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Public Statements

Entrepreneur Access to Capital Act

Floor Speech

By:
Date:
Location: Washington, DC

BREAK IN TRANSCRIPT

Mr. McHENRY. Mr. Chairman, I yield myself such time as I may consume.

When I'm at home in western North Carolina, I hear frequently from my constituents, from small businesses, that they have a very difficult time raising capital in these very challenging times that we're in. And over 2 years into an economic recovery that is struggling, America's labor and capital markets continue to face unprecedented challenges. Nearly 14 million Americans remain officially unemployed, with an additional 11 million underemployed. And small businesses continue to struggle to access capital despite an endless number of government initiatives.

The origin of these barriers to capital formation rests in two Federal securities laws--the Securities Act of 1933 and the Securities Exchange Act of 1934--that have not been substantially updated since a gallon of gasoline cost 10 cents and only 31 percent of households owned a telephone. Today, a gallon of gas, as we know, costs about 35 times more per gallon than it did then, and nearly every American owns a telephone. In fact, most people have the Internet in their pocket.

So while the comparison of then and now is nostalgic, the ramifications of not modernizing our securities regulations have led to registration and reporting requirements so onerous and costly that small companies have great difficulty raising capital.

For instance, if a startup company offers an equity stake to investors through a medium like Facebook or Twitter, it is presumably in violation of SEC regulations for that communication and offering. However, soliciting money for one's favorite charity or even a political candidate through the same Internet medium is perfectly legal. So, clearly, something is not right.

Furthermore, high net worth individuals can invest in businesses before the average family can. And that small business is limited on the amount of equity stakes they can provide investors and limited in the number of investors they can get. So, clearly, something has to be done to open these capital markets to the average investor, and that's what the Entrepreneur Access to Capital Act is all about.

It removes the SEC restrictions on crowdfunding to allow entrepreneurs and small businesses to raise capital from everyday investors. Already prevalent in Europe and Asia, crowdfunding has proven that broadening the communication investment capabilities between investors and entrepreneurs can have a positive impact and a positive effect on capital formation which is the lifeblood of a strong and growing economy.

Specifically, my bill will allow companies to pool up to $1 million without the expense of registering with the SEC or up to $2 million if the company provides investors with audited financial statements. Individual contributors are limited to $10,000 or 10 percent of the investor's annual income, whichever is less.

In addition, H.R. 2930 creates a regulatory structure of investor protection around this new, innovative form of financing with substantial intermediary requirements or issue requirements if there is no intermediary. This key mandate for investor protection is why the bill has received broad bipartisan support both in the Financial Services Committee and from President Obama.

This has been crafted both with Republican and Democrat staffers, getting input from my colleagues from across the aisle at a subcommittee markup, multiple hearings we've had on the idea of crowdfunding, as well as a full committee markup. And we worked together and passed it with a bipartisan vote coming out of committee. This was a collaborative operation, and I appreciate my colleagues and I appreciate the staff of the Financial Services Committee as well as the staff on the Oversight and Government Reform Committee and my subcommittee where we had a number of hearings on capital formation, and out of that came this idea.

This is the culmination of months of work. The process began for crafting this piece of legislation over the summer. When the President stood in this Hall, in this room just a couple months ago for his jobs bill, and when he included in the proposal this idea of crowdfunding, it was a very positive thing--not just to have a good idea that we can pass here in the House, but to have a good idea that has the possibility of getting through the Senate, where it's a very challenging time for them to pass legislation at all. And that way it can make it to the President's desk and really give entrepreneurs the opportunity to raise this capital, to actually create and grow jobs. That's why they need the capital, so we can grow jobs, create jobs and provide more opportunity for our constituents and folks across this country.

We can protect and inspire confidence in the investor community as well as allow small businesses, those companies most critical to our economy, to gain the capital needed to expand, compete, and thrive.

I urge my colleagues to support this bill that combines both the best of microfinance with the power of crowdsourcing and give folks the opportunity--the average, everyday investor--the opportunity to have an equity stake in their favorite company, not just accredited investors and not just so-called high net worth individuals. That's the purpose of this legislation. I ask my colleagues to support this legislation, and I reserve the balance of my time.

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Mr. McHENRY. I thank my colleague for submitting that for the record, the definition.

Now, the intention is that you have an Internet portal of sorts, but this could be done on any mass basis. But the disclosures have to be very clear--which we specify in the legislation--and we've given the SEC the ability to specify additional pieces. I have a technical amendment to clarify what the Securities and Exchange Commission staff thinks is very important to add to this bill. But I do appreciate the gentleman offering the definition.

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Mr. McHENRY. I thank my colleague for yielding.

This is a very important point of distinction here. These intermediaries are not broker-dealers. That is neither the intent on either side of the aisle. That is not the description of it. These intermediaries are there to have a low-cost conduit for capital formation and a means to do that. That is the intention.

