LegiStorm

Summary:

U.S. capital markets are the largest and considered to be the most efficient in the world. Companies rely heavily on capital access to fund growth and create jobs. As the principal regulator of U.S. capital markets, the Securities and Exchange Commission (SEC) requires that offers and sales of securities either be registered with the SEC or be undertaken with an exemption from registration. Registered securities offerings, often calledpublic offerings, are available to all types of investors and have more rigorous disclosure requirements. By contrast, securities offerings that are exempt from SEC registration are referred to as private offerings and are mainly available to more sophisticated investors. Some policymakers have concluded that changes in market trends require updated regulations governing capital access. Specifically, the number of publicly listed U.S. companies has declined by half over the last two decades, and small- to medium-sized companies are said to have more difficulty accessing capital relative to larger companies. Additionally, new capital access tools not previously part of the SEC regulatory regime, such as crowdfunding and initial coin offerings, have emerged. These new tools are especially helpful for small businesses and startups. The bipartisan Jumpstart Our Business Startups Act of 2012 (JOBS Act; P.L. 112-106) scaled regulation for smaller companies and reduced regulations in general for certain types of capital formation. It established a number of new options to expand capital access through both public and private offerings, including a new provision for crowdfunding. Parts of the Fixing America’s Surface Transportation Act (JOBS Act 2.0; P.L. 114-94) provided additional relief. Following the JOBS Act, the public and private offering dichotomy has started to blur, and securities regulation has become increasingly tailored to suit companies of different sizes and with different needs. However, concerns over capital formation have persisted, given that the number of IPOs remained at far below long-term average levels post-JOBS Act and smaller businesses continue to face capital access pressure. To address these concerns, Congress has considered numerous legislative proposals to further expand the scaled approach, with some proposals building on existing JOBS Act provisions. The most notable of these proposals is S. 488, a capital formation package referred to as JOBS Act 3.0. Originally a relatively narrow bill, S. 488 was passed by the Senate and then was amended significantly and passed by the House in a 406-4 vote on July 17, 2018. The package includes 32 titles, many of which have previously passed the House with bipartisan support as standalone bills. The policy debate surrounding capital formation proposals often focuses on expanding capital access and protecting investors, two of the SEC’s core missions. Expanding capital access promotes capital formation and allows for greater access of investment opportunities for more investors. Investor protection is considered to be important for healthy and efficient capital markets because many investors would be more willing to provide capital, and even at a lower cost, if they could expect enforceable contracts for their investments through a transparent process. At times, expanding capital access can come at the expense of investor protection. For example, proposals that reduce the registration and disclosures that a company must make can decrease the company’s compliance costs and increase the speed and efficiency of capital formation. But the reduced disclosures may expose a company’s investors to additional risks if they are not receiving information that is important to making informed investment decisions. This report analyzes legislative proposals that would generally affect the terms and amounts of capital provided to companies by investors. It analyzes a number of current legislative proposals and agency actions to expand both public and private securities offerings through amendments to program design, investor access, and disclosure requirements, among other provisions.