H.R. 4564 — Introduced in House

I 113th CONGRESS 2d Session H. R. 4564 IN THE HOUSE OF REPRESENTATIVES May 6, 2014 Mr. McHenry (for himself and Mr. Garrett) introduced the following bill; which was referred to the Committee on Financial Services A BILL To amend the Jumpstart Our Business Startups Act to improve the crowdfunding provisions, and for other purposes. 1. Short title This Act may be cited as the Equity Crowdfunding Improvement Act of 2014. 2. Crowdfunding (a) Repeal of existing law The CROWDFUND Act is hereby repealed and the provisions of law amended by such Act are revived or restored as if such Act had not been enacted. (b) New crowdfunding law The Jumpstart Our Business Startups Act is amended— (1) by inserting after title II the following: III Entrepreneur Access to Capital 301. Crowdfunding exemption (a) In general Section 4(a) of the Securities Act of 1933 (15 U.S.C. 77d(a)(6)) is amended by adding at the end the following: (6) transactions involving the offer or sale of securities by an issuer, provided that— (A) the aggregate amount sold within the previous 12-month period in reliance upon this exemption is— (i) $3,000,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, or less; or (ii) if the issuer provides potential investors with audited financial statements, $5,000,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, or less; (B) the aggregate amount sold to any investor who is not an accredited investor in reliance on this exemption within the previous 12-month period does not exceed the greater of— (i) $5,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics; (ii) 10 percent of the investor’s annual income; or (iii) 10 percent of the investor’s net worth; (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); (D) if the aggregate amount sold within the previous 12-month period in reliance upon this exemption is— (i) $500,000 or less, the issuer provides potential investors with financial statements that have been certified by the principal executive officer of the issuer to be true and complete in all material respects; and (ii) more than $500,000 and less than $3,000,000, the issuer provides potential investors with financial statements that have been reviewed by a public accountant who is independent of the issuer, using professional standards and procedures for such review; and (E) at the time such securities are issued, the issuer is a corporation. . (b) Requirement on intermediaries The Securities Act of 1933 (15 U.S.C. 77a et seq.) is amended by inserting after section 4 the following: 4A. Requirements on intermediaries with respect to crowdfunding transactions (a) Requirements on intermediaries For purposes of section 4(a)(6), a person acting as an intermediary in a transaction involving the offer or sale of securities shall comply with the requirements of this subsection if the intermediary— (1) registers with the Commission as— (A) a broker; or (B) a person acting as an intermediary who does not— (i) offer investment advice or recommendations; (ii) explicitly solicit purchases, sales, or offers to buy particular securities offered or displayed on its website or portal; (iii) directly compensate employees, agents, or other persons for direct sale of securities displayed or referenced on its website or portal; or (iv) manage, possess, or otherwise handle investor funds or securities; (2) warns investors, including on the intermediary's website used for the offer and sale of such securities, of the speculative nature generally applicable to investments in startups, emerging businesses, and small issuers, including risks in the secondary market related to illiquidity; (3) warns investors that they are subject to the restriction on sales requirement described under subsection (d); (4) takes reasonable measures to reduce the risk of fraud with respect to such transaction; (5) provides the Commission with the intermediary's physical address, website address, and the names of the intermediary, the chief officer of the intermediary (or person fulfilling a similar role), and any employee of the intermediary responsible for the intermediary’s direct compliance with the securities laws (as defined under section 3 of the Securities Exchange Act of 1934), and updates such information with the Commission within 6 business days of such information changing; (6) provides the Commission with continuous investor-level access to the intermediary's website; (7) requires each potential investor to answer questions demonstrating— (A) an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers; (B) an understanding of the risk of illiquidity; and (C) such other areas as the Commission, in consultation with self-regulatory organizations (as defined in section 3 of the Securities Exchange Act of 1934), may determine appropriate by rule or regulation; (8) requires the issuer to state a target offering amount and a deadline to reach the target offering amount and ensure the third party custodian described under paragraph (11) withholds offering proceeds until— (A) aggregate capital raised from investors other than the issuer is no less than 100 percent of the target offering amount; and (B) the issuer has complied with all requirements under this section; (9) carries out a background check on the executive officers, directors, and shareholders with 15 percent or more voting control of the issuer (or persons fulfilling similar roles) to ensure such persons would not meet the disqualification provisions adopted in accordance with section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act; (10) provides the Commission and potential investors with notice of the offering, not later than the first day securities are offered to potential investors, including— (A) the issuer's name, legal status, physical address, and website address; (B) the names of the executive officers, directors, and shareholders with 15 percent or more voting control of the issuer (or persons fulfilling similar roles); (C) the intended use of the proceeds of the offering; and (D) the target offering amount and the deadline to reach the target offering amount; (11) outsources cash functions to a qualified third party custodian, such as a broker or dealer registered under section 15(b)(1) of the Securities Exchange Act of 1934 or an insured depository