Title III of the JOBS Act of 2012 – The Crowdfund Act

TITLE III—CROWDFUNDING
SEC. 301. SHORT TITLE.
This title may be cited as the ‘‘Capital Raising Online While
Deterring Fraud and Unethical Non-Disclosure Act of 2012’’ or
the ‘‘CROWDFUND Act’’.
SEC. 302. 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 (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).’’.
(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:

‘‘(a) REQUIREMENTS ON INTERMEDIARIES.—A person acting as
an intermediary in a transaction involving the offer or sale of
securities for the account of others pursuant to section 4(6) shall—
‘‘(1) register with the Commission as—
‘‘(A) a broker; or
‘‘(B) a funding portal (as defined in section 3(a)(80)
of the Securities Exchange Act of 1934);
‘‘(2) register with any applicable self-regulatory organization
(as defined in section 3(a)(26) of the Securities Exchange
Act of 1934);
‘‘(3) provide such disclosures, including disclosures related
to risks and other investor education materials, as the Commission
shall, by rule, determine appropriate;
‘‘(4) ensure that each investor—
‘‘(A) reviews investor-education information, in accordance
with standards established by the Commission, by
rule;
‘‘(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; and
‘‘(C) answers questions demonstrating—
‘‘(i) an understanding of the level of risk generally
applicable to investments in startups, emerging
businesses, and small issuers;
‘‘(ii) an understanding of the risk of illiquidity;
and
‘‘(iii) an understanding of such other matters as
the Commission determines appropriate, by rule;
‘‘(5) take such measures to reduce the risk of fraud with
respect to such transactions, as established by the Commission,
by rule, including obtaining a background and securities
enforcement regulatory history check on each officer, director,
and person holding more than 20 percent of the outstanding
equity of every issuer whose securities are offered by such
person;
‘‘(6) not later than 21 days prior to the first day on which
securities are sold to any investor (or such other period as
the Commission may establish), make available to the Commission
and to potential investors any information provided by
the issuer pursuant to subsection (b);
‘‘(7) ensure that all offering proceeds are only provided
to the issuer when the aggregate capital raised from all investors
is equal to or greater than a target offering amount,
and allow all investors to cancel their commitments to invest,
as the Commission shall, by rule, determine appropriate;
‘‘(8) make such efforts as the Commission determines appropriate,
by rule, to ensure that no investor in a 12-month period
has purchased securities offered pursuant to section 4(6) that,
in the aggregate, from all issuers, exceed the investment limits
set forth in section 4(6)(B);
‘‘(9) take such steps to protect the privacy of information
collected from investors as the Commission shall, by rule, determine
appropriate;
‘‘(10) not compensate promoters, finders, or lead generators
for providing the broker or funding portal with the personal
identifying information of any potential investor;
‘‘(11) prohibit its directors, officers, or partners (or any
person occupying a similar status or performing a similar function)
from having any financial interest in an issuer using
its services; and
‘‘(12) meet such other requirements as the Commission
may, by rule, prescribe, for the protection of investors and
in the public interest.
