H.R. 79, Helping Angels Lead Our Startups (HALOS) Act

Floor Situation
 

On Tuesday, January 10, 2017, the House will begin consideration of H.R. 79, the Helping Angels Lead Our Startups (HALOS) Act, under a structured rule. H.R. 79 was introduced on January 3, 2017, by Rep. Steve Chabot (R-OH) and was referred to the Committee on Financial Services. H.R. 79 is similar to H.R. 4498, which passed the House by a vote of 325 to 89 on April 27, 2016. The Senate did not act on the bill in the 114th Congress.

Summary

H.R. 79 amends the Securities Act of 1933 to clarify that certain startup companies are able to give presentations about their company and host certain types of events, like a “demo day,” without violating certain SEC investment solicitation bans. The bill attempts to ensure that startup companies do not inadvertently violate SEC regulations governing general solicitation of potential investors.

Background

Under the Securities Act of 1933, any offer to sell securities must either be registered with the Securities and Exchange Commission (SEC) or meet an exemption. SEC Regulation D contains three general rules for providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC.[1] One such exemption is Rule 506 of Regulation D, which allows companies to offer securities for sale up to 35 non-accredited investors and an unlimited number of accredited investors, as long as the company does not market its securities through general solicitations or advertising.

On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was enacted, which among other things, extended the Rule 506 exemption to securities marketed through a general solicitation or advertising so long as the issuer takes steps to verify that all purchasers of the securities are “accredited investors.” This provision, in effect, makes it easier for certain startup enterprises to market their securities to a larger pool of accredited investors or “angel” investors.[2]

Angel investors are generally wealthy individuals who are often actively involved in the startups they back, and are not typically professional investors. In 2014, angels invested approximately $24 billion in over 73,000 startups and are responsible for 90 percent of the equity investment that startups receive. Corporations like Amazon, Costco, Facebook, Google, and Starbucks were all first funded by angel investors[3]

However, in implementing the JOBS Act, the SEC classified events held by startup companies and attended by angel investors as general solicitations to purchase a security, thus requiring entrepreneurs and startups to verify everyone in attendance during such events is an accredited investor.  According to the Committee, this verification can be burdensome and jeopardizes educational and economic development events like “demo days” – where startups may interact with angel investors and venture capitalists but do not solicit investors to purchase an equity interest in the company.[4] H.R. 79 establishes the definition of an “angel investor group” for purposes of the Federal Securities laws and exempts these demo days and related events from being considered a general solicitation under Regulation D to protect startups from inadvertently violating this rule.

H.R. 79 is similar to H.R. 4498, which passed the House by a vote of 325 to 89 on April 27, 2016. The Senate did not act on the bill in the 114th Congress.

Amendments

1. Rep. Nydia Velazquez (D-NY)—This amendment requires the event sponsor to provide attendees with a written disclosure outlining the nature of the event and the risks of investing in the securities for sale. It would also clarify that attendance at an event does not in itself does not establish a pre-existing relationship for purposes of Rule 506(b).
    
2. Rep. Maxine Waters (D-CA)—This amendment limits the types of fees "demo day" sponsors can collect and requires an issuer to be a real business.

Cost

A Congressional Budget Office (CBO) cost estimate is currently not available. However, CBO estimates that the net effect of enacting of H.R. 4498, which is similar to H.R. 79, on discretionary spending would be negligible, assuming appropriations actions consistent with that authority. Pay-as-you-go procedures do not apply because enacting H.R. 4498 would not affect direct spending or revenues. CBO estimates that enacting H.R. 4498 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year period beginning in 2027.

Staff Contact

For questions or further information please contact John Huston with the House Republican Policy Committee by email or at 6-5539.