Pay Our Protectors Not Our Politicians Act of 2018

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, H.R. 1219, the Supporting America's Innovators Act, is legislation that certainly shows that sometimes we can get together and we can support a good idea. This act is such a thing. It shows how well we can work together to craft bipartisan solutions that support our Nation's innovators and the jobs that they create.

Last Congress, Mr. McHenry came to me with a problem: Sophisticated angel investors who fund promising startup businesses want to pool their money together, but the law effectively caps them at 100 investors per fund. If more than 100 people want to invest, the fund is forced to exclude some of them from the deal to avoid registration and regulation as an ``investment company'' under the securities laws. That means investors willing to commit capital are being turned away and startups are losing out on important early-stage funding.

Because of Congresswoman Nydia Velazquez and Mr. Patrick McHenry working together, working out any concerns that had been identified on either side of the aisle, we now, today, have a piece of legislation, a bill, that would narrowly increase the investor limitation from 100 to 250 persons for certain venture capital funds, provided that the fund does not have more than $10 million in total investor capital.

This type of fund structure is used today by AngelList, an angel investing platform that connects investors meeting certain income and asset thresholds with one another so they can pool their money into special-purpose funds which then invest them in a particular startup company. Importantly, both the companies and the investors benefit from this structure.

Compared with making hundreds of smaller direct investments, a company, for example, only has as a single point of contact, the angel fund advised by a fiduciary, rather than hundreds of investors who must all individually approve corporate actions such as mergers and acquisitions and expanding ownership.

Investors also like this structure because they can delegate monitoring the startups they invest in to the investment adviser to the fund. Such monitoring may be significant, considering that investors, recognizing that most early-stage companies fail, typically diversify their investments among 30 to 80 companies.

H.R. 1219 reasonably promotes this fund structure for startup investments by providing a narrowly tailored exemption for certain venture capital funds which must invest at least 80 percent of their funds in small businesses. Under the bill, the venture capital funds must have no more than 250 investors and no more than $10 million in investor capital, ensuring that they are small enough that investors are able to monitor and manage their investments.

The bill's limits also ensure that we aren't creating a loophole for other investment companies, like mutual funds, to avoid regulation; nor are we providing relief to other private funds, like hedge funds or private equity funds, that have very little restriction and investor protection.

Mr. Speaker, too often Congress seeks to help small businesses by repealing sensible guardrails and rules of the road with little to no thought of the impact on investors or market integrity. This is a mistake since it is investors that provide the money necessary for small businesses to grow. If investors don't trust the markets to operate fairly, they will decline to invest or raise costs on the very businesses we want to help. H.R. 1219 is different and reflects a measured, bipartisan approach to promoting our Nation's startups and the investors who take a chance on them.

I thank Mr. McHenry and Ms. Velazquez for their leadership on this bill. I urge all of my colleagues to vote ``yes.''

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield as much time as she may consume to the gentlewoman from New York (Ms. Velazquez).

Mr. Speaker, I yield 4 minutes to the gentlewoman from New York (Mrs. Carolyn B. Maloney), the ranking member of the Financial Services Committee's Subcommittee on Capital Markets, Securities, and Investments.

Mr. Speaker, I yield 3 minutes to the gentleman from Illinois (Mr. Foster), a member of the Subcommittee on Capital Markets, Securities, and Investments.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, we have received tremendous support for this legislation, and we are extremely hopeful that we will be able to come together on both sides of the aisle and continue to give support to our small businesses. As a matter of fact, we have a lot of those in the Congress of the United States--a lot of Members, rather--who talk about supporting small businesses, but we don't often see real legislation that can do that. This is such legislation, and I cannot thank Ms. Velazquez and Mr. McHenry enough for the way that they have worked on this legislation together.

Mr. Speaker, I include in the Record some of the letters of support that we have received from the Center for American Entrepreneurship, the Internet Association, TechNet, Angel Capital Association, and AngelList.

Center for

American Entrepreneurship,

April 25, 2016.

Hon. Jeb Hensarling,

Chairman, Committee on Financial Services, House of

Representatives, Washington, DC.

