[Congressional Record Volume 157, Number 167 (Thursday, November 3, 2011)]
[House]
[Pages H7295-H7308]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
ENTREPRENEUR ACCESS TO CAPITAL ACT
Mr. McHENRY. Mr. Speaker, I ask unanimous consent that all Members
have 5 legislative days within which to revise and extend their remarks
on H.R. 2930 and to insert extraneous material thereon.
The SPEAKER pro tempore (Mr. Garrett). Is there objection to the
request of the gentleman from North Carolina?
There was no objection.
The SPEAKER pro tempore. Pursuant to House Resolution 453 and rule
XVIII, the Chair declares the House in the Committee of the Whole House
on the state of the Union for the consideration of the bill, H.R. 2930.
{time} 1545
In the Committee of the Whole
Accordingly, the House resolved itself into the Committee of the
Whole House on the state of the Union for the consideration of the bill
(H.R. 2930) to amend the securities laws to provide for registration
exemptions for certain crowdfunded securities, and for other purposes,
with Mr. Bass of New Hampshire in the chair.
The Clerk read the title of the bill.
The CHAIR. Pursuant to the rule, the bill is considered read the
first time.
The gentleman from North Carolina (Mr. McHenry) and the gentleman
from Colorado (Mr. Perlmutter) each will control 30 minutes.
The Chair recognizes the gentleman from North Carolina.
Mr. McHENRY. Mr. Chairman, I yield myself such time as I may consume.
When I'm at home in western North Carolina, I hear frequently from my
constituents, from small businesses, that they have a very difficult
time raising capital in these very challenging times that we're in. And
over 2 years into an economic recovery that is struggling, America's
labor and capital markets continue to face unprecedented challenges.
Nearly 14 million Americans remain officially unemployed, with an
additional 11 million underemployed. And small businesses continue to
struggle to access capital despite an endless number of government
initiatives.
The origin of these barriers to capital formation rests in two
Federal securities laws--the Securities Act of 1933 and the Securities
Exchange Act of 1934--that have not been substantially updated since a
gallon of gasoline cost 10 cents and only 31 percent of households
owned a telephone. Today, a gallon of gas, as we know, costs about 35
times more per gallon than it did then, and nearly every American owns
a telephone. In fact, most people have the Internet in their pocket.
So while the comparison of then and now is nostalgic, the
ramifications of not modernizing our securities regulations have led to
registration and reporting requirements so onerous and costly that
small companies have great difficulty raising capital.
For instance, if a startup company offers an equity stake to
investors through a medium like Facebook or Twitter, it is presumably
in violation of SEC regulations for that communication and offering.
However, soliciting money for one's favorite charity or even a
political candidate through the same Internet medium is perfectly
legal. So, clearly, something is not right.
Furthermore, high net worth individuals can invest in businesses
before the average family can. And that small business is limited on
the amount of equity stakes they can provide investors and limited in
the number of investors they can get. So, clearly, something has to be
done to open these capital markets to the average investor, and that's
what the Entrepreneur Access to Capital Act is all about.
It removes the SEC restrictions on crowdfunding to allow
entrepreneurs and small businesses to raise capital from everyday
investors. Already prevalent in Europe and Asia, crowdfunding has
proven that broadening the communication investment capabilities
between investors and entrepreneurs can have a positive impact and a
positive effect on capital formation which is the lifeblood of a strong
and growing economy.
Specifically, my bill will allow companies to pool up to $1 million
without the expense of registering with the SEC or up to $2 million if
the company provides investors with audited financial statements.
Individual contributors are limited to $10,000 or 10 percent of the
investor's annual income, whichever is less.
In addition, H.R. 2930 creates a regulatory structure of investor
protection
[[Page H7296]]
around this new, innovative form of financing with substantial
intermediary requirements or issue requirements if there is no
intermediary. This key mandate for investor protection is why the bill
has received broad bipartisan support both in the Financial Services
Committee and from President Obama.
This has been crafted both with Republican and Democrat staffers,
getting input from my colleagues from across the aisle at a
subcommittee markup, multiple hearings we've had on the idea of
crowdfunding, as well as a full committee markup. And we worked
together and passed it with a bipartisan vote coming out of committee.
This was a collaborative operation, and I appreciate my colleagues and
I appreciate the staff of the Financial Services Committee as well as
the staff on the Oversight and Government Reform Committee and my
subcommittee where we had a number of hearings on capital formation,
and out of that came this idea.
{time} 1550
This is the culmination of months of work. The process began for
crafting this piece of legislation over the summer. When the President
stood in this Hall, in this room just a couple months ago for his jobs
bill, and when he included in the proposal this idea of crowdfunding,
it was a very positive thing--not just to have a good idea that we can
pass here in the House, but to have a good idea that has the
possibility of getting through the Senate, where it's a very
challenging time for them to pass legislation at all. And that way it
can make it to the President's desk and really give entrepreneurs the
opportunity to raise this capital, to actually create and grow jobs.
That's why they need the capital, so we can grow jobs, create jobs and
provide more opportunity for our constituents and folks across this
country.
We can protect and inspire confidence in the investor community as
well as allow small businesses, those companies most critical to our
economy, to gain the capital needed to expand, compete, and thrive.
I urge my colleagues to support this bill that combines both the best
of microfinance with the power of crowdsourcing and give folks the
opportunity--the average, everyday investor--the opportunity to have an
equity stake in their favorite company, not just accredited investors
and not just so-called high net worth individuals. That's the purpose
of this legislation. I ask my colleagues to support this legislation,
and I reserve the balance of my time.
Executive Office of The President, Office of Management
and Budget,
Washington, DC, November 2, 2011.
Statement of Administration Policy
H.R. 2930--Entrepreneur Access to Capital Act
(Rep. McHenry, R-North Carolina, and 5 cosponsors)
The Administration supports House passage of H.R. 2930. In
the President's September 8th Address to a Joint Session of
Congress on jobs and the economy, he called for cutting away
the red tape that prevents many rapidly growing startup
companies from raising needed capital, including through a
``crowdfunding'' exemption from the requirement to register
public securities offerings with the Securities and Exchange
Commission. This proposal, which would enable greater
flexibility in soliciting relatively small equity
investments, grew out of the President's Startup America
initiative and has been endorsed by the President's Council
on Jobs and Competitiveness. H.R. 2930 is broadly consistent
with the President's proposal. This bill will make it easier
for entrepreneurs to raise capital and create jobs. The
Administration looks forward to continuing to work with the
Congress to craft legislation that facilitates capital
formation and job growth, and provides appropriate investor
protections.
Mr. PERLMUTTER. Mr. Chairman, I yield myself such time as I may
consume.
I thank my friend from North Carolina for bringing this matter to the
floor, for being the sponsor of this bill and for working with us to
make this bill better.
Now, as Mr. McHenry said, this is a bill that really allows money to
be raised, investments to be made by people without a lot of money.
They are investors who are going to make smaller investments but in a
large volume. As my friend said, this isn't 1933, and this isn't 1934
when those acts were passed. But still, what we've got to remember is
sales can be made on the Internet now, or this bill will ask that sales
be made of securities on the Internet. Originally, it could be on the
phone, it could have been by mail, and it could have been by word of
mouth. But what we've got to do with this ability to raise money across
the Internet is ensure that the proper protections are put into place
so that those who might deceive or defraud or in some other way mislead
investors who are making these investments can be policed and the laws
can be enforced if, in fact, there is some type of fraudulent act.
Now H.R. 2930 enables small companies and individuals to make use of
Internet-based social networks to raise up to $1 million from friends,
family, and other interested investors. While the bill caps both the
total level of securities and the amount investors can invest,
Democrats expressed strong concerns about the potential harm this new
market could pose to investors. Originally, the bill provided few
investor protections and no SEC or State regulatory oversight.
During the committee markup of H.R. 2930, Democrats added provisions
requiring crowdfunding. And ``crowdfunding'' is a term that really
isn't seen in our law to date. And what it is is the sale of
securities, the solicitation of investments across the Internet in
small amounts. So Democrats asked that there be notice given to State
regulators so that they could police the activities against wrongful
conduct, deception, fraud, embezzlement, or other kinds of misdeeds.
Democrats successfully added a provision to disqualify bad actors,
individuals that have been convicted of either State or Federal
securities law violations or other financial law violations. Democrats
also requested, and the gentleman from North Carolina and the
Republicans agreed, to create a regulatory framework for the
crowdfunding Web sites that would provide additional disclosures,
safeguards, and protections for investors who wanted to buy into one of
these investments.
We recently had a financial crisis that we're still continuing to dig
our way out of. There were Ponzi schemes. Everybody is aware of the
Madoff Ponzi scheme and others. We need to have protections for
investors as businesses seek to form and develop capital. We thank the
gentleman from North Carolina in working with us to place some of those
investor protections into this bill.
We know there will be a number of amendments that are proposed that
will continue to strengthen those investor protections. We thank the
gentleman from North Carolina for bringing this bill forward.
I reserve the balance of my time.
Mr. McHENRY. I thank my colleague from Colorado for working actively
with me and with my staff to make this bill better, as well as my
colleagues, Mrs. Maloney from New York, Ms. Waters of California, and
Mr. Al Green. Thank you so much for your work in working in a
bipartisan way to improve the bill.
With that, I would like to yield such time as he may consume to the
chairman of the Financial Services Committee, the gentleman from
Alabama (Mr. Bachus).
Mr. BACHUS. Mr. Chairman, I feel like I'm having a dream, and in that
dream my colleague, Patrick McHenry, has legislation on the floor, and
President Obama has endorsed that legislation. I feel like I ought to
wake up and find out that that was a dream. But in reality, it's
actually what's happening here today. I told Mr. McHenry that I would
like unanimous consent to ask that we call this the McHenry-Obama
friendship bill, but I won't do that.
Let me say this: The President did issue a statement yesterday, and
in that statement, it says that the administration supports House
passage of H.R. 2930. It goes on to say, in the President's September 8
address to the Joint Session of Congress on jobs and the economy, he
called for cutting away redtape that prevents many rapidly growing
startup companies from raising needed capital, including through
crowdfunding exemption from the requirement to register public
securities offerings with the Securities and Exchange Commission. He
goes on to say that he believes that this bill will make it much easier
for entrepreneurs to raise capital and create jobs. And it will.
