79–006 

115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 115–889 

DEVELOPING AND EMPOWERING OUR ASPIRING LEADERS 

ACT OF 2018 

AUGUST 3, 2018.—Committed to the Committee of the Whole House on the State 

of the Union and ordered to be printed 

Mr. HENSARLING, from the Committee on Financial Services, 

submitted the following 

R E P O R T 

[To accompany H.R. 6177] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 6177) to require the Securities and Exchange Commission 

to revise the definitions of a qualifying portfolio company and a 

qualifying investment to include an emerging growth company and 

the equity securities of an emerging growth company, respectively, 

for purposes of the exemption from registration for venture capital 

fund advisers under the Investment Advisers Act of 1940, having 

considered the same, report favorably thereon with amendments 

and recommend that the bill as amended do pass. 

The amendments are as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Developing and Empowering our Aspiring Leaders 

Act of 2018’’. 

SEC. 2. DEFINITIONS. 

Not later than the end of the 180-day period beginning on the date of the enactment of this Act, the Securities and Exchange Commission shall— 

(1) revise the definition of a qualifying investment under paragraph (c) of section 275.203(l)–1 of title 17, Code of Federal Regulations, to include an equity 

security issued by a qualifying portfolio company, whether acquired directly 

from the company or in a secondary acquisition; and 

(2) revise paragraph (a) of such section to require, as a condition of a private 

fund qualifying as a venture capital fund under such paragraph, that the qualifying investments of the private fund are predominantly qualifying investments 

that were acquired directly from a qualifying portfolio company. 

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Amend the title so as to read: 

A bill to require the Securities and Exchange Commission to revise the definition of a qualifying investment to include an equity 

security issued by a qualifying portfolio company, whether acquired 

directly from the company or in a secondary acquisition, for purposes of the exemption from registration for venture capital fund 

advisers under the Investment Advisers Act of 1940, and for other 

purposes. 

PURPOSE AND SUMMARY

On June 21, 2018, Representative Trey Hollingsworth introduced 

H.R. 6177, the ‘‘Developing and Empowering Our Aspiring Leaders 

Act’’. As modified by an amendment in the nature of a substitute, 

H.R. 6177 requires the U.S. Securities and Exchange Commission 

(SEC) to revise the definition of a ‘‘qualifying investment’’ under 

section 275.203(l)–1(c) of title 17, Code of Federal Regulations, to 

include equity securities issued by a qualifying portfolio company— 

whether acquired directly from the company or via a secondary 

transaction. H.R. 6177 will enable funds to increase their ability to 

provide necessary capital through secondary acquisitions. In doing 

so, the bill also balances the need for such investments not to be 

the primary means by which venture capital funds spread their 

portfolio by requiring the SEC to revise paragraph (a) of section 

275.2013(l)–1(c) such that a venture capital fund’s ‘‘qualifying investments’’ must be predominantly those that were acquired directly from a qualifying portfolio company. In other words, the legislation will better enable venture capital funds to provide necessary growth capital to companies without having to register as 

a registered investment adviser (RIA), while continuing to operate 

in a manner such that the fund is predominantly comprised of 

qualifying investments that were acquired directly instead of in a 

secondary acquisition. The legislation requires the SEC to revise its 

definition within 180 days of enactment. 

BACKGROUND AND NEED FOR LEGISLATION

The goal of H.R. 6177 is to allow venture funds to continue to 

provide necessary growth capital to companies by revising the definition of ‘‘qualifying investment’’ to include equity securities acquired in a secondary transaction. 

Title IV of the Dodd-Frank Act—the ‘‘Regulation of Advisers to 

Hedge Funds and Others’’—mandated that advisers to private 

funds, such as private equity and hedge funds, register as RIAs 

under the Investment Advisers Act of 1940. Title IV also included 

a provision, Section 407, that amends the Advisers Act to exempt 

advisers to a venture capital fund from SEC registratioin. Though 

advisers to venture capital funds were exempt statutorily from registration, the Dodd-Frank Act required that the SEC define what 

qualified as a venture capital fund. On July 21, 2011, the SEC’s 

rules to define venture capital became effective. The SEC defines 

a venture capital fund as a private fund that meets the following 

conditions: 

(1) Represents itself as pursuing a venture capital strategy to its 

investors and prospective investors; 

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(2) Holds no more than 20 percent of its aggregate capital contributions and uncalled committed capital in non-qualifying investments, other than short-term holdings; 

(3) Does not borrow, provide guarantees, or otherwise incur leverage, other than limited short-term borrowing; 

(4) Does not offer its investors redemption or other similar liquidity rights except in extraordinary circumstances; and 

(5) Is not registered under the Investment Company Act of 1940 

and has not elected to be treated as a business development company. 

Since the adoption of the definition, venture capital funds have 

increasingly played an important role to improve the U.S. economy. 