Hon. Maxine Waters,

Ranking Member, Committee on Financial Services, House of

Representatives, Washington, DC.

Dear Chairman Hensarling and Ranking Member Waters: On

behalf of the Center for American Entrepreneurship, I write

today to express our strong support for legislation offered

by Rep. Patrick McHenry: H.R. 4854, the ``Supporting

America's Innovators Act of 2016,'' and H.R. 4855, the ``Fix

Crowdfunding Act of 2016.'' Both bills will significantly

enhance American entrepreneurs' access to the capital they

need to launch and grow new businesses and, in doing so,

accelerate economic growth and job creation.

CAE is a nonpartisan policy and advocacy organization whose

mission is to engage policymakers in Washington and across

the nation regarding the critical importance of entrepreneurs

and start-ups to innovation, economic growth, and job

creation, and to pursue a comprehensive policy agenda

intended to significantly enhance the circumstances for new

business formation, survival, and growth.

As you may know, recent research has demonstrated that

start-ups are disproportionately responsible for the

innovations that drive economic growth and account for

virtually all net new job creation. Alarmingly, recent

research has also demonstrated that, despite impressive

strength in certain cities around the country, rates of new

business formation in America have been declining for 30

years, and the decline is occurring in all 50 states, in all

but a handful of the 360 metro areas examined, and across a

broad range of industry sectors, including high-technology.

Given the importance of thriving entrepreneurship to

innovation, economic growth, and job creation, such

circumstances amount to nothing less than a national

emergency.

When asked or surveyed, entrepreneurs across the country

report that access to sufficient capital on affordable terms

remains among their principal challenges. The legalization of

crowdfunding by way of the Jumpstart Our Business Start-ups

(JOBS) Act in 2012 was a major step forward in meaningfully

enhancing innovators' access to investment capital. But

further reforms are necessary to realize the Act's full

potential to promote entrepreneurship, growth, greater

opportunity, and job creation.

H.R. 4854, the ``Supporting America's Innovators Act''

would amend an exemption

under the Investment Company Act of 1940 by increasing the

investor limitation from 100 to 500 persons for qualifying

venture capital funds that purchase no more than $10 million

in securities in any one issuer, adjusted for inflation.

Lifting the current arbitrary cap would not only increase

entrepreneurs' access to additional investors, but will

protect investors through a greater diversification of risk.

H.R. 4855, the ``Fix Crowdfunding Act'' would amend the

crowdfunding aspects of the JOBS Act in a number of important

ways:

Raising the annual issuance amount from $1 million to $5

million;

Exempting the beneficial owners of crowdfunding securities

from counting towards the Exchange Act 12(g) requirement

triggering public reporting;

Exempting special purpose vehicles (SPVs) created for the

purpose of investing in a single issuer of crowdfunding

securities from registration as investment companies under

the Investment Company Act, and permitting SPVs considered as

``venture capital funds'' to offer crowdfunding securities;

Revising the investment cap so that investors earning

$100,000 or less may invest up to 5 percent of their annual

income or net worth, and investors earning more than $100,000

to invest up to 10 percent of their annual income or net

worth;

Defining the requirements for a crowdfunding intermediary

to disqualify an issuer when the intermediary, through a

background check or other means, determines that the issuer

knowingly made untrue statements or omissions related to

material facts, or engaged in fraud;

Defining a crowdfunding intermediary's potential liability

to include only instances when the intermediary knowingly

makes untrue statements or omissions related to material

facts or knowingly engages in fraud;

Permitting an issuer to ``test the waters'' by soliciting

non-binding commitments of interest from potential investors

without filing information with the SEC, provided that no

funds are accepted by the issuer and any material changes

that occur between the solicitation and the offer are

highlighted to potential investors; and,

Providing a 5-year grace period for portals to make a good-

faith effort to comply with all crowdfunding rules, and

prohibits the SEC from bringing any enforcement actions

during that period.

