[House Report 112-262]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 112-262
======================================================================
ENTREPRENEUR ACCESS TO CAPITAL ACT
_______
October 31, 2011.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Bachus, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 2930]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 2930) to amend the securities laws to provide
for registration exemptions for certain crowdfunded securities,
and for other purposes, having considered the same, report
favorably thereon with an amendment and recommend that the bill
as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Entrepreneur Access to Capital Act''.
SEC. 2. CROWDFUNDING EXEMPTION.
(a) Securities Act of 1933.--Section 4 of the Securities Act of 1933
(15 U.S.C. 77d) is amended by adding at the end the following:
``(6) transactions involving the issuance of securities for
which--
``(A) the aggregate annual amount raised through the
issue of the securities is--
``(i) $1,000,000 or less; or
``(ii) if the issuer provides potential
investors with audited financial statements,
$2,000,000 or less;
``(B) individual investments in the securities are
limited to an aggregate annual amount equal to the
lesser of--
``(i) $10,000; and
``(ii) 10 percent of the investor's annual
income;
``(C) in the case of a transaction involving an
intermediary between the issuer and the investor, such
intermediary complies with the requirements under
section 4A(a); and
``(D) in the case of a transaction not involving an
intermediary between the issuer and the investor, the
issuer complies with the requirements under section
4A(b).''.
(b) Requirements To Qualify for Crowdfunding Exemption.--The
Securities Act of 1933 is amended by inserting after section 4 the
following:
``SEC. 4A. REQUIREMENTS WITH RESPECT TO CERTAIN SMALL TRANSACTIONS.
``(a) Requirements on Intermediaries.--For purposes of section 4(6),
a person acting as an intermediary in a transaction involving the
issuance of securities shall comply with the requirements of this
subsection if the intermediary--
``(1) warns investors, including on the intermediary's
website, of the speculative nature generally applicable to
investments in startups, emerging businesses, and small
issuers, including risks in the secondary market related to
illiquidity;
``(2) warns investors that they are subject to the
restriction on sales requirement described under subsection
(e);
``(3) takes reasonable measures to reduce the risk of fraud
with respect to such transaction;
``(4) provides the Commission with the intermediary's
physical address, website address, and the names of the
intermediary and employees of the person, and keep such
information up-to-date;
``(5) provides the Commission with continuous investor-level
access to the intermediary's website;
``(6) requires each potential investor to answer questions
demonstrating competency in--
``(A) recognition of the level of risk generally
applicable to investments in startups, emerging
businesses, and small issuers;
``(B) risk of illiquidity; and
``(C) such other areas as the Commission may
determine appropriate;
``(7) requires the issuer to state a target offering amount
and withhold capital formation proceeds until aggregate capital
raised from investors other than the issuer is no less than 60
percent of the target offering amount;
``(8) carries out a background check on the issuer's
principals;
``(9) provides the Commission with basic notice of the
offering, not later than the first day funds are solicited from
potential investors, including--
``(A) the issuer's name, legal status, physical
address, and website address;
``(B) the names of the issuer's principals;
``(C) the stated purpose and intended use of the
capital formation funds sought by the issuer; and
``(D) the target offering amount;
``(10) outsources cash-management functions to a qualified
third party custodian, such as a traditional broker or dealer
or insured depository institution;
``(11) maintains such books and records as the Commission
determines appropriate;
``(12) makes available on the intermediary's website a method
of communication that permits the issuer and investors to
communicate with one another; and
``(13) does not offer investment advice.
