[House Report 114-723]
[From the U.S. Government Publishing Office]


114th Congress    }                                    {        Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                    {       114-723

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



 
                     MICRO OFFERING SAFE HARBOR ACT

                                _______
                                

 September 6, 2016.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

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

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 4850]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4850) to amend the Securities Act of 1933 to 
exempt certain micro-offerings from the registration 
requirements of such Act, 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 ``Micro Offering Safe Harbor Act''.

SEC. 2. EXEMPTIONS FOR MICRO-OFFERINGS.

  (a) In General.--Section 4 of the Securities Act of 1933 (15 U.S.C. 
77d) is amended--
          (1) in subsection (a), by adding at the end the following:
          ``(8) transactions meeting the requirements of subsection 
        (f).''; and
          (2) by adding at the end the following:
  ``(f) Certain Micro-Offerings.--
          ``(1) In general.--Except as provided in paragraph (2), the 
        transactions referred to in subsection (a)(8) are transactions 
        involving the sale of securities by an issuer (including all 
        entities controlled by or under common control with the issuer) 
        that meet all of the following requirements:
                  ``(A) Pre-existing relationship.--Each purchaser has 
                a substantive pre-existing relationship with an officer 
                of the issuer, a director of the issuer, or a 
                shareholder holding 10 percent or more of the shares of 
                the issuer.
                  ``(B) 35 or fewer purchasers.--There are no more 
                than, or the issuer reasonably believes that there are 
                no more than, 35 purchasers of securities from the 
                issuer that are sold in reliance on the exemption 
                provided under subsection (a)(8) during the 12-month 
                period preceding such transaction.
                  ``(C) Small offering amount.--The aggregate amount of 
                all securities sold by the issuer, including any amount 
                sold in reliance on the exemption provided under 
                subsection (a)(8), during the 12-month period preceding 
                such transaction, does not exceed $500,000.
          ``(2) Disqualification.--
                  ``(A) In general.--The exemption provided under 
                subsection (a)(8) shall not be available for a 
                transaction involving a sale of securities if any 
                person described in subparagraph (B) would have 
                triggered disqualification pursuant to section 
                230.506(d) of title 17, Code of Federal Regulations.
                  ``(B) Persons described.--The persons described in 
                this subparagraph are the following:
                          ``(i) The issuer.
                          ``(ii) Any predecessor of the issuer.
                          ``(iii) Any affiliated issuer.
                          ``(iv) Any director, executive officer, other 
                        officer participating in the offering, general 
                        partner, or managing member of the issuer.
                          ``(v) Any beneficial owner of 20 percent or 
                        more of the issuer's outstanding voting equity 
                        securities, calculated on the basis of voting 
                        power.
                          ``(vi) Any promoter connected with the issuer 
                        in any capacity at the time of such sale.
                          ``(vii) Any investment manager of an issuer 
                        that is a pooled investment fund.
                          ``(viii) Any person that has been or will be 
                        paid (directly or indirectly) remuneration for 
                        solicitation of purchasers in connection with 
                        such sale of securities.
                          ``(ix) Any general partner or managing member 
                        of any such investment manager or solicitor.
                          ``(x) Any director, executive officer, or 
                        other officer participating in the offering of 
                        any such investment manager or solicitor or 
                        general partner or managing member of such 
                        investment manager or solicitor.''.
  (b) Exemption Under State Regulations.--Section 18(b)(4) of the 
Securities Act of 1933 (15 U.S.C. 77r(b)(4)) is amended--
          (1) in subparagraph (F), by striking ``or'' at the end;
          (2) in subparagraph (G), by striking the period and inserting 
        ``; or''; and
          (3) by adding at the end the following:
                  ``(H) section 4(a)(8).''.

                          Purpose and Summary

    Introduced by Representatives Tom Emmer, Luke Messer, Andy 
Barr, Ed Royce, Steve Chabot, Scott Tipton, Mo Brooks, and 
Roger Williams, H.R. 4850, the ``Micro Offering Safe Harbor 
Act,'' would amend the Securities Act of 1933 (the Act) to 
exempt certain ``micro-offerings'' from the Act's registration 
requirements.
    H.R. 4850 would allow small businesses to operate with 
confidence that they are not in violation of the law when 
making a non-public securities offering if all of the following 
requirements are met:
           Each purchaser has a substantive pre-
        existing relationship with an officer, director or 
        shareholder with 10 percent or more of the shares of 
        the issuer;
           The issuer reasonably believes that there 
        are no more than 35 purchasers of securities from the 
        issuer that are sold in reliance on the exemption 
        during the 12-month period preceding the transaction; 
        and
           The aggregate amount of all securities sold 
        by the issuer does not exceed $500,000 over a 12-month 
        period.
    Additionally, the Micro Offering Safe Harbor Act would 
prohibit a bad actor from participating in a micro-offering.

