Congress to Expand Market for Private Company Shares

Sponsored by Rep. Patrick McHenry, the bill applies to the so-called "Section 4(a)(1 ½)" exemption, an alternative to the better-known Rule 144 of the Securities Act of 1933, which allows for public resale of restricted stock after a holding period.

The legislation to would write into law an informal exemption that lets investors in privately held companies sell their shares. The legislation comes amid a broad push by lawmakers and regulators to foster a healthier secondary market for small company stocks.

HR 1839, the "Reforming Access for Investments in Startup Enterprises Act of 2015," comes while the the SEC is pushing to improve capital formation for small companies and has recently turned its attention to creating a better outlet for investors and entrepreneurs to sell shares in the companies prior to a full-fledged initial public offering or acquisition.

Section 4(a)(1 ½) is considered a hybrid exemption the courts have allowed through an interpretation of Section 4(a)(1) and Section 4(a)(2) of the Securities Act, which set out conditions for secondary market sales of securities that are exempt from the SEC's registration rules.

The SEC's Advisory Committee on Small and Emerging Companies discussed the process of formalizing Section 4(a)(1 ½) at its March 4 meeting. McHenry's measure would codify the exemption by amending the Securities Act.

"Secondary markets are among the most important arenas for entrepreneurs seeking capital, but the lack of liquidity in these markets has limited their viability as a tool for growing companies," said McHenry in a statement.


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