United States: Not Just For Banks: Congress Passes Legislation Providing Relief From Dodd-Frank Era Regulations Restricting Capital Formation

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Act"). While much of the Act was designed to provide smaller financial institutions and community banks with relief from regulations implemented under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), Title V of the Act includes provisions designed to encourage capital formation.  Specifically, the Act directs the Securities and Exchange Commission (the "SEC") to reform Rule 701 and Regulation A under the Securities Act of 1933 (the "1933 Act"). In addition, the Act expands the scope of the blue sky registration exemption by amending Section 18 of the 1933 Act. Finally, the Act expands the exception under Section 3(c)(1) of the Investment Company Act of 1940 (the "1940 Act") for "qualifying venture capital funds," directs the SEC to streamline the offering process for closed-end funds, and expands investor protection to mutual funds domiciled in U.S. territories. These changes are described below.

1933 Act Actions

Rule 701

Rule 701 provides an exemption from the registration requirements of the 1933 Act for offers and sales of securities by private companies pursuant to written compensatory benefit plans or contracts for employees, directors and consultants.  Rule 701 requires issuers to deliver a copy of the compensatory benefit plan or the contract to participants before offering and selling the relevant securities. However, if the aggregate sales price during any consecutive 12-month period exceeds $5 million, Rule 701 requires issuers to provide enhanced disclosures to all participants "a reasonable period of time before the date of the sale."  The enhanced disclosures include risk factors and financial statements that are no more than 180 days old. For retirement plans under ERISA, issuers must provide participants with a copy of the summary plan description required by ERISA. For plans not subject to ERISA (e.g., typical stock incentive plans), issuers must provide participants with a summary of the material terms of the plan.

The Act directs the SEC to increase the threshold amount for enhanced disclosures from $5 million to $10 million over a 12-month period.

Regulation A

Regulation A provides an exemption from 1933 Act registration requirements for certain smaller public offerings. Regulation A offerings are divided into two tiers: Tier 1 offerings are limited to $20 million in sales in a 12-month period while Tier 2 offerings may not exceed $50 million in sales in a 12-month period. Tier 2 offerings are exempt from state blue sky laws, but issuers must satisfy ongoing periodic reporting obligations. For both tiers, issuers must file offering statements on Form 1-A with the SEC.

Currently, companies that have SEC reporting obligations under Sections 13 or 15(d) of the Securities Exchange Act of 1934 are prohibited from issuing securities pursuant to Regulation A.  The Act directs the SEC to amend Regulation A to allow reporting companies to offer securities pursuant to Regulation A. In addition, reporting companies utilizing Tier 2 offerings will be able to satisfy Regulation A's periodic reporting obligations by complying with their reporting obligations under Section 13 or Section 15(d).

Blue Sky RegistrationExemption

Section 18 of the Securities Act exempts offerings of "covered securities" from state blue sky laws. Section 18(b)(1) provides that covered securities include securities listed or authorized for listing on the New York Stock Exchange, American Stock Exchange, or National Market System of the Nasdaq Stock Market. In addition, covered securities include securities listed or authorized for listing on a national securities exchange that has been determined by the SEC to have listing standards similar to the aforementioned exchanges.

The Act amends Section 18 to apply the exemption from state blue sky laws to offerings of securities designated as qualified for trading in the national market system that are listed, or authorized for listing, on any national securities exchange, rather than applying the exemption to the various enumerated securities exchanges.

1940 Act Actions

Expansion of theSection 3(c)(1) Private Fund Exception for Qualifying Venture Capital Funds

Certain private investment funds ¾ including venture capital funds, hedge funds, and private equity funds ¾ rely on an exception from the 1940 Act definition of "investment company" contained in Section 3(c)(1) of the 1940 Act to avoid registration with and regulation by the SEC as an investment company.  Prior to enactment of the Act, Section 3(c)(1) excepted a fund from the definition of "investment company" if the fund was not engaged in a public offering and if the fund's securities were beneficially owned by not more than 100 persons. 

The Act extends the Section 3(c)(1) exception by permitting "qualifying venture capital funds" that are not engaged in a public offering to have up to 250 beneficial owners. 1  The intent behind expanding beneficial ownership in qualifying venture capital funds is to improve access to capital for small, startup businesses in which such venture capital funds invest.

As amended by the Act, Section 3(c)(1) defines a "qualifying venture capital fund" as any venture capital fund (as currently defined in Rule 203(l)-1 under the Investment Advisers Act of 1940) with not more than $10 million in aggregate capital contributions and uncalled capital commitments.  Given this size limitation, the Act's expansion of Section 3(c)(1) can be expected to have a relatively limited effect on the overall private investment fund market.

Streamlining theOffering Process for Closed-End Funds

The Act directs the SEC to propose rules to allow registered closed-end funds that are listed on a national securities exchange or interval funds operating under Rule 23c-3 under the 1940 Act (together, "closed-end funds") to rely on reporting procedures currently available to operating companies with well-known seasoned issuer status.  In particular, the new rules will streamline the registration process for closed-end funds, allowing them to offer additional shares through a shelf registration and to deliver prospectuses electronically.  In addition, closed-end funds would no longer have to file post-effective amendments to their registration statements to update their financial statements.  Instead, a closed-end fund's initial registration statement could refer to future amendments and incorporate those by reference.

Notably, the Act's changes do not apply to so-called "tender offer funds," which are registered closed-end funds that are not listed on an exchange and do not make use of Rule 23c-3.  Instead, tender offer funds offer liquidity through periodic tender offers made pursuant to the Exchange Act's tender offer rules.  It is not clear why the Act carves tender offer funds out of its relief.

The Act directs the SEC to propose the new closed-end fund rules within one year from enactment of the Act, and such new rules should be effective by May 24, 2020.

Expanding InvestorProtection to Mutual Funds Domiciled in U.S. Territories

The Act repeals Section 6(a)(1) of the 1940 Act, which provided an exemption from investment company registration and regulation for mutual funds organized in certain U.S. territories, namely Puerto Rico, the Virgin Islands, and Guam.  The exemption was originally enacted in 1940 based on the belief that it would be difficult to enforce the 1940 Act in distant U.S. territories.  Repeal of the exemption will have the effect of extending the investor protection provisions of the 1940 Act to shareholders of mutual funds organized in Puerto Rico, the Virgin Islands, and Guam. 

Existing funds relying on Section 6(a)(1) generally will have three years from the date of enactment of the Act to come into compliance with the amendment, subject to the ability of the SEC, upon its own motion or acting upon a fund's application, to extend the effective date for up to another three years. 


1 Other private funds relying on the Section 3(c)(1) exception will continue to be restricted to 100 beneficial owners.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions