S. 1791 – Reading Mode

112th CONGRESS

1st Session

S. 1791

IN THE SENATE OF THE UNITED STATES

November 2, 2011

Mr. Brown of Massachusetts introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs

A BILL

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

Short title

This Act may be cited as the Democratizing Access to Capital Act of 2011.

Crowdfunding exemption

Section 4 of the Securities Act of 1933 (15 U.S.C. 77d) is amended—

(1)

in paragraph (2), by inserting before the period at the end , other than as provided in paragraph (6);

(2)

by striking The provisions and inserting the following:

(a)

In general

The provisions

; and

(3)

by adding at the end the following:

(6)

subject to subsection (b), transactions involving the issuance of securities through a crowdfunding intermediary, whether or not the transaction involves a public offering, for which—

(A)

the aggregate annual amount raised through the issue of the securities is $1,000,000 or less during any 12-month period, by any incorporated entity formed under and subject to the law of any State; and

(B)

individual investments in the securities are limited to an aggregate annual amount of not more than $1,000.

(b)

Certain crowdfunding exemption criteria

(1)

In general

In order to qualify for the exemption under subsection (a)(6), the issuer shall—

(A)

disclose to investors all rights of investors, including complete information about the risks, obligations, benefits, history, and costs of offering;

(B)

be an incorporated entity formed under and subject to the law of a State; and

(C)

file such notice with the Commission as the Commission shall prescribe.

(2)

Disqualification

Not later than 90 days after the date of enactment of this Act, the Commission shall, by rule or regulation, establish disqualification provisions under which a person shall not be eligible to utilize the exemption under subsection (a)(6), or to participate in the affairs of a crowdfunding 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 (1512 U.S.C. 77d note).

(3)

Restricted securities

Securities issued under a transaction described in subsection (a)(6) shall be considered restricted securities, subject to a one-year holding period.

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 For the purposes and inserting:

(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(a)(6) of the Securities Act of 1933.

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 subparagraph (C) as subparagraph (D); and

(2)

by inserting after subparagraph (B) the following:

(C)

section 4(a)(6);

State fraud authority

Section 18(c)(1) of the Securities Act of 1933 (15 U.S.C. 77r(c)(1)) is amended by striking or dealer and inserting , dealer, or crowdfunding intermediaries.

Notice filings permitted

Section 18(c)(2) of the Securities Act of 1933 (15 U.S.C. 77r(c)(2)) is amended by inserting after subsection (D) the following:

(E)

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)(C), 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 issuer’s State of organization, or any State in which purchasers of 50 percent or greater of the aggregate amount of the issue are a residents.

Broker and dealer exemptions

(a)

Brokers

Section 3(a)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 780c(a)(4)) is amended by adding at the end the following:

(G)

Exemption for crowdfunding intermediaries

(i)

In general

The term broker does not include any crowdfunding intermediary.

(ii)

Definition

For purposes of this paragraph, the term crowdfunding intermediary means any intermediary that—

(I)

is open to and accessible by the general public;

(II)

provides public communication portals for investors and potential investors;

(III)

warns investors of the speculative nature generally applicable to investments in startups, emerging businesses, and small issuers, including risks in the secondary market related to illiquidity;

(IV)

warns investors that they are subject to a 1-year restriction on sales of securities issued;

(V)

takes reasonable measures to reduce the risk of fraud with respect to such transaction;

(VI)

prohibits its employees from investing in the offerings made through the crowdfunding intermediary, or to have any financial interest in the companies posting offerings through the crowdfunding intermediary;

(VII)

does not offer investment advice or recommendations;

(VIII)

provides to the Commission—

(aa)

the crowdfunding intermediary’s physical address, website address, and the names of the crowdfunding intermediary and employees of the crowdfunding intermediary, keeping such information up-to-date; and

(bb)

continuous investor-level access to the intermediary’s website;

(IX)

requires each potential investor to answer questions demonstrating competency in—

(aa)

recognition of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;

(bb)

risk of illiquidity; and

(cc)

such other areas as the Commission may determine appropriate;

(X)

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 not less than 60 percent of the target offering amount;

(XI)

carries out a background check on the issuer’s principals;

(XII)

provides the Commission with basic notice of the offering, not later than the first day on which funds are solicited from potential investors, including—

(aa)

the issuer’s name, legal status, physical address, and website address;

(bb)

the names of the issuer’s principals;

(cc)

the stated purpose and intended use of the capital formation funds sought by the issuer; and

(dd)

the target offering amount;

(XIII)

outsources cash-management functions to a qualified third-party custodian, such as a traditional broker or dealer or insured depository institution;

(XIV)

maintains such books and records as the Commission determines appropriate; and

(XV)

defines and makes available the process for raising and resolving a complaint, including alternatives available to investors if the crowdfunding intermediary is unable to resolve a dispute to the satisfaction of the investor.

(b)

Dealers

Section 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 780c(a)(4)) is amended by adding at the end the following:

(D)

Exemption for crowdfunding intermediaries

The term dealer does not include any crowdfunding intermediary described in paragraph (4)(G).

Conforming amendments

(a)

Securities Act of 1933

The Securities Act of 1933 (15 U.S.C. 77a et seq.) is amended by striking section 4 each place that term appears (other than in the amendments made by sections 1 through 4 of this Act) and inserting section 4(a).

(b)

Securities Exchange Act of 1934

Section 28(f)(5)(E) of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(f)(5)(E)) is amended by striking section 4(2) and inserting section 4(a)(2).