Helping Angels Lead Our Startups Act
Floor Speech
I rise in opposition to H.R. 4498, the Helping Angels Lead Our Startups Act.
This bill will 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 risk 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 that are sponsored by certain groups, colleges, nonprofits, trade associations, or angel investor groups, for example.
The bill's intent is to expand the role of angel investors in capital formation. It is a laudable goal, but it is one that needs appropriate rules to ensure investors have the protection and legal recourse needed to make sound investments.
So, 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 markets for their securities and offer them to any member of the public who walks in the door.
Let me be clear. If a university wants to sponsor a so-called demo day with companies that want to pitch their ideas and products, they already can, and the entire public can attend. The companies, however, just can't talk about offers or sell securities in their companies.
I am concerned that this bill, however, would cause real harm to retail investors. For example, a hedge fund could set up an event that is sponsored by a questionable college, like Corinthian, could pass out flyers on campus that advertise their shares, and then sell those shares to anyone who had attended the event, including the students who may know nothing about how this whole operation works. 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 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 to raise the capital they need to grow their businesses.
In exchange for the expanded framework and lower levels of investor protection, we passed a simple amendment that I offered to require companies to just 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 that the buyer has the necessary income and assets to qualify for such a purchase rather than rely on so-called 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 these sales events. They have to either make sure they have a preexisting relationship with the investor or verify their income and assets at the time of purchase, which is 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 that 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.
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Ms. MAXINE WATERS of California. Sinema).
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Ms. MAXINE WATERS of California. Mr. Speaker, I reserve the balance of my time.
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Ms. MAXINE WATERS of California. Mr. Speaker, I reserve the balance of my time.
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Ms. MAXINE WATERS of California. Mr. Speaker, we have no further speakers.
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Ms. MAXINE WATERS of California. Mr. Speaker, I continue to reserve the balance of my time.
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Ms. MAXINE WATERS of California. Mr. Speaker, I reserve the balance of my time.
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Ms. MAXINE WATERS of California. Mr. Speaker, I continue to reserve the balance of my time.
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Ms. MAXINE WATERS of California. Mr. Speaker, I continue to reserve the balance of my time.
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Ms. MAXINE WATERS of California. Mr. Speaker, I continue to reserve the balance of my time.
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Ms. MAXINE WATERS of California. Mr. Speaker, I reserve the balance of my time.
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Ms. MAXINE WATERS of California. I yield myself such time as I may consume.
Mr. Speaker and Members, we have heard a lot of conversation from the opposite side of the aisle about what the SEC has done or has not done. As a matter of fact, it was represented that the SEC had misinterpreted the bill. That is not true.
We absolutely need rules of the road. We need to make sure that we are protecting investors. We need to make sure that we are not allowing folks to be put at great risk who don't understand or know what is happening in these rooms. I am concerned about these demo days on campuses where students may be encouraged in these presentations to invest their parents' money or get their parents involved in schemes that they may not be aware of.
Why is this so important to us?
It is important to us because we have arrived at a time in the Congress of the United States where we recognize the need for consumer protection. Prior to the recession that we had that was created in 2008 because of the subprime meltdown and the faulty products that were placed out in the marketplace by banks and financial institutions, consumers were really ignored and not protected.
We have payday loans that target our communities that charge 400 to 500 percent interest and take advantage of some of the most vulnerable people in our society. We have all of these fraudulent mortgages that almost brought this country down, that created a recession--almost a depression--and we are still finding out about some of the exotic products that they put out on the market that tricked people into signing on the dotted line who eventually lost their homes.
We have the fiduciary duty that we have been debating in Congress.
Do you know why we are debating that?
We are debating that because we have investment advisers who were in conflict with the people they were supposed to be protecting and supposed to be advising, and they literally were advising seniors, who had savings for their retirement, to invest in plans that they would ultimately lose all of their money in.
So in addition to payday loans and fraudulent mortgages and conflict of interest and fiduciary, we have had mandatory arbitration and on and on and on. We have arrived at a time when Democrats are implementing Dodd-Frank. We are making sure that we have the Consumer Financial Protection Bureau that is doing the work that had not been done all of these years.
Yes, we are concerned about this. We supported the JOBS Act. We supported it with an amendment that I put in there that said that you must take reasonable opportunities to ensure that you know who these investors are. We are talking about accredited investors, folks who have resources, folks who know how this game is operated, folks who can protect themselves. They have lawyers, they have consultants, all of that.
What we don't want is--we don't want these students and we don't want people who walk in off the street who may be presented with an opportunity that is not a real opportunity.
For example, what if we had something like Corinthian that is a private, postsecondary school that we had to close down, or DeVry University, or the University of Phoenix, or the Trump University?
Any of these could present themselves as credible businesses to be invested in, only to find out later that the students have been misled, they have not gotten jobs, they don't have anything. They have not made any money. We are saying this is another effort to simply protect those who oftentimes are the targets of the rip-offs and the fraud.