[[Page H7297]]
Last night, I was at a Faith & Politics dinner where our friends,
Congressman Steny Hoyer and Senator Roy Blunt, were receiving the John
Lewis-Amo Houghton Award. As we know, both those colleagues are bridge
builders. The gentleman at the table next to me, and these were people
that were supporting Faith & Politics, said to me, I appreciate the
fact you're going to bring a crowdfunding bill to the floor of the
House. And I was somewhat amazed, because a few months ago--I have to
admit, I'm not a high techie like the President or Congressman
McHenry--I really didn't know the difference between clown funding and
crowdfunding before we started talking about this bill.
I said to him, how do you know about this bill? He said, well, I'm an
executive with Facebook. And he said many companies similar to
Facebook, and you mentioned this in your earlier speech, in other
countries they raise money through crowdfunding. And he said they even
do it here, but they avoid the law. It is a modern thing to do. It's
like Facebook, it's like Google, and it's like BlackBerry several years
ago. It's something that we didn't know about. But we do now, and we do
need to keep our laws current.
I do also close by commending Congressman Perlmutter for making this
bill a better bill and one that protects consumers. With this
legislation, we'll move this provision into the 21st century and bring
it up to date with modern ways to finance businesses.
{time} 1600
That will give us an advantage that presently is a disadvantage when
it comes to competing with some of our foreign competition. We
certainly want to level that playing field and create jobs, and this
bill does that.
Mr. PERLMUTTER. Madam Chair, I yield myself such time as I may
consume.
For the record, H.R. 2930 creates a new exemption from registration
under the Securities Act of 1933 for what we call ``crowdfunding''
securities. I think the record should have a definition. Crowdfunding
refers to a technique for raising money over the Internet in relatively
small amounts from a large number of people. And that's the exemption
that's being sought pursuant to this bill, a different way to raise
money. Would the gentleman agree?
I yield to my friend from North Carolina.
Mr. McHENRY. I thank my colleague for submitting that for the record,
the definition.
Now, the intention is that you have an Internet portal of sorts, but
this could be done on any mass basis. But the disclosures have to be
very clear--which we specify in the legislation--and we've given the
SEC the ability to specify additional pieces. I have a technical
amendment to clarify what the Securities and Exchange Commission staff
thinks is very important to add to this bill. But I do appreciate the
gentleman offering the definition.
Mr. PERLMUTTER. I thank my friend.
One other new term in the bill that we ought to have some discussion
about is ``intermediary.'' Intermediary in the bill is more or less a
custodian of funds. Am I correct or not?
I yield to my friend.
Mr. McHENRY. I appreciate the gentleman.
The intention would be that the intermediary is, in essence, the
conduit of funds. There's the notion of the broker-dealer, which is
well established in law. What this does is, it's similar to a broker-
dealer; but it is a very low-regulatory, low-cost basis of doing it.
What this is, in essence, is an intermediary defined as Websters
would define an intermediary. And I think that's probably the better
way to describe it.
Mr. PERLMUTTER. To the degree that the intermediary exists in this,
they will be subject to the enforcement principles as we go through the
amendments.
With that, I yield 3 minutes to my other friend from North Carolina
(Mr. Miller).
Mr. MILLER of North Carolina. Madam Chair, exempting this funding
source from SEC regulation is not all this bill does. It also prohibits
the States from doing anything. This is not a case where the proponents
of the bill are saying, let's not let the Federal Government do this;
let's let the States do this. They say, no, the States can't touch it
at all.
The people of the various States, using their right to vote, can't
decide that in their State they want someone looking at what is being
offered to mom-and-pop investors to make sure that they're not getting
flim-flammed. That is a great deal of the investor protections that
we've had in this country. It has been done at the State level, and
this takes those cops off the beat altogether.
So if you think that the people of the States should be able to
exercise their own judgment about whether they want their States
looking at what is being offered to mom-and-pop investors, you should
vote against this bill.
Mr. McHENRY. Madam Chair, I yield myself such time as I may consume.
I need to correct the record with regard to what my colleague from
North Carolina said. What he said is simply not, in fact, what this
bill does.
Furthermore, as we know, securities fraud is prosecuted not just at
the Federal level, but by the States as well. That will continue to
exist.
Furthermore, if my colleague from North Carolina would reach out to
my colleague from Colorado, I'm supporting his amendment which
preserves the States' rights of action.
Mr. MILLER of North Carolina. Will the gentleman yield?
Mr. McHENRY. I yield to the gentleman.
Mr. MILLER of North Carolina. Yes, that has to do with enforcement.
But the bill prohibits the States from having up-front disclosure
requirements so that a Secretary of State--who is typically the
securities law enforcer in most States--can look at it, require
disclosure, look at what the disclosures are, look at what is being
offered is really what is there. Yes, the bill does, thanks to the
gentleman from Colorado's good work----
Mr. McHENRY. Reclaiming my time, to correct the record, in the State
of North Carolina, there is no pre-filing requirement. In the State of
New York, for instance, they actually have up-front filing
requirements.
Additionally, in this legislation, how it is crafted is the SEC would
provide notice of this offering to the States once that offering
occurs. This is something that my colleague from New York (Mrs.
Maloney) crafted in the subcommittee. My staff, as well as the
Financial Services Committee Republican staff, worked diligently with
the Democrat staff on the Financial Services Committee as well as Mrs.
Maloney's staff and came up with a three-page amendment, which was
adopted on a bipartisan basis at the committee--I appreciate my
colleague from New York offering that--and it has improved the bill.
Mr. MILLER of North Carolina. If the gentleman will yield, did the
gentleman not get a letter dated November 3, 2011, from Elaine Marshall
saying what you just said isn't right?
Mr. McHENRY. Reclaiming my time, I did not receive that letter. My
two Democratic colleagues from North Carolina that are on the Financial
Services Committee did in fact get that letter. My colleague Mel Watt--
a fantastic member--submitted it for the record in the Financial
Services Committee. I had neither a letter nor a call from my Secretary
of State raising concerns about that.
With that, I would be happy to yield such time as he may consume to
my colleague from New Jersey, the chairman of the Subcommittee on
Capital Markets in Financial Services, Mr. Garrett.
Mr. GARRETT. I thank the gentleman from North Carolina for all of his
work on this legislation, as well as the chairman of the full
committee, Spencer Bachus, for his leadership on this initiative as
well.
To the extent, as with the previous piece of legislation that we had,
it goes to the overarching theme I think of today--and also during the
last 10 months of this time in the House--which is job creation for
this country, what can we do here in the House of Representatives to
facilitate the creation of more jobs.
And just like with the last piece of legislation, what we can do is
help businesses, both small and large, to obtain additional capital,
capital being at the heart of the ability of a small business to go
out, to expand, to grow, to
[[Page H7298]]
hire new employees, and to create jobs in this country.
The legislation before us goes well in that direction. And now, done
in a bipartisan manner, it, as the sponsor, stands head and shoulders
above the way it was before because it adds additional provisions for
safety and soundness to it.
It allows for equity financing, in which investors can purchase
ownership stakes in the company in exchange for basically stock or
shares in those companies to grow in a future direction, to grow larger
and what have you. And it allows the companies to obtain those funds
without having to repay specific amounts at any particular time. What
does that mean? That means it enables the company today to obtain that
capital today to expand the company and hire new employees.
Now, through the efforts of the gentleman from North Carolina, what
they did, in a bipartisan manner, was to add additional--what do you
want to call it, protections, I guess, it will--and which was part of
the discussion I think we had in committee at the time. And that was a
good discussion there. We had the markup in the committee to allow for
some of these discussions; and I know it went further, after the
hearing and eventually with markup, to achieve this.
I think it's important--I'm just going to spend a minute--I know you
touched on some of these, but I want to take a minute or two to run
through what the additional protections are that we are providing for
investors, in no particular order--well, maybe they are, actually. They
are in the order of page eight and nine of the bill, but in front of me
here, first: Warning investors of the speculative nature generally
applicable to investment in startups--and that's what we're talking
about here, they're startups. And if you're going to invest in a
startup, it's not a sure thing, it is speculative. So those warnings
are there.
Secondly, warning investors that they are subject to the restrictions
on sale requirements. What that basically means is that if you're
investing in this today, don't expect necessarily that you can just
take your money out tomorrow, but that there may be restrictions as to
when you can take out your money. But that's necessary, as I said
before, so that the business can have that capital to grow. So it's
reasonable.
Thirdly, taking reasonable measures to reduce the risk of fraud with
respect to such transactions--again, a reasonable measure.
Fourthly, providing the SEC, the Securities and Exchange Commission,
with continuous investor-level access to the issuer's Web site. Why?
Because we want to make sure that that information that is being
conveyed to whom--the investors in this--is the same information that
the SEC has. A good provision.
Fifthly, requiring each investor to answer questions, to do what? To
demonstrate their abilities--and I think the gentleman from North
Carolina already went through this as far as what those restrictions
should be--but, A, recognition of the level of risk generally
applicable. It goes back to what I said before: If you're going to get
involved in this, make sure that you understand it. And that's one of
the questions. B, risk of liquidity. If you're talking about a startup
company as opposed to something that's traded on one of the exchanges,
there's not a lot of liquidity out there, generally speaking.
{time} 1610
That means there's not a lot of folks out there who are trading these
shares on a daily or hourly basis. So you have to understand that there
is going to be a restriction on liquidity in this marketplace.
And, C, such areas as the SEC may determine appropriate, so broad
authority there.
Sixth out of seventh I'm going to touch upon, and maybe this is the
point that the gentleman was just referencing in some respects, the
outsourcing of cash-managing functions to a qualified third-party
custodian. And I think the gentleman referenced traditional broker-
dealers, but actually this goes into a slightly different caveat from
that which, I think, is actually the appropriate manner; otherwise,
what you may be doing with all these restrictions being good, you don't
want to get too restrictive in this and too costly. If you did do that,
then you may end up making this just as difficult as if you were in
some other framework.
Mr. McHENRY. Will the gentleman yield?
Mr. GARRETT. I yield to the gentleman from North Carolina.
Mr. McHENRY. I thank my colleague for yielding.
This is a very important point of distinction here. These
intermediaries are not broker-dealers. That is neither the intent on
either side of the aisle. That is not the description of it. These
intermediaries are there to have a low-cost conduit for capital
formation and a means to do that. That is the intention.
And all the protections outlined in the bill on these intermediaries,
on how they are to operate, are there to enable it to be both low-cost
but also preserve individuals' capital and make sure their investment's
appropriately taken care of.
