[House Report 112-262]
[From the U.S. Government Publishing Office]


112th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    112-262

======================================================================



 
                   ENTREPRENEUR ACCESS TO CAPITAL ACT

                                _______
                                

October 31, 2011.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

  Mr. Bachus, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2930]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2930) to amend the securities laws to provide 
for registration exemptions for certain crowdfunded securities, 
and for other purposes, having considered the same, report 
favorably thereon with an amendment and recommend that the bill 
as amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Entrepreneur Access to Capital Act''.

SEC. 2. CROWDFUNDING EXEMPTION.

  (a) Securities Act of 1933.--Section 4 of the Securities Act of 1933 
(15 U.S.C. 77d) is amended by adding at the end the following:
          ``(6) transactions involving the issuance of securities for 
        which--
                  ``(A) the aggregate annual amount raised through the 
                issue of the securities is--
                          ``(i) $1,000,000 or less; or
                          ``(ii) if the issuer provides potential 
                        investors with audited financial statements, 
                        $2,000,000 or less;
                  ``(B) individual investments in the securities are 
                limited to an aggregate annual amount equal to the 
                lesser of--
                          ``(i) $10,000; and
                          ``(ii) 10 percent of the investor's annual 
                        income;
                  ``(C) in the case of a transaction involving an 
                intermediary between the issuer and the investor, such 
                intermediary complies with the requirements under 
                section 4A(a); and
                  ``(D) in the case of a transaction not involving an 
                intermediary between the issuer and the investor, the 
                issuer complies with the requirements under section 
                4A(b).''.
  (b) Requirements To Qualify for Crowdfunding Exemption.--The 
Securities Act of 1933 is amended by inserting after section 4 the 
following:

``SEC. 4A. REQUIREMENTS WITH RESPECT TO CERTAIN SMALL TRANSACTIONS.

