S 1970 ISCommentsClose CommentsPermalink

112th CONGRESSCommentsClose CommentsPermalink

1st SessionCommentsClose CommentsPermalink

S. 1970CommentsClose CommentsPermalink

To amend the securities laws to provide for registration exemptions for certain crowdfunded securities, and for other purposes.CommentsClose CommentsPermalink

IN THE SENATE OF THE UNITED STATESCommentsClose CommentsPermalink

December 8, 2011CommentsClose CommentsPermalink

Mr. MERKLEY (for himself, Mr. BENNET, and Ms. LANDRIEU) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban AffairsCommentsClose CommentsPermalink

A BILLCommentsClose CommentsPermalink

To amend the securities laws to provide for registration exemptions for certain crowdfunded securities, and for other purposes.CommentsClose CommentsPermalink

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,CommentsClose CommentsPermalink

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2011’ or the ‘CROWDFUND Act’.CommentsClose CommentsPermalink

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:CommentsClose CommentsPermalink





‘(6) any transaction involving the offer or sale of securities by an issuer (including all entities controlled by or under common control with the issuer), provided that--CommentsClose CommentsPermalink





‘(A) the aggregate amount sold to all investors 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, is not more than $1,000,000, as such amount is adjusted by the Commission by notice published in the Federal Register to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics;CommentsClose CommentsPermalink





‘(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 the greater of--CommentsClose CommentsPermalink





‘(i) $500, as such amount is adjusted by the Commission by notice published in the Federal Register to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics; orCommentsClose CommentsPermalink





‘(ii) if the investor has an annual income of--CommentsClose CommentsPermalink





‘(I) greater than $50,000 but less than $100,000 (as such amounts are adjusted by the Commission by notice published in the Federal Register to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics), 1 percent of the annual income of such investor; orCommentsClose CommentsPermalink





‘(II) greater than $100,000 (as such amount is adjusted by the Commission by notice published in the Federal Register to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics), 2 percent of the annual income of such investor;CommentsClose CommentsPermalink





‘(C) the transaction is conducted through a broker or funding portal that complies with the requirements of section 4A(a); andCommentsClose CommentsPermalink





‘(D) the issuer complies with the requirements of section 4A(b).’.CommentsClose CommentsPermalink





(b) Requirements To Qualify for Crowdfunding Exemption- The Securities Act of 1933 (15 U.S.C. 77a et seq.) is amended by inserting after section 4 the following:CommentsClose CommentsPermalink

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

‘(a) Requirements on Intermediaries- A person engaged in the business of effecting transactions in securities for the account of others pursuant to section 4(6) shall--CommentsClose CommentsPermalink





‘(1) register with the Commission as--CommentsClose CommentsPermalink





‘(A) a broker; orCommentsClose CommentsPermalink





‘(B) a funding portal (as defined in section 3(a)(80) of the Securities Exchange Act of 1934);CommentsClose CommentsPermalink





‘(2) register with any applicable self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act of 1934);CommentsClose CommentsPermalink





‘(3) provide such disclosures, including disclosures related to risks and other investor education materials, as the Commission shall, by rule, determine appropriate;CommentsClose CommentsPermalink





‘(4) ensure that each potential investor--CommentsClose CommentsPermalink





‘(A) reviews investor-education information, in line with standards established by the Commission, by rule;CommentsClose CommentsPermalink





‘(B) positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; andCommentsClose CommentsPermalink





‘(C) answers questions demonstrating--CommentsClose CommentsPermalink





‘(i) an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;CommentsClose CommentsPermalink





‘(ii) an understanding of the risk of illiquidity; andCommentsClose CommentsPermalink





‘(iii) an understanding of such other matters as the Commission determines appropriate, by rule;CommentsClose CommentsPermalink





‘(5) take such measures to reduce the risk of fraud with respect to such transactions, as established by rule of the Commission, including obtaining a criminal background check and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the shares of every issuer whose securities are offered by such person;CommentsClose CommentsPermalink





‘(6) not later than 1 month prior to the first day on which securities are offered to any potential investor (or such other period as the Commission may establish), provide in writing to the Commission and each potential investor any information provided by the issuer pursuant to subsection (b);CommentsClose CommentsPermalink





‘(7) ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to the target offering amount, and allow all investors to cancel their commitments to invest, as the Commission, by rule, shall determine appropriate;CommentsClose CommentsPermalink