They invest in companies that help to drive economic growth and 

play an important role in expanding opportunities for American 

workers. Venture capital funds provide an average of three million 

new jobs a year and have been responsible for almost all net new 

job creation in the U.S. over the last 40 years. In 2017, venture 

firms invested a total of $84.2 billion—up 16 percent from 2016 

and more than 100 percent from ten years ago. 

Despite the best intentions, the RIA rules promulgated by the 

SEC inadvertently discourage some venture capital firms from continuing to invest in companies through secondary investments. As 

written, the SEC’s rules state that venture capital funds only can 

have 20 percent of their capital commitments in non-qualifying investments. Qualifying investments are defined as: (1) any equity 

security issued by a qualifying portfolio company that is directly 

acquired by the private fund; (2) any equity security issued by a 

qualifying portfolio company in exchange for directly acquired equity issued by the same qualifying portfolio company; and (3) any 

equity security issued by a company of which a qualifying portfolio 

company is majority-owned subsidiary, or a predecessor, and that 

is acquired by the fund in exchange for directly acquired equity. 

This definition prohibits secondary acquisitions from being considered qualifying investments, which means that secondary acquisitions fall into the 20 percent non-qualifying bucket. Accordingly, 

small private companies that need additional capital to grow and 

that may help them eventually become public companies cannot 

turn to venture capital funds for secondary acquisitions because 

such funds are concerned they will exceed the 20 percent limit— 

and trigger the requirement to register as a RIA. 

A multi-industry Midwestern venture capital firm that invests in 

growing companies highlighted to the Financial Services Committee the concerns with the current regulatory structure: 

Because secondary investments are not qualifying, we 

have to analyze each of our investments not just to determine whether it’s a good company with growth potential, 

but also whether the secondaries we pick up would push 

us towards registration. Allowing us to do our company 

diligence without this risk would make [venture capital] 

investment easier and better targeted. 

The Committee also learned from a Pennsylvania healthcare venture capital firm the negative consequences that limiting a venture 

capital fund’s ability to invest in secondary acquisitions has on 

growing businesses: 

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Our firm focuses entirely on providing capital to help entrepreneurs grow young healthcare businesses. In this context, there is sometimes the need to provide these hard 

working founders with partial liquidity as part of a larger 

growth financing. Although these deals clearly result in 

growth of both revenue and jobs, they currently fall outside the venture capital exemption. In our current fund, 

we are facing the very tough decision of passing on a compelling investment in this category (which would take us 

over the 20% threshold) in order to avoid registering, 

which would be a significant burden for our 9 person firm. 

This legislation, H.R. 6177, would remedy this problem—a problem that, in particular, limits access to capital for smaller companies—by requiring the SEC to revise the definition of a ‘‘qualifying 

investment’’ to include secondary acquisitions for purposes of RIA 

exemptions—thereby allowing venture capital funds to provide capital through secondary acquisitions—while still requiring a private 

fund’s qualifying investments to be predominately comprised of equity securities acquired directly from a qualifying portfolio company. 

As a venture capital firm investing in multiple industries in California stated, ‘‘We are one of the oldest venture capital firms in Silicon Valley yet have to constantly monitor our non-qualifying basket to make sure we don’t accidentally foot fault into registration. 

I believe the SEC made a good faith effort to write an accurate definition of venture capital, but the on the ground reality confirms 

that it needs an update. The Hollingsworth bill would be a very 

positive change.’’ H.R. 6177 is a smart legislative initiative to ensure that venture funds can continue to provide capital to small 

companies that need investment capital the most. 

HEARINGS

The subcommittee on Capital Markets, Securities, and Investment held a hearing examining matters relating to H.R. 6177 on 

May 23, 2018. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on 

July 11, 2018, and ordered H.R. 6177 to be reported favorably to 

the House, as amended, by voice vote. 

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. On a motion by 

Chairman Hensarling, the amendment in the nature of substitute 

was adopted by voice vote. A secondary motion offered by Chairman Hensarling was made to report the bill, as amended, favorably 

to the House. The motion was agreed to by a voice vote, a quorum 

being present. 

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 ComVerDate Sep 11 2014 05:12 Aug 07, 2018 Jkt 079006 PO 00000 Frm 00004 Fmt 6659 Sfmt 6602 E:\HR\OC\HR889.XXX HR889
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mittee 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. 6177 will reduce the regulatory burden on venture funds while allowing them 

to continue providing their crucial growth capital to companies. 

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, July 17, 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. 3555, H.R. 6177, H.R. 

6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R. 6324. 

If you wish further details on these estimates, we will be pleased 

to provide them. The CBO staff contact is Stephen Rabent. 

Sincerely, 

MARK P. HADLEY

(For Keith Hall, Director). 

Enclosure. 

