The U.S. House of Representatives Passes the Expanding Access to Capital Act

On March 8, 2024, an important new Bill was passed in the U.S. House of Representatives.  

According to Patrick McHenry (NC-10), Chairman of the House Financial Services Committee, the new Bill — H.R. 2799, known as the “Expanding Access to Capital Act” (the “Bill”) — builds on the success of the 2012 Jumpstart Our Business Startups Act (the “JOBS Act”). 

The new Bill is expected to provide several benefits for investors and the economy. 

For example, it should make it easier for entrepreneurs and their investors “who don’t live in Silicon Valley” to raise capital. According to Chairman McHenry, almost three-quarters (3/4) of all venture capital fund startups are in Silicon Valley, New York, or Boston. By making it easier for all small businesses to raise capital, the Bill will open up fundraising to those not living in these areas. 

Also, it will create more capital raising and investment opportunities for non-accredited investors. Along with the expansion of the definition of “accredited investor” (discussed more fully below), the Bill expands capital-raising and investment opportunities for those other than the wealthy elite. 

Another primary benefit is that, if made law, the Bill will make it easier for companies to go public. Conducting an initial public offering (IPO) can be difficult and expensive to do. Since the end of 2010, IPOs have been declining. The Bill, which incentivizes going public, should help turn that trend around.

It is also anticipated that if the Bill becomes law, it will create more jobs. According to Chairman McHenry, making it easier for biotech startups to raise money will create more jobs because “[a] 2021 study found that biotech startups expand their workforces by an average of 150 percent in the first three years after undertaking an IPO using the JOBS Act’s IPO on-ramp provisions.“

Another possible benefit for potential investors is that the Bill will increase access to private markets — allowing more Americans to participate in high-growth investment opportunities. Historically, private markets have been difficult to break into because of the expensive initial investment required. Currently, only “accredited investors” have been able to participate in most private equity opportunities. Additionally, the definition of “accredited investor” is based on a person’s wealth or income. The Bill would change that to focus not on an individual’s wealth, but on his or her level of investment sophistication, experience, and expertise.

Along those same lines, the Bill expands the definition of “accredited investor.” Instead of focusing on the traditional factors of wealth to define an “accredited investor,” the Bill looks at an individual’s investment sophistication, experience, and expertise and not just their income. The new definition of “accredited investor” includes any individual “receiving individualized investment advice or individualized investment recommendations” with respect to a private offering from a qualified professional. 

The purpose of the revised definition of “accredited investor” is to allow more “retail” investors — in other words, everyday Americans who are not accredited investors according to their income — to participate in investment opportunities. This would allow clients of registered advisors to have access to non-registered securities — so long as they do not invest more than 10% of their net worth or gross income into private securities.

Four Important Amendments.

The Bill was adopted by the House, but its final iteration included four (4) important amendments:

1. An amendment clarifying the definition of "general solicitation" and "angel investor" for purposes of the federal securities laws that will allow startups to discuss their products and business plans at certain events, including "demo days."

2. An amendment that requires the Securities and Exchange Commission (SEC) to allow investor disclosures to be delivered by electronic means, rather than by paper. 

3. An amendment allowing 403(b) plans to invest in collective investment trusts (CITs).

4. An amendment allowing closed-end investment companies (companies that invest in securities using money raised in an IPO offering) to invest their assets in private fund securities.

The Bill reduces various securities regulations that apply to brokers, advisors and companies, and allows for more investment by raising the caps on the allowed capital that venture funds can raise. 

Opposition to the Bill

Although the Bill did pass the House, not everyone agreed that it should.  

Democrats and certain consumer advocates opposed the legislation in part on the grounds that it will only make it easier for companies to offer securities without providing sufficient disclosures or registering those securities with the Securities and Exchange Commission (SEC).

What’s Next? 

The Bill is one step closer to becoming law, but there’s still a long way to go. It now must move to the Senate. 

When the Senate will vote on it is not yet known. Nor do we know whether the Expanding Access to Capital Act will, indeed, ultimately become law.
 

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