``(b) Requirements on Issuers if no Intermediary.--For purposes of
section 4(6), an issuer who offers securities without an intermediary
shall comply with the requirements of this subsection if the issuer--
``(1) warns investors, including on the issuer's website, of
the speculative nature generally applicable to investments in
startups, emerging businesses, and small issuers, including
risks in the secondary market related to illiquidity;
``(2) warns investors that they are subject to the
restriction on sales requirement described under subsection
(e);
``(3) takes reasonable measures to reduce the risk of fraud
with respect to such transaction;
``(4) provides the Commission with the issuer's physical
address, website address, and the names of the principals and
employees of the issuers, and keeps such information up-to-
date;
``(5) provides the Commission with continuous investor-level
access to the issuer's website;
``(6) requires each potential investor to answer questions
demonstrating competency in--
``(A) recognition of the level of risk generally
applicable to investments in startups, emerging
businesses, and small issuers;
``(B) risk of illiquidity; and
``(C) such other areas as the Commission may
determine appropriate;
``(7) states a target offering amount and withholds capital
formation proceeds until the aggregate capital raised from
investors other than the issuer is no less than 60 percent of
the target offering amount;
``(8) provides the Commission with basic notice of the
offering, not later than the first day funds are solicited from
potential investors, including--
``(A) the stated purpose and intended use of the
capital formation funds sought by the issuer; and
``(B) the target offering amount;
``(9) outsources cash-management functions to a qualified
third party custodian, such as a traditional broker or dealer
or insured depository institution;
``(10) maintains such books and records as the Commission
determines appropriate;
``(11) makes available on the issuer's website a method of
communication that permits the issuer and investors to
communicate with one another;
``(12) does not offer investment advice; and
``(13) discloses to potential investors, on the issuer's
website, that the issuer has an interest in the issuance.
``(c) Verification of Income.--For purposes of section 4(6), an
issuer or intermediary may rely on certifications provided by an
investor to verify the investor's income.
``(d) Information Available to States.--The Commission shall make the
notices described under subsections (a)(9) and (b)(8) and the
information described under subsections (a)(4) and (b)(4) available to
the States.
``(e) Restriction on Sales.--With respect to a transaction involving
the issuance of securities described under section 4(6), an investor
may not sell such securities during the 1-year period beginning on the
date of purchase, unless such securities are sold to--
``(1) the issuer of such securities; or
``(2) an accredited investor.
``(f) Construction.--
``(1) No treatment as broker.--With respect to a transaction
described under section 4(6) involving an intermediary, such
intermediary shall not be treated as a broker under the
securities laws solely by reason of participation in such
transaction.
``(2) No preclusion of other capital raising.--Nothing in
this section or section 4(6) shall be construed as preventing
an issuer from raising capital through methods not described
under section 4(6).''.
(c) Rulemaking.--Not later than 90 days after the date of the
enactment of this Act, the Securities and Exchange Commission shall
issue such rules as may be necessary to carry out section 4A of the
Securities Act of 1933. In issuing such rules, the Commission shall
carry out the cost-benefit analysis required under section 2(b) of such
Act.
(d) Disqualification.--Not later than 90 days after the date of the
enactment of this Act, the Securities and Exchange Commission shall by
rule or regulation establish disqualification provisions under which a
person shall not be eligible to utilize the exemption under section
4(6) of the Securities Act of 1933 or to participate in the affairs of
an intermediary facilitating the use of that exemption. Such provisions
shall be substantially similar to the disqualification provisions
contained in the regulations adopted in accordance with section 926 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (15
U.S.C. 77d note).
SEC. 3. EXCLUSION OF CROWDFUNDING INVESTORS FROM SHAREHOLDER CAP.
Section 12(g)(5) of the Securities Exchange Act of 1934 (15 U.S.C.
78l(g)(5)) is amended--
(1) by striking ``(5) For the purposes'' and inserting:
``(5) Definitions.--
``(A) In general.--For the purposes''; and
(2) by adding at the end the following:
``(B) Exclusion for persons holding certain
securities.--For purposes of this subsection, the term
`held of record' shall not include holders of
securities issued pursuant to transactions described
under section 4(6) of the Securities Act of 1933.''.
SEC. 4. PREEMPTION OF STATE LAW.
Section 18(b)(4) of the Securities Act of 1933 (15 U.S.C. 77r(b)(4))
is amended--
(1) by redesignating subparagraphs (C) and (D) as
subparagraphs (D) and (E), respectively; and
(2) by inserting after subparagraph (B) the following:
``(C) section 4(6);''.