institution; (12) maintains such books and records as the Commission determines appropriate; (13) makes available on the intermediary's website a method of communication that permits the issuer and investors to communicate with one another; (14) provides the Commission with a notice upon completion of the offering, which shall include the aggregate offering amount and the number of purchasers; and (15) does not offer investment advice. (b) Verification of investor information For purposes of section 4(a), an intermediary may rely on a certification by an investor as to— (1) the investor’s status as an accredited investor; and (2) with respect to an unaccredited investor, the investor’s annual income, net worth, and the aggregate amount of securities sold to the investor in reliance on the exemption provided by section 4(a) within the previous 12-month period. (c) Information Available to States The Commission shall make the notices described under subsections (a)(10) and (a)(14) and the information described under subsection (a)(5) available to the States. (d) Restriction on Sales Newly issued securities purchased in a transaction made in reliance on section 4(a)(6) may not be resold by any person during the 1-year period beginning on the date of original purchase, unless such securities are sold to— (1) the issuer of such securities; or (2) an accredited investor. (e) Requirement for use of intermediaries when selling to unaccredited investors With respect to a transaction described under section 4(a)(6), an issuer may only enter into a transaction with an unaccredited investor through the use of an intermediary, and any resale of a security originally issued in reliance on section 4(a)(6) may only be made with an unaccredited investor through the use of an intermediary. (f) Rules of construction (1) No registration as broker With respect to a transaction either made pursuant to section 4(a)(6) or involving the resale of a security originally issued pursuant to section 4(a)(6) and involving an intermediary, such intermediary shall not be required to register as a broker under section 15(a)(1) of the Securities Exchange Act of 1934 solely by reason of participation in such transaction. (2) Right to select transactions An intermediary may select in which transactions to serve as an intermediary, and such selection shall not be considered investment advice or subject the intermediary to regulation under the Investment Advisers Act of 1940. (3) Right to terminate transaction An intermediary may review the transaction and terminate the transaction at any time if— (A) in carrying out the intermediary’s due diligence under the transaction, the intermediary determines that termination is appropriate; (B) the intermediary is able to return all funds provided by potential investors; and (C) the custodian has not transferred the offering proceeds to the issuer. (4) No preclusion of other capital raising Nothing in this section or section 4(a)(6) shall be construed as preventing an issuer from raising capital through securities offerings made in reliance on other exemptions from registration. . (c) Rulemaking Not later than 120 days after the date of the enactment of this title, 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 consider the costs and benefits of the action. (d) Disqualification Not later than 120 days after the date of the enactment of this title, the Securities and Exchange Commission shall by rule or regulation establish disqualification provisions under which an issuer shall not be eligible to utilize the exemption under section 4(a)(6) of the Securities Act of 1933 based on the disciplinary history of the issuer or its predecessors, affiliates, officers, directors, or persons fulfilling similar roles. The Commission shall also establish disqualification provisions under which an intermediary shall not be eligible to act as an intermediary in connection with an offering utilizing the exemption under section 4(a)(6) of the Securities Act of 1933 based on the disciplinary history of the intermediary or its predecessors, affiliates, officers, directors, or persons fulfilling similar roles. 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). (e) Treatment of crowdfunding investment companies Section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)) is amended by adding at the end the following: (15) Any person substantially all of whose business is confined to investing in securities purchased in a transaction made in reliance on section 4(a)(6) of the Securities Act of 1933. . 302. 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 the following: (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, securities originally issued in transactions described under section 4(a)(6) of the Securities Act of 1933 shall neither be deemed to be nor counted towards the definition of held of record. . 303. Preemption of State law (a) In general 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(a)(6); . (b) Clarification of the Preservation of State Enforcement Authority (1) In general The amendments made by subsection (a) relate solely to State registration, documentation, and offering requirements, as described under section 18(a) of the Securities Act of 1933 (15 U.S.C. 77r(a)), and shall have no impact or limitation on other State authority to take enforcement action with regard to an issuer, intermediary, or any other person or entity using the exemption from registration provided by section 4(a)(6) of such Act. (2) Clarification of state jurisdiction over unlawful conduct of intermediaries, issuers, and custodians Section 18(c)(1) of the Securities Act of 1933 is amended by striking with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions. and inserting the following: , in connection with securities or securities transactions, with respect to— (A) fraud or deceit; (B) unlawful conduct by a broker or dealer; and (C) with respect to a transaction described under section 4(a)(6), unlawful conduct by an intermediary, issuer, or custodian. . ; and (2) in the table of contents for such Act by amending the items relating to title III to read as follows: TITLE III—Entrepreneur Access to Capital Sec. 301. Crowdfunding exemption. Sec. 302. Exclusion of crowdfunding investors from shareholder cap. Sec. 303. Preemption of State law. .