Mr. GARRETT. One of the reasons that you do that is because we are
talking about small companies, companies that may be creative artists
starting up a business, a nonprofit starting up a business, a small
entrepreneur, so you're talking about small folks, small businesses.
You're talking about businesses under $1 million.
If you were talking about what we read about in The Wall Street
Journal, if we were talking about things that may be shortly traded on
the New York Stock Exchange, that would be more appropriate. But you're
talking about these much more, smaller type of industries here; right?
Mr. McHENRY. Absolutely. And I appreciate my colleague yielding.
The intent is, if you're going to raise $50,000 from 5,000 people, it
has to be a low-cost basis of doing that; and the traditional broker-
dealer model is not efficient at those lower cost basis fundraising
opportunities or equity-raising opportunities.
Mr. GARRETT. Part of the other problem is that you may not find the
interest actually by the broker-dealers if you're talking about a
$25,000 or $50,000 or $100,000 enterprise.
Is that another reason why you went this way?
Mr. McHENRY. Yes. The idea is that, with the traditional broker-
dealers, they're not in this market. So our intent with these low-
dollar issuances, that has not been a traditional part of the action on
Wall Street, not in the modern era, and so we're trying to carve out
this opportunity for small business folks.
Mr. GARRETT. Before you leave, tied to this is another one of the two
last points I was going to raise, which perhaps you would like to
illuminate on.
The bill also requires that the intermediaries state a target amount
that you're raising. You just said perhaps $50,000; right? And one of
the requirements under it, as I understand it, is that you would have
to withhold the capital formation proceeds, the money that you collect,
the capital, until you hit a percentage of or that target amount. Is
that correct?
Mr. McHENRY. Correct.
Mr. GARRETT. The point of that is, again, what? Basically investor
protection here. What you don't want to have happen, I guess, is: Say
I'm going to go out into the marketplace and start raising money, and
as soon as the cash starts coming in I can start using it right away,
even though I was intending to raise $200,000, but I'm going to start
using it right away. Those proceeds may not go to the point where you
intended.
I see the gentleman from Colorado is nodding his head. Is that your
understanding? Is that the reason why this was included in here?
Mr. PERLMUTTER. The answer is yes, if my friend from New Jersey is
yielding to me for a second.
Mr. GARRETT. Well, I will very briefly. I understand that I've gone
over the time that I was supposed to be speaking.
Mr. PERLMUTTER. I will reserve my comments for my time.
Mr. GARRETT. With that, I rise in complete support of this
legislation.
Mr. PERLMUTTER. I would like to ask the Chair what time each side has
remaining.
The Acting CHAIR (Mrs. Miller of Michigan). The gentleman from
Colorado has 23 minutes remaining. The
[[Page H7299]]
gentleman from North Carolina has 9\1/2\ minutes remaining.
Mr. PERLMUTTER. I yield myself such time as I may consume.
The gentleman from New Jersey just brought something up. My friend
from North Carolina is correct, and I misstated it. The intermediary is
more or less the platform, the conduit. But one of its
responsibilities, and this is found in 4A, section 10, is to outsource
the cash management responsibilities to qualified third-party
custodians such as broker-dealers or insured depository institutions,
which was a concern that we were all--we all had during the committee
hearing is, ``Okay. Who's holding the money? Can they be trusted? Will
they release the money at the right time?'' which was what the
gentleman from New Jersey was just talking about.
So I thank my friend from North Carolina for reminding me of that
section. Again, it's another piece of investor protection and a good
idea that helps with capital formation. Again, we're trying to blend
these two concepts.
I would like to yield 3 minutes to the gentleman from Texas (Mr. Al
Green).
Mr. AL GREEN of Texas. Thank you, Mr. Perlmutter, and I thank Mr.
McHenry.
I rise in support of H.R. 2930, the Entrepreneur Access to Capital
Act.
I'm standing where I'm standing because I'm honored to celebrate the
bipartisanship associated with this act. For those who are at home who
may not be able to see and understand, normally I would be standing to
my right; but I do unconventional things, and I think it's appropriate
today to stand where I'm standing.
Mr. McHenry, I'd like to thank you for the spirit that you have shown
as we have tried to make this a better bill. I'd also like to echo
these same expressions of appreciation to Mr. Bachus. I think that Mrs.
Maloney merits an expression of appreciation as well. And I especially,
notwithstanding all of the other persons that I've had a chance to
thank, including the ranking member, but I do want to thank the staffs
who worked with us because they did outstanding work.
Mr. Grimm and I were able to craft a bipartisan amendment that would
aid and assist in the effort that Mr. Perlmutter has called to our
attention, making sure that the persons who handle the dollars, that
these persons are not persons who have been convicted of either State
securities fraud or Federal securities fraud. And this amendment would
require that the SEC construct appropriate measures, regulation or
rule, to prevent these persons from handling the money, if you will.
And I'm honored to say that, with this amendment, I find this bill
much better than it was initially. But I also have to say that Mr.
McHenry never rejected the bill, the amendment, and I'm grateful that
it has worked out to the extent that it has.
So today we will have greater transparency. We will have small
businesses in a position such that they can use this thing called
crowdfunding to fund their efforts. And also, we give persons who
cannot invest in a large way an opportunity to invest in a small way
and hopefully enter into the capital markets for equity purposes.
Mr. McHENRY. Madam Chair, I reserve the balance of my time.
Mr. PERLMUTTER. I yield 3 minutes to the Congresswoman from New York
(Mrs. Maloney).
Mrs. MALONEY. I thank the gentleman for yielding and for his
outstanding work on this bill and so many others.
I, first of all, want to thank Ranking Member Waters and Ranking
Member Frank for their hard work on this bill, and to commend Ranking
Member Frank for his outstanding leadership on the Dodd-Frank
regulatory reform bill.
I also applaud the leadership of Chairman Bachus and Chairman Garrett
and my colleague Mr. McHenry from the great State of North Carolina for
his work on this really new idea in capital formation, and for working
so well and being so open to Democratic ideas and working in a very
professional way with the Democratic staff and Members' staffs and
Members and literally, in some form or another, accepting every
Democratic amendment, which I think is a first. So we are grateful for
that.
Crowdfunding is a way for small startups to raise capital through the
Internet. Investors use these Web sites to come together, and on the
Internet they are able to raise lower dollar amounts to help
enterprises get off the ground.
Crowdfunding is a new way of raising capital. It's a new idea, and it
helps small businesses. In this time of economic hardship, we have
repeatedly heard from our constituents about the need to help small
businesses. We have heard from small businesses about the need to have
more liquidity and more loans.
{time} 1620
We really need to make sure that America's innovators and
entrepreneurs and researchers have the resources necessary to drive
economic recovery and to turn their ideas into the reality of a company
that will create jobs and grow our economy.
By passing this bill, we will make it easier to provide different
avenues for startups and smaller businesses to access the capital they
need to move our economy forward, and it will not only help small
businesses raise capital, but thanks to the changes and amendments we
agreed upon in committee, it contains much stronger investor
protections as well.
During the committee markup, I offered an amendment that was accepted
which will require the issuers to provide notice to the SEC that they
intend to engage in crowdfunding. The SEC must then make that notice
available to the State's securities regulators. And with that
knowledge, the States can ensure and better protect investors, and it's
strengthening, really, investor protection and, really, enforcement.
The Acting CHAIR. The time of the gentlewoman has expired.
Mr. PERLMUTTER. I yield 1 additional minute to the gentlelady.
Mrs. MALONEY. The manager's amendment agreed to in the committee will
empower the SEC with additional safeguards to make crowdfunding safer
for investors. It was literally a joint Democratic and Republican
amendment, and I am very glad we were able to work together to make
this a better bill.
I'm really happy about this bill because New York is a center for
innovators, and many people come from all around the world to build
their ideas. And this bill will help them do it.
It was done in a joint effort. And I hope that my friends on the
other side of the aisle will join us in passing the American Jobs Act,
which will also put Americans to work and help grow our economy.
We are not going to cut our way to prosperity. We need to invest in
growth. The American Jobs Act invests in our infrastructure, in our
workers, in innovation. It helps build the American Dream. So I hope my
colleagues will join with us in passing that important bill, too.
I urge my colleagues to support this bill.
Mr. McHENRY. I yield myself 20 seconds.
I thank my colleague from New York for improving this legislation and
her staff for working so diligently with my staff and the staff on the
committees as well. Very wonderful and constructive process.
I think this is a better bill, and I hope the Senate can take it up
and pass it and send it to the President.
I reserve the balance of my time.
Mr. PERLMUTTER. Madam Chair, I yield myself such time as I may
consume.
I would like to thank my friend from North Carolina for bringing this
bill forward.
It is a good idea. It allows for investments to be made in smaller
amounts by more people using mass kinds of solicitations through the
Internet, through some other vehicle that we may not know of at this
point. And that is a good step. And as we've gone through the process,
we've built it into a better bill by adding in investor protections
because this is something where people could be misled. There could be
misrepresentations, and there has to be some penalty for that. As the
amendment process goes forward today, we will build those amendments
into this.
Now, having said all of that, having listened to the description of
the bill
[[Page H7300]]
that preceded us about making it easier to sell securities, sell
investments, sell deals to accredited investors, that's a nice step,
too. Again, we need to have investor protection restrictions in there
just to make sure people don't get defrauded. We just suffered through
that in 2008 with the likes of Madoff and Stanford and a number of
other fraudsters, con artists. We want to minimize that if we can as we
try to make capital available to businesses to grow.
Now, let's not make any mistake here. These are nice steps, but
they're not going to put a lot of people back to work.
My friend, Mr. McHenry, described the President speaking in this very
Chamber about this bill, but what he was really talking about was the
American Jobs Act. And the American Jobs Act is what this body needs to
pass as well. We need to keep teachers on the job. We need to keep
firefighters on the job. We need to put construction workers back on
the job.
There were complaints about the United States Senate slowing things
down, blocking things. Well, today, the United States Senate, the
Republicans in the United States Senate, blocked rebuilding the
infrastructure of this country--the roads, the bridges, the energy
system, the sewer systems, the basic things that this country needs
which would put thousands and thousands of construction workers back on
the job.
So it would be jobs today, investments for a long time for this
country.
We need to keep those teachers on the job. We need to put our
veterans, as they come home from Iraq and from Afghanistan, we need to
make sure they have a job. That's part of the Jobs Act. That's what
needs to be done today. This is a good step in capital formation. But
it isn't putting people to work right away. That's what this Nation
needs.