Securities and Exchange Commission Legislation 

On July 11, the House Committee on Financial Services ordered 

eight bills to be reported related to the rules, regulations, and operations of the Securities and Exchange Commission (SEC). The bills 

are: 

• H.R. 3555, the Exchange Regulatory Improvement Act, 

would require the Securities and Exchange Commission (SEC) 

to issue regulations regarding its definition of what constitutes 

a facility used by a national securities exchange; 

• H.R. 6177, the Developing and Empowering our Aspiring 

Leaders Act of 2018, would direct the SEC to conduct a rulemaking to expand what types of asset acquisitions are considered qualifying investments for a venture capital fund; 

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• H.R. 6319, the Expanding Investment in Small Business 

Act, would require the SEC to conduct a study on the limitation on the amount of outstanding securities a closed-end fund 

may hold from a single issuer and still be classified as diversified; • H.R. 6320, the Promoting Transparent Standards for Corporate Insiders Act, would require the SEC to conduct a study 

of various proposals to change agency rules regarding the use 

of written trading plans by certain securities traders; • H.R. 6321, the Investment Adviser Regulatory Flexibility 

Improvement Act, would require the SEC to revise the definitions of a small business and small organization applicable for 

assessing the effect of the agency’s rulemakings under the Investment Advisers Act of 1940 on those entities; • H.R. 6322, the Enhancing Multi-Class Share Disclosures 

Act, would direct the SEC to issue a rule requiring securities 

issuers with multi-class stock structures to make disclosures 

regarding the voting power of certain individuals; • H.R. 6323, the National Senior Investor Initiative Act of 

2018, would direct the SEC to establish a taskforce to identify 

challenges that senior investors face and to report on its findings every two years; and • H.R. 6324, the Middle Market IPO Underwriting Cost Act, 

would direct the SEC to study the costs associated with small 

and medium-sized companies undertaking an initial public offering and to report on its findings. 

Using information from the SEC regarding the costs of similar 

activities, CBO estimates that implementing seven of those bills— 

H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, 

and H.R. 6324—would each have a gross cost of about $1 million 

for the agency to conduct the required studies and rulemakings and 

to issue reports. CBO estimates that implementing the eighth 

bill—H.R. 6323—would have a gross cost of $7 million over the 

2019–2023 period for the SEC to establish and carry out the functions of the taskforce established under the bill. 

However, the SEC is authorized to collect fees sufficient to offset 

its annual appropriation; therefore, CBO estimates that the net effect on discretionary spending of implementing each of those bills 

would be negligible, assuming appropriation actions consistent with 

that authority. H.R. 6323 also would require the Government Accountability Office (GAO) to conduct a study on the economic costs 

of the financial exploitation of senior citizens and CBO estimates 

that implementing that section would cost GAO less than $500,000; 

such spending would be subject to the availability of appropriated 

funds. 

None of the bills would affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply for any of the eight 

bills. 

None of the bills would increase net direct spending or on-budget 

deficits in any of the four consecutive 10-year periods beginning in 

2029, CBO estimates. 

None of the bills contain intergovernmental mandates as defined 

in the Unfunded Mandate Reform Act (UMRA) and would not affect the budgets of state, local, or tribal governments. All of them 

would require the SEC to take actions that could raise the agency’s 

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administrative costs and the fees it collects to offset those costs. If 

the SEC increased fees, it would increase the cost of an existing 

mandate on private entities required to pay those fees. CBO estimates that none of the bills would increase fees in an amount that 

would exceed the annual threshold for private-sector mandates established in UMRA ($160 million in 2018, 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 

reviewed 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 rule makings: The 

Committee estimates that the bill requires one directed rulemaking 

to require the SEC to revise the definition of qualifying investment 

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to include equity securities offered by a qualifying portfolio company whether acquired directly or in a secondary transaction and 

to condition that to qualify as a venture capital fund private funds 

are still predominately comprised of qualifying investments that 

were acquired directly from a qualifying portfolio company. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title 

This Section cites H.R. 6177 as the ‘‘Developing and Empowering 

our Aspiring Leaders Act of 2018.’’ 

Section 2. Definitions 

This section requires the SEC, within 180 days of enactment, to 

revise the definition of qualifying investments under paragraph (c) 

of section 275.203(l)–1 of title 17, Code of Federal Regulations to 

include equity securities offered by a qualifying portfolio company 

acquired in a secondary acquisition. Additionally, the bill would revise paragraph (a) to ensure that private funds are still predominately comprised of qualifying investments that we acquired directly from a qualifying portfolio company. 

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: H.R. 6177 does not repeal or 

amend any section of a statute. Therefore, the Office of Legislative 

Counsel did not prepare the report contemplated by clause 

3(e)(1)(B) of rule XIII of the Rules of the House of Representatives. 

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