Both bills help strike a more appropriate balance between

the twin priorities of capital formation and investor

protection. In doing so, these reforms significantly enhance

the prospects for new business formation, survival, and

growth at a time when faster economic growth is necessary to

address challenges such as underemployment, stagnant middle-

class wages, the income and wealth gaps, and alarmingly high

levels of poverty and dependence.

CAE commends you for your leadership to promote American

entrepreneurship and innovation and greatly appreciates your

thoughtful consideration of the reforms in H.R. 4854 and H.R.

4855. We look forward to continuing to work with you, the

bills' sponsors, and the Committee's distinguished members on

behalf of American entrepreneurs and start-ups.

Sincerely,

Robert E. Litan,

Chairman, Center for American

Entrepreneurship.

Mr. Speaker, I reserve the balance of my time.

Madam Speaker, I continue to reserve the balance of my time.

Madam Speaker, I have no further requests for time, and I yield myself the balance of my time.

Madam Speaker, I am pleased that, for the first time this Congress, committee Republicans have brought to the House floor a bill that has broad bipartisan support. Oftentimes, the opposite side of the aisle on our committee take a partisan approach to legislation and sometimes do not express a lot of interest in the views of the opposite side of the aisle or the millions of Americans whom they represent. However, in contrast, this bill before us today is the product of thoughtful, bipartisan compromise and will help startup companies and their investors equally. Madam Speaker, this is how laws should be made.

Indeed, last Congress, Mr. McHenry and I worked together to promote liquidity in the secondary market for startup company stock by creating a clearer path for startup investors to resell their stock. The result of our bipartisan efforts was the Reforming Access for Investments in Startup Enterprises Act, which became law in 2015, along with seven other bipartisan, financial services bills included in the Fixing America's Surface Transportation Act.

Going forward, I hope that my friends on the opposite side of the aisle will remember what we can achieve when we work together. So, again, I thank both Mr. McHenry for reaching across the aisle and Ms. Velazquez for working with me on H.R. 1219, the Supporting America's Innovators Act of 2017. I urge all of my colleagues to join me and vote ``yes.''

Madam Speaker, I yield back the balance of my time.

Mr. Speaker, pursuant to House Resolution 242, I call up the bill (H.R. 1219) to amend the Investment Company Act of 1940 to expand the investor limitation for qualifying venture capital funds under an exemption from the definition of an investment company, and ask for its immediate consideration in the House.

Mr. Speaker, I ask unanimous consent that all Members may have 5 legislative days in which to revise and extend their remarks and to submit extraneous materials on the bill under consideration.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, we all know that small businesses and entrepreneurs are the heartbeat of the American economy. Access to financial capital is vital for entrepreneurs seeking to start up, operate, or expand their businesses. However, gaining access to capital has remained an enduring challenge for many small businesses.

The financial crisis and the Great Recession made the situation worse, frankly, as capital became increasingly hard to access from institutional banks and various capital market players. While conditions have improved somewhat in recent years, many entrepreneurs continue to struggle with accessing the capital they need to compete and to grow.

In order to succeed, these companies need capital and credit, the lifeblood for growth, expansion, and job creation. Yet the government continues to construct arbitrary walls that cut them off from essential financing, as smaller companies are caught in a sea of regulatory red tape created by Washington bureaucrats.

We know that 60 percent of all net new jobs that have come into this country, that have been created here in the United States, come from these small businesses. They are oftentimes S corporations, LLCs, sole proprietorships. Small companies often have such owners also be operators. They are working alongside their fellow employees.

That 60 percent of those jobs that have been created here in the United States isn't just a one-time blip. That is over the last 20 years, the last two decades, that we have seen that trend.

Congress has made strides in tailoring the regulatory environment for smaller companies, no doubt, most notably when we passed, with strong bipartisan support, the Jumpstart Our Business Startups, or JOBS, Act in 2012. This was a bipartisan bill that was signed into law by President Obama. The JOBS Act's benefits are notable as more and more companies use its provisions to raise investment capital in both the public and private markets.

The JOBS Act has raised the cap on investors in a privately held company from 500 to 2,000 investors, but the limit on the number of investors acting as a coordinated group to invest in a company remained at 100, where it has been since 1940, some 77 years ago.