This Jobs Act that the President proposed when he talked about
crowdfunding, as we have been in this bill, what he was here for was to
get the Jobs Act, to get these tax credits passed that would help our
veterans get to work, to get our infrastructure rebuilt, to rebuild our
schools and to keep teachers on the job. That's what this Nation needs.
That's what this Nation wants. That's what our people expect.
So I thank my friend from North Carolina for bringing this bill
forward. It's a good idea. He's been willing to work with us to make it
a better idea, and we thank him. We also ask him and his colleagues on
the Republican side of the aisle to pass this Jobs Act today. America
needs it today.
With that, I yield back the balance of my time.
Mr. McHENRY. Madam Chair, I yield myself the balance of my time.
The Entrepreneur Access to Capital Act is about giving entrepreneurs
the power to raise money, to raise equity stakes in their business or
their business idea, to grow their business or create a new business.
That's really what this is about.
The legislation we have here on the floor today--I know to some of my
colleagues, as some people talk about, the Internet is just a series of
tubes, or they refer to the Internet as the ``Internets'' or something
like that. But we understand and my colleagues understand that the
Internet can be used in a positive way, in an absolutely positive way.
With a Web site like eBay, you have individuals exchanging goods that
don't know each other. But they can tell their reputation. And they can
exchange these goods and get quality goods for a quality price. And you
have a lot of choices. We want to take that idea and give investors
that same idea.
We have crowdfunding Web sites in the United States today. They help
raise money for musicians or artists. And what the artists do is say,
``You know, if you invest in my ability to go into the studio and
record an album,'' or whatever they call it, ``I'll give you the first
download, or I'll give you the first CD.''
{time} 1630
So you have folks pony up $50 or $25 for their favorite banks. You
have folks who are raising money--folks who have a bakery--and they
say, If you contribute a few bucks, you'll get six whoopie pies.
People have innovative ways of doing this. We're giving them the
power, the opportunity; and we're relieving this Federal restriction
that currently prevents them from having equity stakes in their
favorite businesses, in their favorite ideas--their local coffee shops
or their bakeries, their favorite bands or even the next Facebook.
These are the opportunities that we're going to be able to give
investors.
We have fraud protection in this legislation, language which has been
crafted in a bipartisan way. It's a strong improvement to the bill, and
I look forward to a bipartisan vote. I am very hopeful it will make its
way intact through the Senate and make its way to the President's desk
where he can sign it. That way, we can allow entrepreneurs and
innovators that opportunity.
We take the best of micro-finance and the best of crowdsourcing and
combine them in this legislation, and it's a positive thing. We can
work together on important matters of creating jobs--and we have--and
this is a first step. I certainly appreciate my colleague's willingness
to work to improve the bill and to bring us to this day.
With that, I yield back the balance of my time.
Ms. JACKSON LEE of Texas. Madam Chair, I rise today in support of
H.R. 2930, ``Entrepreneur Access to Capital Act'' to amend the
securities laws to provide for registration exemptions for certain
crowdfunded securities, and for other purposes. This bill reduces the
regulatory burdens on capital formation by small businesses and
addresses regulations on crowdfunding.
The concept of crowdfunding focuses on collective cooperation where
investors try to get funding publicly instead of from personal
contacts. The network is large, and many investors are often found
through the Internet. It is a valuable tool for startups and other
fledgling businesses. As I have said time and time again, startups are
the lifeblood of our economy and American innovation. They provide
necessary jobs, especially in this sluggish market.
This bill provides a crowdfunding exemption to the Securities and
Exchange Commission (SEC) registration requirements for firms raising
up to $5 million, with individual investments limited to $10,000 or 10
percent of an investor's income. As per the exemption, limits are
removed on the number of investors until the first $5 million of
capital is raised. This exemption provides smaller investors the chance
to support startups, which is currently not an option under SEC
regulation. There is a current 499-shareholder cap for private
companies. The bill excludes crowdfunding investors from the cap for
private companies and removes the ban on general solicitation that
exists in many current exemptions.
I support this bill because its purpose is to ease the regulations
that implement stipulations on garnering investors and capital. It is a
measure fledgling small businesses benefit from. Also it should limit
fraud and promote the jobs America needs.
Without access to initial investors and capital, Houston native
Michael Dell would not have been able to start one of the most
successful computer retail businesses in the world. His $1,000 dollar
primary investment in the 1980s allowed Dell Computers to become a
household name. Without this capital, America would not have had one of
its premier innovators.
The economic impact of this legislation is encouraging. Businesses
require investors and capital in order to expand and flourish. When
businesses are presented with this opportunity, jobs are created that
in turn, will stimulate economic growth. Dell's headquarters alone
employs roughly 16,000 people.
I urge my colleagues to join me in supporting H.R. 2930,
``Entrepreneur Access to Capital Act,'' this will ease SEC restrictions
in order to stimulate innovation, and promote regulations that open up
the sphere for startups that would not have the opportunity to succeed
without a wide network of investors. This, in turn, promotes economic
recovery and job creation.
The Acting CHAIR. All time for general debate has expired.
Pursuant to the rule, the amendment in the nature of a substitute
printed in the bill shall be considered as an original bill for the
purpose of amendment under the 5-minute rule and shall be considered
read.
The text of the committee amendment in the nature of a substitute is
as follows:
H.R. 2930
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Entrepreneur Access to
Capital Act''.
[[Page H7301]]
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);''.
The Acting CHAIR. No amendment to the committee amendment is in order
except those printed in part A of House Report 112-265. Each such
amendment may be offered only in the order printed in the report, by a
Member designated in the report, shall be considered read, shall be
debatable for the time specified in the report equally divided and
controlled by the proponent and an opponent, shall not be subject to
amendment, and shall not be subject to a demand for division of the
question.
Amendment No. 1 Offered by Mr. McHenry
The Acting CHAIR. It is now in order to consider amendment No. 1
printed in part A of House Report 112-265.
Mr. McHENRY. Madam Chair, I have an amendment at the desk.
The Acting CHAIR. The Clerk will designate the amendment.
The text of the amendment is as follows:
Page 5, line 5, strike ``issuance'' and insert ``offer or
sale''.
Page 5, line 6, strike ``for which'' and insert ``by an
issuer, provided that''.
Page 5, beginning on line 7, strike ``annual amount raised
through the issue of the securities'' and insert ``amount
sold within the previous 12-month period in reliance upon
this exemption''.
Page 5, beginning on line 13, strike ``individual
investments in the securities are limited to an aggregate
annual amount equal
[[Page H7302]]
to'' and insert ``the aggregate amount sold to any investor
in reliance on this exemption within the previous 12-month
period does not exceed''.
Page 5, line 17, strike ``the'' and insert ``such''.
Page 6, line 8, strike ``issuance'' and insert ``offer or
sale''.
Page 6, line 12, after ``website'' insert ``used for the
offer and sale of such securities''.
Page 6, line 24, strike ``person'' and insert
``intermediary''.
Page 7, line 4, strike ``competency in''.
Page 7, line 5, strike ``recognition'' and insert ``an
understanding''.
Page 7, line 8, before ``risk'' insert ``an understanding
of the''.
Page 7, line 10, before the semicolon insert ``by rule or
regulation''.
Page 7, strike lines 11 through 15 and insert the
following:
``(7) 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 (10)
withholds offering proceeds until aggregate capital raised
from investors other than the issuer is no less than 60
percent of the target offering amount;''.
Page 7, line 18, strike ``with basic'' and insert ``and
potential investors with''.
Page 7, beginning on line 19, strike ``funds are solicited
from'' and insert ``securities are offered to''.
Page 8, line 2, strike ``capital formation funds'' and
insert ``proceeds of the offering''.
Page 8, line 4, before the semicolon insert ``and the
deadline to reach the target offering amount''.
Page 8, beginning on line 6, strike ``traditional broker or
dealer or'' and insert ``broker or dealer registered under
section 15(b)(1) of the Securities Exchange Act of 1934 or
an''.
Page 8, line 13, strike ``and'' and insert after such line
the following:
``(13) provides the Commission with a notice upon
completion of the offering, which shall include the aggregate
offering amount and the number of purchasers; and''.
Page 8, line 14, strike ``(13)'' and insert ``(14)''.
Page 8, line 17, before ``securities'' insert ``or sells''.
Page 9, line 13, strike ``competency in''.
Page 9, line 14, strike ``recognition'' and insert ``an
understanding''.
Page 9, line 17, before ``risk'' insert ``an understanding
of the''.
Page 9, line 19, before the semicolon insert ``by rule or
regulation''.
Page 9, beginning on line 20, strike ``withholds capital
formation'' and insert ``ensures that the third party
custodian described under paragraph (9) withholds offering''.
Page 10, line 1, strike ``basic''.
Page 10, beginning on line 2, strike ``funds are solicited
from'' and insert ``securities are offered to''.
Page 10, line 5, strike ``capital formation funds'' and
insert ``proceeds of the offering''.
Page 10, line 7, before the semicolon insert ``and the
deadline to reach the target offering amount''.
Page 10, beginning on line 9, strike ``traditional broker
or dealer or'' and insert ``broker or dealer registered under
section 15(b)(1) of the Securities Exchange Act of 1934 or
an''.
Page 10, line 16, strike ``and'' and insert after such line
the following:
``(13) provides the Commission with a notice upon
completion of the offering, which shall include the aggregate
offering amount and the number of purchasers; and''.
Page 10, line 17, strike ``(13)'' and insert ``(14)''.
Page 10, line 22, strike ``provided by an investor'' and
insert ``as to annual income provided by the person to whom
the securities are sold''.
Page 11, line 1, strike ``(a)(9) and (b)(8)'' and insert
``(a)(9), (a)(13), (b)(8), and (b)(13)''.
Page 11, line 5, strike ``an investor may not sell'' and
insert ``a purchaser may not transfer''.
Page 11, strike lines 11 through 15 and insert the
following:
``(1) No registration as broker.--With respect to a
transaction described under section 4(6) 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.''.
Page 11, line 21, strike ``90'' and insert ``180''.
Page 12, beginning on line 1, strike ``carry out the cost-
benefit analysis required under section 2(b) of such Act''
and insert ``consider the costs and benefits of the action''.
Page 12, line 3, strike ``90'' and insert ``180''.
Page 12, line 6, strike ``a person'' and insert ``an
issuer''.
Page 12, beginning on line 8, strike ``or to participate in
the affairs of an intermediary facilitating the use of that
exemption.'' and insert ``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(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.''.