                  Background and Need for Legislation

    Although small companies are at the forefront of 
technological innovation and job creation, they often face 
significant obstacles in obtaining funding in the capital 
markets. These obstacles are often attributable to the 
proportionately larger burden that securities regulations--
written for large public companies--place on small companies 
when they seek to go public. According to one scholar from the 
Heritage Foundation, ``It's estimated by the Securities and 
Exchange Commission that registration costs $2.5 million in 
legal, accounting, and other expenses. So registration is not 
an option for small companies.''
    H.R. 4850, the Micro Offering Safe Harbor Act, would define 
the ``non-public offering'' exemption under the Securities Act 
of 1933, and provide small businesses the confidence needed to 
know that they are not violating the law. Since the federal 
securities laws were first enacted in 1933, securities 
``transactions by an issuer not involving any public offering'' 
have been exempt from registration with the Securities and 
Exchange Commission (SEC).
    As an example, H.R. 4850 could allow the owner of a local 
restaurant chain or a start-up business to get up in front of a 
local chamber of commerce and solicit an investment in their 
business without running afoul of the federal securities laws. 
By facilitating micro-offerings, the bill provides a useful 
alternative to a private offering under Regulation D, which can 
be costly for a small business, and typically requires the 
engagement of an attorney.
    As noted above, H.R. 4850 would exempt micro-offerings from 
registration with the SEC so long as the set forth factors are 
met. The legislation appropriately scales federal rules and 
regulatory compliance for small businesses, and provides 
another practical option for entrepreneurs to raise the capital 
they need to start up or grow their firms. Small private 
companies would not have to incur formidable legal costs and 
contend with regulatory uncertainties, and the SEC would not 
have to take any action to authorize a micro-offering. With 
fraud protection still in place, H.R. 4850 is a sound, much-
needed legislative initiative that reduces regulatory costs and 
legal risks.
    In testimony before the Financial Services Committee in 
April 2016, Raymond Keating, Chief Economist for the Small 
Business & Entrepreneurship Council, echoed Congressman Emmer's 
statements that H.R. 4850 would help small businesses and 
startups gain access to capital:

          SBE Council agrees with Congressman Tom Emmer of 
        Minnesota, who introduced this bill, in his statement: 
        ``Entrepreneurs will be able to more easily launch 
        their startups and existing businesses will have better 
        prospects for growth. By simply clarifying an old law, 
        more small businesses will raise capital through non-
        public offerings, easing the burdens of red-tape, 
        onerous paperwork, and the threat of lawsuits.''

                                Hearing

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing examining matters relating to H.R.4850 on April 14, 
2016.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
June 16, 2016, and ordered H.R. 4850 to be reported favorably 
to the House as amended by a recorded vote of 34 yeas to 25 
nays (recorded vote no. FC-117), a quorum being present. An 
amendment in the nature of a substitute offered by Mr. Emmer 
was agreed to by voice vote. An amendment to the amendment in 
the nature of a substitute offered by Mr. Hinojosa was not 
agreed to by a recorded vote of 26 ayes to 33 nays (recorded 
vote no. FC-116).

                            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. The 
amendment offered by Mr. Hinojosa was defeated by a recorded 
vote of 26 ayes to 33 nays (Record vote no. FC-116), a quorum 
being present. The second recorded vote in Committee was a 
motion by Chairman Hensarling to report the bill favorably to 
the House as amended. That motion was agreed to by a recorded 
vote of 34 ayes to 25 nays (Record vote no. FC-117), a quorum 
being present.


                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 4850 
will allow small businesses to access capital needed to grow by 
amending the Securities Act of 1933 to clarify what constitutes 
a ``non-public offering'' of securities and by authorizing 
``micro-offerings'' to clarify the requirements that small 
businesses need to comply with to not violate the federal 
securities laws when making a non-public offering.

   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 Estimates

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

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, September 2, 2016.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4850, the Micro 
Offering Safe Harbor Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