  ``(a) Requirements on Intermediaries.--For purposes of section 4(6), 
a person acting as an intermediary in a transaction involving the 
issuance of securities shall comply with the requirements of this 
subsection if the intermediary--
          ``(1) warns investors, including on the intermediary's 
        website, of the speculative nature generally applicable to 
        investments in startups, emerging businesses, and small 
        issuers, including risks in the secondary market related to 
        illiquidity;
          ``(2) warns investors that they are subject to the 
        restriction on sales requirement described under subsection 
        (e);
          ``(3) takes reasonable measures to reduce the risk of fraud 
        with respect to such transaction;
          ``(4) provides the Commission with the intermediary's 
        physical address, website address, and the names of the 
        intermediary and employees of the person, and keep such 
        information up-to-date;
          ``(5) provides the Commission with continuous investor-level 
        access to the intermediary's website;
          ``(6) requires each potential investor to answer questions 
        demonstrating competency in--
                  ``(A) recognition of the level of risk generally 
                applicable to investments in startups, emerging 
                businesses, and small issuers;
                  ``(B) risk of illiquidity; and
                  ``(C) such other areas as the Commission may 
                determine appropriate;
          ``(7) requires the issuer to state a target offering amount 
        and withhold capital formation proceeds until aggregate capital 
        raised from investors other than the issuer is no less than 60 
        percent of the target offering amount;
          ``(8) carries out a background check on the issuer's 
        principals;
          ``(9) provides the Commission with basic notice of the 
        offering, not later than the first day funds are solicited from 
        potential investors, including--
                  ``(A) the issuer's name, legal status, physical 
                address, and website address;
                  ``(B) the names of the issuer's principals;
                  ``(C) the stated purpose and intended use of the 
                capital formation funds sought by the issuer; and
                  ``(D) the target offering amount;
          ``(10) outsources cash-management functions to a qualified 
        third party custodian, such as a traditional broker or dealer 
        or insured depository institution;
          ``(11) maintains such books and records as the Commission 
        determines appropriate;
          ``(12) makes available on the intermediary's website a method 
        of communication that permits the issuer and investors to 
        communicate with one another; and
          ``(13) does not offer investment advice.
  ``(b) Requirements on Issuers if no Intermediary.--For purposes of 
section 4(6), an issuer who offers securities without an intermediary 
shall comply with the requirements of this subsection if the issuer--
          ``(1) warns investors, including on the issuer's website, of 
        the speculative nature generally applicable to investments in 
        startups, emerging businesses, and small issuers, including 
        risks in the secondary market related to illiquidity;
          ``(2) warns investors that they are subject to the 
        restriction on sales requirement described under subsection 
        (e);
          ``(3) takes reasonable measures to reduce the risk of fraud 
        with respect to such transaction;
          ``(4) provides the Commission with the issuer's physical 
        address, website address, and the names of the principals and 
        employees of the issuers, and keeps such information up-to-
        date;
          ``(5) provides the Commission with continuous investor-level 
        access to the issuer's website;
          ``(6) requires each potential investor to answer questions 
        demonstrating competency in--
                  ``(A) recognition of the level of risk generally 
                applicable to investments in startups, emerging 
                businesses, and small issuers;
                  ``(B) risk of illiquidity; and
                  ``(C) such other areas as the Commission may 
                determine appropriate;
          ``(7) states a target offering amount and withholds capital 
        formation proceeds until the aggregate capital raised from 
        investors other than the issuer is no less than 60 percent of 
        the target offering amount;
          ``(8) provides the Commission with basic notice of the 
        offering, not later than the first day funds are solicited from 
        potential investors, including--
                  ``(A) the stated purpose and intended use of the 
                capital formation funds sought by the issuer; and
                  ``(B) the target offering amount;
          ``(9) outsources cash-management functions to a qualified 
        third party custodian, such as a traditional broker or dealer 
        or insured depository institution;
          ``(10) maintains such books and records as the Commission 
        determines appropriate;
          ``(11) makes available on the issuer's website a method of 
        communication that permits the issuer and investors to 
        communicate with one another;
          ``(12) does not offer investment advice; and
          ``(13) discloses to potential investors, on the issuer's 
        website, that the issuer has an interest in the issuance.
  ``(c) Verification of Income.--For purposes of section 4(6), an 
issuer or intermediary may rely on certifications provided by an 
investor to verify the investor's income.
  ``(d) Information Available to States.--The Commission shall make the 
notices described under subsections (a)(9) and (b)(8) and the 
information described under subsections (a)(4) and (b)(4) available to 
the States.
  ``(e) Restriction on Sales.--With respect to a transaction involving 
the issuance of securities described under section 4(6), an investor 
may not sell such securities during the 1-year period beginning on the 
date of purchase, unless such securities are sold to--
          ``(1) the issuer of such securities; or
          ``(2) an accredited investor.
  ``(f) Construction.--
          ``(1) No treatment as broker.--With respect to a transaction 
        described under section 4(6) involving an intermediary, such 
        intermediary shall not be treated as a broker under the 
        securities laws solely by reason of participation in such 
        transaction.
          ``(2) No preclusion of other capital raising.--Nothing in 
        this section or section 4(6) shall be construed as preventing 
        an issuer from raising capital through methods not described 
        under section 4(6).''.
  (c) Rulemaking.--Not later than 90 days after the date of the 
enactment of this Act, the Securities and Exchange Commission shall 
issue such rules as may be necessary to carry out section 4A of the 
Securities Act of 1933. In issuing such rules, the Commission shall 
carry out the cost-benefit analysis required under section 2(b) of such 
Act.
  (d) Disqualification.--Not later than 90 days after the date of the 
enactment of this Act, the Securities and Exchange Commission shall by 
rule or regulation establish disqualification provisions under which a 
person shall not be eligible to utilize the exemption under section 
4(6) of the Securities Act of 1933 or to participate in the affairs of 
an intermediary facilitating the use of that exemption. Such provisions 
shall be substantially similar to the disqualification provisions 
contained in the regulations adopted in accordance with section 926 of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 
U.S.C. 77d note).