Page 13, beginning on line 1, strike ``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.'' and insert ``securities held by
persons who purchase such securities in transactions
described under section 4(6) of the Securities Act of 1933
shall not be deemed to be `held of record'.''.
The Acting CHAIR. Pursuant to House Resolution 453, the gentleman
from North Carolina (Mr. McHenry) and a Member opposed each will
control 5 minutes.
The Chair recognizes the gentleman from North Carolina.
Mr. McHENRY. This is primarily a technical amendment based on post-
markup feedback from the staff of the Securities and Exchange
Commission. The final language has been negotiated between my staff and
the majority and minority staffs of the Financial Services Committee.
The more substantive changes made to this amendment include:
requiring the issuer to state a target offering amount and a deadline
to reach the target offering amount; requiring the commission to
provide a notice upon completion of the offering, which shall include
the aggregate offering amount and the number of purchasers; clarifying
the disqualification provision to ensure that both issuers and
intermediaries, as well as their predecessors, affiliates, officers,
directors or persons fulfilling similar roles, are disqualified from
the exemption established in this bill should they have a history of
committing securities fraud.
I appreciate the SEC staff lending their technical expertise to this
amendment, and I appreciate the bipartisan effort from both the
majority and minority committee staffs to further improve the final
bill.
With that, I yield back the balance of my time.
The Acting CHAIR. The question is on the amendment offered by the
gentleman from North Carolina (Mr. McHenry).
The amendment was agreed to.
Amendment No. 2 Offered by Mr. Fincher
The Acting CHAIR. It is now in order to consider amendment No. 2
printed in part A of House Report 112-265.
Mr. FINCHER. Madam Chairman, I have an amendment at the desk.
The Acting CHAIR. The Clerk will designate the amendment.
The text of the amendment is as follows:
Page 5, line 9, insert after ``$1,000,000'' the following:
``, 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,''.
Page 5, line 12, insert after ``$2,000,000'' the following:
``, 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,''.
The Acting CHAIR. Pursuant to House Resolution 453, the gentleman
from Tennessee (Mr. Fincher) and a Member opposed each will control 5
minutes.
The Chair recognizes the gentleman from Tennessee.
Mr. FINCHER. I want to thank my colleague from North Carolina (Mr.
McHenry) for his great work on this bill and for trying to put the
focus on creating jobs. It's not often so many times what we do but
what we can undo up here in Washington that will let the private sector
get back in the business of creating jobs.
Madam Chairman, the amendment I am offering with my colleague from
California (Mr. Sherman) would simply adjust for inflation the $1
million and $2 million caps in the underlying bill. This will ensure
investment opportunities today are just as strong tomorrow.
As the real value of money decreases over time, small-contribution
investors may be discouraged from supporting start-up companies in the
future due to the diminishing buying power of their original
investments. By indexing the caps in the bill to reflect the annual
change in the consumer price index, we will continue to allow
investment opportunities for Main Street Americans, like our teachers,
police officers and farmers, to pool their money and support
entrepreneurs in their communities.
I urge my colleagues to support this amendment.
Mr. McHENRY. Will the gentleman yield?
Mr. FINCHER. I yield to my colleague from North Carolina.
Mr. McHENRY. I thank the gentleman from Tennessee for offering
[[Page H7303]]
this bipartisan amendment. This is a good-government amendment.
The old adage is ``a million bucks isn't what it used to be.'' Well,
when reg D-504 of the Securities and Exchange Act of 1934 had a $1
million exemption that was put in place in 1982, that $1 million would
be $2.4 million today. So, just in a short period of time, it can show
you the impact of 30 years of inflation.
I appreciate my colleague for offering this amendment, as it's a very
good amendment, and I certainly appreciate your representing the good
folks of Tennessee.
Mr. FINCHER. I yield back the balance of my time.
The Acting CHAIR. The question is on the amendment offered by the
gentleman from Tennessee (Mr. Fincher).
The amendment was agreed to.
Amendment No. 3 Offered by Mr. Quayle
The Acting CHAIR. It is now in order to consider amendment No. 3
printed in part A of House Report 112-265.
Mr. QUAYLE. Madam Chair, I have an amendment at the desk.
The Acting CHAIR. The Clerk will designate the amendment.
The text of the amendment is as follows:
Page 5, line 16, insert before the semicolon the following:
``, 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''.
The Acting CHAIR. Pursuant to House Resolution 453, the gentleman
from Arizona (Mr. Quayle) and a Member opposed each will control 5
minutes.
The Chair recognizes the gentleman from Arizona.
Mr. QUAYLE. Madam Chair, I yield myself such time as I may consume.
I want to thank my friend and colleague from North Carolina for
bringing this bill to the floor, and I want to thank our friends on the
other side of the aisle for working on this important bill as well.
Madam Chair, this is a commonsense amendment that will make it easier
for American companies to raise capital, to expand, and to hire more
workers.
I support the gentleman from North Carolina's legislation, which
removes an unnecessary barrier to allow start-ups and small businesses
to raise capital through individual investments of up to $10,000, or 10
percent of an investor's income. My amendment would simply index this
individual investment cap to inflation.
Entrepreneurs and new businesses play a vital role in advancing both
job creation and innovation in our country. Over the last three
decades, new businesses have created nearly 40 million jobs and have
been responsible for nearly all net new job creation. Unfortunately,
the environment for new businesses has grown increasingly unfavorable.
In the past 3 years, the number of new businesses launched has fallen
23 percent. Capital investment in start-up companies has decreased, and
far fewer small companies are holding initial public offerings.
Madam Chair, too often when legislation is not indexed to inflation,
Congress must go back and amend current laws. For instance, $10,000 in
1980 would actually be $27,535 today. The need for small businesses to
have access to capital is constant. It makes sense that, as the value
of the dollar fluctuates over time, we should adjust the investment cap
accordingly.
This amendment will promote economic growth at no cost to the
taxpayer. I support H.R. 2930, and I urge my colleagues to support this
pro-growth amendment.
I reserve the balance of my time.
Mr. PERLMUTTER. I claim time in opposition, although I am not opposed
to the amendment.
The Acting CHAIR. Without objection, the gentleman from Colorado is
recognized for 5 minutes.
There was no objection.
{time} 1640
Mr. PERLMUTTER. I want my friend from New York to catch her breath.
That's why I'm going to claim time in opposition. But I also do have a
question.
In 2008 when the stock market crashed, when we saw home prices drop
like a rock, when people lost their jobs, we experienced over a several
month period deflation--not inflation; deflation. Under the amendments,
both the preceding one as well as the amendment by my friend from
Arizona, when I look at it, I think, if the price goes down, this could
also shrink.
I yield to my friend North Carolina.
Mr. McHENRY. I thank my colleague for bringing this up, and it is a
great concern. I didn't have the opportunity to say, I do, in fact,
support the gentleman's amendment. I appreciate him offering it. It's a
very thoughtful amendment.
I believe, looking at this, when you have it on an annualized basis,
that does actually allay some of those concerns. But I think you and I
agree that when we don't address some of these securities laws as
frequently as we should to update with technology and what happens in
the market, we should have in place these measures to ensure that
Congress' intent is followed even 20 years from now and can keep pace
with what is reasonable in the marketplace.
I think that your concern is actually a very interesting one. And I
would be happy to talk with the gentleman more about ways that we can
update securities laws to deal with some of these struggles.
Mr. PERLMUTTER. Reclaiming my time, I thank my friend from North
Carolina. We have no opposition to this amendment. We urge its
adoption.
I yield back the balance of my time.
Mr. QUAYLE. I yield to the gentleman from North Carolina.
Mr. McHENRY. Madam Chair, I want to thank my colleague from Arizona
(Mr. Quayle) for offering this amendment. It's a very sharp amendment,
a very thoughtful approach to securities law, a very thoughtful
approach to crowdfunding and the idea of allowing average, everyday
investors the same opportunities that high-net-worth individuals enjoy
in this country. I thank the gentleman for working on job creation and
job growth.
Mr. QUAYLE. I yield back the balance of my time.
The Acting CHAIR. The question is on the amendment offered by the
gentleman from Arizona (Mr. Quayle).
The amendment was agreed to.
Amendment No. 4 Offered by Ms. Velazquez
The Acting CHAIR. It is now in order to consider amendment No. 4
printed in part A of House Report 112-265.
Ms. VELAZQUEZ. Madam Chair, I have an amendment at the desk.
The Acting CHAIR. The Clerk will designate the amendment.
The text of the amendment is as follows:
Page 8, line 13, strike ``and''.
Page 8, line 14, strike the period and insert ``; and''.
Page 8, after line 14, insert the following:
``(14) discloses to potential investors the intermediary's
compensation structure for participation in the security
offering.''.
The Acting CHAIR. Pursuant to House Resolution 453, the gentlewoman
from New York (Ms. Velazquez) and a Member opposed each will control 5
minutes.
The Chair recognizes the gentlewoman from New York.
Ms. VELAZQUEZ. Madam Chair, I yield myself such time as I may
consume.
In order for entrepreneurs to continue to fulfill their traditional
role as job creators, it is essential that they have access to the
capital they rely upon as fuel for innovation and economic expansion.
Crowdfunding represents a promising new tool for this service. But in
order to realize its full potential, investors who buy these securities
must be able to make fully informed decisions. My amendment will make
this possible by requiring crowdfunding intermediaries to disclose how
they are compensated.
Despite its relatively recent emergence, crowdfunding shares many
characteristics with ordinary stock investing. In this marketplace,
however, Web sites and social media will fill the role of brokers and
dealers. They will act as a conduit between stock insurers and ordinary
investors. Unlike stockbrokers, these intermediaries may be paid by
commission, flat fees, or subscriptions. Depending on their
compensation structure, however, intermediaries may have an incentive
to advertise the ideas that provide them with the most money, rather
than what makes the most investment sense. This not only puts ordinary
investors at risk but also undermines the entire premise of
crowdfunding, which is supposed to promote those ideas that have the
most merit.
[[Page H7304]]
Compensation disclosure is not without precedent. It is currently
required by all securities brokers and dealers. This transparency
provides investors with the vital information necessary to have the
confidence that their investment decisions are prudent. Furthermore,
these disclosures take nothing more than a few lines on an offer sheet
or a quick conversation. This is a simple commonsense amendment that
will help ordinary people make informed investment decisions as this
new industry evolves. If intermediaries are going to fill the role of
brokers and dealers in crowdfunding operations, it only makes sense
that just like others in the investment industry, they should be
subject to similar requirements to protect the investors they will
solicit.