Purpose and Summary
H.R. 2930, the ``Entrepreneur Access to Capital Act,''
would create a new registration exemption from the Securities
Act of 1933 for securities issued through internet platforms
also known as ``crowdfunding.'' To use this new exemption, the
issuer's offering cannot exceed $1 million, unless the issuer
provides investors with audited financial statements, in which
case the offering amount may not exceed $2 million. An
individual's investment must be equal to or less than the
lesser of $10,000 or 10 percent of the investor's annual
income. By exempting such offerings from registration with the
Securities and Exchange Commission (SEC) and preempting state
registration laws, H.R. 2930 will enable entrepreneurs to more
easily access capital from potential investors across the
United States to grow their business and create jobs.
H.R. 2930 requires issuers and intermediaries to fulfill a
number of requirements in order to avail themselves of this new
exemption. These requirements, which include notices to the SEC
about the offerings and parties to the offerings that will be
shared with the States, are designed to reduce the risk of
fraud in these offerings and thereby protect investors. The
legislation also allows for an unlimited number of investors to
invest via a crowdfunding offering and preempts state
securities registration laws. However, the legislation does not
restrict the States' ability to discover and stop and prosecute
fraudulent offerings.
Background and Need for Legislation
Capital formation is necessary for job creation and is
essential for any lasting economic recovery. Without access to
capital, businesses cannot expand. Without regulatory
certainty, capital disappears.
Companies obtain capital through borrowing or equity
financing. Because banks have tightened their lending standards
in the wake of the economic crisis, there is less credit
available to fund growth. Accordingly, equity financing, in
which investors purchase ownership stakes in a company in
exchange for a share of the company's future profits, is an
increasingly essential means of providing small companies with
the capital they need to grow and create jobs.
Crowdfunding is an increasingly popular method of capital
formation, where, according to SEC Chairman Mary Schapiro,
``groups of people pool money, typically comprised of very
small individual contributions, to support an effort by others
to accomplish a specific goal.'' Current SEC regulations impede
this innovative and lower-risk form of financing, by
prohibiting general solicitation and advertisements for non-
registered offerings and capping the number of shareholders for
non-registered companies at 500.
At a hearing on H.R. 2930 held by the Subcommittee on
Capital Markets and Government Sponsored Enterprises on
September 21, 2011, Dana Mauriello, the Founder and President
of ProFounder, testified that ``[i]t is important that
crowdfunding exist because it democratizes access to start-up
capital. Capital exists in people's communities and it just
can't be accessed. Anyone who is bright, driven, and has a
great idea can gather a supportive community around himself.
Crowdfunding allows that entrepreneur to turn his community
into a capital source.'' Ms. Mauriello also supported allowing
general solicitation in connection with crowdfunding offerings
and allowing for an unlimited number of investors. She
identified federal preemption of state law as a ``necessary
pre-condition'' for crowdfunding.
Hearing
On September 21, 2011, the Subcommittee on Capital Markets
and Government Sponsored Enterprises held a hearing entitled
``Legislative Proposals to Facilitate Small Business Capital
Formation and Job Creation,'' to consider H.R. 2930 and four
other bills. The following witnesses testified:
Ms. Meredith Cross, Director, Division of
Corporation Finance, U.S. Securities and Exchange Commission
Mr. Vincent Molinari, Founder and Chief Executive
Officer, GATE Technologies LLC
Mr. Barry E. Silbert, Founder and Chief Executive
Officer, SecondMarket, Inc.
Mr. Matthew H. Williams, Chairman and President,
Gothenburg State Bank, on behalf of the American Bankers
Association
Mr. William D. Waddill, Senior Vice President and
Chief Financial Officer, OncoMed Pharmaceuticals, Inc., on
behalf of the Biotechnology Industry Organization
Mr. A. Heath Abshure, Commissioner, Arkansas
Securities Department on behalf of the North American
Securities Administrators
Ms. Dana Mauriello, President, ProFounder
Committee Consideration
The Subcommittee on Capital Markets and Government
Sponsored Enterprises met in open session on October 5, 2011,
and ordered H.R. 2930 favorably reported to the full Committee
by a record vote of 18 yeas and 14 nays (Record vote no. CM-
37).
The Committee on Financial Services met in open session on
October 26, 2011 and ordered H.R. 2930, as amended, favorably
reported to the House 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.
There were no record votes taken on amendments or in connection
with ordering H.R. 2930, as amended, reported to the House.
