House Financial Services Committee Issues Report on Small Business Access to Capital After Natural Disaster Act

WASHINGTON, Feb. 1 -- The House Financial Services Committee issued a report (H.Rpt. 115-529) on legislation (H.R. 4792) to amend the Securities Exchange Act of 1934 to expand access to capital for small businesses affected by hurricanes or other natural disasters. The report was advanced by Rep. Jeb Hensarling, R-Texas, on Jan. 29.

Excerpts of the report follow:

Purpose and Summary

On January 18, 2018, Representative Nydia Velazquez introduced H.R. 4792, the "Small Business Access to Capital After a Natural Disaster Act," which amends the Securities Exchange Act of 1934 to require the Securities and Exchange Commission's (SEC) Advocate for Small Business Capital Formation (Small Business Advocate) to identify any unique challenges to small businesses affected by hurricanes or natural disasters when assessing problems that the small businesses have with securing access to capital. This bill further requires that in its annual report the Small Business Advocate must include a summary of any unique issues encountered by small businesses affected by hurricanes or natural disasters.

Background and Need for Legislation

In the 114th Congress, Congress passed and President Obama signed into law, H.R. 3874, the SEC Small Business Advocate Act of 2016 (P.L. 114-284). This law created within the SEC the Office for Small Business Capital Formation (OSBCF) and the Small Business Capital Formation Advisory Committee (Advisory Committee) within the Securities and Exchange Commission (SEC). The OSBCF will be led by the Advocate for Small Business Capital Formation, who will be appointed by and reports to the Commission, with the responsibility to, among other things:

Help small businesses resolve problems with the SEC;

Analyze the potential impact of proposed rules and regulations that are likely to have a significant effect on small businesses; and

Reach out to small businesses to understand issues related to capital formation.

The Advisory Committee provides advice to the Commission on rules and policies related to capital formulation, securities trading, and reporting and governance requirements for emerging and smaller public companies.

Prior to the enactment of H.R. 3874, the responsibility to facilitate and promote capital formation resided within the SEC's Office of Small Business Policy (OSBP), which is housed within the SEC's Division of Corporation Finance. OSBP answers questions on disclosure and other issues relating to smaller public companies, including those classified as "smaller reporting companies," and on limited, private, and intrastate offerings of securities. OSBP also processes requests for waivers of disqualification arising under rule 262 of Regulation A and rule 505(b)(2)(iii) and rule 506(d)(2)(ii) of Regulation D. In addition, OSBP reaches out to smaller companies to facilitate capital formation. These efforts include coordinating the annual SEC Government-Business Forum on Small Business Capital Formation, which focuses on the current status of issues and programs related to small business capital formation.

Unfortunately, the OSBP is a functional office rather than an advocacy office. The OSBP does not advocate for changes to the securities laws for smaller public companies, small businesses seeking equity capital, or investors in those companies or businesses. The OSBP does not advance initiatives to make equity capital more readily available to smaller issuers. Rather than neglecting the needs of small businesses, a permanent office dedicated to small business capital formation within the SEC is a logical outcome of the JOBS Act since the SEC has taken little to no action to advance the many recommendations the agency has received from its annual Government-Business Forum on Small Business Capital Formation (Forum) to help small businesses and EGCs access the capital markets.

A major purpose of the Forum is to identify unnecessary impediments to small business capital formation and find ways to eliminate or reduce them. Each Forum develops recommendations for government and private action to improve the environment for small business capital formation. But the SEC rarely, if ever, acts on the recommendations made by the Forum's participants, which include small business executives, venture capitalists, government officials, trade association representatives, lawyers, accountants, academics and small business advocates. The law promotes capital formation and creates an office within the SEC to advocate for the job creators and entrepreneurs seeking equity capital as well as their investors. The office will then be able to leverage the recommendations the SEC has collected and prompt the SEC to act on those most likely to help small businesses and EGCs access the capital markets.