‘‘(b) REQUIREMENTS FOR ISSUERS.—For purposes of section 4(6),
an issuer who offers or sells securities shall—
‘‘(1) file with the Commission and provide to investors
and the relevant broker or funding portal, and make available
to potential investors—
‘‘(A) the name, legal status, physical address, and
website address of the issuer;
‘‘(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;
‘‘(C) a description of the business of the issuer and
the anticipated business plan of the issuer;
‘‘(D) a description of the financial condition of the
issuer, including, for offerings that, together with all other
offerings of the issuer under section 4(6) within the preceding
12-month period, have, in the aggregate, target
offering amounts of—
‘‘(i) $100,000 or less—
‘‘(I) the income tax returns filed by the issuer
for the most recently completed year (if any); and
‘‘(II) financial statements of the issuer, which
shall be certified by the principal executive officer
of the issuer to be true and complete in all material
respects;
‘‘(ii) more than $100,000, but not more than
$500,000, 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 the
Commission, by rule, for such purpose; and
‘‘(iii) more than $500,000 (or such other amount
as the Commission may establish, by rule), audited
financial statements;
‘‘(E) a description of the stated purpose and intended
use of the proceeds of the offering sought by the issuer
with respect to the target offering amount;
‘‘(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;
‘‘(G) the price to the public of the securities or the
method for determining the price, provided that, prior to
sale, each investor shall be provided in writing the final
price and all required disclosures, with a reasonable opportunity
to rescind the commitment to purchase the securities;
‘‘(H) a description of the ownership and capital structure
of the issuer, including—
‘‘(i) terms of the securities of the issuer being
offered and each other class of security of the issuer,
including how such terms may be modified, and a
summary of the differences between such securities,
including how the rights of the securities being offered
may be materially limited, diluted, or qualified by the
rights of any other class of security of the issuer;
‘‘(ii) a description of how the exercise of the rights
held by the principal shareholders of the issuer could
negatively impact the purchasers of the securities being
offered;
‘‘(iii) the name and ownership level of each existing
shareholder who owns more than 20 percent of any
class of the securities of the issuer;
‘‘(iv) how the securities being offered are being
valued, and examples of methods for how such securities
may be valued by the issuer in the future,
including during subsequent corporate actions; and
‘‘(v) the risks to purchasers of the securities
relating to minority ownership in the issuer, the risks
associated with corporate actions, including additional
issuances of shares, a sale of the issuer or of assets
of the issuer, or transactions with related parties; and
‘‘(I) such other information as the Commission may,
by rule, prescribe, for the protection of investors and in
the public interest;
‘‘(2) not advertise the terms of the offering, except for
notices which direct investors to the funding portal or broker;
‘‘(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 shall, 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;
‘‘(4) not less than annually, file with the Commission and
provide to investors reports of the results of operations and
financial statements of the issuer, as the Commission shall,
by rule, determine appropriate, subject to such exceptions and
termination dates as the Commission may establish, by rule;
and
‘‘(5) comply with such other requirements as the Commission
may, by rule, prescribe, for the protection of investors
and in the public interest.
‘‘(c) LIABILITY FOR MATERIAL MISSTATEMENTS AND OMISSIONS.—
‘‘(1) ACTIONS AUTHORIZED.—
‘‘(A) IN GENERAL.—Subject to paragraph (2), a person
who purchases a security in a transaction exempted by
the provisions of section 4(6) may bring an action against
an issuer described in paragraph (2), either at law or
in equity in any court of competent jurisdiction, to recover
the consideration paid for such security with interest
thereon, less the amount of any income received thereon,
upon the tender of such security, or for damages if such
person no longer owns the security.

(B) LIABILITY.—An action brought under this paragraph
shall be subject to the provisions of section 12(b)
and section 13, as if the liability were created under section
12(a)(2).
‘‘(2) APPLICABILITY.—An issuer shall be liable in an action
under paragraph (1), if the issuer—
‘‘(A) by the use of any means or instruments of
transportation or communication in interstate commerce
or of the mails, by any means of any written or oral
communication, in the offering or sale of a security in
a transaction exempted by the provisions of section 4(6),
makes an untrue statement of a material fact or omits
to state a material fact required to be stated or necessary
in order to make the statements, in the light of the circumstances
under which they were made, not misleading,
provided that the purchaser did not know of such untruth
or omission; and
‘‘(B) does not sustain the burden of proof that such
issuer did not know, and in the exercise of reasonable
care could not have known, of such untruth or omission.
‘‘(3) DEFINITION.—As used in this subsection, the term
‘issuer’ includes any person who is a director or partner of
the issuer, and the principal executive officer or officers, principal
financial officer, and controller or principal accounting
officer of the issuer (and any person occupying a similar status
or performing a similar function) that offers or sells a security
in a transaction exempted by the provisions of section 4(6),
and any person who offers or sells the security in such offering.
‘‘(d) INFORMATION AVAILABLE TO STATES.—The Commission
shall make, or shall cause to be made by the relevant broker
or funding portal, the information described in subsection (b) and
such other information as the Commission, by rule, determines
appropriate, available to the securities commission (or any agency
or office performing like functions) of each State and territory
of the United States and the District of Columbia.