During consideration of H.R. 2930 by the Committee, the
following amendments were considered:
1. An amendment in the nature of a substitute offered by
Mr. McHenry, no. 1, to establish an exemption from registration
under the Securities Act of 1933 for offerings that meet
certain criteria; to establish the annual offering threshold
and the maximum annual individual investment; to require the
issuer to set a target offering amount and restrict
disbursements of proceeds until the capital raised from
investors other than issuer exceeds sixty percent of the target
offering amount; to require the intermediary, or issuer if
there is no intermediary, to warn investors of the risks of
investing in startups and emerging businesses and to take
measures to reduce risk; to provide the SEC with investor-level
access to the issuer's website; to require potential investors
to demonstrate competency; to outsource cash-management to a
qualified third party; to maintain such records as the SEC
deems appropriate; to restrict sales of securities for one year
unless the securities are sold to an accredited investor or to
the issuer of the securities, to facilitate investor-issuer
communication, to authorize the SEC to issue rules to carry out
the provisions of the Act, to exclude crowdfunding investors
from shareholder registration thresholds and to preempt state
law as amended by an amendment offered by Mrs. Maloney, no 1a;
an amendment offered by Mr. Stivers, no 1b; and an amendment
offered by Messrs. Green and Grimm, no 1c; was agreed to by
voice vote.
2. An amendment offered by Mrs. Maloney, no. 1a, to an
amendment in the nature of a substitute offered by Mr. McHenry,
no. 1, to require the intermediary, or the issuer, if there is
no intermediary, to provide the SEC with basic notice of the
offering, not later than the first day funds are solicited from
potential investors; and to require the SEC to make notices of
offerings and information about issuers and intermediaries
available to the States, was agreed to by voice vote.
3. An amendment offered by Mr. Stivers, no. 1b, to an
amendment in the nature of a substitute offered by Mr. McHenry,
no. 1, to reduce the maximum offering amount to $1,000,000 from
$5,000,000, while allowing the issuer to raise up to $2,000,000
if the issuer provides audited financial statements, was agreed
to by voice vote.
4. An amendment offered by Mr. Green and Mr. Grimm, no. 1c,
to an amendment in the nature of a substitute offered by Mr.
McHenry, no. 1, to require the SEC to issue regulations that
would disqualify individuals previously convicted of federal or
state securities fraud from utilizing the 4(6) exemption, or
from participating in the affairs of an intermediary
facilitating the use of the exemption, was agreed to by voice
vote.
5. An amendment offered by Mr. Perlmutter, no. 1d, to an
amendment in the nature of a substitute offered by Mr. McHenry,
no. 1, to strike Section 4 of the bill, was offered and
withdrawn.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held a hearing and
made findings that are reflected in 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 establishes the
following performance related goals and objectives for this
legislation:
The objective of H.R. 2930, the ``Entrepreneur Access to
Capital Act,'' is to create a new registration exemption from
the Securities Act of 1933 for securities issued through
internet platforms also known as ``crowdfunding.'' To use this
new exemption, the issuer's offering cannot exceed $1 million,
unless the issuer provides investors with audited financial
statements, in which case the offering amount may not exceed $2
million. An individual's investment must be equal to or less
than the lesser of $10,000 or 10 percent of the investor's
annual income. By exempting such offerings from registration
with the Securities and Exchange Commission (SEC) and
preempting state registration laws, H.R. 2930 will enable
entrepreneurs to more easily access capital from potential
investors across the United States to grow their business and
create jobs.
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.
Committee Cost Estimate
The Committee adopts as its own 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 Estimate
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, October 28, 2011.
Hon. Spencer Bachus,
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. 2930, the
Entrepreneur Access to Capital Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 2930--Entrepreneur Access to Capital Act
H.R. 2930 would establish an exemption from requirements
that certain securities be registered with the Securities and
Exchange Commission (SEC). Specifically, the bill would exempt
securities from registration requirements if:
The aggregate amount raised through the
issuance is $1 million or less each year ($2 million or
less if the issuer provides investors with certain
financial information); and
Each individual who invests in the
securities does not invest, in any year, more than the
lessor of $10,000 or 10 percent of the investor's
annual income.