I urge Members to vote ``yes'' on the amendment, and I reserve the
balance of my time.
Mr. McHENRY. Madam Chair, I claim time in opposition to the
amendment.
The Acting CHAIR. The gentleman from North Carolina is recognized for
5 minutes.
Mr. McHENRY. Unfortunately, I have to oppose this amendment. In the
course of a subcommittee legislative hearing, a subcommittee markup,
and a full committee markup, this amendment was never offered. My
colleague from New York serves on the Financial Services Committee. As
my other colleagues have mentioned, I worked diligently across the
aisle to incorporate every idea my colleagues from across the aisle
had. They've incorporated them into this bill. It's a better piece of
legislation because of it.
My colleague had the opportunity at the full committee markup to
offer this amendment and didn't. We heard at the capital formation and
crowdfunding hearing in the Capital Markets Subcommittee--I attended
that, and all Members of the Financial Services Committee that were
there that day were allowed to participate. None of the witnesses
raised a compensation disclosure as a precondition to create successful
crowdfunding securities offerings. My colleague did not participate in
the hearing. And when the subject matter of the amendment could have
been raised with a panel of capital formation experts, it was not
raised.
This is an interesting amendment. What we have in this legislation is
an enormous amount of investor protection. We want crowdfunding
intermediaries to be able to compete with one another and to innovate
and to offer the best platform and technology for both issuers and
investors. Our belief is that businesses will be able to work with
different intermediaries. If they don't see an intermediary that fits
with their cost structure or the cost basis they see fit, they can be
their own intermediary. That's how this bill is constructed. This
amendment doesn't work technically with the construct of that. By
forcing intermediaries to disclose the compensation structure to
potential investors, we believe it will have a chilling effect on
compensation in the market and the participation of potential
intermediaries in this mode.
So unfortunately, I have got to oppose this amendment. Had the
gentlelady brought this to me during the subcommittee or full committee
markup, I would have been happy to work with my colleague on trying to
craft workable language. But here on the floor today, I'm opposed to
the amendment. I ask my colleagues to vote against this flawed
amendment.
I reserve the balance of my time.
Ms. VELAZQUEZ. May I inquire as to how much time I have remaining?
The Acting CHAIR. The gentlewoman from New York has 2\1/2\ minutes
remaining.
Ms. VELAZQUEZ. I yield 30 seconds to the gentleman from Colorado (Mr.
Perlmutter).
Mr. PERLMUTTER. I thank the gentlelady.
I would just say to my friend from North Carolina, I appreciate the
fact that this is new, but I think when we are dealing with these small
investments and lots of people, just as with a charity, you'd like to
know that most of it's going to the charity and not to the solicitation
effort. That is why I would say this is important, so you know that
it's getting to your investment and not to the sale effort. So I would
support her amendment.
Mr. McHENRY. Madam Chair, I yield myself such time as I may consume.
I would ask my colleagues, do they disclose on their campaign Web
sites how much it costs to process a credit card contribution?
Exactly. I don't know if my colleagues are making those disclosures
when folks are contributing to their campaigns. So this restriction is
actually a creation of Congress.
I understand the issue. It's a very powerful issue on compensation.
This was never raised in the two subcommittee hearings I have had on
capital formation on the TARP in the Financial Services Subcommittee of
Oversight and Government Reform, nor in the legislative markup at the
Subcommittee on Capital Markets, nor during the subcommittee markup nor
the full committee markup in the Committee on Financial Services.
{time} 1650
Furthermore, I would point my colleague to page 6 of the legislative
text. We have investor protection requirements for intermediaries that
go on for, really, three pages. This specifies a lot of investor
protection. It has received a bipartisan vote. The time for this
amendment is past. It is not best constructed here on the floor. I ask
my colleagues to vote ``no.''
With that, I yield back the balance of my time.
Ms. VELAZQUEZ. I yield myself the balance of my time.
It amazes me that given the experience that brought us to this time,
that brought the economy to its knees with the Wall Street crisis, with
the Madoff Ponzi scheme, that you come here and say this is not the
appropriate time. It is the appropriate time to protect investors, and
that is exactly what we do here.
Compensation disclosure, for the investors to have the information to
know who their intermediaries are and how they are going to be
compensated, this is the appropriate time. This is the right time. It
is important that we protect investors by them knowing how those
intermediaries will be compensated, how their money will be invested.
What makes more sense for an intermediary to invest in this company
versus this other company, because if he invests in this other company
he's going to make more money? What is wrong with transparency? What is
wrong with disclosure? Nothing is wrong.
You have three pages of protection, but you left the most important
protection for investors. What is wrong with the investor to know how
those intermediaries will be compensated? That is the core of my
amendment. And we should, just like brokers and dealers, they will have
their own business interest and they will not necessarily be the same
as investors' interest. Their interest and that of the investors are
not mutually exclusive. Just like brokers and dealers, intermediaries
will have discretion to choose which investment they propose.
I ask for a ``yes'' vote on my amendment.
The Acting CHAIR. The question is on the amendment offered by
gentlewoman from New York (Ms. Velazquez).
The question was taken; and the Acting Chair announced that the noes
appeared to have it.
Ms. VELAZQUEZ. Madam Chair, I demand a recorded vote.
The Acting CHAIR. Pursuant to clause 6 of rule XVIII, further
proceedings on the amendment offered by the gentlewoman from New York
will be postponed.
Amendment No. 5 Offered by Mr. Barrow
The Acting CHAIR. It is now in order to consider amendment No. 5
printed in part A of House Report 112-265.
Mr. BARROW. I have an amendment at the desk.
The Acting CHAIR. The Clerk will designate the amendment.
The text of the amendment is as follows:
Page 11, after line 9, insert the following:
``(f) Website for Crowdfunding Investment Safety Tips.--
``(1) In general.--The Commission shall establish a website
that provides the public with safety tips for investing in
securities described under section 4(6).
``(2) Links to website.--The intermediary in a transaction
involving the issuance of securities described under section
4(6) or, in the case of such transaction not involving an
intermediary, the issuer, shall place a link
[[Page H7305]]
to the website described under paragraph (1) in a prominent
location on the main page of the website of such intermediary
or issuer that is used to facilitate such transaction.''.
Page 11, line 10, strike ``(f)'' and insert ``(g)''.
The Acting CHAIR. Pursuant to House Resolution 453, the gentleman
from Georgia (Mr. Barrow) and a Member opposed each will control 5
minutes.
The Chair recognizes the gentleman from Georgia.
Mr. BARROW. Madam Chair, I yield myself such time as I may consume.
Many of the small business owners that I've talked to back home tell
me that the biggest barrier that they face in starting up a business is
securing access to capital. When traditional lenders aren't lending, we
need to find innovative ways to get startup and expansion money in the
hands of small business job creators.
This bill uses the Internet to knock down some of the financial
barriers that get between mom-and-pop startups and willing investors so
they can get the money they need to grow their businesses and put more
people to work. However, as with almost everything involving the
Internet, new opportunities to do good bring new opportunities for
mischief. We all agree that businesses and investors must understand
the potential risks that come with these innovations. The bill requires
that the SEC adopt regulations specifying the warnings and information
that the issuer has to offer, but it leaves the content and the
formatting of this information to rulemaking proceedings to be
completed later, and it leaves open the possibility of inconsistent
warnings and information for different investment opportunities.
My amendment takes the bill's basic approach one step further by
requiring that the offering contain a link to a site maintained by the
SEC where the SEC will post a comprehensive set of warnings and safety
tips to anyone who is about to use the Internet to raise capital
without all of the hassle and the safeguards of a regulated SEC
offering. This would provide a consistent set of warnings and avoid the
inconsistent, unclear, or misleading messages that investors might get
from different Web sites.
Madam Chair, a word to the wise is sufficient, but too many words can
obscure the information that folks really need. My amendment offers
something better than a word--a link to the information that we all
agree that investors should have available to them before they put
their money down. Investors don't have to read it and they don't have
to heed it, but it's there. And that's the least that we should do.
Small businesses and the investment community stand to gain from this
system, but only if everyone involved is on the same page about the
potential benefits and the drawbacks. My amendment will help make sure
that happens.
I want to thank my colleagues for their work on this bipartisan bill,
and I ask for your support in passing this job-creating, investor-
protecting amendment.
I reserve the balance of my time.
Mr. McHENRY. Madam Chair, I rise in opposition to the amendment.
The Acting CHAIR. The gentleman from North Carolina is recognized for
5 minutes.
Mr. McHENRY. Unfortunately, I have to oppose this amendment. I ask my
colleague from Georgia if he consulted, in the construct of this
language, with the SEC staff.
I yield to the gentleman.
Mr. BARROW. Well, I understand that our staffs have consulted with
each other about the utility of this. I don't know how far they have
gone with the SEC. But I can tell you the basic outline of this
requirement is not to gum up the offering, not to require the issuer to
put all kinds of stuff in the offering that can actually obscure the
information that the offerer wants to put to the public and can allow
the SEC basically to intrude into that offering, but to require one
simple link where they can go and get all of the information that any
wise investor needs.
Mr. McHENRY. Reclaiming my time, we did not see this legislative text
until it was filed with the Rules Committee. We worked to try to
accommodate the Member with text that could be acceptable.
Unfortunately, the construct of this is simply not acceptable and we
couldn't come to reasonable accommodation on language that would be
workable.
Look, the SEC is certainly overburdened. We all know that. I mean,
they're working very hard. They currently have two Web sites right now.
What this amendment would do is force them to have a third Web site.
Furthermore, in the discussion of this amendment, my colleague
describes this as a public offering. The crowdfunding legislation
described here is an exempt offering, very different in nature than a
public offering, and is exempt from the SEC regs.
On page 6 of the legislation, subsection (a)(1), it mandates that
individuals, intermediaries in this process, would have to add a
warning to investors, including the intermediary's Web site, 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 restrictions on
sales requirements described under subsection (e).
Additionally, (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.
This part of the legislation, my staff as well as the staff of the
Financial Services Committee, Democrats and Republicans, as well as the
staff of Mrs. Maloney and Ms. Waters crafted this language in a very
balanced way. We've included those concerns.
Unfortunately, the language before us today is deeply flawed, and
with the nature of securities laws as they are in this country--and in
the world, for that matter--we want to make sure that it has the
appropriate balance, that it has been thoroughly vetted through counsel
and actually has agreement. That is why this amendment is deeply flawed
and I oppose it.