SEC. 3. EXCLUSION OF CROWDFUNDING INVESTORS FROM SHAREHOLDER CAP.

  Section 12(g)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 
78l(g)(5)) is amended--
          (1) by striking ``(5) For the purposes'' and inserting:
          ``(5) Definitions.--
                  ``(A) In general.--For the purposes''; and
          (2) by adding at the end the following:
                  ``(B) Exclusion for persons holding certain 
                securities.--For purposes of this subsection, the term 
                `held of record' shall not include holders of 
                securities issued pursuant to transactions described 
                under section 4(6) of the Securities Act of 1933.''.

SEC. 4. PREEMPTION OF STATE LAW.

  Section 18(b)(4) of the Securities Act of 1933 (15 U.S.C. 77r(b)(4)) 
is amended--
          (1) by redesignating subparagraphs (C) and (D) as 
        subparagraphs (D) and (E), respectively; and
          (2) by inserting after subparagraph (B) the following:
                  ``(C) section 4(6);''.

                          Purpose and Summary

    H.R. 2930, the ``Entrepreneur Access to Capital Act,'' 
would create a new registration exemption from the Securities 
Act of 1933 for securities issued through internet platforms 
also known as ``crowdfunding.'' To use this new exemption, the 
issuer's offering cannot exceed $1 million, unless the issuer 
provides investors with audited financial statements, in which 
case the offering amount may not exceed $2 million. An 
individual's investment must be equal to or less than the 
lesser of $10,000 or 10 percent of the investor's annual 
income. By exempting such offerings from registration with the 
Securities and Exchange Commission (SEC) and preempting state 
registration laws, H.R. 2930 will enable entrepreneurs to more 
easily access capital from potential investors across the 
United States to grow their business and create jobs.
    H.R. 2930 requires issuers and intermediaries to fulfill a 
number of requirements in order to avail themselves of this new 
exemption. These requirements, which include notices to the SEC 
about the offerings and parties to the offerings that will be 
shared with the States, are designed to reduce the risk of 
fraud in these offerings and thereby protect investors. The 
legislation also allows for an unlimited number of investors to 
invest via a crowdfunding offering and preempts state 
securities registration laws. However, the legislation does not 
restrict the States' ability to discover and stop and prosecute 
fraudulent offerings.

                  Background and Need for Legislation

    Capital formation is necessary for job creation and is 
essential for any lasting economic recovery. Without access to 
capital, businesses cannot expand. Without regulatory 
certainty, capital disappears.
    Companies obtain capital through borrowing or equity 
financing. Because banks have tightened their lending standards 
in the wake of the economic crisis, there is less credit 
available to fund growth. Accordingly, equity financing, in 
which investors purchase ownership stakes in a company in 
exchange for a share of the company's future profits, is an 
increasingly essential means of providing small companies with 
the capital they need to grow and create jobs.
    Crowdfunding is an increasingly popular method of capital 
formation, where, according to SEC Chairman Mary Schapiro, 
``groups of people pool money, typically comprised of very 
small individual contributions, to support an effort by others 
to accomplish a specific goal.'' Current SEC regulations impede 
this innovative and lower-risk form of financing, by 
prohibiting general solicitation and advertisements for non-
registered offerings and capping the number of shareholders for 
non-registered companies at 500.
    At a hearing on H.R. 2930 held by the Subcommittee on 
Capital Markets and Government Sponsored Enterprises on 
September 21, 2011, Dana Mauriello, the Founder and President 
of ProFounder, testified that ``[i]t is important that 
crowdfunding exist because it democratizes access to start-up 
capital. Capital exists in people's communities and it just 
can't be accessed. Anyone who is bright, driven, and has a 
great idea can gather a supportive community around himself. 
Crowdfunding allows that entrepreneur to turn his community 
into a capital source.'' Ms. Mauriello also supported allowing 
general solicitation in connection with crowdfunding offerings 
and allowing for an unlimited number of investors. She 
identified federal preemption of state law as a ``necessary 
pre-condition'' for crowdfunding.