Issuers of such securities or intermediaries acting between
the issuer and investors would be required to take certain
steps, which include providing certain information to investors
and the SEC, in order to be eligible to take advantage of the
exemption. The bill would require the SEC to develop
regulations to implement this new authority and to set out
actions that would disqualify certain individuals from issuing
securities under the exemption.
Based on information from the SEC, CBO estimates that
implementing H.R. 2930 would have a negligible impact on the
SEC's workload, and any change in agency spending that is
subject to appropriation would not be significant. Enacting
H.R. 2930 would not affect direct spending or revenues;
therefore, pay-as-you-go procedures do not apply.
H.R. 2930 would impose an intergovernmental mandate as
defined in the Unfunded Mandates Reform Act (UMRA) by
prohibiting states from requiring issuers of some securities to
register the securities with the state, or to pay registration
fees, prior to issuance. As defined in UMRA, the direct costs
of a mandate include any amounts that state governments would
be prohibited from raising in revenues as a result of the
mandate. The cost of the mandate would be the amount of fee
revenue that states would be precluded from collecting. Based
on information from the SEC and industry sources, CBO estimates
that forgone revenues would be small and would not exceed the
threshold established in UMRA for intergovernmental mandates
($71 million in 2011, adjusted annually for inflation). H.R.
2930 contains no new private-sector mandates as defined in
UMRA.
The CBO staff contact for this estimate is Susan Willie.
This estimate was approved by Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
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
H.R. 2930 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section provides a short title to the bill by citing
it as the ``Entrepreneur Access to Capital Act.''
Section 2. Crowdfunding exemption
This section amends Section 4 of the Securities Act of 1933
to create a new registration exemption for securities issued
through internet platforms also known as ``crowdfunding.'' To
use this new exemption, the issuer's offering cannot exceed $1
million, unless the issuer provides investors with audited
financial statements, in which case the offering amount may not
exceed $2 million. An individual's investment must be equal to
or less than the lesser of $10,000 or 10 percent of the
investor's annual income.
This section also states that the intermediary (or the
issuer if there is no intermediary) must comply with certain
delineated requirements.
The intermediary must (1) warn investors of the speculative
nature generally applicable to investments in startups,
emerging businesses, and small issuers; (2) warn investors that
there are restrictions on the re-sale of the securities; (3)
take reasonable measures to reduce the risk of fraud with
respect to the transaction; (4) provide the Securities and
Exchange Commission (SEC) with information about the
intermediary; (5) provide the SEC with continuous investor-
level access to the intermediary's website; (6) require each
investor to answer questions demonstrating a basic
understanding of the nature of the securities offered; (7)
require the issuer to state a target offering amount and
withhold capital formation proceeds until the aggregate capital
raised from investors other than the issuer is greater than or
equal to 60 percent of the target offering amount; (8) carry
out background checks on the issuer's principals; (9) provide
the SEC with information about the issuer and offering; (10)
outsource cash-management functions to a qualified third party
custodian; (11) maintain such books and records as the SEC
deems appropriate; (12) allow for communication between the
issuer and investors; and (13) not offer investment advice.
This section also requires that, if there is no
intermediary, the issuer must (1) warn investors of the
speculative nature generally applicable to investments in
startups, emerging businesses, and small issuers; (2) warn
investors that there are restrictions on the re-sale of the
securities; (3) take reasonable measures to reduce the risk of
fraud with respect to the transaction; (4) provide SEC with
information about the issuer and offering; (5) provide the SEC
with continuous investor-level access to the issuer's website;
(6) require each investor to answer questions demonstrating a
basic understanding of the nature of the securities offered;
(7) state a target offering amount and withhold capital
formation proceeds until the aggregate capital raised from
investors other than the issuer is greater than or equal to 60
percent of the target offering amount; (8) outsource cash-
management functions to a qualified third party custodian; (9)
maintain such books and records as the SEC deems appropriate;
(10) allow for communication between the issuer and investors;
(11) not offer investment advice; and (12) disclose their
interest in the issuance to investors.
This section also provides that an issuer or intermediary
may rely on certifications provided by the investor to verify
the investor's income.
This section also requires that the SEC make the
information about the information it receives about the
intermediary, issuer, and offering available to the States.
This section also restricts investors from re-selling the
securities for one year unless the securities are sold to the
issuer or an accredited investor.