‘(8) make such efforts as the Commission determines appropriate, by rule, to ensure that, for any offering made pursuant to section 4(6), that no investor exceeds the investment limits set forth in section 4(6)(B);CommentsClose CommentsPermalink





‘(9) make such efforts as the Commission determines appropriate, by rule, to ensure that no investor has purchased securities offered pursuant to section 4(6), that in the aggregate from all issuers, exceed the greater of--CommentsClose CommentsPermalink





‘(A) $2,000 (as such amount is adjusted by the Commission, by notice published in the Federal Register to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics); orCommentsClose CommentsPermalink





‘(B) if the investor has an annual income of--CommentsClose CommentsPermalink





‘(i) greater than $50,000 but not more than $100,000 (as such amounts are adjusted by the Commission, by notice published in the Federal Register to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics), 4 percent of the annual income of such investor; orCommentsClose CommentsPermalink





‘(ii) greater than $100,000 (as such amount is adjusted by the Commission by notice published in the Federal Register to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics), 8 percent of the annual income of such investor;CommentsClose CommentsPermalink





‘(10) takes such steps to protect the privacy of information collected from investors as the Commission shall, by rule, determine appropriate;CommentsClose CommentsPermalink





‘(11) not compensate promoters, finders, lead generators, or other persons to attract or provide the personal information of any potential investor;CommentsClose CommentsPermalink





‘(12) prohibit its directors, officers, partners, or employees (or any person occupying a similar status or performing a similar function) from having any financial interest in an issuer using its services; andCommentsClose CommentsPermalink





‘(13) meet such other requirements as the Commission may, by rule, prescribe.CommentsClose CommentsPermalink





‘(b) Requirements for Issuers- For purposes of section 4(6), an issuer who offers or sells securities shall--CommentsClose CommentsPermalink





‘(1) be organized under and subject to the laws of a State;CommentsClose CommentsPermalink





‘(2) file with the Commission and provide to actual and potential investors and the relevant broker or funding portal--CommentsClose CommentsPermalink





‘(A) the name, legal status, physical address, and website address of the issuer;CommentsClose CommentsPermalink





‘(B) the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer;CommentsClose CommentsPermalink





‘(C) a description of the business of the issuer and the anticipated business plan of the issuer;CommentsClose CommentsPermalink





‘(D) a description of the financial condition of the issuer, including--CommentsClose CommentsPermalink





‘(i) financial statements reviewed by a public accountant who is independent of the issuer, using professional standards and procedures for such review or standards and procedures established by rule of the Commission for such purpose; orCommentsClose CommentsPermalink





‘(ii) for offerings seeking to raise more than $500,000 (or such other amount as may be established by the Commission, by rule), audited financial statements;CommentsClose CommentsPermalink





‘(E) a description of the stated purpose and intended use of the proceeds of the offering sought by the issuer;CommentsClose CommentsPermalink





‘(F) the target offering amount, the deadline to reach the target offering amount, and regular updates regarding the progress of the issuer in meeting the target offering amount;CommentsClose CommentsPermalink





‘(G) the price at which the securities will be offered for a given ownership stake;CommentsClose CommentsPermalink





‘(H) a description of the ownership and capital structure of the issuer, how the securities being offered are being valued, what the rights of the securities are, and how rights may be exercised by the issuer and shareholders; andCommentsClose CommentsPermalink





‘(I) such other information as the Commission may, by rule, prescribe;CommentsClose CommentsPermalink





‘(3) not advertise the specific details of the offering, except for notices which direct investors to the funding portal or broker;CommentsClose CommentsPermalink





‘(4) file with the Commission and provide to investors quarterly reports of the results of operations and financial statements, as the Commission shall, by rule, determine appropriate, subject to such exceptions and termination dates as the Commission may establish, by rule; andCommentsClose CommentsPermalink





‘(5) comply with such other requirements as the Commission may prescribe, by rule.CommentsClose CommentsPermalink





‘(c) Liability for Misstatements- The issuer and any person who is a director or officer (or any person occupying a similar status or performing a similar function) or partner in the issuer shall be liable to any person acquiring such security that was subject to an offering pursuant to section 4(6) for any untrue statement of a material fact or omission to state a material fact required to be stated in connection with any offering made pursuant to section 4(6).CommentsClose CommentsPermalink