And all the protections outlined in the bill on these intermediaries, on how they are to operate, are there to enable it to be both low-cost but also preserve individuals' capital and make sure their investment's appropriately taken care of.

BREAK IN TRANSCRIPT

Mr. McHENRY. Absolutely. And I appreciate my colleague yielding.

The intent is, if you're going to raise $50,000 from 5,000 people, it has to be a low-cost basis of doing that; and the traditional broker-dealer model is not efficient at those lower cost basis fundraising opportunities or equity-raising opportunities.

Mr. GARRETT. Part of the other problem is that you may not find the interest actually by the broker-dealers if you're talking about a $25,000 or $50,000 or $100,000 enterprise.

Is that another reason why you went this way?

Mr. McHENRY. Yes. The idea is that, with the traditional broker-dealers, they're not in this market. So our intent with these low-dollar issuances, that has not been a traditional part of the action on Wall Street, not in the modern era, and so we're trying to carve out this opportunity for small business folks.

Mr. GARRETT. Before you leave, tied to this is another one of the two last points I was going to raise, which perhaps you would like to illuminate on.

The bill also requires that the intermediaries state a target amount that you're raising. You just said perhaps $50,000; right? And one of the requirements under it, as I understand it, is that you would have to withhold the capital formation proceeds, the money that you collect, the capital, until you hit a percentage of or that target amount. Is that correct?

Mr. McHENRY. Correct.

BREAK IN TRANSCRIPT

Mr. McHenry, I'd like to thank you for the spirit that you have shown as we have tried to make this a better bill. I'd also like to echo these same expressions of appreciation to Mr. Bachus. I think that Mrs. Maloney merits an expression of appreciation as well. And I especially, notwithstanding all of the other persons that I've had a chance to thank, including the ranking member, but I do want to thank the staffs who worked with us because they did outstanding work.

Mr. Grimm and I were able to craft a bipartisan amendment that would aid and assist in the effort that Mr. Perlmutter has called to our attention, making sure that the persons who handle the dollars, that these persons are not persons who have been convicted of either State securities fraud or Federal securities fraud. And this amendment would require that the SEC construct appropriate measures, regulation or rule, to prevent these persons from handling the money, if you will.

And I'm honored to say that, with this amendment, I find this bill much better than it was initially. But I also have to say that Mr. McHenry never rejected the bill, the amendment, and I'm grateful that it has worked out to the extent that it has.

BREAK IN TRANSCRIPT

Mr. McHENRY. Madam Chair, I yield myself the balance of my time.

The Entrepreneur Access to Capital Act is about giving entrepreneurs the power to raise money, to raise equity stakes in their business or their business idea, to grow their business or create a new business. That's really what this is about.

The legislation we have here on the floor today--I know to some of my colleagues, as some people talk about, the Internet is just a series of tubes, or they refer to the Internet as the ``Internets'' or something like that. But we understand and my colleagues understand that the Internet can be used in a positive way, in an absolutely positive way.

With a Web site like eBay, you have individuals exchanging goods that don't know each other. But they can tell their reputation. And they can exchange these goods and get quality goods for a quality price. And you have a lot of choices. We want to take that idea and give investors that same idea.

We have crowdfunding Web sites in the United States today. They help raise money for musicians or artists. And what the artists do is say, ``You know, if you invest in my ability to go into the studio and record an album,'' or whatever they call it, ``I'll give you the first download, or I'll give you the first CD.''

So you have folks pony up $50 or $25 for their favorite banks. You have folks who are raising money--folks who have a bakery--and they say, If you contribute a few bucks, you'll get six whoopie pies.

People have innovative ways of doing this. We're giving them the power, the opportunity; and we're relieving this Federal restriction that currently prevents them from having equity stakes in their favorite businesses, in their favorite ideas--their local coffee shops or their bakeries, their favorite bands or even the next Facebook. These are the opportunities that we're going to be able to give investors.

We have fraud protection in this legislation, language which has been crafted in a bipartisan way. It's a strong improvement to the bill, and I look forward to a bipartisan vote. I am very hopeful it will make its way intact through the Senate and make its way to the President's desk where he can sign it. That way, we can allow entrepreneurs and innovators that opportunity.

We take the best of micro-finance and the best of crowdsourcing and combine them in this legislation, and it's a positive thing. We can work together on important matters of creating jobs--and we have--and this is a first step. I certainly appreciate my colleague's willingness to work to improve the bill and to bring us to this day.

With that, I yield back the balance of my time.

BREAK IN TRANSCRIPT

Mr. McHENRY. This is primarily a technical amendment based on post-markup feedback from the staff of the Securities and Exchange Commission. The final language has been negotiated between my staff and the majority and minority staffs of the Financial Services Committee.