                                Hearing

    On September 21, 2011, the Subcommittee on Capital Markets 
and Government Sponsored Enterprises held a hearing entitled 
``Legislative Proposals to Facilitate Small Business Capital 
Formation and Job Creation,'' to consider H.R. 2930 and four 
other bills. The following witnesses testified:
     Ms. Meredith Cross, Director, Division of 
Corporation Finance, U.S. Securities and Exchange Commission
     Mr. Vincent Molinari, Founder and Chief Executive 
Officer, GATE Technologies LLC
     Mr. Barry E. Silbert, Founder and Chief Executive 
Officer, SecondMarket, Inc.
     Mr. Matthew H. Williams, Chairman and President, 
Gothenburg State Bank, on behalf of the American Bankers 
Association
     Mr. William D. Waddill, Senior Vice President and 
Chief Financial Officer, OncoMed Pharmaceuticals, Inc., on 
behalf of the Biotechnology Industry Organization
     Mr. A. Heath Abshure, Commissioner, Arkansas 
Securities Department on behalf of the North American 
Securities Administrators
     Ms. Dana Mauriello, President, ProFounder

                        Committee Consideration

    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises met in open session on October 5, 2011, 
and ordered H.R. 2930 favorably reported to the full Committee 
by a record vote of 18 yeas and 14 nays (Record vote no. CM-
37).
    The Committee on Financial Services met in open session on 
October 26, 2011 and ordered H.R. 2930, as amended, favorably 
reported to the House by voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. 
There were no record votes taken on amendments or in connection 
with ordering H.R. 2930, as amended, reported to the House.
    During consideration of H.R. 2930 by the Committee, the 
following amendments were considered:
    1. An amendment in the nature of a substitute offered by 
Mr. McHenry, no. 1, to establish an exemption from registration 
under the Securities Act of 1933 for offerings that meet 
certain criteria; to establish the annual offering threshold 
and the maximum annual individual investment; to require the 
issuer to set a target offering amount and restrict 
disbursements of proceeds until the capital raised from 
investors other than issuer exceeds sixty percent of the target 
offering amount; to require the intermediary, or issuer if 
there is no intermediary, to warn investors of the risks of 
investing in startups and emerging businesses and to take 
measures to reduce risk; to provide the SEC with investor-level 
access to the issuer's website; to require potential investors 
to demonstrate competency; to outsource cash-management to a 
qualified third party; to maintain such records as the SEC 
deems appropriate; to restrict sales of securities for one year 
unless the securities are sold to an accredited investor or to 
the issuer of the securities, to facilitate investor-issuer 
communication, to authorize the SEC to issue rules to carry out 
the provisions of the Act, to exclude crowdfunding investors 
from shareholder registration thresholds and to preempt state 
law as amended by an amendment offered by Mrs. Maloney, no 1a; 
an amendment offered by Mr. Stivers, no 1b; and an amendment 
offered by Messrs. Green and Grimm, no 1c; was agreed to by 
voice vote.
    2. An amendment offered by Mrs. Maloney, no. 1a, to an 
amendment in the nature of a substitute offered by Mr. McHenry, 
no. 1, to require the intermediary, or the issuer, if there is 
no intermediary, to provide the SEC with basic notice of the 
offering, not later than the first day funds are solicited from 
potential investors; and to require the SEC to make notices of 
offerings and information about issuers and intermediaries 
available to the States, was agreed to by voice vote.
    3. An amendment offered by Mr. Stivers, no. 1b, to an 
amendment in the nature of a substitute offered by Mr. McHenry, 
no. 1, to reduce the maximum offering amount to $1,000,000 from 
$5,000,000, while allowing the issuer to raise up to $2,000,000 
if the issuer provides audited financial statements, was agreed 
to by voice vote.
    4. An amendment offered by Mr. Green and Mr. Grimm, no. 1c, 
to an amendment in the nature of a substitute offered by Mr. 
McHenry, no. 1, to require the SEC to issue regulations that 
would disqualify individuals previously convicted of federal or 
state securities fraud from utilizing the 4(6) exemption, or 
from participating in the affairs of an intermediary 
facilitating the use of the exemption, was agreed to by voice 
vote.
    5. An amendment offered by Mr. Perlmutter, no. 1d, to an 
amendment in the nature of a substitute offered by Mr. McHenry, 
no. 1, to strike Section 4 of the bill, was offered and 
withdrawn.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held a hearing and 
made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    The objective of H.R. 2930, the ``Entrepreneur Access to 
Capital Act,'' is to create a new registration exemption from 
the Securities Act of 1933 for securities issued through 
internet platforms also known as ``crowdfunding.'' To use this 
new exemption, the issuer's offering cannot exceed $1 million, 
unless the issuer provides investors with audited financial 
statements, in which case the offering amount may not exceed $2 
million. An individual's investment must be equal to or less 
than the lesser of $10,000 or 10 percent of the investor's 
annual income. By exempting such offerings from registration 
with the Securities and Exchange Commission (SEC) and 
preempting state registration laws, H.R. 2930 will enable 
entrepreneurs to more easily access capital from potential 
investors across the United States to grow their business and 
create jobs.

