HR 6427, a potentially important piece of financial services related legislation, has been passed by the US House of Representatives by a vote of 391-2. Entitled “The Creating Financial Prosperity for Businesses and Investors Act,” the bill aggregates six House Financial Services Committee measures that each previously passed the House with bipartisan support.

The bill is seen as a move by Republican leadership, particularly newly re-elected Financial Services Committee Chairman Jeb Hensarling (R- TX), to promote capital formation and remove barriers to growth faced by small businesses and startups.  While there is no guarantee the Senate will approve the Bill, the House would not  be trying to get something to the Senate unless there was at least some chance for it to get through.  Observers have even suggested that individual pieces of HR 6427 – which is more or less a compilation of prior bills approved by the House – may get through the Senate in the wake of the House’s recent and overwhelmingly bi-partisan approval.

Of particular relevance to financial services industry practitioners are the following portions of the bill:

  • New SEC office and committee focused on small business: Title II would establish the Office for Small Business Capital Formation within the SEC to assist small businesses and their investors to resolve significant problems with the SEC or self-regulatory organizations and identify issues and propose changes to statutes, regulations, and rules to benefit small businesses and their investors and facilitate capital formation. It would also establish the SEC Small Business Advisory Committee to provide the SEC with advice on capital formation, securities trading, public reporting, and corporate governance for emerging, privately held businesses and smaller public companies.
  • Increase in investor limit for qualifying venture capital funds: Title III of the bill would amend the Investment Company Act of 1940 (1940 Act), to allow “qualifying venture capital funds” to avoid registration under the Act until they amass 250 investors.  A QVCF, as defined, would not be able to purchase more than $10 million in securities in any one issuer, adjusted for inflation.
  • Amendments to crowdfunding law:  Title IV of the bill would amend aspects of the “crowdfunding” provisions  contained in the Jumpstart Our Business Startups Act (known as the JOBS Act).  It would amend the 1940 Act as well as the Securities Act of 1933, to permit special purpose vehicles to acquire securities of qualifying issuers, and raise the threshold for registering the securities of crowdfunding issuers under the Securities Exchange Act of 1934 to $75 million ($50 million for issuers that have previously not reported any revenues).
  • Expansion of the definition of “accredited investor”: Title V of the bill would amend the definition of “accredited investor” found in Regulation D adopted under the 1933 Act to add inflation adjustment provisions to the current $1 million net worth and $200,000 ($300,000 jointly), income requirements, and to add two new categories of accredited investors: (i) persons with a current securities-related license; and (ii) persons whom the SEC determines by rulemaking to have demonstrable education or job experience to qualify as having professional subject-matter knowledge related to a particular investment.  Notably, the Financial Industry Regulatory Authority (FINRA) or another self-regulatory organization would be required to verify the person’s education or job experience.
  • Elimination of the 1940 Act exemption for funds located in Puerto Rico, the Virgin Islands and other US territories and possessions: Title VI of the bill would amend the 1940 Act to terminate an exemption for investment companies located in Puerto Rico, the Virgin Islands and any other possession of the United States that sell their shares only to the residents of the territory or possession in which they operate.  The bill would establish a three-year safe harbor for funds that currently enjoy this exemption.  Furthermore, the bill would authorize the SEC to further delay the effective date of this change for specific funds for up to three additional years.

Find out more about these aspects of the bill by contacting the author.


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In the midst of a complicated fiscal situation, Puerto Rico continues to attract investors and companies through two extant tax incentive packages: Puerto Rico’s Act 20 – the Promotion of Export Services Act – and Act 22 – the Act to Promote the Relocation of Individual Investors to Puerto Rico.

Act 20 and Act 22 were enacted in Puerto Rico in 2012 to promote the exportation of services by companies and individuals providing such services from Puerto Rico and the relocation of high-net-worth individuals to Puerto Rico. Both laws aim to provide attractive incentives to encourage investors to relocate to Puerto Rico, while also encouraging local service providers to expand their businesses by offering their services to clients located outside Puerto Rico. The laws strive to contribute to the growth of the Island’s economy and, since their enactment over four years ago, have been embraced on a bipartisan basis on the Island as an important part of the government’s economic development plan.

At the heart of these incentives is Puerto Rico’s unique tax status: even though Puerto Rico is a territory of the United States (and generally subject to all US. federal laws), it is treated as a “foreign country” for US federal income tax purposes, and a special tax treatment applies to its residents. This unique situation has allowed Puerto Rico to enact tax incentives that are geared to promote its economic development and that may be attractive to US persons. These incentives promote the establishment of manufacturing operations, tourism activities, international banking operations, international insurance operations and production of films in Puerto Rico, among others.

In this alert, we summarize the tax benefits available under Act 20 and Act 22 that may be of interest to individuals and companies seeking a general understanding of the potential tax benefits of moving to or relocating all or part of their operations to Puerto Rico.


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