H.R. 4850--Micro Offering Safe Harbor Act

    Under current law, the Securities and Exchange Commission 
(SEC) prohibits the sale or delivery of securities that have 
not been registered with the SEC. Certain transactions are 
exempt from this prohibition. H.R. 4850 would expand the 
exemption to include the sale of securities that meet certain 
criteria regarding the number of purchasers and aggregate 
offering amount sold by the issuer in a 12-month period. The 
bill also would exempt such transactions from state regulation 
of securities offerings.
    Under H.R. 4850, CBO expects only a relatively small number 
of securities transactions would be covered under the expanded 
exemption that are not currently covered by other exemptions. 
As a result, on the basis of information provided by the SEC, 
CBO estimates that implementing H.R. 4850 would have no 
significant effect on the agency's costs to update, monitor, 
and enforce regulations. Moreover, the SEC is authorized to 
collect fees sufficient to offset its annual appropriation; 
therefore; CBO estimates that the net effect on discretionary 
spending would be negligible, assuming appropriations actions 
consistent with that authority. Enacting H.R. 4850 would not 
affect direct spending or revenues; therefore, pay-as-you-go 
procedures do not apply.
    CBO estimates that enacting H.R. 4850 would not increase 
net direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2027.
    H.R. 4850 would preempt state laws that govern state-level 
registration of security offerings to exempt some security 
offerings from state registration and regulation. Issuers would 
be exempt from registering such securities if each purchaser of 
the security has a pre-existing relationship with the officer 
of the issuer, the offering has 35 or fewer purchasers, and the 
aggregate amount of securities sold by the issuer does not 
exceed $500,000 in a 12-month period. The preemption would be a 
mandate as defined in the Unfunded Mandate Reform Act (UMRA) 
because it would limit the authority of states to apply their 
own laws and regulations. However, CBO estimates that the 
preemption itself would impose no duty on states that would 
result in additional spending or a loss of revenues.
    H.R. 4850 contains no private-sector mandates as defined in 
UMRA.
    The CBO staff contact for this estimate is Stephen Rabent. 
The estimate was approved by Theresa Gullo, 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. 4850 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    Duplication of Federal Programs

    Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), 
the Committee states that no provision of H.R. 4850 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), 
the Committee states that H.R. 4850 contains no directed 
rulemaking.

             Section-by-Section Analysis of the Legislation


Section 1: Short title

    This section cites H.R. 4850 as the ``Micro Offering Safe 
Harbor Act.''

Section 2: Exemptions and micro-offerings

    This section amends Section 4 of the Securities Act of 1933 
to clarify the exemptions from federal securities laws for non-
public offerings. Specifically, small businesses are exempt if 
they meet the all of the following requirements: each investor 
has a substantive pre-existing relationship with an owner; 
there are 35 or fewer purchases of securities from the issuer 
over a 12 month period; the amount of securities sold does not 
exceed $500,000 over a 12 month period. This section would also 
prevent bad actors from participating in a micro-offering. The 
section also exempts such micro-offerings from state regulation 
of securities offerings.

         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, and existing law in which no 
change is proposed is shown in roman):