           New Budget Authority, Entitlement Authority, and 
                            Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, October 28, 2011.
Hon. Spencer Bachus,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2930, the 
Entrepreneur Access to Capital Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 2930--Entrepreneur Access to Capital Act

    H.R. 2930 would establish an exemption from requirements 
that certain securities be registered with the Securities and 
Exchange Commission (SEC). Specifically, the bill would exempt 
securities from registration requirements if:
           The aggregate amount raised through the 
        issuance is $1 million or less each year ($2 million or 
        less if the issuer provides investors with certain 
        financial information); and
           Each individual who invests in the 
        securities does not invest, in any year, more than the 
        lessor of $10,000 or 10 percent of the investor's 
        annual income.
    Issuers of such securities or intermediaries acting between 
the issuer and investors would be required to take certain 
steps, which include providing certain information to investors 
and the SEC, in order to be eligible to take advantage of the 
exemption. The bill would require the SEC to develop 
regulations to implement this new authority and to set out 
actions that would disqualify certain individuals from issuing 
securities under the exemption.
    Based on information from the SEC, CBO estimates that 
implementing H.R. 2930 would have a negligible impact on the 
SEC's workload, and any change in agency spending that is 
subject to appropriation would not be significant. Enacting 
H.R. 2930 would not affect direct spending or revenues; 
therefore, pay-as-you-go procedures do not apply.
    H.R. 2930 would impose an intergovernmental mandate as 
defined in the Unfunded Mandates Reform Act (UMRA) by 
prohibiting states from requiring issuers of some securities to 
register the securities with the state, or to pay registration 
fees, prior to issuance. As defined in UMRA, the direct costs 
of a mandate include any amounts that state governments would 
be prohibited from raising in revenues as a result of the 
mandate. The cost of the mandate would be the amount of fee 
revenue that states would be precluded from collecting. Based 
on information from the SEC and industry sources, CBO estimates 
that forgone revenues would be small and would not exceed the 
threshold established in UMRA for intergovernmental mandates 
($71 million in 2011, adjusted annually for inflation). H.R. 
2930 contains no new private-sector mandates as defined in 
UMRA.
    The CBO staff contact for this estimate is Susan Willie. 
This estimate was approved by Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 2930 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section provides a short title to the bill by citing 
it as the ``Entrepreneur Access to Capital Act.''

