Possibly lost in the heat of summer and the false narrative that the Economic Growth, Regulatory Relief, and Consumer Protection Act had somehow repealed the Dodd-Frank Act, the recent Act, which was signed into law on May 24th, has a few provisions impacting the securities laws. None of these are complete “game changers,” but all could assist earlier stage companies:
- Investment Company Act. Venture capital funds that have less than $10 million in capital contributions are now deemed to be “qualifying venture capital funds.” Qualifying venture capital funds can now have up to 250 investors (rather than 100) to remain exempt from being subject to the Investment Company Act of 1940. This may have the effect of lowering the minimum investment amount in a fund, which may entice more investors to invest in funds.
- Rule 701 Exemption. Private companies can rely on Rule 701 as a registration exemption to adopt stock option and stock purchase programs for employees, consultants, and advisors. In any 12-month period, an eligible issuer can issue an amount of securities that is the greater of (i) $1 million; (ii) 15% of the issuer’s total assets; or (iii) 15% of the outstanding securities of the class being issued. As long as the amount of securities sold during any 12-month period is less than $5 million, the issuer needed to only provide a copy of the compensatory benefit plan to employees, consultants, and advisors. For larger private companies, the $5 million ceiling was easily exceeded, which then triggered much more burdensome disclosure requirements. The recent Act increases that disclosure trigger from $5 million to $10 million.
- Regulation A+. So far issuers and bankers are still warming up to Regulation A+. I think Regulation A+ will likely become a commonly used registration exemption over the long-term. The new Act may help. Previously, issuers that were subject to the periodic reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934 were not eligible to use Regulation A. The new Act orders the SEC to remove that restriction.
Again, none of these tweaks will by themselves unleash an army of new startups, but we should applaud anytime Congress does anything remotely practical.