                SECTION 4 OF THE SECURITIES ACT OF 1933

                         exempted transactions

  Sec. 4. (a) The provisions of section 5 shall not apply to--
          (1) transactions by any person other than an issuer, 
        underwriter, or dealer.
          (2) transactions by an issuer not involving any 
        public offering.
          (3) transactions by a dealer (including an 
        underwriter no longer acting as an underwriter in 
        respect of the security involved in such transaction), 
        except--
                  (A) transactions taking place prior to the 
                expiration of forty days after the first date 
                upon which the security was bona fide offered 
                to the public by the issuer or by or through an 
                underwriter,
                  (B) transactions in a security as to which a 
                registration statement has been filed taking 
                place prior to the expiration of forty days 
                after the effective date of such registration 
                statement or prior to the expiration of forty 
                days after the first date upon which the 
                security was bona fide offered to the public by 
                the issuer or by or through an underwriter 
                after such effective date, whichever is later 
                (excluding in the computation of such forty 
                days any time during which a stop order issued 
                under section 8 is in effect as to the 
                security), or such shorter period as the 
                Commission may specify by rules and regulations 
                or order, and
                  (C) transactions as to securities 
                constituting the whole or a part of an unsold 
                allotment to or subscription by such dealer as 
                a participant in the distribution of such 
                securities by the issuer or by or through an 
                underwriter.
        With respect to transactions referred to in clause (B), 
        if securities of the issuer have not previously been 
        sold pursuant to an earlier effective registration 
        statement the applicable period, instead of forty days, 
        shall be ninety days, or such shorter period as the 
        Commission may specify by rules and regulations or 
        order.
          (4) brokers' transactions executed upon customers' 
        orders on any exchange or in the over-the-counter 
        market but not the solicitation of such orders.
          (5) transactions involving offers or sales by an 
        issuer solely to one or more accredited investors, if 
        the aggregate offering price of an issue of securities 
        offered in reliance on this paragraph does not exceed 
        the amount allowed under section 3(b)(1) of this title, 
        if there is no advertising or public solicitation in 
        connection with the transaction by the issuer or anyone 
        acting on the issuer's behalf, and if the issuer files 
        such notice with the Commission as the Commission shall 
        prescribe.
          (6) transactions involving the offer or sale of 
        securities by an issuer (including all entities 
        controlled by or under common control with the issuer), 
        provided that--
                  (A) the aggregate amount sold to all 
                investors by the issuer, including any amount 
                sold in reliance on the exemption provided 
                under this paragraph during the 12-month period 
                preceding the date of such transaction, is not 
                more than $1,000,000;
                  (B) the aggregate amount sold to any investor 
                by an issuer, including any amount sold in 
                reliance on the exemption provided under this 
                paragraph during the 12-month period preceding 
                the date of such transaction, does not exceed--
                          (i) the greater of $2,000 or 5 
                        percent of the annual income or net 
                        worth of such investor, as applicable, 
                        if either the annual income or the net 
                        worth of the investor is less than 
                        $100,000; and
                          (ii) 10 percent of the annual income 
                        or net worth of such investor, as 
                        applicable, not to exceed a maximum 
                        aggregate amount sold of $100,000, if 
                        either the annual income or net worth 
                        of the investor is equal to or more 
                        than $100,000;
                  (C) the transaction is conducted through a 
                broker or funding portal that complies with the 
                requirements of section 4A(a); and
                  (D) the issuer complies with the requirements 
                of section 4A(b).
          (7) transactions meeting the requirements of 
        subsection (d).
          (8) transactions meeting the requirements of 
        subsection (f).
  (b) Offers and sales exempt under section 230.506 of title 
17, Code of Federal Regulations (as revised pursuant to section 
201 of the Jumpstart Our Business Startups Act) shall not be 
deemed public offerings under the Federal securities laws as a 
result of general advertising or general solicitation.
  (c)(1) With respect to securities offered and sold in 
compliance with Rule 506 of Regulation D under this Act, no 
person who meets the conditions set forth in paragraph (2) 
shall be subject to registration as a broker or dealer pursuant 
to section 15(a)(1) of this title, solely because--
                  (A) that person maintains a platform or 
                mechanism that permits the offer, sale, 
                purchase, or negotiation of or with respect to 
                securities, or permits general solicitations, 
                general advertisements, or similar or related 
                activities by issuers of such securities, 
                whether online, in person, or through any other 
                means;
                  (B) that person or any person associated with 
                that person co-invests in such securities; or
                  (C) that person or any person associated with 
                that person provides ancillary services with 
                respect to such securities.
  (2) The exemption provided in paragraph (1) shall apply to 