Section 2. Crowdfunding exemption

    This section amends Section 4 of the Securities Act of 1933 
to create a new registration exemption for securities issued 
through internet platforms also known as ``crowdfunding.'' To 
use this new exemption, the issuer's offering cannot exceed $1 
million, unless the issuer provides investors with audited 
financial statements, in which case the offering amount may not 
exceed $2 million. An individual's investment must be equal to 
or less than the lesser of $10,000 or 10 percent of the 
investor's annual income.
    This section also states that the intermediary (or the 
issuer if there is no intermediary) must comply with certain 
delineated requirements.
    The intermediary must (1) warn investors of the speculative 
nature generally applicable to investments in startups, 
emerging businesses, and small issuers; (2) warn investors that 
there are restrictions on the re-sale of the securities; (3) 
take reasonable measures to reduce the risk of fraud with 
respect to the transaction; (4) provide the Securities and 
Exchange Commission (SEC) with information about the 
intermediary; (5) provide the SEC with continuous investor-
level access to the intermediary's website; (6) require each 
investor to answer questions demonstrating a basic 
understanding of the nature of the securities offered; (7) 
require the issuer to state a target offering amount and 
withhold capital formation proceeds until the aggregate capital 
raised from investors other than the issuer is greater than or 
equal to 60 percent of the target offering amount; (8) carry 
out background checks on the issuer's principals; (9) provide 
the SEC with information about the issuer and offering; (10) 
outsource cash-management functions to a qualified third party 
custodian; (11) maintain such books and records as the SEC 
deems appropriate; (12) allow for communication between the 
issuer and investors; and (13) not offer investment advice.
    This section also requires that, if there is no 
intermediary, the issuer must (1) warn investors of the 
speculative nature generally applicable to investments in 
startups, emerging businesses, and small issuers; (2) warn 
investors that there are restrictions on the re-sale of the 
securities; (3) take reasonable measures to reduce the risk of 
fraud with respect to the transaction; (4) provide SEC with 
information about the issuer and offering; (5) provide the SEC 
with continuous investor-level access to the issuer's website; 
(6) require each investor to answer questions demonstrating a 
basic understanding of the nature of the securities offered; 
(7) state a target offering amount and withhold capital 
formation proceeds until the aggregate capital raised from 
investors other than the issuer is greater than or equal to 60 
percent of the target offering amount; (8) outsource cash-
management functions to a qualified third party custodian; (9) 
maintain such books and records as the SEC deems appropriate; 
(10) allow for communication between the issuer and investors; 
(11) not offer investment advice; and (12) disclose their 
interest in the issuance to investors.
    This section also provides that an issuer or intermediary 
may rely on certifications provided by the investor to verify 
the investor's income.
    This section also requires that the SEC make the 
information about the information it receives about the 
intermediary, issuer, and offering available to the States.
    This section also restricts investors from re-selling the 
securities for one year unless the securities are sold to the 
issuer or an accredited investor.
    This section also provides that an intermediary shall not 
be treated as a broker solely by reason of participation in a 
crowdfunding offering.
    This section also clarifies that an issuer's engaging in a 
crowdfunding offering does not restrict the issuer's ability to 
raise capital through other means.
    This section requires the SEC to issue rules to implement 
the requirements on intermediaries and issuers and to establish 
disqualification provisions under which the exemption shall not 
be available.

Section 3. Exclusion of crowdfunding investors from shareholder cap

    This section provides that persons who hold securities 
issued pursuant to the crowdfunding exemption shall not count 
against the shareholder threshold cap in Section 12(g) of the 
Securities Exchange Act of 1934.

Section 4. Preemption of state law

    This section exempts securities issued through the 
crowdfunding exemption from state securities laws.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                         SECURITIES ACT OF 1933

TITLE I--SHORT TITLE

           *       *       *       *       *       *       *


                         EXEMPTED TRANSACTIONS

  Sec. 4. The provisions of section 5 shall not apply to--
          (1) * * *

           *       *       *       *       *       *       *

          (6) transactions involving the issuance of securities 
        for which--
                  (A) the aggregate annual amount raised 
                through the issue of the securities is--
                          (i) $1,000,000 or less; or
                          (ii) if the issuer provides potential 
                        investors with audited financial 
                        statements, $2,000,000 or less;
                  (B) individual investments in the securities 
                are limited to an aggregate annual amount equal 
                to the lesser of--
                          (i) $10,000; and
                          (ii) 10 percent of the investor's 
                        annual income;
                  (C) in the case of a transaction involving an 
                intermediary between the issuer and the 
                investor, such intermediary complies with the 
                requirements under section 4A(a); and
                  (D) in the case of a transaction not 
                involving an intermediary between the issuer 
                and the investor, the issuer complies with the 
                requirements under section 4A(b).