‘‘(e) RESTRICTIONS ON SALES.—Securities issued pursuant to
a transaction described in section 4(6)—
‘‘(1) may not be transferred by the purchaser of such securities
during the 1-year period beginning on the date of purchase,
unless such securities are transferred—
‘‘(A) to the issuer of the securities;
‘‘(B) to an accredited investor;
‘‘(C) as part of an offering registered with the Commission;
or
‘‘(D) to a member of the family of the purchaser or
the equivalent, or in connection with the death or divorce
of the purchaser or other similar circumstance, in the
discretion of the Commission; and
‘‘(2) shall be subject to such other limitations as the
Commission shall, by rule, establish.
‘‘(f) APPLICABILITY.—Section 4(6) shall not apply to transactions
involving the offer or sale of securities by any issuer that—
‘‘(1) is not organized under and subject to the laws of
a State or territory of the United States or the District of
Columbia;
‘‘(2) is subject to the requirement to file reports pursuant
to section 13 or section 15(d) of the Securities Exchange Act
of 1934;
‘‘(3) is an investment company, as defined in section 3
of the Investment Company Act of 1940, or is excluded from
the definition of investment company by section 3(b) or section
3(c) of that Act; or
‘‘(4) the Commission, by rule or regulation, determines
appropriate.
‘‘(g) 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).
‘‘(h) CERTAIN CALCULATIONS.—
‘‘(1) DOLLAR AMOUNTS.—Dollar amounts in section 4(6) and
subsection (b) of this section shall be adjusted by the Commission
not less frequently than once every 5 years, by notice
published in the Federal Register to reflect any change in
the Consumer Price Index for All Urban Consumers published
by the Bureau of Labor Statistics.
‘‘(2) INCOME AND NET WORTH.—The income and net worth
of a natural person under section 4(6)(B) shall be calculated
in accordance with any rules of the Commission under this
title regarding the calculation of the income and net worth,
respectively, of an accredited investor.’’.
(c) RULEMAKING.—Not later than 270 days after the date of
enactment of this Act, the Securities and Exchange Commission
(in this title referred to as the ‘‘Commission’’) shall issue such
rules as the Commission determines may be necessary or appropriate
for the protection of investors to carry out sections 4(6)
and section 4A of the Securities Act of 1933, as added by this
title. In carrying out this section, the Commission shall consult
with any securities commission (or any agency or office performing
like functions) of the States, any territory of the United States,
and the District of Columbia, which seeks to consult with the
Commission, and with any applicable national securities association.
(d) DISQUALIFICATION.—
(1) IN GENERAL.—Not later than 270 days after the date
of enactment of this Act, the Commission shall, by rule, establish
disqualification provisions under which—
(A) an issuer shall not be eligible to offer securities
pursuant to section 4(6) of the Securities Act of 1933,
as added by this title; and
(B) a broker or funding portal shall not be eligible
to effect or participate in transactions pursuant to that
section 4(6).
(2) INCLUSIONS.—Disqualification provisions required by
this subsection shall—
(A) be substantially similar to the provisions of section
230.262 of title 17, Code of Federal Regulations (or any
successor thereto); and
(B) disqualify any offering or sale of securities by a
person that—
(i) is subject to a final order of a State securities
commission (or an agency or officer of a State performing
like functions), a State authority that supervises
or examines banks, savings associations, or credit
unions, a State insurance commission (or an agency
or officer of a State performing like functions), an
appropriate Federal banking agency, or the National
Credit Union Administration, that—
(I) bars the person from—
(aa) association with an entity regulated
by such commission, authority, agency, or
officer;
(bb) engaging in the business of securities,
insurance, or banking; or
(cc) engaging in savings association or
credit union activities; or
(II) constitutes a final order based on a violation
of any law or regulation that prohibits fraudulent,
manipulative, or deceptive conduct within the
10-year period ending on the date of the filing
of the offer or sale; or
(ii) has been convicted of any felony or misdemeanor
in connection with the purchase or sale of
any security or involving the making of any false filing
with the Commission.

SEC. 303. EXCLUSION OF CROWDFUNDING INVESTORS FROM SHAREHOLDER
CAP.