This section also provides that an intermediary shall not
be treated as a broker solely by reason of participation in a
crowdfunding offering.
This section also clarifies that an issuer's engaging in a
crowdfunding offering does not restrict the issuer's ability to
raise capital through other means.
This section requires the SEC to issue rules to implement
the requirements on intermediaries and issuers and to establish
disqualification provisions under which the exemption shall not
be available.
Section 3. Exclusion of crowdfunding investors from shareholder cap
This section provides that persons who hold securities
issued pursuant to the crowdfunding exemption shall not count
against the shareholder threshold cap in Section 12(g) of the
Securities Exchange Act of 1934.
Section 4. Preemption of state law
This section exempts securities issued through the
crowdfunding exemption from state securities laws.
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, existing law in which no change is
proposed is shown in roman):
SECURITIES ACT OF 1933
TITLE I--SHORT TITLE
* * * * * * *
EXEMPTED TRANSACTIONS
Sec. 4. The provisions of section 5 shall not apply to--
(1) * * *
* * * * * * *
(6) transactions involving the issuance of securities
for which--
(A) the aggregate annual amount raised
through the issue of the securities is--
(i) $1,000,000 or less; or
(ii) if the issuer provides potential
investors with audited financial
statements, $2,000,000 or less;
(B) individual investments in the securities
are limited to an aggregate annual amount equal
to the lesser of--
(i) $10,000; and
(ii) 10 percent of the investor's
annual income;
(C) in the case of a transaction involving an
intermediary between the issuer and the
investor, such intermediary complies with the
requirements under section 4A(a); and
(D) in the case of a transaction not
involving an intermediary between the issuer
and the investor, the issuer complies with the
requirements under section 4A(b).
SEC. 4A. REQUIREMENTS WITH RESPECT TO CERTAIN SMALL TRANSACTIONS.
(a) Requirements on Intermediaries.--For purposes of section
4(6), a person acting as an intermediary in a transaction
involving the issuance of securities shall comply with the
requirements of this subsection if the intermediary--
(1) warns investors, including on the intermediary's
website, of the speculative nature generally applicable
to investments in startups, emerging businesses, and
small issuers, including risks in the secondary market
related to illiquidity;
(2) warns investors that they are subject to the
restriction on sales requirement described under
subsection (e);
(3) takes reasonable measures to reduce the risk of
fraud with respect to such transaction;
(4) provides the Commission with the intermediary's
physical address, website address, and the names of the
intermediary and employees of the person, and keep such
information up-to-date;
(5) provides the Commission with continuous investor-
level access to the intermediary's website;
(6) requires each potential investor to answer
questions demonstrating competency in--
(A) recognition of the level of risk
generally applicable to investments in
startups, emerging businesses, and small
issuers;
(B) risk of illiquidity; and
(C) such other areas as the Commission may
determine appropriate;
(7) requires the issuer to state a target offering
amount and withhold capital formation proceeds until
aggregate capital raised from investors other than the
issuer is no less than 60 percent of the target
offering amount;
(8) carries out a background check on the issuer's
principals;
(9) provides the Commission with basic notice of the
offering, not later than the first day funds are
solicited from potential investors, including--
(A) the issuer's name, legal status, physical
address, and website address;
(B) the names of the issuer's principals;
(C) the stated purpose and intended use of
the capital formation funds sought by the
issuer; and
(D) the target offering amount;
(10) outsources cash-management functions to a
qualified third party custodian, such as a traditional
broker or dealer or insured depository institution;
(11) maintains such books and records as the
Commission determines appropriate;
(12) makes available on the intermediary's website a
method of communication that permits the issuer and
investors to communicate with one another; and
(13) does not offer investment advice.