SEC. 4A. REQUIREMENTS WITH RESPECT TO CERTAIN SMALL TRANSACTIONS.

  (a) Requirements on Intermediaries.--For purposes of section 
4(6), a person acting as an intermediary in a transaction 
involving the issuance of securities shall comply with the 
requirements of this subsection if the intermediary--
          (1) warns investors, including on the intermediary's 
        website, of the speculative nature generally applicable 
        to investments in startups, emerging businesses, and 
        small issuers, including risks in the secondary market 
        related to illiquidity;
          (2) warns investors that they are subject to the 
        restriction on sales requirement described under 
        subsection (e);
          (3) takes reasonable measures to reduce the risk of 
        fraud with respect to such transaction;
          (4) provides the Commission with the intermediary's 
        physical address, website address, and the names of the 
        intermediary and employees of the person, and keep such 
        information up-to-date;
          (5) provides the Commission with continuous investor-
        level access to the intermediary's website;
          (6) requires each potential investor to answer 
        questions demonstrating competency in--
                  (A) recognition of the level of risk 
                generally applicable to investments in 
                startups, emerging businesses, and small 
                issuers;
                  (B) risk of illiquidity; and
                  (C) such other areas as the Commission may 
                determine appropriate;
          (7) requires the issuer to state a target offering 
        amount and withhold capital formation proceeds until 
        aggregate capital raised from investors other than the 
        issuer is no less than 60 percent of the target 
        offering amount;
          (8) carries out a background check on the issuer's 
        principals;
          (9) provides the Commission with basic notice of the 
        offering, not later than the first day funds are 
        solicited from potential investors, including--
                  (A) the issuer's name, legal status, physical 
                address, and website address;
                  (B) the names of the issuer's principals;
                  (C) the stated purpose and intended use of 
                the capital formation funds sought by the 
                issuer; and
                  (D) the target offering amount;
          (10) outsources cash-management functions to a 
        qualified third party custodian, such as a traditional 
        broker or dealer or insured depository institution;
          (11) maintains such books and records as the 
        Commission determines appropriate;
          (12) makes available on the intermediary's website a 
        method of communication that permits the issuer and 
        investors to communicate with one another; and
          (13) does not offer investment advice.
  (b) Requirements on Issuers if No Intermediary.--For purposes 
of section 4(6), an issuer who offers securities without an 
intermediary shall comply with the requirements of this 
subsection if the issuer--
          (1) warns investors, including on the issuer's 
        website, of the speculative nature generally applicable 
        to investments in startups, emerging businesses, and 
        small issuers, including risks in the secondary market 
        related to illiquidity;
          (2) warns investors that they are subject to the 
        restriction on sales requirement described under 
        subsection (e);
          (3) takes reasonable measures to reduce the risk of 
        fraud with respect to such transaction;
          (4) provides the Commission with the issuer's 
        physical address, website address, and the names of the 
        principals and employees of the issuers, and keeps such 
        information up-to-date;
          (5) provides the Commission with continuous investor-
        level access to the issuer's website;
          (6) requires each potential investor to answer 
        questions demonstrating competency in--
                  (A) recognition of the level of risk 
                generally applicable to investments in 
                startups, emerging businesses, and small 
                issuers;
                  (B) risk of illiquidity; and
                  (C) such other areas as the Commission may 
                determine appropriate;
          (7) states a target offering amount and withholds 
        capital formation proceeds until the aggregate capital 
        raised from investors other than the issuer is no less 
        than 60 percent of the target offering amount;
          (8) provides the Commission with basic notice of the 
        offering, not later than the first day funds are 
        solicited from potential investors, including--
                  (A) the stated purpose and intended use of 
                the capital formation funds sought by the 
                issuer; and
                  (B) the target offering amount;
          (9) outsources cash-management functions to a 
        qualified third party custodian, such as a traditional 
        broker or dealer or insured depository institution;
          (10) maintains such books and records as the 
        Commission determines appropriate;
          (11) makes available on the issuer's website a method 
        of communication that permits the issuer and investors 
        to communicate with one another;
          (12) does not offer investment advice; and
          (13) discloses to potential investors, on the 
        issuer's website, that the issuer has an interest in 
        the issuance.
  (c) Verification of Income.--For purposes of section 4(6), an 
issuer or intermediary may rely on certifications provided by 
an investor to verify the investor's income.
  (d) Information Available to States.--The Commission shall 
make the notices described under subsections (a)(9) and (b)(8) 
and the information described under subsections (a)(4) and 
(b)(4) available to the States.
  (e) Restriction on Sales.--With respect to a transaction 
involving the issuance of securities described under section 
4(6), an investor may not sell such securities during the 1-
year period beginning on the date of purchase, unless such 
securities are sold to--
          (1) the issuer of such securities; or
          (2) an accredited investor.
  (f) Construction.--
          (1) No treatment as broker.--With respect to a 
        transaction described under section 4(6) involving an 
        intermediary, such intermediary shall not be treated as 
        a broker under the securities laws solely by reason of 
        participation in such transaction.
          (2) No preclusion of other capital raising.--Nothing 
        in this section or section 4(6) shall be construed as 
        preventing an issuer from raising capital through 
        methods not described under section 4(6).