As noted by Kevin Laws of AngelList in his written testimony before our Capital Markets Subcommittee: ``With online fundraising and general solicitation becoming more common because of the JOBS Act, companies are bumping up against the limit more frequently. The current limit . . . now acts as a brake on the amount of money the company wanted to raise, leaving tens of millions of dollars on the table that did not go into startups.''

While H.R. 1219, the Supporting America's Innovators Act, a bipartisan bill introduced by the vice chairman of our Financial Services Committee, Representative Patrick McHenry, and Nydia Velazquez of New York, would amend the cap currently contained in the Investment Company Act to allow 250 investors for a ``qualified venture capital fund,'' therefore enhancing angel investors' ability to provide important funding to small businesses.

This bill is a very modest increase to the current exemption that has been in place for nearly 77 years. Modernizing this cap is long overdue and reflects today's capital markets and the reality of the increasingly important role that angel investors and others play as they commit the funds necessary to help small businesses grow.

The Securities and Exchange Commission, unfortunately, continues to ignore the backlog of good ideas to spur capital formation, which is recommended by entrepreneurs, small businesses, and market participants from their annual SEC Government-Business Forum on Capital Formation. This is a forum that is put together annually. They take and solicit ideas. They want to hear from people that are in the marketplace to figure out what ways they could go to improve that. Unfortunately, they have not acted on

this, and in the SEC's absence, Congress must act to promote market efficiency and capital formation.

I think we can all agree that we support smart regulation that protects investors and maintains orderly and efficient markets. But outdated, excessive, and unnecessary regulation whose costs outweigh benefits is dumb regulation that overburdens smaller companies. Let's provide some regulatory relief by enacting the bipartisan bill that will ease the burdens on small businesses and job creators and help foster capital formation and get Americans back to work.

Mr. Speaker, I would also like to note, in a hearing that we had on this bill last Congress, it passed our committee 52-2, including the ranking member voting for it. There were no dissenting minority views that were offered, and no amendments were offered at the Rules Committee on this. We have got a lot of consensus. I believe this is the right thing to do to move forward.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield 2 minutes to the gentleman from North Carolina (Mr. McHenry), our vice chairman and the sponsor of this bill.

Mr. Speaker, I yield 2 minutes to the gentleman from Ohio (Mr. Chabot), the chairman of the Committee on Small Business here in the House of Representatives and a strong supporter of this bill.

Mr. Speaker, I yield 2 minutes to the gentleman from Illinois (Mr. Hultgren), the vice chairman of our Subcommittee on Capital Markets, Securities, and Investments.

Mr. Speaker, I yield 2 minutes to the gentleman from Maine (Mr. Poliquin).

Mr. Speaker, I yield 2 minutes to the distinguished gentleman from Arkansas (Mr. Hill).

Madam Speaker, I yield 2 minutes to the gentleman from Minnesota (Mr. Emmer).

Madam Speaker, may I inquire as to the balance of time each side has left?

Madam Speaker, I yield 2 minutes to the gentleman from Ohio (Mr. Davidson).

Madam Speaker, I yield 2 minutes to the gentleman from Indiana (Mr. Hollingsworth), a new member of our Financial Services Committee.

Madam Speaker, I yield as much time as he may consume to the gentleman from Texas (Mr. Hensarling), chairman of the Financial Services Committee.

Madam Speaker, I yield myself such time as I may consume.

Madam Speaker, as I close on this very important bill that we have been talking about, H.R. 1219, I just want to say congratulations to our sponsors, Congressman McHenry and Congresswoman Velazquez, for their leadership on this, as well as my Capital Markets, Securities, and Investments Subcommittee ranking member, Representative Maloney, for working together to advance this commonsense bill.

As was pointed out by both the chairman and the ranking member, there is strong bipartisan consensus that this bill is a winner for the American people. Some people today, as they tee off the Masters, we might say it is a 6-inch putt for the American people knowing that this is good for them and good for the economy.

I want to encourage all of my colleagues on both sides of the aisle to support this bill, H.R. 1219.

