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Waters Urges Bipartisan Compromise on H.R. 4498 During Floor Debate

Offers Amendment to ‘HALOS Act’ that Would Prevent Loopholes in Law

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Washington, DC, April 27, 2016 | comments

During floor consideration of H.R. 4498, Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, said the measure could lead to unnecessary and harmful loopholes in our securities laws.‎

The measure would roll back a requirement enacted under the JOBS Act for companies selling private offerings to first verify that a purchaser is an accredited investor during sales events sponsored by groups such as colleges, non-profits, trade associations or angel investor groups. Waters expressed concern that this would lead to less financially sophisticated individuals purchasing private offerings without full knowledge of or protection for their investment.

In her remarks, Waters underscored the need to balance capital formation with investor protection, and offered an amendment that would address some of the unintended consequences of the bill.


The full text of the remarks, as prepared for delivery, is as follows:

Thank you, Mr. Chairman, I rise in opposition to H.R. 4498, the “Helping Angels Lead Our Startups Act.” This bill would make changes to investor protections under the JOBS Act that I believe are ill-advised and could lead to unintended consequences for our regulatory framework. It would do so by broadening the scope of when private securities offerings can be solicited or advertised to the public without first verifying that the purchaser is financially sophisticated enough to understand the risks involved – what we call “accredited investors”.

Specifically, the bill would require the SEC to amend its safe harbor rules for private placements under Rule 506 of Regulation D, so that the current verification requirements for general solicitation and advertising do not effectively apply to sales events sponsored by certain groups – colleges, non-profits, trade associations, or angel investor groups, for example.

The bill’s intent is to expand the role of angel investors in capital formation – a laudable goal, but one that needs appropriate rules to ensure investors have the protection and legal recourse needed to make sound investments. While the bill would limit the amount and type of information that can be communicated for these events, it would still allow companies to condition the market for their securities and offer them to any member of the public that walks in the door.

Now, let me be clear. If a university wants to sponsor a “demo day” with companies who want to pitch their ideas and products, they already can, and the entire public can attend. The companies, however, just can’t talk about, offer, or sell securities in their company.

I am concerned that this bill, however, could cause real harm to retail investors. For example, a hedge fund could set up an event sponsored by a questionable college like Corinthian, pass out fliers on campus advertising their shares, and then sell those shares to anyone who attended the event.
They would not have to take “reasonable steps” to verify that these purchasers are accredited investors.

Furthermore, events sponsored by government entities, nonprofits, and universities are likely to attract the very people we are trying to protect – investors who are not accredited and who do not have enough financial sophistication or wherewithal to understand the investments or bear their high risk of loss.

We created the Rule 506 exemption under the JOBS Act to expand the market for private offerings. Private companies can now advertise and solicit offerings to the general public, which helps them raise the capital they need to grow their businesses. But in exchange for the expanded framework and lower levels of investor protection, we passed a simple amendment that I offered to require companies to take “reasonable steps” to verify that the purchaser of the security is an accredited investor.

The intent was simple: if a company is going to advertise riskier private offerings, it must ensure the buyer has the necessary income and assets to qualify for such a purchase, rather than rely on self-certification.

The bill would effectively reverse this sensible amendment during these sales events.

At best, the bill is also unnecessary. The SEC has already provided relief to angel investor groups if they curate the people who attend their sales events. They have to either make sure they have a pre-existing relationship with the investor or verify their income and assets at the time of purchase, consistent with our regulatory framework.

I have offered an amendment, which will be debated later today, that would codify the SEC’s relief and prevent harm to everyday investors. It would also limit the exemptions to operating companies, so shell companies and investment vehicles like hedge funds can’t solicit potentially risky offerings to unknowing investors. These revisions to the bill would strike an appropriate balance between capital formation and investor protection, while still supporting angel investor groups.

However, without my amendment, I cannot support this bill.

Thank you and I reserve the balance of my time.

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