I reserve the balance of my time.
Mr. BARROW. Madam Chair, I yield myself such time as I may consume.
I understand the gentleman to be concerned about the distinction
between this type of offering and a public offering, and I wish to
remind him of what perhaps wasn't clearly understood. The point we're
trying to make here is an exempt offering. That does not have all of
the rigamarole and the hassle and the fine print and all of the
safeguards that go along with a public offering.
{time} 1700
It is because we're trying to provide the ease and convenience of an
exempt offering while still providing the necessary information that
folks have to have that we all are concerned about the investment
warnings that the gentleman thinks we need to have in the bill. I agree
with that. This is not a public offering. What we're trying to do,
though, is to make sure that we don't exempt folks from having the
information they might need to have before they make an investment in
this entirely new and heretofore unregulated marketplace.
The gentleman is also concerned about the fact that there is yet
another Web site. We're just talking about a page here that can be
readily linked so the person looking at the information that the issuer
wants to make available to the public, they can just hit on one link,
and they can go someplace else immediately and get all the information
that they need or the information they don't need. They can read it or
not read it.
Mr. McHENRY. Will the gentleman yield?
Mr. BARROW. I yield to the gentleman from North Carolina.
Mr. McHENRY. The legislative text on line 4 specifies, establish a
Web site.
Mr. BARROW. Yes, a site on the Internet, on the World Wide Web, can
be just one page that can have all the information that you need.
Reclaiming my time, the main concern that I've got is that the
investment protections the gentleman refers to in the bill suffer from
the problem of being both overinclusive and underinclusive. On the one
hand, it gives the SEC comprehensive authority to require that certain
information be made
[[Page H7306]]
available and the person be tested and answer questions on the
information that the SEC requires that they demonstrate competence on.
This could suffer from underinclusion if the SEC doesn't ask or insist
that the person have the most minimal information. It could be
incredibly overinclusive if the SEC wants to use the authority given by
the bill, as written, to require that the investor demonstrate
competence on a million things.
Just think of the terms and conditions in the typical software
download program; and if someone's got to answer a question about every
sentence in there, you can actually give the SEC the authority, and
you're kind of inviting them to go into this offering and to require
competence on all kinds of stuff the person doesn't need.
Oftentimes, as Emerson said, a glimpse reveals what the gaze
obscures. What I think folks need to have is a direct link that takes
them to the information that anybody ought to have, and they can read
it or not read it. They can heed it or not heed it. But it won't gum up
the offering. It won't get between what the issuer wants to make
available in order to make the sale and the information a person needs
to have in order to decide whether or not this is the right place for
them to make this kind of investment.
With that, I reserve the balance of my time.
Mr. McHENRY. May I inquire of the Chair the remaining time on both
sides.
The Acting CHAIR. The gentleman from North Carolina has 1\3/4\
minutes remaining. The gentleman from Georgia has 30 seconds remaining.
Mr. McHENRY. Madam Chair, I yield myself the balance of my time.
I certainly appreciate my colleague's intent, but I'm simply
uncomfortable with requiring facilitators or these intermediaries that
we create in this legislation of what is an exempt offering under
securities law to actually link to the SEC's Web site. It gives the
stamp of approval of sorts, it seems to me, of this exempt offering. It
actually might create more confusion, not necessarily by the
gentleman's intent, but by the design of the legislation before us, by
the legislative text that we have here in this amendment.
Unfortunately, that is not helpful. Actually, it would be hurtful to
this matter, and that's why I have to oppose it.
Now, I am hopeful that when this legislation is signed into law by
the President that the Securities and Exchange Commission Office of
Education and Investor Advocacy would create an investor alert, which
is their standard process, regarding crowdfunding investments like the
SEC did with the microcap stock, a guide to investors, which is
available on the SEC's existing Web site.
And that's the concern here. We want to make sure that this is done
appropriately. We currently are operating in securities law that
originated over 75 years ago, or roughly 75 years ago. So we want to
make sure we get this right. Unfortunately, this amendment is ill-
crafted, and that's why we have to oppose it.
I yield back the balance of my time.
Mr. BARROW. Madam Chair, I yield myself the balance of my time.
I thank the gentleman for his discussion and for his good-faith
effort to try and reach an understanding as how we can make the
investment information more meaningful. I'm concerned, too, about the
stamp of approval, the so-called Good Housekeeping Seal of Approval
someone might get from finding something that is heretofore highly
regulated available now in a totally brand-new marketplace. I'm
concerned about the opposite impact, that not having the right
information in the hands of the investor can serve as a Good
Housekeeping Seal of Approval, what's in front of them now.
As written, the bill allows the SEC to prescribe all kinds of
information that the person has to demonstrate a competence in. My bill
would do a lot better than that. It would get the SEC out of the
conversation, provide a link where a person can go someplace else and
see what it is they need to see if they want to see it without getting
between the issuer and the customer.
With that, I yield back the balance of my time.
The Acting CHAIR. The question is on the amendment offered by the
gentleman from Georgia (Mr. Barrow).
The amendment was rejected.
Amendment No. 6 Offered by Mr. Perlmutter
The Acting CHAIR. It is now in order to consider amendment No. 6
printed in part A of House Report 112-265.
Mr. PERLMUTTER. I have an amendment at the desk.
The Acting CHAIR. The Clerk will designate the amendment.
The text of the amendment is as follows:
In section 4, strike ``Section'' and insert the following:
(a) In General.--Section
In section 4, add at the end the following:
(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
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(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(6), unlawful conduct by an intermediary, issuer, or
custodian.''.
The Acting CHAIR. Pursuant to House Resolution 453, the gentleman
from Colorado (Mr. Perlmutter) and a Member opposed each will control 5
minutes.
The Chair recognizes the gentleman from Colorado.
Mr. PERLMUTTER. Madam Chair, I yield myself such time as I may
consume.
This is the amendment we've been visiting about over the course of
this bill. And what it does, the structure of the bill is such that it
solicits, an issuer can solicit small investments via the Internet or
some other mass type of media, and that solicitation then, a
notification is made to the Securities and Exchange Commission. Once
that notification is made, then notice of the solicitation on the
Internet, this crowdfunding so to speak, is then given to each State so
that the State regulators, the State enforcement authorities, are given
notice of this solicitation, of this crowdfunding request for sale of
securities.
The amendment that Mr. McHenry and I have prepared makes sure that
when the States get this notice, they can use their police powers,
their enforcement authority, to make sure that the issuer, or anyone
involved with the solicitation, anyone involved with this crowdfunding
which is being used across the Internet, can then, the laws can be
enforced to stop any kinds of fraud, defalcation of funds,
embezzlement, misrepresentation, any kinds of bad acts related to the
solicitation under the crowdfunding.
This applies to both the issuer and the intermediaries. Anybody
holding the funds will still be subject to the police powers of the
State. So we maintain the States' rights for police power.
Mr. McHENRY. Will the gentleman yield?
Mr. PERLMUTTER. I yield to my friend from North Carolina.
Mr. McHENRY. I thank my colleague from Colorado for offering this
amendment, and I thank my colleague for working diligently across the
aisle. This was an idea that he had in the full committee markup. We
worked diligently to get that done at full committee markup. It was not
able to be done, but the language we have here today is a very good
amendment.
The amendment ensures that the States' securities regulators have the
means to police fraud, deceit, misrepresentation, and other unlawful
behavior to protect investors. Since States' securities regulators
already have the resources and expertise, much more so than the SEC, to
examine unlawful behavior at a micro-level, it is essential that this
legislation recognize and authorize them to continue to fight unlawful
conduct. The powers of State securities regulators for crowdfunding are
no different from what that which they have for any covered security.
[[Page H7307]]
Mr. PERLMUTTER. I reserve the balance of my time.
Mr. McHENRY. Madam Chair, I claim time in opposition.
The Acting CHAIR. The gentleman from North Carolina is recognized for
5 minutes.
Mr. McHENRY. I am not opposed to this legislation. I thank my
colleague for offering it.
Mr. WATT. Will the gentleman yield?
Mr. McHENRY. I'd be happy to yield to my colleague from North
Carolina.
Mr. WATT. I was rising to claim time in opposition because I am
opposed. But if the gentleman is going to yield me time.
Mr. McHENRY. I'd be happy to let my colleague--
The Acting CHAIR. As a true opponent on his feet, the gentleman from
North Carolina (Mr. Watt) is recognized for 5 minutes in lieu of the
other gentleman from North Carolina (Mr. McHenry).
Mr. WATT. I thank the Chair.
{time} 1710
Let me say this: This is kind of an awkward conversation because we
did have this discussion in committee. We were advised in committee
that the preemption language would be corrected between the committee
and the floor. It was revised. And the amendment does take a step in
the right direction, so I won't ask for a recorded vote on the
amendment, but it doesn't take a step far enough in the right direction
because the amendment still preempts States from having the pre-review
of these offerings that they now have. Even though it reserves to them
the authority to do something about fraud, it does not reserve to them
the authority to get involved in the review process. And in that sense,
it continues to preempt State law.
I want to applaud my friends, both Mr. McHenry and Mr. Perlmutter,
for making a step in the right direction, but this still preempts State
law, and States ought to have the prerogative to be involved in this.
The State of North Carolina, from which Mr. McHenry hails, the
Secretary of State is adamantly of the opinion--and I agree with her--
that this amendment does not go far enough.
When we get back into the full House and I can offer a letter into
the Record, it will note that the North American Securities
Administrators Association does not think the amendment goes far enough
to protect States' rights.
I'm not accusing anybody of bad faith. I think they made a good faith
effort to try to find grounds. But this raises the exact issue that I
raised in the committee, which was the appropriate place to have done
this and made this amendment and debated it and thought it out--in the
committee, not on the floor of the House. And when you leave it to just
a couple of individuals to work out something between committee and the
floor of the House, sometimes it doesn't get to where people would like
for it to be.
With that, I reserve the balance of my time.
North American Securities
Administrators Association, Inc.,
Washington, DC, November 3, 2011.
Hon. John Boehner,
Speaker, House of Representatives,
Washington, DC.
Dear Mr. Speaker: I am writing on behalf of the North
American Securities Administrators Association (NASAA) to
express my opposition to H.R. 2930, the Entrepreneur Access
to Capital Act, which is scheduled to be voted on by the
House of Representatives this week.
This legislation is well intended, but structurally flawed.
