59–006 

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 preexisting 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. 

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‘‘(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. 

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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 redtape, 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. 

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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. 

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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. 

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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. 

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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): 

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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; 

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(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. 

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(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 ADVER- TISING.—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, 

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directly, 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. 

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(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. 

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(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 

* * * * * * * 

* * * * * * * 

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 

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16 

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 OFFER- INGS.—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; øor¿ 

(G) section 4(a)(7)ø.¿; or 

(H) section 4(a)(8). 

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(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. 

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(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 SECURI- TIES.—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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(19) 

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-thecounter 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 securimstockstill on DSK3G9T082PROD with HEARINGS

20 

ties. 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. 

Æ 

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