The more substantive changes made to this amendment include: requiring the issuer to state a target offering amount and a deadline to reach the target offering amount; requiring the commission to provide a notice upon completion of the offering, which shall include the aggregate offering amount and the number of purchasers; clarifying the disqualification provision to ensure that both issuers and intermediaries, as well as their predecessors, affiliates, officers, directors or persons fulfilling similar roles, are disqualified from the exemption established in this bill should they have a history of committing securities fraud.

I appreciate the SEC staff lending their technical expertise to this amendment, and I appreciate the bipartisan effort from both the majority and minority committee staffs to further improve the final bill.

With that, I yield back the balance of my time.

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Mr. McHENRY. I thank the gentleman from Tennessee for offering this bipartisan amendment. This is a good-government amendment.

The old adage is ``a million bucks isn't what it used to be.'' Well, when reg D-504 of the Securities and Exchange Act of 1934 had a $1 million exemption that was put in place in 1982, that $1 million would be $2.4 million today. So, just in a short period of time, it can show you the impact of 30 years of inflation.

I appreciate my colleague for offering this amendment, as it's a very good amendment, and I certainly appreciate your representing the good folks of Tennessee.

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Mr. McHENRY. I thank my colleague for bringing this up, and it is a great concern. I didn't have the opportunity to say, I do, in fact, support the gentleman's amendment. I appreciate him offering it. It's a very thoughtful amendment.

I believe, looking at this, when you have it on an annualized basis, that does actually allay some of those concerns. But I think you and I agree that when we don't address some of these securities laws as frequently as we should to update with technology and what happens in the market, we should have in place these measures to ensure that Congress' intent is followed even 20 years from now and can keep pace with what is reasonable in the marketplace.

I think that your concern is actually a very interesting one. And I would be happy to talk with the gentleman more about ways that we can update securities laws to deal with some of these struggles.

Mr. PERLMUTTER. Reclaiming my time, I thank my friend from North Carolina. We have no opposition to this amendment. We urge its adoption.

I yield back the balance of my time.

Mr. QUAYLE. I yield to the gentleman from North Carolina.

Mr. McHENRY. Madam Chair, I want to thank my colleague from Arizona (Mr. Quayle) for offering this amendment. It's a very sharp amendment, a very thoughtful approach to securities law, a very thoughtful approach to crowdfunding and the idea of allowing average, everyday investors the same opportunities that high-net-worth individuals enjoy in this country. I thank the gentleman for working on job creation and job growth.

BREAK IN TRANSCRIPT

Mr. McHENRY. Unfortunately, I have to oppose this amendment. In the course of a subcommittee legislative hearing, a subcommittee markup, and a full committee markup, this amendment was never offered. My colleague from New York serves on the Financial Services Committee. As my other colleagues have mentioned, I worked diligently across the aisle to incorporate every idea my colleagues from across the aisle had. They've incorporated them into this bill. It's a better piece of legislation because of it.

My colleague had the opportunity at the full committee markup to offer this amendment and didn't. We heard at the capital formation and crowdfunding hearing in the Capital Markets Subcommittee--I attended that, and all Members of the Financial Services Committee that were there that day were allowed to participate. None of the witnesses raised a compensation disclosure as a precondition to create successful crowdfunding securities offerings. My colleague did not participate in the hearing. And when the subject matter of the amendment could have been raised with a panel of capital formation experts, it was not raised.

This is an interesting amendment. What we have in this legislation is an enormous amount of investor protection. We want crowdfunding intermediaries to be able to compete with one another and to innovate and to offer the best platform and technology for both issuers and investors. Our belief is that businesses will be able to work with different intermediaries. If they don't see an intermediary that fits with their cost structure or the cost basis they see fit, they can be their own intermediary. That's how this bill is constructed. This amendment doesn't work technically with the construct of that. By forcing intermediaries to disclose the compensation structure to potential investors, we believe it will have a chilling effect on compensation in the market and the participation of potential intermediaries in this mode.

So unfortunately, I have got to oppose this amendment. Had the gentlelady brought this to me during the subcommittee or full committee markup, I would have been happy to work with my colleague on trying to craft workable language. But here on the floor today, I'm opposed to the amendment. I ask my colleagues to vote against this flawed amendment.

I reserve the balance of my time.

BREAK IN TRANSCRIPT

Mr. McHENRY. Madam Chair, I yield myself such time as I may consume.

I would ask my colleagues, do they disclose on their campaign Web sites how much it costs to process a credit card contribution?

Exactly. I don't know if my colleagues are making those disclosures when folks are contributing to their campaigns. So this restriction is actually a creation of Congress.

I understand the issue. It's a very powerful issue on compensation. This was never raised in the two subcommittee hearings I have had on capital formation on the TARP in the Financial Services Subcommittee of Oversight and Government Reform, nor in the legislative markup at the Subcommittee on Capital Markets, nor during the subcommittee markup nor the full committee markup in the Committee on Financial Services.