(b) Requirements on Issuers if No Intermediary.--For purposes
of section 4(6), an issuer who offers securities without an
intermediary shall comply with the requirements of this
subsection if the issuer--
(1) warns investors, including on the issuer's
website, of the speculative nature generally applicable
to investments in startups, emerging businesses, and
small issuers, including risks in the secondary market
related to illiquidity;
(2) warns investors that they are subject to the
restriction on sales requirement described under
subsection (e);
(3) takes reasonable measures to reduce the risk of
fraud with respect to such transaction;
(4) provides the Commission with the issuer's
physical address, website address, and the names of the
principals and employees of the issuers, and keeps such
information up-to-date;
(5) provides the Commission with continuous investor-
level access to the issuer's website;
(6) requires each potential investor to answer
questions demonstrating competency in--
(A) recognition of the level of risk
generally applicable to investments in
startups, emerging businesses, and small
issuers;
(B) risk of illiquidity; and
(C) such other areas as the Commission may
determine appropriate;
(7) states a target offering amount and withholds
capital formation proceeds until the aggregate capital
raised from investors other than the issuer is no less
than 60 percent of the target offering amount;
(8) provides the Commission with basic notice of the
offering, not later than the first day funds are
solicited from potential investors, including--
(A) the stated purpose and intended use of
the capital formation funds sought by the
issuer; and
(B) the target offering amount;
(9) outsources cash-management functions to a
qualified third party custodian, such as a traditional
broker or dealer or insured depository institution;
(10) maintains such books and records as the
Commission determines appropriate;
(11) makes available on the issuer's website a method
of communication that permits the issuer and investors
to communicate with one another;
(12) does not offer investment advice; and
(13) discloses to potential investors, on the
issuer's website, that the issuer has an interest in
the issuance.
(c) Verification of Income.--For purposes of section 4(6), an
issuer or intermediary may rely on certifications provided by
an investor to verify the investor's income.
(d) Information Available to States.--The Commission shall
make the notices described under subsections (a)(9) and (b)(8)
and the information described under subsections (a)(4) and
(b)(4) available to the States.
(e) Restriction on Sales.--With respect to a transaction
involving the issuance of securities described under section
4(6), an investor may not sell such securities during the 1-
year period beginning on the date of purchase, unless such
securities are sold to--
(1) the issuer of such securities; or
(2) an accredited investor.
(f) Construction.--
(1) No treatment as broker.--With respect to a
transaction described under section 4(6) involving an
intermediary, such intermediary shall not be treated as
a broker under the securities laws solely by reason of
participation in such transaction.
(2) No preclusion of other capital raising.--Nothing
in this section or section 4(6) shall be construed as
preventing an issuer from raising capital through
methods not described under section 4(6).
* * * * * * *
SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.
(a) * * *
(b) Covered Securities.--For purposes of this section, the
following are covered securities:
(1) * * *
* * * * * * *
(4) Exemption in connection with certain exempt
offerings.--A security is a covered security with
respect to a transaction that is exempt from
registration under this title pursuant to--
(A) * * *
* * * * * * *
(C) section 4(6);
[(C)] (D) section 3(a), other than the offer
or sale of a security that is exempt from such
registration pursuant to paragraph (4), (10),
or (11) of such section, except that a
municipal security that is exempt from such
registration pursuant to paragraph (2) of such
section is not a covered security with respect
to the offer or sale of such security in the
State in which the issuer of such security is
located; or
[(D)] (E) Commission rules or regulations
issued under section 4(2), except that this
subparagraph does not prohibit a State from
imposing notice filing requirements that are
substantially similar to those required by rule
or regulation under section 4(2) that are in
effect on September 1, 1996.
* * * * * * *
----------
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
REGISTRATION REQUIREMENTS FOR SECURITIES
Sec. 12. (a) * * *
* * * * * * *
(g)(1) * * *
* * * * * * *
[(5) For the purposes]
(5) Definitions.--
(A) In general.--For the purposes of this subsection
the term ``class'' shall include all securities of an
issuer which are of substantially similar character and
the holders of which enjoy substantially similar rights
and privileges. The Commission may for the purpose of
this subsection define by rules and regulations the
terms ``total assets'' and ``held of record'' as it
deems necessary or appropriate in the public interest
or for the protection of investors in order to prevent
circumvention of the provisions of this subsection. For
purposes of this subsection, a security futures product
shall not be considered a class of equity security of
the issuer of the securities underlying the security
futures product.
(B) Exclusion for persons holding certain
securities.--For purposes of this subsection, the term
``held of record'' shall not include holders of
securities issued pursuant to transactions described
under section 4(6) of the Securities Act of 1933.
* * * * * * *