any person described in such paragraph if--
          (A) such person and each person associated with that 
        person receives no compensation in connection with the 
        purchase or sale of such security;
          (B) such person and each person associated with that 
        person does not have possession of customer funds or 
        securities in connection with the purchase or sale of 
        such security; and
          (C) such person is not subject to a statutory 
        disqualification as defined in section 3(a)(39) of this 
        title and does not have any person associated with that 
        person subject to such a statutory disqualification.
  (3) For the purposes of this subsection, the term ``ancillary 
services'' means--
          (A) the provision of due diligence services, in 
        connection with the offer, sale, purchase, or 
        negotiation of such security, so long as such services 
        do not include, for separate compensation, investment 
        advice or recommendations to issuers or investors; and
          (B) the provision of standardized documents to the 
        issuers and investors, so long as such person or entity 
        does not negotiate the terms of the issuance for and on 
        behalf of third parties and issuers are not required to 
        use the standardized documents as a condition of using 
        the service.
  (d) Certain Accredited Investor Transactions.--The 
transactions referred to in subsection (a)(7) are transactions 
meeting the following requirements:
          (1) Accredited investor requirement.--Each purchaser 
        is an accredited investor, as that term is defined in 
        section 230.501(a) of title 17, Code of Federal 
        Regulations (or any successor regulation).
          (2) Prohibition on general solicitation or 
        advertising.--Neither the seller, nor any person acting 
        on the seller's behalf, offers or sells securities by 
        any form of general solicitation or general 
        advertising.
          (3) Information requirement.--In the case of a 
        transaction involving the securities of an issuer that 
        is neither subject to section 13 or 15(d) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78m; 
        78o(d)), nor exempt from reporting pursuant to section 
        240.12g3-2(b) of title 17, Code of Federal Regulations, 
        nor a foreign government (as defined in section 230.405 
        of title 17, Code of Federal Regulations) eligible to 
        register securities under Schedule B, the seller and a 
        prospective purchaser designated by the seller obtain 
        from the issuer, upon request of the seller, and the 
        seller in all cases makes available to a prospective 
        purchaser, the following information (which shall be 
        reasonably current in relation to the date of resale 
        under this section):
                  (A) The exact name of the issuer and the 
                issuer's predecessor (if any).
                  (B) The address of the issuer's principal 
                executive offices.
                  (C) The exact title and class of the 
                security.
                  (D) The par or stated value of the security.
                  (E) The number of shares or total amount of 
                the securities outstanding as of the end of the 
                issuer's most recent fiscal year.
                  (F) The name and address of the transfer 
                agent, corporate secretary, or other person 
                responsible for transferring shares and stock 
                certificates.
                  (G) A statement of the nature of the business 
                of the issuer and the products and services it 
                offers, which shall be presumed reasonably 
                current if the statement is as of 12 months 
                before the transaction date.
                  (H) The names of the officers and directors 
                of the issuer.
                  (I) The names of any persons registered as a 
                broker, dealer, or agent that shall be paid or 
                given, directly or indirectly, any commission 
                or remuneration for such person's participation 
                in the offer or sale of the securities.
                  (J) The issuer's most recent balance sheet 
                and profit and loss statement and similar 
                financial statements, which shall--
                          (i) be for such part of the 2 
                        preceding fiscal years as the issuer 
                        has been in operation;
                          (ii) be prepared in accordance with 
                        generally accepted accounting 
                        principles or, in the case of a foreign 
                        private issuer, be prepared in 
                        accordance with generally accepted 
                        accounting principles or the 
                        International Financial Reporting 
                        Standards issued by the International 
                        Accounting Standards Board;
                          (iii) be presumed reasonably current 
                        if--
                                  (I) with respect to the 
                                balance sheet, the balance 
                                sheet is as of a date less than 
                                16 months before the 
                                transaction date; and
                                  (II) with respect to the 
                                profit and loss statement, such 
                                statement is for the 12 months 
                                preceding the date of the 
                                issuer's balance sheet; and
                          (iv) if the balance sheet is not as 
                        of a date less than 6 months before the 
                        transaction date, be accompanied by 
                        additional statements of profit and 
                        loss for the period from the date of 
                        such balance sheet to a date less than 
                        6 months before the transaction date.
                  (K) To the extent that the seller is a 
                control person with respect to the issuer, a 
                brief statement regarding the nature of the 
                affiliation, and a statement certified by such 
                seller that they have no reasonable grounds to 