While intended to promote an internet-based fundraising
technique known as ``crowd-funding'' as a tool for
investment, this legislation will needlessly preempt state
securities laws and weaken important investor protections.
Crowd-funding is an online money-raising strategy that
began as a way for the public to donate small amounts of
money, often through social networking websites, to help
artists, musicians, filmmakers and other creative people
finance their projects. The concept has recently been
promoted as a way of assisting small businesses and start-ups
looking for investment capital to help get their business
ventures off the ground.
State securities regulators are acutely aware of today's
difficult economic environment and its effects on job growth.
Small businesses are important to job growth and to improving
the economy. However, by placing unnecessary limits on the
ability of state securities regulators to protect retail
investors from the risks associated with smaller, speculative
investments, Congress is poised to enact policies intended to
strengthen the economy that will very likely have precisely
the opposite effect. If this legislation is enacted in its
present form it will prohibit states from enforcing laws
designed to minimize the risks to investors. As currently
written, H.R. 2930 would only allow states to address
investor losses after they occur. Under this scenario, the
public will lose confidence in this business funding method,
thus, hurting the efforts to make crowd-funding a viable
means for raising capital.
Preemption of State Law
Section 4 of H.R. 2930 would preempt state laws requiring
disclosures or reviewing exempted investment offerings before
they are sold to the public. The authority to require such
filings is critical to the ability of states to get ``under
the hood'' of an offering to make sure that it is what it
says it is. Moreover, as a matter of principle and policy,
NASAA ardently believes that review of offerings of this size
should remain primarily the responsibility of the states. As
the securities regulators closest to the investing public,
and in light of our demonstrated record of effectiveness,
states are the most appropriate regulator in this area. State
regulators are closer, more accessible, and more in touch
with the local and regional economic issues that affect both
the issuer and the investor in a small business offering.
NASAA sincerely appreciates the effort of Congressman Ed
Perlmutter (D-CO) to work with the bill's sponsor to produce
a bipartisan amendment that would alleviate states concerns
with the preemptive provisions of H.R. 2930. Unfortunately,
the Perlmutter-McHenry amendment that was made in order by
the Rules Committee on November 2 falls far short of this
goal. By simply clarifying that states ``retain jurisdiction
. . . to investigate and bring enforcement actions with
respect to fraud or deceit,'' the amendment essentially
restates the preemptive provisions as they existed in the
original bill. The Perlmutter-McHenry amendment fails to
address the fundamental concern that states have had with
H.R. 2930 since its introduction: the preemption of state
authority to review securities prior to their offering.
Congress should refrain from preempting state law.
Preempting state authority is a very serious step and not
something that should ever be undertaken lightly or without
careful consideration, including a thorough examination of
all available alternatives. In the case of crowd-funding,
state securities regulators are not only capable of acting,
but indeed, are acting, and Congress should allow them the
opportunity to continue to protect retail investors from the
risks associated with smaller, speculative investments.
Individual Investment Cap
One of the fundamental tenets of securities law is that an
investor is protected when the seller of securities is
required to disclose sufficient information so that an
investor can make an informed decision. Post-sale antifraud
remedies provide little comfort to an investor who has lost a
significant sum of money that is unrecoverable. Any effort to
remove or weaken the up-front registration and disclosure
process should not happen without adequate alternative
safeguards.
NASAA appreciates that the concept of crowd-funding is
appealing in many respects because it provides small,
innovative enterprises, access to capital that might not
otherwise be available. Indeed, this is precisely the reason
that states are now considering adopting a model rule that
would establish a more modest exemption for crowd-funding as
it is traditionally understood, with individual investments
capped at several hundred dollars per investor.
By contrast, H.R. 2930 goes far beyond anything that is
being contemplated by the states or traditional advocates of
crowd-funding. By setting an individual investment cap of 10
percent of annual income, or $10,000, H.R. 2930 will create
an exemption that will expose many more American families to
potentially catastrophic financial harm. Given that most U.S.
households have a relatively modest amount of savings, a loss
of $10,000, in even a single case, can be financially
crippling.
Aggregate Investment Cap
H.R. 2930 would permit businesses to solicit investments of
up to $2 million, in increments of $10,000 per investment.
Such a high cap on aggregate investment makes the bill
inconsistent with the expressed rationale for the crowd-
funding exception. A company that is sufficiently large to
warrant the raising of $2 million in investment capital is
also a company that can afford to comply with the applicable
registration and filing requirements.
Registration and filing requirements at both the state and
federal level exist to protect investors, and any company
raising up to $2 million can afford to comply with them.
Thank you for your consideration of these important issues.
If you have any questions, please feel free to contact me or
Michael Canning, Co-Director of Policy, at the NASAA
Corporate Office at (202) 737-0900.
Sincerely,
Jack E. Herstein,
President.
[[Page H7308]]
____
State of North Carolina, Department of the Secretary of
State,
Raleigh, NC, November 3, 2011.
Re H.R. 2930--``Entrepreneur Access to Capital Act of 2011''
Hon. Melvin Watt,
Rayburn HOB,
Washington, DC.
Dear Representative Watt: I am writing to express my
concern with H.R. 2930, the Entrepreneur Access to Capital
Act, which could be voted on by the House this week. This
legislation, intended to promote an internet-based
fundraising technique known as ``crowd-funding'' as a tool
for investment, will preempt state investor protection laws
and weaken important investor protections.
Crowdfunding is an online money-raising strategy that began
as a way for the public to donate small amounts of money,
often through social networking websites, to help artists,
musicians, filmmakers and other creative people finance their
projects. The concept has recently been suggested as a way of
assisting small businesses and start-ups looking for
investment capital to get their business ventures off the
ground.
Soliciting charitable donations from strangers online to
advance a goal or cause is one thing. Selling shares in a
business online to strangers who expect to realize a
potential return on their investment is something very
different.
H.R. 2930 contains a preemption provision that would
prohibit my agency from requiring the filing or disclosure of
information about these investment opportunities before they
are offered to the public in my state. I believe enacting
this preemption would be a serious mistake because, based on
our previous experience, many of the crowdfunding
opportunities will be targeted at Mom and Pop retail
investors. The authority to require filings is critical to my
office's ability to ``get under the hood'' of an offering to
make sure that it really is what it says it is.
I appreciate efforts by Congressman Ed Perlmutter (D-CO) to
work with the bill's sponsor to produce a bipartisan
amendment that would alleviate the states' concern with the
preemptive provisions of H.R. 2930. Unfortunately, the
Perlmutter-McHenry Amendment made in order by the Rules
Committee on November 2 does not achieve this goal. Indeed,
by simply clarifying that states ``retain jurisdiction . . .
to investigate and bring enforcement actions with respect to
fraud or deceit,'' the amendment essentially restates the
preemptive provisions as they existed in the original bill.
H.R. 2930 may be well intended, but I am concerned that it
could create serious enforcement challenges and potentially
open the door to the possibility of significant increases in
investment fraud. Small businesses are vital to job growth
and to improving the economy in our state, but by displacing
significant safeguards currently provided by the crucial role
of state securities regulators, Congress could enact policies
intended to strengthen the economy that have precisely the
opposite effect.
As North Carolina's top investor protection official, I
urge you not to support H.R. 2930 in its current form. I
understand the North American Securities Administrators
Association (NASAA), of which I am a member, is already hard
at work on a state level model rule on crowdfunding that
would preserve a state's ability to prevent scam artists from
using crowdfunding offerings as the latest method for ripping
off Main Street investors. I urge you to remove the state
preemption section from the bill.
Thank you for your attention to this important matter.
Please don't hesitate to contact me if I may be of any
assistance, or if you or your staff have questions regarding
the legislation in question.
Sincerely,
Elaine F. Marshall.
Mr. PERLMUTTER. Madam Chair, how much time remains?
The Acting CHAIR. The gentleman from Colorado has 2 minutes
remaining. The gentleman from North Carolina has 2 minutes remaining.
Mr. McHENRY. Will my colleague yield?
Mr. PERLMUTTER. I yield to my other friend from North Carolina.
Mr. McHENRY. I thank my colleague Mr. Perlmutter for working
diligently with us on this language. He raised significant concerns.
The language that we have that the gentleman was integral in crafting
actually is perhaps part of the reason why the President supports the
legislation. And I appreciate Mr. Perlmutter's working diligently on
this.
I would remind my colleagues that in our legislative hearing on this
bill, the Democrat witness before the committee said that crowdfunding
will not work but for this exemption from individual State
registration. It is a very key part of this process. When it costs $150
to register a security in Connecticut, and all you're trying to do is
raise $150 from Connecticut, you net zero. And beyond that, asking a
lawyer to file the paperwork. What we want to do is preserve that anti-
fraud bit that the States do very well at, and we have done that with
this language.
I thank my colleague for yielding.
Mr. PERLMUTTER. I reserve the balance of my time.
Mr. WATT. Madam Chair, I yield myself the balance of my time,
although I won't take it.
I want to express my thanks also to Mr. Perlmutter, and to my
colleague from North Carolina (Mr. McHenry). As I indicated, they made
an effort to move this in the right direction. They, in fact, moved it.
This amendment is better than the underlying bill, which totally
preempted State law. So it moves in the right direction, it just does
not move far enough in the right direction. Because of that--I mean,
I'm not going to vote against the amendment. I'm not even going to ask
for a recorded vote on the amendment itself. But it will make it
necessary for me to oppose the bill itself. And I thought it was
important enough for me to come down and express this because there are
a significant number of people out there, including a number of State
Attorneys General and/or Secretaries of State who believe this does not
go far enough.
With that, I yield back the balance of my time.
Mr. PERLMUTTER. In closing, Madam Chair, I appreciate Mr. Watt's
comments. They're legitimate, except that the purpose of this is to
have in effect a national solicitation notification nationally to the
SEC, and then the powers of the States kick in, as opposed to
individual notification State by State. And I appreciate his concern--
it's legitimate, but to make this work, you have to have a structure
that allows for the national offering, notice to the States, and then
the States' police powers kick in. And the SEC has its police powers as
well if there is any fraud, manipulation, misrepresentation, or the
like.
With that, I would urge adoption of the amendment.
I yield back the balance of my time.
The Acting CHAIR. The question is on the amendment offered by the
gentleman from Colorado (Mr. Perlmutter).
The amendment was agreed to.
The Acting CHAIR. The Committee will rise informally.
The Speaker pro tempore (Mr. McHenry) assumed the chair.
____________________