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New Small Offering Exemption Receiving Support

In the recent State of the Union address, President Obama called on Congress to pass a legislative package intended to stimulate small businesses and improve their ability to raise capital. If Congress heeds his call, small companies may soon be able to raise up to $50 million in a 12-month period without undergoing a traditional initial public offering (IPO).

The Small Company Capital Formation Act of 2011 (H.R. 1070) was passed by the House of Representatives in early November by a nearly unanimous and bipartisan majority of 421-1. H.R. 1070 would amend the Securities Act of 1933 to allow a company to offer and sell up to $50 million of its securities during a 12-month period, pursuant to certain terms and conditions under a special exemption from registration. If this legislation is enacted, a new type of offering would be created as a replacement for Regulation A offerings, which are currently capped at $5 million. The legislation as drafted would require that securities be offered and sold publicly, but cannot be restricted. An identical version of the bill was introduced in the Senate (S. 1540) last year but has yet to make it past committee.

Companies using this new offering would be required to file an offering statement, likely similar to current Form 1-A, with the Securities and Exchange Commission (SEC). However, the company would be allowed to solicit interest in the offering prior to the filing of this statement. Annually thereafter, companies would be required to file audited financial statements, and the SEC would be given the power to require certain disclosures periodically regarding the company and its business operations, financial condition, corporate governance principles, and use of investor funds.

Although H.R. 1070 does not provide an exemption from state blue sky laws, if the securities are offered or sold on a national securities exchange, or if they are offered or sold to a “qualified purchaser” (to be defined by the SEC), they would be treated as “covered securities” for purposes of the National Securities Markets Improvement Act (NSMIA). The bill would also require the Comptroller General to conduct a study on the impact of state blue sky laws and report to certain committees in Congress.

To summarize, the new type of offering would differ from the current Regulation A offerings in a few key ways:




  Regulation A Offering  H.R. 1070
Maximum Offering Size  $5 million  $50 million
Audited Financials Required No Yes
Determining Interest in the Offering Companies may “test the waters” to determine interest (1) Companies allowed to “solicit” interest in the offering (2)

(1) Currently, a company may “test the waters” by publishing or delivering to a prospective investor a written document or by making scripted radio or television broadcasts. 

(2) The SEC would be given discretion to determine how a company can “solicit” an offering prior to filing the offering document.

There has been no progress since H.R. 1070 passed in November. But considering the overwhelming bipartisan support, the explicit endorsement by the White House to raise the Regulation A offering size to $50 million in December, and the president’s Blueprint for an America Built to Last calling for expanded access to capital, we may see this legislation pass into law sometime this year. As Congress has now reconvened, we hope to see some new developments. We will continue to provide updates as this legislation progresses.

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume II, Number 37
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About this Author

Daniel I. DeWolf, Mintz Levin, Member, Chair, Technology Practice; Co-chair, Venture Capital & Emerging Companies Practice Emerging Companies Lawyer, Venture Capitalism
Member / Chair, Technology Practice; Co-chair, Venture Capital & Emerging Companies Practice

Daniel is a leading authority on growth companies and venture capital law — and has worked on pioneering online capital-raising methods since the Internet’s beginning. He is immersed in the national and international ecosystem of emerging companies and investors focused on start-ups. He has also been a member of NYU Law School’s faculty since 2003, where he teaches venture capital law. Earlier, he co-founded and served as managing director of an early stage venture capital firm based in New York City.

Daniel is Chair of Mintz's Technology Practice Group and Co-chair of the firm’s...

212-692-6223
Samuel Effron, Securities Law Attorney, Mintz Levin, Capital Financing Lawyer,Venture Capital & Emerging Companies Securities & Capital Markets
Member

Sam’s practice focuses on venture capital and other private securities transactions, counseling start-ups and emerging growth companies, funds and crowdfunding platforms. Sam is heavily involved in the start-up community in New York and regularly advises and mentors young companies and entrepreneurs regarding the legal and business issues that they face, and speaks at many of the local accelerators, incubators and co-working spaces.

Sam is a co-editor of MintzEdge, an online resource...

212-692-6810
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