The Senate Thursday is expected to take up the bill with two amendments, one preventing companies from disguising how many shareholders they actually have and the other imposing investor safeguards on companies that use Internet crowdfunding to solicit capital.
It was unclear late Wednesday whether the amendments would get enough Republican votes to pass but supporters were hoping that co-sponsorship of one amendment by Massachusetts Republican Scott Brown would convince enough GOP Senators to support the package. Reid delayed plans to vote on the package Wednesday in order to gauge support before bringing it to a vote.
Agreement on the amendments would settle a dispute between Senate Republicans and some Democrats in the chamber over the need to add investor protections to the bill, which has already been passed by the GOP-controlled House.
The underlying bill would raise the shareholder trigger for full Securities and Exchange Commission registration from the current 500 shareholders to 1,000 shareholders for most companies and 2,000 shareholders for community banks. "Emerging growth companies" would be exempt from full SEC registration for up to five years for companies with less than $1 billion in revenues and less than $700 million in public float. The bill also would allow capital raising through Internet crowdfunding.
Late Tuesday the Senate voted down a broader set of investor protections written by Democratic Sens. Jack Reed of Rhode Island, Mary Landrieu of Louisiana and Carl Levin of Michigan.
"Democrats and Republicans agree we need to pass the IPO bill . . . but we must do it in a way that balances the needs and rights of investors and prevents fraud and abuse," Reid, of Nevada, said on the Senate floor Wednesday, adding that the new amendments "won't make the bill perfect but will make it a lot better."
One amendment, sponsored by Reed, would prevent companies from staying below the 1,000 trigger for SEC registration by clarifying that the number of shareholders a company has will be tallied according to the number of "beneficial" shareholders, meaning the investors who paid for the shares and are entitled to receive dividends from the companies and vote on corporate ballots. Some companies have managed to stay below the current shareholder limit by counting the number of "shareholders of record," which can depress the tally if many shares are held in street name by the investors' brokerage firms.
"Investors, when they buy stock in public companies expect routine disclosures," Reed told his colleagues. "All that goes hand in hand with the widely dispersed ownership of public companies," he said. Without the change Reed is pushing, raising the threshold would allow many large companies to "go dark" and "will frustrate the expectation of those investors who assumed they were buying shares in a public company and would be able to follow that company through public reports though the course of their ownership," he said.
The other amendment would impose protections for investors who participate in Internet fundraising by companies. Sponsored by Democrats Jeff Merkley of Oregon and Michael Bennet of Colorado and Brown, it would require firms using crowdfunding to make company financials available on the fundraising web portal, would cap how much each investor can contribute to a company according to the investor's income, and would require a three-week delay between when a company posts its fundraising request and when the offering may close. Finally, anyone who is paid to promote a crowdfunding offering must disclose that fact.
Merkley said allowing crowdfunding without the added protections would be a "huge mistake."
He said, "If there is no information, there is nothing to guide the wisdom of the crowd."
The amendment would require that when companies are raising less than $100,000 the CEO must certify the accuracy of the statement. Firms seeking to raise between $100,000 and $500,000 must have a CPA review the statements. Fundraising above $500,000 would require a formally audited financial statement. "As the amount of money you're asking for increases, you're required to do more due diligence and present the details as well," he said.
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