Madam Speaker, I yield back the balance of my time.

Madam Speaker, on that I demand the yeas and nays.

Madam Speaker, first, I want to thank the gentleman from Michigan, not only for yielding but, more importantly, for his leadership in helping improve our capital markets and our economy here.

I want to thank all of the Republican and Democrat cosponsors of H.R. 1219, particularly our vice chairman of the full committee Mr. McHenry of North Carolina, for his leadership and also Ms. Velazquez on the other side of the aisle for her leadership on this issue as well. Both of these colleagues are senior members of the committee which I have the honor of chairing.

Madam Speaker, we know that while optimism and confidence in our economy are up considerably over the last few months, our Nation still has a way to go to experience the robust economic growth the American people have experienced in the past of which they also deserve.

One obvious reason that the economy continues to limp along is bureaucratic burdens imposed by Washington's top-down regulations on America's small businesses on Main Street.

I got a message from a gentleman by the name of Larry, a small- business owner in Mabank, Texas, who I have the privilege of representing here in Congress, and he summed it up fairly well. He said: ``So many businesses have to deal with regulations and taxes that didn't exist a few years ago. It is especially hard on smaller businesses. While large companies have their own staff of attorneys and the capital to comply with regulations, small businesses don't.''

So, Madam Speaker, as my colleagues on the Financial Services Committee know all too well, because we have had countless witnesses before our committee to attest to such, Washington has inflicted upon Main Street America a complex set of burdensome and expensive and confusing regulations.

Many were written, again, with the largest public companies in mind, but they burden small companies and hurt their ability to access capital. That is exactly what Larry of Mabank, Texas, has told me, and I believe it.

So, clearly, Congress should work, preferably on a bipartisan basis, to level the playing field while maintaining fair and efficient capital markets, protecting investors, and allowing small companies the chance to succeed.

We can make progress on these goals today by advancing this bipartisan bill, the Supporting America's Innovators Act. This bill was approved by the Financial Services Committee with the overwhelming support of Republicans and Democrats. The vote in committee was 54-2. In addition, a similar bill passed the House last year overwhelmingly on a bipartisan basis.

Madam Speaker, these vote totals demonstrate that just about everyone--Republican and Democrat--agrees that this commonsense legislation will indeed help grow our economy.

H.R. 1219 specifically increases the limits on the number of individuals from 100 to 250 who invest in certain venture capital funds before those funds are forced to register with the SEC as ``investment companies.'' This change would permit angel and venture funds to better help accredited investors invest in small-business startups. These early stage investors play a vital role in helping many small businesses get their start. In 2015, angel investors deployed nearly $25 billion to 71,000 different startups across our Nation. In the first quarter of 2017, venture capital invested more than $16 billion in almost 1,800 startups.

If anyone here, for some reason, doubts the impact these investors can have on our Nation's economic growth, let me remind them that companies such as Amazon, Costco, Google, Facebook, and Starbucks were all first funded by angel investors. Let's also remember, Madam Speaker, that almost half of the people who work in this country own or work for small

businesses. They create nearly historically two-thirds of the new jobs in America. So clearly our economy works better for working Americans when small businesses thrive and have access to capital and credit they need to innovate, expand, and create jobs.

The Supporting America's Innovators Act modernizes a regulation to enhance the ability for startups and small businesses to receive critical funding and capital from the private markets and, in particular, angel investors and venture capital. Undoubtedly it will help today's small-business startups become the next great American entrepreneurial success story and, in doing so, help invigorate economic growth and help create more American jobs.

I urge the adoption of H.R. 1219.

Mr. Speaker, let me take this opportunity to thank the ranking member for yielding me time.

Mr. Speaker, I rise in support of H.R. 1219, the Supporting America's Innovators Act of 2017, which I am proud to cosponsor with Mr. McHenry.

Throughout my career here in Congress, I have always supported and encouraged legislation that creates jobs and fosters innovation for America's entrepreneurs and small businesses. The bill we are considering today will further that goal.

Mr. Speaker, I always say access to capital is access to opportunity. That is exactly what this legislation does.