At a December 2, 2015, Subcommittee on Capital Markets and Government Sponsored Enterprises hearing, Chris Mathieu, Chief Financial Officer of Horizon Technology Finance, who testified on behalf of the Small Business Investor Alliance (SBIA), stated that "the SEC Small Business Advocate Act strengthens the voice of small business at the SEC by making significant changes to the way the SEC hears from small business stakeholders; responds to stakeholder requests; and makes recommendations to Congress and the SEC to improve the ability of small business to access capital." Mr. Mathieu further noted that "[s]maller business investors have a much lower threshold for pain and the SEC needs to understand the challenges of scale when creating policy." At the same hearing, Brian Hahn, the chief financial officer of GlycoMimetics, testifying on behalf of the Biotechnology Industry Organization (BIO), stated that "[t]he Small Business Advocate would serve as a partner to the existing Investor Advocate, giving small businesses an independent voice at the SEC and helping the SEC to understand the impact of regulatory burdens on growing companies as it considers new compliance requirements."

On September 13, 2017, SEC Chairman Jay Clayton along with Commissioners Michael Piwowar and Kara Stein issued a joint statement to announce the launch of a nationwide search for candidates for a new senior executive position at the SEC, the Advocate for Small Business Capital Formation and specifically noted, "The Advocate will be a powerful voice for small businesses and small business investors, providing assistance, conducting outreach to better understand their concerns and recommending improvements to the regulatory environment."

Even though the SEC has yet to appoint its first Small Business Advocate, the need to expand the Advocate's area of focus is worthy of Congressional action. The specific goal of H.R. 4792 is to have the Small Business Advocate facilitate increased access to capital to small businesses affected by hurricanes or natural disasters so that communities affected by the devastation that accompanies such events can recover faster.

Recent natural disasters, such as Hurricane Harvey in Texas, Hurricane Irma in Puerto Rico, and the wildfires in California, have wreaked havoc on individuals and communities across the country. Small businesses are not exempt from this devastation and can be especially vulnerable to natural disasters due to the costs of rebuilding or loss of revenue from people being displaced.

According to the Federal Emergency Management Agency (FEMA), nearly 40 percent of small businesses do not reopen their doors after a natural disaster. Additionally, a survey of 500 small businesses conducted by Nationwide in 2015 found that 75 percent of small businesses do not develop plans to prepare for disasters. Even more troubling is that only 18 percent of companies that have fewer than 50 employees have a disaster recovery plan.

One of the SEC's core missions is to facilitate capital formation, and as the Commission rightly is refocusing on this duty, the new Office of the Small Business Advocate provides an important resource for identifying ways to improve access to capital for small businesses. Specifically, the Small Business Advocate's responsibilities include: (1) helping small businesses resolve problems with the SEC; (2) analyzing the potential impact of proposed rules and regulations that are likely to have a significant effect on small businesses; and (3) reaching out to small businesses to understand issues related to capital formation. Further, the Small Business Advocate's annual report to Congress can be a helpful resource for Congress to consider how to improve capital formation.

H.R. 4792 reminds the Small Business Advocate that these responsibilities go beyond the consideration of issues that affect small businesses operating in the normal course and requires the Advocate to identify unique issues which inhibit access to capital formation that small businesses face in the aftermath of a natural disaster. Considering the essential role small businesses play to generate jobs and investment in their local communities, the SEC Small Business Advocate and the Advisory Committee identifying ways to improve capital formation in areas affected by natural disasters could benefit our whole country and the entire economy by encouraging investment in such areas after natural disasters, thereby jumpstarting those local economies as they recover amidst devastation and reducing the degree to which businesses otherwise may need to rely on more bureaucratic programs to survive or reopen.

Hearings

The Committee on Financial Services held a hearing examining matters relating to H.R. 4792 on November 3, 2017.

Committee Consideration

The Committee on Financial Services met in open session on January 17, 2018, and January 18, 2018, and ordered H.R. 4792 to be reported favorably to the House without amendment by a recorded vote of 57 yeas to 0 nays (Record vote no. FC-150), a quorum being present.

Committee Votes

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion to report legislation and amendments thereto. The sole recorded vote was on a motion by Chairman Hensarling to report the bill favorably to the House without amendment. The motion was agreed to by a recorded vote of 57 yeas to 0 nays (Record vote no. FC-150), a quorum being present.

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Committee Oversight Findings

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report.

Performance Goals and Objectives

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House of Representatives, the Committee states that H.R. 4792 will expand access to capital for small businesses affected by natural disasters by requiring the SEC's Advocate for Small Business Capital Formation to identify any unique capital formation challenges to small businesses facing and recovering from hurricanes or other natural disasters.

New Budget Authority, Entitlement Authority, and Tax Expenditures

In compliance with clause 3(c)(2) of rule XIII of the Rules of the House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by the Director of the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974.