‘(d) Information Available to States- The Commission shall make the information described in subsection (b) and such other information as the Commission, by rule, determines appropriate, available to the appropriate securities regulatory authority of each State.CommentsClose CommentsPermalink





‘(e) Restrictions on Sales- Securities issued pursuant to a transaction described in section 4(6)--CommentsClose CommentsPermalink





‘(1) may not be transferred by the purchaser of such securities during the 2-year period beginning on the date of purchase, unless such securities are transferred--CommentsClose CommentsPermalink





‘(A) to the issuer of the securities;CommentsClose CommentsPermalink





‘(B) to an accredited investor;CommentsClose CommentsPermalink





‘(C) as part of an offering registered with the Commission; orCommentsClose CommentsPermalink





‘(D) to a member of the family of the purchaser or the equivalent, or in connection with the death of the purchaser; andCommentsClose CommentsPermalink





‘(2) shall be subject to such other limitations as the Commission shall establish, by rule.CommentsClose CommentsPermalink





‘(f) Rule of Construction- 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).’.CommentsClose CommentsPermalink





(c) Rulemaking- Not later than 1 year after the date of enactment of this Act, the Securities and Exchange Commission (in this Act referred to as the ‘Commission’) shall issue such rules as may be necessary to carry out section 4(6) and section 4A of the Securities Act of 1933, as added by this Act.CommentsClose CommentsPermalink





(d) Disqualification- Not later than 1 year after the date of enactment of this Act, the Commission shall, by rule, establish disqualification provisions that are 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)--CommentsClose CommentsPermalink





(1) under which an issuer shall not be eligible to offer securities pursuant to section 4(6) of the Securities Act of 1933, as added by this Act; andCommentsClose CommentsPermalink





(2) under which a funding portal or broker shall not be eligible to effect transactions for the account of others pursuant to section 4(6) of the Securities Act of 1933, as added by this Act.CommentsClose CommentsPermalink

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

Section 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)) is amended by adding at the end the following:CommentsClose CommentsPermalink





‘(6) EXCLUSION FOR PERSONS HOLDING CERTAIN SECURITIES- The Commission may, as appropriate, exempt from this subsection securities acquired pursuant to an offering made under section 4(6) of the Securities Act of 1933.’.CommentsClose CommentsPermalink

SEC. 4. FUNDING PORTAL REGULATION.

(a) Exemption-CommentsClose CommentsPermalink





(1) IN GENERAL- Section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c) is amended by adding at the end the following:CommentsClose CommentsPermalink





‘(h) Limited Exemption for Funding Portals- The Commission shall, by rule, as the Commission determines appropriate, exempt funding portals from the registration requirements of section 15(a)(1), conditionally or unconditionally, provided that such funding portals remain subject to such examination by the Commission and a national securities association and to such other requirements under this title as the Commission determines appropriate under such rule.’.CommentsClose CommentsPermalink





(2) RULEMAKING- A rule to carry out section 3(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78c), as added by this subsection, shall be issued not later than 1 year after the date of enactment of this Act.CommentsClose CommentsPermalink





(b) Definition- Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following:CommentsClose CommentsPermalink





‘(80) FUNDING PORTAL- The term ‘funding portal’ means any person engaged in the business of effecting transactions in securities for the account of others, solely pursuant to section 4(6) of the Securities Act of 1933 (15 U.S.C. 77d(6)) that does not--CommentsClose CommentsPermalink





‘(A) offer investment advice or recommendations;CommentsClose CommentsPermalink





‘(B) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;CommentsClose CommentsPermalink





‘(C) compensate employees, agents, or other third parties for such solicitation or based on the sale of securities displayed or references on its website or portal;CommentsClose CommentsPermalink





‘(D) hold, manage, possess, or otherwise handle investor funds or securities; orCommentsClose CommentsPermalink





‘(E) engage in such other activities as the Commission may, by rule, determine appropriate.’.CommentsClose CommentsPermalink

SEC. 5. FRAUD RESPONSE REVIEW.

The Commission shall conduct a review of the effects of the provisions of this Act on investor protection--CommentsClose CommentsPermalink





(1) once every 6 months during the first 2 years after the date of enactment of this Act;CommentsClose CommentsPermalink





(2) annually during the 3 years following the 2-year period referred to in paragraph (1); andCommentsClose CommentsPermalink





(3) not less frequently than once every 5 years thereafter.CommentsClose CommentsPermalink