The Investment Company Act of 1940 currently limits the number of accredited investors in a venture fund to no more than 100 individuals, but most funds try not to reach that limit in order to adjust for unforeseen circumstances. This artificially low limit restricts the number of individuals that can invest in small businesses and startups. That means less opportunity for entrepreneurs.

Our bill will address this problem by allowing up to 250 accredited investors to participate in venture funds with up to $10 million in capital.

It is important to stress that these are accredited investors. They have at least $200,000 in minimum income or $1 million in net assets. These are sophisticated investors comfortable with the risks involved in the startup sector.

Many of these investors pool their money together either in local or national groups. More recently, many have gotten involved in online crowdfunding platforms, which were created through the JOBS Act, to funnel more capital to small businesses and startups.

Our bill will create greater access for women-owned and women-led businesses. The types of funds empowered to attract more investors under this bill are often a good capital source for women-owned firms.

I am proud that our bipartisan legislation has garnered a wide range of attention and support from the industry. The Angel Capital Association and the Internet Association have endorsed the bill. These are groups dedicated to expanding capital opportunities for small businesses.

This bill has also moved through the legislative process with strong bipartisan support every step of the way. Last month, we passed this bill out of the Financial Services Committee with a broad bipartisan vote of 54-2. The same day, the Senate Banking Committee was busy passing its bipartisan companion version, S. 444, sponsored by Senators Heitkamp and Heller. It is also important to recognize that, last year, this Chamber passed a nearly identical version of our bill by a vote of 388-9.

It is time to see this legislation enacted. It will create more capital for small businesses and it will mean more jobs throughout the Nation.

Let me take a moment to thank Mr. McHenry for working with me on this bill, as well as Chairman Hensarling. And let me also thank Ranking Member Waters for her leadership and hard work.

Again, a vote for this bill is a vote for America's entrepreneurs. I urge my colleagues to vote ``yes.''

Mr. Speaker, I thank the ranking member for her leadership on this bill and in so many other areas. I also thank Chairmen Hensarling and Huizenga; and, of course, my good friend and colleague from the great State of New York, Nydia Velazquez, the champion for small businesses; and Mr. McHenry, who has spent a great deal of his time focusing on job creation and access to capital for small businesses.

This bill passed in the last Congress under suspension with overwhelming bipartisan support. This bill is intended to make it easier for startup companies to raise money from sophisticated investors by allowing sophisticated angel investors to pool their money into a single venture capital fund, which allows them to leverage their resources and make investments more effectively.

The bill does this by increasing the number of investors who can invest in venture capital funds that are exempt from SEC oversight.

Under current law, a fund can be exempt from SEC oversight if it has fewer than 100 investors and its securities are not offered publicly. This is the exemption that the majority of venture capital funds currently rely on.

Venture capital funds are long-term investors that provide much- needed equity capital to startups and other small companies. The fact that venture capital funds are subject to the same limitation on the number of investors they can have as other private funds, like hedge funds and private equity funds, has limited the growth of venture capital funds.

Specifically, it has limited the ability of angel investors--all of whom are sophisticated, accredited investors--to coordinate their investments by grouping together into a single venture capital fund in order to invest in a promising startup company.

This bill will accommodate these types of angel investors who want to coordinate their investments by increasing the number of accredited investors they can have before they are required to register with the SEC--from 100 investors to 250 investors.

The bill is also narrowly tailored to avoid raising investor protection concerns. It only raises the investor threshold to 250 for venture capital funds that meet the SEC's rigorous five-part definition of a venture capital fund.

Finally, the bill is limited to funds that have less than $10 million in capital invested. So we are only providing relief to relatively small venture capital funds that do not pose a huge risk to the capital markets.

This bill is the product of genuine hard work and bipartisan compromise. Again, I thank Mr. McHenry for his leadership, along with Ms. Velazquez, Ranking Member Waters, and Chairman Hensarling for their hard work on this bill.

I urge my colleagues to join me--and I believe the majority in this body--in supporting this important bill to provide easier and better access to capital for small businesses.