Congressional Budget Office Estimates

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House of Representatives, the following is the cost estimate provided by the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974:

U.S. Congress,

Congressional Budget Office,

Washington, DC, January 26, 2018.

Hon. Jeb Hensarling,

Chairman, Committee on Financial Services,

House of Representatives, Washington, DC.

Dear Mr. Chairman: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 4792, the Small Business Access to Capital After a Natural Disaster Act.

If you wish further details on this estimate, we will be pleased to provide them. The CBO staff contact is Stephen Rabent.

Sincerely,

Keith Hall,

Director.

Enclosure.

H.R. 4792--Small Business Access to Capital After a Natural Disaster Act

H.R. 4792 would expand the functions of the Office of the Advocate for Small Business Capital Formation within the Securities and Exchange Commission (SEC) to include identifying problems that small businesses affected by hurricanes or other natural disasters experience when trying to secure access to capital. The office would be required to summarize any issues identified in an existing annual report.

Using information from the SEC, CBO estimates that implementing H.R. 4792 would cost less than $500,000 over the 2018-2022 period for the agency to broaden the scope of its current activities. Moreover, the SEC is authorized to collect fees sufficient to offset its annual appropriation; therefore, CBO estimates that the net effect on discretionary spending would be negligible, assuming appropriation actions consistent with that authority.

Enacting H.R. 4792 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.

CBO estimates that enacting H.R. 4792 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028.

H.R. 4792 contains no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA).

If the SEC increases fees to offset the costs associated with implementing the bill, H.R. 4792 would increase the cost of an existing mandate on private entities required to pay those assessments. CBO estimates that the incremental cost of the mandate would be small and would fall well below the annual threshold for private-sector mandates established in UMRA ($156 million in 2017, adjusted annually for inflation).

The CBO staff contacts for this estimate are Stephen Rabent (for federal costs) and Rachel Austin (for mandates). The estimate was approved by H. Samuel Papenfuss, Deputy Assistant Director for Budget Analysis.

Federal Mandates Statement

This information is provided in accordance with section 423 of the Unfunded Mandates Reform Act of 1995.

The Committee has determined that the bill does not contain Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental mandate on State, local, or tribal governments.

Advisory Committee Statement

No advisory committees within the meaning of section 5(b) of the Federal Advisory Committee Act were created by this legislation.

Applicability to Legislative Branch

The Committee finds that the legislation does not relate to the terms and conditions of employment or access to public services or accommodations within the meaning of the section 102(b)(3) of the Congressional Accountability Act.

Earmark Identification

With respect to clause 9 of rule XXI of the Rules of the House of Representatives, the Committee has carefully reviewed the provisions of the bill and states that the provisions of the bill do not contain any congressional earmarks, limited tax benefits, or limited tariff benefits within the meaning of the rule.

Duplication of Federal Programs

In compliance with clause 3(c)(5) of rule XIII of the Rules of the House of Representatives, the Committee states that no provision of the bill establishes or reauthorizes: (1) a program of the Federal Government known to be duplicative of another Federal program; (2) a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 111-139; or (3) a program related to a program identified in the most recent Catalog of Federal Domestic Assistance, published pursuant to the Federal Program Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 98-169).

Disclosure of Directed Rulemaking

Pursuant to section 3(i) of H. Res. 5, (115th Congress), the following statement is made concerning directed rulemakings: The Committee estimates that the bill requires no directed rulemakings within the meaning of such section.

Section-by-Section Analysis of the Legislation

Section 1. Short title

This section cites H.R. 4792 as the "Small Business Access to Capital After a Natural Disaster Act".

Section 2. Access to capital for rural-area small businesses

This section amends section 4 of the Securities Exchange Act of 1934 to require the Small Business Advocate to identify problems that small businesses affected by hurricanes or other natural disasters have with securing access to capital and to summarize such issues in the Small Business Advocate's annual report.

Changes in Existing Law Made by the Bill, as Reported

In compliance with clause 3(e) of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill, as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, and existing law in which no change is proposed is shown in roman):

SECURITIES EXCHANGE ACT OF 1934

The full text of the report is found at: https://www.congress.gov/congressional-report/115th-congress/house-report/529/1?r=10

TARGETED NEWS SERVICE: Myron Struck, editor; 703/304-1897; editor@targetednews.com; https://targetednews.com