                believe that the issuer is in violation of the 
                securities laws or regulations.
          (4) Issuers disqualified.--The transaction is not for 
        the sale of a security where the seller is an issuer or 
        a subsidiary, either directly or indirectly, of the 
        issuer.
          (5) Bad actor prohibition.--Neither the seller, nor 
        any person that has been or will be paid (directly or 
        indirectly) remuneration or a commission for their 
        participation in the offer or sale of the securities, 
        including solicitation of purchasers for the seller is 
        subject to an event that would disqualify an issuer or 
        other covered person under Rule 506(d)(1) of Regulation 
        D (17 CFR 230.506(d)(1)) or is subject to a statutory 
        disqualification described under section 3(a)(39) of 
        the Securities Exchange Act of 1934.
          (6) Business requirement.--The issuer is engaged in 
        business, is not in the organizational stage or in 
        bankruptcy or receivership, and is not a blank check, 
        blind pool, or shell company that has no specific 
        business plan or purpose or has indicated that the 
        issuer's primary business plan is to engage in a merger 
        or combination of the business with, or an acquisition 
        of, an unidentified person.
          (7) Underwriter prohibition.--The transaction is not 
        with respect to a security that constitutes the whole 
        or part of an unsold allotment to, or a subscription or 
        participation by, a broker or dealer as an underwriter 
        of the security or a redistribution.
          (8) Outstanding class requirement.--The transaction 
        is with respect to a security of a class that has been 
        authorized and outstanding for at least 90 days prior 
        to the date of the transaction.
  (e) Additional Requirements.--
          (1) In general.--With respect to an exempted 
        transaction described under subsection (a)(7):
                  (A) Securities acquired in such transaction 
                shall be deemed to have been acquired in a 
                transaction not involving any public offering.
                  (B) Such transaction shall be deemed not to 
                be a distribution for purposes of section 
                2(a)(11).
                  (C) Securities involved in such transaction 
                shall be deemed to be restricted securities 
                within the meaning of Rule 144 (17 CFR 
                230.144).
          (2) Rule of construction.--The exemption provided by 
        subsection (a)(7) shall not be the exclusive means for 
        establishing an exemption from the registration 
        requirements of section 5.
  (f) Certain Micro-Offerings.--
          (1) In general.--Except as provided in paragraph (2), 
        the transactions referred to in subsection (a)(8) are 
        transactions involving the sale of securities by an 
        issuer (including all entities controlled by or under 
        common control with the issuer) that meet all of the 
        following requirements:
                  (A) Pre-existing relationship.--Each 
                purchaser has a substantive pre-existing 
                relationship with an officer of the issuer, a 
                director of the issuer, or a shareholder 
                holding 10 percent or more of the shares of the 
                issuer.
                  (B) 35 or fewer purchasers.--There are no 
                more than, or the issuer reasonably believes 
                that there are no more than, 35 purchasers of 
                securities from the issuer that are sold in 
                reliance on the exemption provided under 
                subsection (a)(8) during the 12-month period 
                preceding such transaction.
                  (C) Small offering amount.--The aggregate 
                amount of all securities sold by the issuer, 
                including any amount sold in reliance on the 
                exemption provided under subsection (a)(8), 
                during the 12-month period preceding such 
                transaction, does not exceed $500,000.
          (2) Disqualification.--
                  (A) In general.--The exemption provided under 
                subsection (a)(8) shall not be available for a 
                transaction involving a sale of securities if 
                any person described in subparagraph (B) would 
                have triggered disqualification pursuant to 
                section 230.506(d) of title 17, Code of Federal 
                Regulations.
                  (B) Persons described.--The persons described 
                in this subparagraph are the following:
                          (i) The issuer.
                          (ii) Any predecessor of the issuer.
                          (iii) Any affiliated issuer.
                          (iv) Any director, executive officer, 
                        other officer participating in the 
                        offering, general partner, or managing 
                        member of the issuer.
                          (v) Any beneficial owner of 20 
                        percent or more of the issuer's 
                        outstanding voting equity securities, 
                        calculated on the basis of voting 
                        power.
                          (vi) Any promoter connected with the 
                        issuer in any capacity at the time of 
                        such sale.
                          (vii) Any investment manager of an 
                        issuer that is a pooled investment 
                        fund.
                          (viii) Any person that has been or 
                        will be paid (directly or indirectly) 
                        remuneration for solicitation of 
                        purchasers in connection with such sale 
                        of securities.
                          (ix) Any general partner or managing 
                        member of any such investment manager 
                        or solicitor.
                          (x) Any director, executive officer, 
                        or other officer participating in the 
                        offering of any such investment manager 
                        or solicitor or general partner or 
                        managing member of such investment 
                        manager or solicitor.