Furthermore, I would point my colleague to page 6 of the legislative text. We have investor protection requirements for intermediaries that go on for, really, three pages. This specifies a lot of investor protection. It has received a bipartisan vote. The time for this amendment is past. It is not best constructed here on the floor. I ask my colleagues to vote ``no.''

With that, I yield back the balance of my time.

BREAK IN TRANSCRIPT

Mr. McHENRY. Reclaiming my time, we did not see this legislative text until it was filed with the Rules Committee. We worked to try to accommodate the Member with text that could be acceptable. Unfortunately, the construct of this is simply not acceptable and we couldn't come to reasonable accommodation on language that would be workable.

Look, the SEC is certainly overburdened. We all know that. I mean, they're working very hard. They currently have two Web sites right now. What this amendment would do is force them to have a third Web site.

Furthermore, in the discussion of this amendment, my colleague describes this as a public offering. The crowdfunding legislation described here is an exempt offering, very different in nature than a public offering, and is exempt from the SEC regs.

On page 6 of the legislation, subsection (a)(1), it mandates that individuals, intermediaries in this process, would have to add a warning to investors, including the intermediary's Web site, of the speculative nature generally applicable to investments in startups, emerging businesses, and small issuers, including risks in the secondary market related to illiquidity.

(2) warns investors that they are subject to the restrictions on sales requirements described under subsection (e).

Additionally, (6) requires each potential investor to answer questions demonstrating competency in:

(A) recognition of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;

(B) risk of illiquidity; and

(C) such other areas as the Commission may determine appropriate.

This part of the legislation, my staff as well as the staff of the Financial Services Committee, Democrats and Republicans, as well as the staff of Mrs. Maloney and Ms. Waters crafted this language in a very balanced way. We've included those concerns.

Unfortunately, the language before us today is deeply flawed, and with the nature of securities laws as they are in this country--and in the world, for that matter--we want to make sure that it has the appropriate balance, that it has been thoroughly vetted through counsel and actually has agreement. That is why this amendment is deeply flawed and I oppose it.

I reserve the balance of my time.

BREAK IN TRANSCRIPT

Mr. McHENRY. Madam Chair, I yield myself the balance of my time.

I certainly appreciate my colleague's intent, but I'm simply uncomfortable with requiring facilitators or these intermediaries that we create in this legislation of what is an exempt offering under securities law to actually link to the SEC's Web site. It gives the stamp of approval of sorts, it seems to me, of this exempt offering. It actually might create more confusion, not necessarily by the gentleman's intent, but by the design of the legislation before us, by the legislative text that we have here in this amendment.

Unfortunately, that is not helpful. Actually, it would be hurtful to this matter, and that's why I have to oppose it.

Now, I am hopeful that when this legislation is signed into law by the President that the Securities and Exchange Commission Office of Education and Investor Advocacy would create an investor alert, which is their standard process, regarding crowdfunding investments like the SEC did with the microcap stock, a guide to investors, which is available on the SEC's existing Web site.

And that's the concern here. We want to make sure that this is done appropriately. We currently are operating in securities law that originated over 75 years ago, or roughly 75 years ago. So we want to make sure we get this right. Unfortunately, this amendment is ill-crafted, and that's why we have to oppose it.

I yield back the balance of my time.

BREAK IN TRANSCRIPT

Mr. McHENRY. I thank my colleague from Colorado for offering this amendment, and I thank my colleague for working diligently across the aisle. This was an idea that he had in the full committee markup. We worked diligently to get that done at full committee markup. It was not able to be done, but the language we have here today is a very good amendment.

The amendment ensures that the States' securities regulators have the means to police fraud, deceit, misrepresentation, and other unlawful behavior to protect investors. Since States' securities regulators already have the resources and expertise, much more so than the SEC, to examine unlawful behavior at a micro-level, it is essential that this legislation recognize and authorize them to continue to fight unlawful conduct. The powers of State securities regulators for crowdfunding are no different from what that which they have for any covered security.

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Mr. McHENRY. I thank my colleague Mr. Perlmutter for working diligently with us on this language. He raised significant concerns. The language that we have that the gentleman was integral in crafting actually is perhaps part of the reason why the President supports the legislation. And I appreciate Mr. Perlmutter's working diligently on this.

I would remind my colleagues that in our legislative hearing on this bill, the Democrat witness before the committee said that crowdfunding will not work but for this exemption from individual State registration. It is a very key part of this process. When it costs $150 to register a security in Connecticut, and all you're trying to do is raise $150 from Connecticut, you net zero. And beyond that, asking a lawyer to file the paperwork. What we want to do is preserve that anti-fraud bit that the States do very well at, and we have done that with this language.

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