(a) EXEMPTION.—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:
‘‘(6) EXCLUSION FOR PERSONS HOLDING CERTAIN SECURITIES.—
The Commission shall, by rule, exempt, conditionally
or unconditionally, securities acquired pursuant to an offering
made under section 4(6) of the Securities Act of 1933 from
the provisions of this subsection.’’.
(b) RULEMAKING.—The Commission shall issue a rule to carry
out section 12(g)(6) of the Securities Exchange Act of 1934 (15
U.S.C. 78c), as added by this section, not later than 270 days
after the date of enactment of this Act.
SEC. 304. FUNDING PORTAL REGULATION.
(a) EXEMPTION.—
(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:
‘‘(h) LIMITED EXEMPTION FOR FUNDING PORTALS.—
‘‘(1) IN GENERAL.—The Commission shall, by rule, exempt,
conditionally or unconditionally, a registered funding portal
from the requirement to register as a broker or dealer under
section 15(a)(1), provided that such funding portal—
‘‘(A) remains subject to the examination, enforcement,
and other rulemaking authority of the Commission;
‘‘(B) is a member of a national securities association
registered under section 15A; and
‘‘(C) is subject to such other requirements under this
title as the Commission determines appropriate under such
rule.
‘‘(2) NATIONAL SECURITIES ASSOCIATION MEMBERSHIP.—For
purposes of sections 15(b)(8) and 15A, the term ‘broker or
dealer’ includes a funding portal and the term ‘registered broker
or dealer’ includes a registered funding portal, except to the
extent that the Commission, by rule, determines otherwise,
provided that a national securities association shall only
examine for and enforce against a registered funding portal
rules of such national securities association written specifically
for registered funding portals.’’.
(2) RULEMAKING.—The Commission shall issue 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, not later than
270 days after the date of enactment of this Act.
(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:
‘‘(80) FUNDING PORTAL.—The term ‘funding portal’ means
any person acting as an intermediary in a transaction involving
the offer or sale of 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—
‘‘(A) offer investment advice or recommendations;
‘‘(B) solicit purchases, sales, or offers to buy the securities
offered or displayed on its website or portal;
‘‘(C) compensate employees, agents, or other persons
for such solicitation or based on the sale of securities displayed
or referenced on its website or portal;
‘‘(D) hold, manage, possess, or otherwise handle
investor funds or securities; or
‘‘(E) engage in such other activities as the Commission,
by rule, determines appropriate.’’.
SEC. 305. RELATIONSHIP WITH 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, funding portal, or any other
person or entity using the exemption from registration provided
by section 4(6) of that Act.
(2) CLARIFICATION OF STATE JURISDICTION OVER UNLAWFUL
CONDUCT OF FUNDING PORTALS AND ISSUERS.—Section 18(c)(1)
of the Securities Act of 1933 (15 U.S.C. 77r(c)(1)) 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
‘‘(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.’’.
(c) NOTICE FILINGS PERMITTED.—Section 18(c)(2) of the Securities
Act of 1933 (15 U.S.C. 77r(c)(2)) is amended by adding at
the end the following:
‘‘(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.’’.
(d) FUNDING PORTALS.—
(1) STATE EXEMPTIONS AND OVERSIGHT.—Section 15(i) of
the Securities Exchange Act of 1934 (15 U.S.C. 78o(i)) is
amended—
(A) by redesignating paragraphs (2) and (3) as paragraphs
(3) and (4), respectively; and
(B) by inserting after paragraph (1) the following:
‘‘(2) FUNDING PORTALS.—
‘‘(A) LIMITATION ON STATE LAWS.—Except as provided
in subparagraph (B), no State or political subdivision
thereof may enforce any law, rule, regulation, or other
administrative action against a registered funding portal
with respect to its business as such.
‘‘(B) EXAMINATION AND ENFORCEMENT AUTHORITY.—
Subparagraph (A) does not apply with respect to the examination
and enforcement of any law, rule, regulation, or
administrative action of a State or political subdivision
thereof in which the principal place of business of a registered
funding portal is located, provided that such law,
rule, regulation, or administrative action is not in addition
to or different from the requirements for registered funding
portals established by the Commission.
‘‘(C) DEFINITION.—For purposes of this paragraph, the
term ‘State’ includes the District of Columbia and the territories
of the United States.’’.
(2) 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 funding portal’’.

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