TITLE I--SHORT TITLE

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

  (a) Scope of Exemption.--Except as otherwise provided in this 
section, no law, rule, regulation, or order, or other 
administrative action of any State or any political subdivision 
thereof--
          (1) requiring, or with respect to, registration or 
        qualification of securities, or registration or 
        qualification of securities transactions, shall 
        directly or indirectly apply to a security that--
                  (A) is a covered security; or
                  (B) will be a covered security upon 
                completion of the transaction;
          (2) shall directly or indirectly prohibit, limit, or 
        impose any conditions upon the use of--
                  (A) with respect to a covered security 
                described in subsection (b), any offering 
                document that is prepared by or on behalf of 
                the issuer; or
                  (B) any proxy statement, report to 
                shareholders, or other disclosure document 
                relating to a covered security or the issuer 
                thereof that is required to be and is filed 
                with the Commission or any national securities 
                organization registered under section 15A of 
                the Securities Exchange Act of 1934, except 
                that this subparagraph does not apply to the 
                laws, rules, regulations, or orders, or other 
                administrative actions of the State of 
                incorporation of the issuer; or
          (3) shall directly or indirectly prohibit, limit, or 
        impose conditions, based on the merits of such offering 
        or issuer, upon the offer or sale of any security 
        described in paragraph (1).
  (b) Covered Securities.--For purposes of this section, the 
following are covered securities:
          (1) Exclusive federal registration of nationally 
        traded securities.--A security is a covered security if 
        such security is--
                  (A) listed, or authorized for listing, on the 
                New York Stock Exchange or the American Stock 
                Exchange, or listed, or authorized for listing, 
                on the National Market System of the Nasdaq 
                Stock Market (or any successor to such 
                entities);
                  (B) listed, or authorized for listing, on a 
                national securities exchange (or tier or 
                segment thereof) that has listing standards 
                that the Commission determines by rule (on its 
                own initiative or on the basis of a petition) 
                are substantially similar to the listing 
                standards applicable to securities described in 
                subparagraph (A); or
                  (C) a security of the same issuer that is 
                equal in seniority or that is a senior security 
                to a security described in subparagraph (A) or 
                (B).
          (2) Exclusive federal registration of investment 
        companies.--A security is a covered security if such 
        security is a security issued by an investment company 
        that is registered, or that has filed a registration 
        statement, under the Investment Company Act of 1940.
          (3) Sales to qualified purchasers.--A security is a 
        covered security with respect to the offer or sale of 
        the security to qualified purchasers, as defined by the 
        Commission by rule. In prescribing such rule, the 
        Commission may define the term ``qualified purchaser'' 
        differently with respect to different categories of 
        securities, consistent with the public interest and the 
        protection of investors.
           (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) paragraph (1) or (3) of section 4, and 
                the issuer of such security files reports with 
                the Commission pursuant to section 13 or 15(d) 
                of the Securities Exchange Act of 1934;
                  (B) section 4(4);
                  (C) section 4(6);
                  (D) a rule or regulation adopted pursuant to 
                section 3(b)(2) and such security is--
                          (i) offered or sold on a national 
                        securities exchange; or
                          (ii) offered or sold to a qualified 
                        purchaser, as defined by the Commission 
                        pursuant to paragraph (3) with respect 
                        to that purchase or sale;
                  (E) 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;
                  (F) 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; [or]
                  (G) section 4(a)(7)[.]; or
                  (H) section 4(a)(8).
  (c) Preservation of Authority.--
          (1) Fraud authority.--Consistent with this section, 
        the securities commission (or any agency or office 
        performing like functions) of any State shall retain 
        jurisdiction under the laws of such State to 
        investigate and bring enforcement actions, in 
        connection with securities or securities transactions
                  (A) with respect to--
                          (i) fraud or deceit; or
                          (ii) unlawful conduct by a broker or 
                        dealer; and
                  (B) in connection to a transaction described 
                under section 4(6), with respect to--
                          (i) fraud or deceit; or
                          (ii) unlawful conduct by a broker, 
                        dealer, funding portal, or issuer.
          (2) Preservation of filing requirements.--
                  (A) Notice filings permitted.--Nothing in 
                this 
                section prohibits the securities commission (or 
                any agency or office performing like functions) 
                of any State from requiring the filing of any 
                document filed with the Commission pursuant to 
                this title, together with annual or periodic 
                reports of the value of securities sold or 
                offered to be sold to persons located in the 
                State (if such sales data is not included in 
                documents filed with the Commission), solely 
                for notice purposes and the assessment of any 
                fee, together with a consent to service of 
                process and any required fee.
                  (B) Preservation of fees.--
                          (i) In general.--Until otherwise 
                        provided by law, rule, regulation, or 
                        order, or other administrative action 
                        of any State or any political 
                        subdivision thereof, adopted after the 
                        date of enactment of the National 
                        Securities Markets Improvement Act of 
                        1996, filing or registration fees with 
                        respect to securities or securities 
                        transactions shall continue to be 
                        collected in amounts determined 
                        pursuant to State law as in effect on 
                        the day before such date.
                          (ii) Schedule.--The fees required by 
                        this subparagraph shall be paid, and 
                        all necessary supporting data on sales 
                        or offers for sales required under 
                        subparagraph (A), shall be reported on 
                        the same 
                        schedule as would have been applicable 
                        had the issuer not relied on the 
                        exemption provided in subsection (a).
                  (C) Availability of preemption contingent on 
                payment of fees.--
                          (i) In general.--During the period 
                        beginning on the date of enactment of 
                        the National Securities 
                        Markets Improvement Act of 1996 and 
                        ending 3 years after that date of 
                        enactment, the securities commission 
                        (or any agency or office performing 
                        like functions) of any State may 
                        require the registration of securities 
                        issued by any issuer who refuses to pay 
                        the fees required by subparagraph (B).
                          (ii) Delays.--For purposes of this 
                        subparagraph, delays in payment of fees 
                        or underpayments of fees that are 
                        promptly remedied shall not constitute 
                        a refusal to pay fees.
                  (D) Fees not permitted on listed 
                securities.--Notwithstanding subparagraphs (A), 
                (B), and (C), no filing or fee may be required 
                with respect to any security that is a covered 
                security pursuant to subsection (b)(1), or will 
                be such a covered security upon completion of 
                the transaction, or is a security of the same 
                issuer that is equal in seniority or that is a 
                senior security to a security that is a covered 
                security pursuant to subsection (b)(1).
                  (F) Fees not permitted on crowdfunded 
                securities.--Notwithstanding subparagraphs (A), 
                (B), and (C), no filing or fee may be required 
                with respect to any security that is a covered 
                security pursuant to subsection (b)(4)(B), or 
                will be such a covered security upon completion 
                of the transaction, except for the securities 
                commission (or any agency or office performing 
                like functions) of the State of the principal 
                place of business of the issuer, or any State 
                in which purchasers of 50 percent or greater of 
                the aggregate amount of the issue are 
                residents, provided that for purposes of this 
                subparagraph, the term ``State'' includes the 
                District of Columbia and the territories of the 
                United States.
          (3) Enforcement of requirements.--Nothing in this 
        section shall prohibit the securities commission (or 
        any agency or office performing like functions) of any 
        State from suspending the offer or sale of securities 
        within such State as a result of the failure to submit 
        any filing or fee required under law and permitted 
        under this section.
  (d) Definitions.--For purposes of this section, the following 
definitions shall apply:
          (1) Offering document.--The term ``offering 
        document''--
                  (A) has the meaning given the term 
                ``prospectus'' in section 2(a)(10), but without 
                regard to the provisions of subparagraphs (a) 
                and (b) of that section; and
                  (B) includes a communication that is not 
                deemed to offer a security pursuant to a rule 
                of the Commission.
          (2) Prepared by or on behalf of the issuer.--Not 
        later than 6 months after the date of enactment of the 
        National Securities Markets Improvement Act of 1996, 
        the Commission shall, by rule, define the term 
        ``prepared by or on behalf of the issuer'' for purposes 
        of this section.
          (3) State.--The term ``State'' has the same meaning 
        as in section 3 of the Securities Exchange Act of 1934.
          (4) Senior security.--The term ``senior security'' 
        means any bond, debenture, note, or similar obligation 
        or instrument constituting a security and evidencing 
        indebtedness, and any stock of a class having priority 
        over any other class as to distribution of assets or 
        payment of dividends.