I would ask my colleagues to support the amendment that I am going to put to the bill to make sure that they know who is in the room. I would ask them to support this simple amendment that was made in order in the Committee on Rules to make sure that we are protecting those investors and keeping them from getting ripped off.
Now, some of my friends on the opposite side of the aisle would have you believe that we are not interested in capital formation, that we are not interested in entrepreneurship, that we are not interested in joint ventures. That is absolutely not true. As a matter of fact, folks on this side of the aisle are fighting to make the financial institutions responsible and the banks to make loans where they should be making loans. We have to have a CRA to make sure that they are doing what they should be doing with the depositors' money and on and on and on. We fight for small businesses every day.
We joined up with our colleagues on the opposite side of the aisle to support the JOBS Act even though we had some concerns, and the SEC tried to make sure that we had the kind of legislation that would protect these investors.
Now they are saying: We don't like what the SEC is doing. They are misinterpreting it. They are messing this all up.
Well, that is not true. Now, we know they don't like the SEC. As a matter of fact, they do everything that they can to limit their funding so that they cannot be effective. But these are our cops on the block. The SEC is our cop on the block to try and make sure that we limit the rip-off and the fraud and the undermining of average citizens in our society. We support the JOBS Act. We believe that we should not have these operations on the campuses without knowing who is in the room and allowing investors to be put at risk.
Mr. Speaker and Members, I would ask for a ``no'' vote on the bill. I am going to ask for an ``aye'' vote on the amendment that is going to come up. If my colleagues on the opposite side of the aisle accept this very, very reasonable amendment, then I will vote to support the bill. But if they don't show any concern or compassion for the interests of investors, then I cannot support the bill, and I will ask my caucus not to support the bill. It is as simple as that.
When are we going to stop the fraudulent operations in this country that rip off working people every day, rip off students, and don't care about our investors who are interested in capital formation and investing in real enterprises that can help to grow their business and make some money themselves? When are we going to recognize we can do both?
We don't have to just be on the side of those who would take advantage of people. We must be on the side of both--our investors who are willing to put up money and our businesses who need capital formation--but somehow we always end up letting the most vulnerable people in our society be the target of fraud by those who take advantage of them.
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Ms. MAXINE WATERS of California. Mr. Speaker, as I mentioned during the general debate on H.R. 4498, I am offering this amendment today in order to clarify and improve the bill. If this amendment is accepted, I am prepared to support this legislation.
Indeed, I support the goal of connecting angel investor groups with companies seeking funding, particularly startups and emerging firms. Angel investor groups tend to be comprised of highly sophisticated individuals with significant experience investing in higher risk offerings. They tend to curate their groups carefully and are good gatekeepers for these demo day events.
As such, my amendment seeks to support the efforts of these angel investor associations without creating a harmful loophole in some of the protections we put in place when we adopted the JOBS Act of 2012. This amendment includes several provisions to advance these goals.
First, my amendment stipulates that no sponsor of a demo day can collect finders' fees for connecting investors to companies. This provision ensures that event sponsors--colleges, nonprofits, trade associations, or otherwise--don't have perverse incentives to drum up securities sales.
Second, my amendment limits the relief offered under the bill to actual operating companies in the ``real economy.'' As such, it excludes certain entities like shell companies and investment vehicles like hedge funds. I think that my amendment is appropriately calibrated to ensure that the benefits provided under the bill go to startups like technology firms or manufacturing companies rather than opaque or speculative firms.
Third, my amendment would codify the relief the SEC has already provided for angel investor groups as it relates to these demo days. This will provide legal certainty to these groups without opening up any new loopholes. Let me describe how this would work.
If the company wants to hold a demo day and also condition the market for a securities sale, as H.R. 4498 would allow, they would have to curate the group of people that attend the event. To be clear, under the bill as currently drafted, companies aren't limited to holding science fair-style demonstrations. They can discuss actual securities being offered, the types and amounts of those securities, who has already subscribed to their offerings, and how they intend to use the proceeds of the offering.
Under the SEC's relief and codified in this provision in my amendment, companies can hold these presentations, can talk about their securities, and can solicit attendance. They can even avoid the accredited investor verification requirement in the JOBS Act. They just have to call their existing networks of accredited investors and angel investor group members rather than blasting out an invitation to an entire college campus. If companies do want to blast out the invitation to entire campuses, they still can; they just have to abide by the verification provisions in the JOBS Act.
In summary, this amendment I am offering today ensures that no loopholes to the JOBS Act verification requirement are opened up, that all manner of conflicted fees are prohibited, and that the benefits of the bill go to actual operating companies. And that is very important, actual operating companies.
Mr. Speaker, whether it is through my work to clarify and improve the JOBS Act during the 112th Congress or my work with members on the committee this Congress to amend the definition of ``accredited investors'' or through my amendment today, I have long shown a willingness to work in good faith on issues related to capital formation. I would urge my colleagues to adopt my amendment so that we can all support a strong, bipartisan bill.
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Ms. MAXINE WATERS of California. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
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