The Do-Over Non-Accredited Equity Crowdfunding Bill

This is the do-ver I am proposing.

Proposed October 3, 2012

MCHENRY'S CROWDFUNDING BILL - A DO-OVER

Taking another shot at amending the securities laws to provide for registration exemptions for certain crowdfunded securities, and for other purposes.

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

SECTION 1. SHORT TITLE.

This Act may be cited as the `Getting Equity Crowdfunding Right 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 offer or sale of securities by an issuer, provided that--

`(A) the aggregate amount sold within the previous 12-month period in reliance upon this exemption is--

`(i) $1,000,000, or less; or

`(ii) if the issuer provides potential investors with audited financial statements, $2,000,000, or less;

`(B) the aggregate amount sold to any investor in reliance on this exemption within the previous 12-month period does not exceed $1,000;

`(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 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 Funding Portals - For purposes of section 4(6), a person acting as a funding portal in a transaction involving the offer or sale of securities shall comply with the requirements of this subsection if the funding portal--

`(1) warns investors, including on the crowdfunding website used for the offer and sale of such securities, of the speculative nature generally applicable to investments in startups, emerging businesses, and small issuers, including risks in the secondary market related to illiquidity;

`(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, including--

`(A) a requirement that startup issuers use model seed financing documents that, in any given calendar year, are uniform for all deals offered through the crowdfunding website; and

`(B) a requirement that all investors be granted a liquidation preference over all shares outstanding prior to the offering; and

`(4) provides the Commission with the its physical address, website address, and the names of its employees and agents, and keep such information up-to-date;

`(5) provides the Commission with continuous investor-level access to the crowdfunding website;

`(6) requires each potential investor to certify--

`(A) an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;

`(B) an understanding of the risk of illiquidity; and

`(C) that such investor has not invested more than $5,000 within the previous 12-month period in startups, emerging businesses, and small issuers;

`(7) requires the issuer to state a target offering amount and a deadline to reach the target offering amount and ensure the third party custodian described under paragraph (10) withholds offering proceeds until aggregate capital raised from investors other than the issuer is no less than 60 percent of the target offering amount;

`(8) carries out a background check on the issuer's principals;

`(9) provides the Commission and potential investors with notice of the offering, not later than the first day securities are offered to potential investors, including--

`(A) the issuer's name, legal status, physical address, and website address;

`(B) the names of the issuer's principals;

`(C) the stated purpose and intended use of the proceeds of the offering sought by the issuer; and

`(D) the target offering amount and the deadline to reach the target offering amount;

`(10) outsources cash-management functions to a qualified third party custodian, such as a broker or dealer registered under section 15(b)(1) of the Securities Exchange Act of 1934 or an insured depository institution;

`(11) does not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor;

`(12) makes available on the crowdfunding website a method of communication that permits the issuer and investors to communicate with one another;

`(13) provides the Commission with a notice upon completion of the offering, which shall include the aggregate offering amount and the number of purchasers; and

`(14) is transparent about the method or process it follows in selecting, curating and presenting offerings on the crowdfunding website, as well as what it charges, if anything, for placement or exposure on the crowdfunding website.

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

`(1) provide to investors and the relevant broker or funding portal, and make available to potential investors--

`(A) a description of the ownership and capital structure of the issuer;

`(B) a redline of all final offering documents against the standard templates published by, and then in effect for, the funding portal; and

`(C) fair and accurate disclosure schedules against the representations and warranties of the final offering documents;

`(2) make available on the issuer's website a method of communication that permits the issuer and investors to communicate with one another; and

`(3) not compensate or commit to compensate, directly or indirectly, any person to promote its offerings through communication channels provided by a broker or funding portal, without taking such steps as the Commission may, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication.

`(c) Reliance on Investor Certifications - For purposes of section 4(6), an issuer or intermediary may rely on certifications provided by the person to whom the securities are sold,and investors who make false certifications as to their eligibility to invest under this section 4(6) shall be barred from bringing claims under the Securities Act of 1933 against the issuer or the funding portal.

`(d) Information Available to States- The Commission shall make any notices or information provided to it by funding portals available to the States.

`(e) Restriction on Sales- With respect to a transaction involving the issuance of securities described under section 4(6), a purchaser may not transfer 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 REGISTRATION AS BROKER- With respect to a transaction described under section 4(6), a funding portal shall not be required to register as a broker under section 15(a)(1) of the Securities Exchange Act of 1934 solely by reason of participation in such transaction.

`(2) 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) Disqualification- Not later than 180 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 an issuer shall not be eligible to utilize the exemption under section 4(6) of the Securities Act of 1933 based on the disciplinary history of the issuer or its predecessors, affiliates, officers, directors, or persons fulfilling similar roles. The Commission shall also establish disqualification provisions under which an intermediary shall not be eligible to act as an intermediary in connection with an offering utilizing the exemption under section 4(6) of the Securities Act of 1933 based on the disciplinary history of the intermediary or its predecessors, affiliates, officers, directors, or persons fulfilling similar roles. Such provisions shall be substantially similar to the disqualification provisions contained in the regulations adopted in accordance with section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 77d note).

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, securities held by persons who purchase such securities in transactions described under section 4(6) of the Securities Act of 1933 shall not be deemed to be `held of record'.'.

SEC. 4. PREEMPTION OF STATE LAW.

(a) In General- Section 18(b)(4) of the Securities Act of 1933 (15 U.S.C. 77r(b)(4)) is amended--

(1) by redesignating subparagraphs (C) and (D) as subparagraphs (D) and (E), respectively; and

(2) by inserting after subparagraph (B) the following:

`(C) section 4(6);'.

(b) Clarification of the Preservation of State Enforcement Authority-

(1) IN GENERAL- The amendments made by subsection (a) relate solely to State registration, documentation, and offering requirements, as described under section 18(a) of Securities Act of 1933 (15 U.S.C. 77r(a)), and shall have no impact or limitation on other State authority to take enforcement action with regard to an issuer, intermediary, or any other person or entity using the exemption from registration provided by section 4(6) of such Act.

(2) CLARIFICATION OF STATE JURISDICTION OVER UNLAWFUL CONDUCT OF INTERMEDIARIES, ISSUERS, AND CUSTODIANS- Section 18(c)(1) of the Securities Act of 1933 is amended by striking `with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions.' and inserting the following: `, in connection with securities or securities transactions, with respect to--

`(A) fraud or deceit;

`(B) unlawful conduct by a broker or dealer; and

`(C) with respect to a transaction described under section 4(6), unlawful conduct by an intermediary, issuer, or custodian.'.

MCHENRY'S CROWDFUNDING BILL - A DO-OVER

Taking another shot at amending the securities laws to provide for registration exemptions for certain crowdfunded securities, and for other purposes.

Proposed October 3, 2012

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