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                             MINORITY VIEWS

    Democrats overwhelmingly oppose H.R. 4850, the so-called 
``Micro-Offering Safe Harbor Act of 2016'' because it would 
likely harm both investors and the integrity of capital 
formation for small businesses everywhere. Specifically, the 
bill as amended eliminates all of the existing investor 
protections for crowdfunding and Regulation A offerings, 
provided that the securities: (1) are sold to purchasers with a 
substantive pre-existing relationship with individuals 
affiliated with the company, including controlling investors; 
(2) involve 35 or fewer purchasers; (3) do not exceed more than 
$500,000, annually; and (4) do not involve a person who has 
violated the securities laws.
    Generally, if a company wants to publicly advertise its 
securities, it needs to either register them with the 
Securities and Exchange Commission (SEC) or make use of one of 
the several exemptions that balance costs to the company with 
the protection of investors, some which are specifically 
designed to assist smaller businesses. These include equity 
crowdfunding, in which companies can raise up to $1 million 
annually and Regulation A, in which companies can raise up to 
$50 million annually. Both exemptions permit small businesses 
to issue shares while still providing investors with relevant 
disclosures to make investing decisions. In addition, under 
both exemptions, companies can publicly advertise when offering 
their securities to retail investors. However, to protect such 
less sophisticated investors, both offerings also limit the 
amount of securities individual investors can purchase. H.R. 
4850 significantly reduces investor protections afforded under 
these exemptions.
    History suggests that the approach of H.R. 4850 is wrought 
with danger for investors. In the past, Rule 504 of Regulation 
D permitted a company to generally solicit and sell up to $1 
million in securities without registration with either the 
states or the SEC. In addition, such securities were considered 
unrestricted and thus freely tradable upon receipt. However, in 
1999 after examining the market and bringing enforcement 
actions, the SEC concluded that ``the freely tradable nature of 
these securities may have facilitated some later fraudulent 
secondary transactions in the over-the-counter markets for 
securities of `microcap' companies.'' In particular, Rule 504 
had been used in fraudulent ``pump-and-dump schemes.'' 
Following on these findings, the SEC required such securities 
to be registered with the states if the company wanted to 
publicly advertise them, and restricted their resale.
    Recognizing that history and prudence require that H.R. 
4850 be improved to prevent future fraud, Democrats offered an 
amendment to require the most basic protections for investors. 
Mr. Hinojosa's amendment would have set limits on retail 
investor exposure, require a simple 11-page notice filing of 
the offering and basic disclosures for investors, and restrict 
the resale of the securities. Such modest changes would have 
prevented this unnecessary exemption from creating new avenues 
for fraud, and enabled the state securities regulators to 
oversee these smaller issuances. And yet, Republicans rejected 
this good faith amendment by a partisan vote.
    According to the Commission, ``[f]raud in the microcap 
stock markets is of increasing concern to regulators as such 
markets have proven to be fertile grounds for fraud and abuse. 
This is, in part, because accurate information about microcap 
stocks may be difficult for the average investor to find, since 
many microcap companies do not file financial reports with the 
Commission.'' Democrats do not support creating statutory 
exemptions that further reduce the ability of investors to 
understand these micro-cap companies.
    For these reasons, we oppose H.R. 4850.

                                   Maxine Waters.
                                   Denny Heck.
                                   Keith Ellison.
                                   Emanuel Cleaver.
                                   Gwen Moore.
                                   Stephen F. Lynch.
                                   Al Green.
                                   Joyce Beatty.
                                   Wm. Lacy Clay.

                                  [all]