           *       *       *       *       *       *       *


SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.

  (a) * * *
  (b) Covered Securities.--For purposes of this section, the 
following are covered securities:
          (1) * * *

           *       *       *       *       *       *       *

          (4) Exemption in connection with certain exempt 
        offerings.--A security is a covered security with 
        respect to a transaction that is exempt from 
        registration under this title pursuant to--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) section 4(6);
                  [(C)] (D) section 3(a), other than the offer 
                or sale of a security that is exempt from such 
                registration pursuant to paragraph (4), (10), 
                or (11) of such section, except that a 
                municipal security that is exempt from such 
                registration pursuant to paragraph (2) of such 
                section is not a covered security with respect 
                to the offer or sale of such security in the 
                State in which the issuer of such security is 
                located; or
                  [(D)] (E) Commission rules or regulations 
                issued under section 4(2), except that this 
                subparagraph does not prohibit a State from 
                imposing notice filing requirements that are 
                substantially similar to those required by rule 
                or regulation under section 4(2) that are in 
                effect on September 1, 1996.

           *       *       *       *       *       *       *

                              ----------                              


                    SECURITIES EXCHANGE ACT OF 1934

TITLE I--REGULATION OF SECURITIES EXCHANGES

           *       *       *       *       *       *       *


                REGISTRATION REQUIREMENTS FOR SECURITIES

  Sec. 12. (a) * * *

           *       *       *       *       *       *       *

  (g)(1) * * *

           *       *       *       *       *       *       *

  [(5) For the purposes]
  (5) Definitions.--
          (A) In general.--For the purposes of this subsection 
        the term ``class'' shall include all securities of an 
        issuer which are of substantially similar character and 
        the holders of which enjoy substantially similar rights 
        and privileges. The Commission may for the purpose of 
        this subsection define by rules and regulations the 
        terms ``total assets'' and ``held of record'' as it 
        deems necessary or appropriate in the public interest 
        or for the protection of investors in order to prevent 
        circumvention of the provisions of this subsection. For 
        purposes of this subsection, a security futures product 
        shall not be considered a class of equity security of 
        the issuer of the securities underlying the security 
        futures product.
          (B) Exclusion for persons holding certain 
        securities.--For purposes of this subsection, the term 
        ``held of record'' shall not include holders of 
        securities issued pursuant to transactions described 
        under section 4(6) of the Securities Act of 1933.

           *       *       *       *       *       *       *


                                  
