleaver.
                                   John C. Carney.
                                   Stephen F. Lynch.
                                   Carolyn B. Maloney.
                                   Al Green.
                                   Wm. Lacy Clay.
                                   Brad Miller.
                                   Michael E. Capuano.
                                   Gary L. Ackerman.
                                   Andre Carson.
                                   Luis V. Gutierrez.
                                   Ruben Hinojosa.
                                   Melvin L. Watt.
                                   Gwen Moore.
                                   Maxine Waters.