II 

112TH CONGRESS 

1ST SESSION S. 1970 

To amend the securities laws to provide for registration exemptions for 

certain crowdfunded securities, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

DECEMBER 8, 2011 

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 Affairs 

A BILL 

To amend the securities laws to provide for registration 

exemptions for certain crowdfunded securities, and for 

other purposes. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Capital Raising Online 

5 While Deterring Fraud and Unethical Non-Disclosure Act 

6 of 2011’’ or the ‘‘CROWDFUND Act’’. 


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1 SEC. 2. CROWDFUNDING EXEMPTION. 

2 (a) SECURITIES ACT OF 1933.—Section 4 of the Se3 curities Act of 1933 (15 U.S.C. 77d) is amended by add4 ing at the end the following: 

5 ‘‘(6) any transaction involving the offer or sale 

6 of securities by an issuer (including all entities con7 trolled by or under common control with the issuer), 

8 provided that— 

9 ‘‘(A) the aggregate amount sold to all in10 vestors by an issuer, including any amount sold 

11 in reliance on the exemption provided under 

12 this paragraph during the 12-month period pre13 ceding the date of such transaction, is not more 

14 than $1,000,000, as such amount is adjusted 

15 by the Commission by notice published in the 

16 Federal Register to reflect the annual change in 

17 the Consumer Price Index for All Urban Con18 sumers published by the Bureau of Labor Sta19 tistics; 

20 ‘‘(B) the aggregate amount sold to any in21 vestor by an issuer, including any amount sold 

22 in reliance on the exemption provided under 

23 this paragraph during the 12-month period pre24 ceding the date of such transaction, does not 

25 exceed the greater of— 


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1 ‘‘(i) $500, as such amount is adjusted 

2 by the Commission by notice published in 

3 the Federal Register to reflect the annual 

4 change in the Consumer Price Index for 

5 All Urban Consumers published by the Bu6 reau of Labor Statistics; or 

7 ‘‘(ii) if the investor has an annual in8 come of— 

9 ‘‘(I) greater than $50,000 but 

10 less than $100,000 (as such amounts 

11 are adjusted by the Commission by 

12 notice published in the Federal Reg13 ister to reflect the annual change in 

14 the Consumer Price Index for All 

15 Urban Consumers published by the 

16 Bureau of Labor Statistics), 1 percent 

17 of the annual income of such investor; 

18 or 

19 ‘‘(II) greater than $100,000 (as 

20 such amount is adjusted by the Com21 mission by notice published in the 

22 Federal Register to reflect the annual 

23 change in the Consumer Price Index 

24 for All Urban Consumers published by 

25 the Bureau of Labor Statistics), 2 


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1 percent of the annual income of such 

2 investor; 

3 ‘‘(C) the transaction is conducted through 

4 a broker or funding portal that complies with 

5 the requirements of section 4A(a); and 

6 ‘‘(D) the issuer complies with the require7 ments of section 4A(b).’’. 

8 (b) REQUIREMENTS TO QUALIFY FOR

9 CROWDFUNDING EXEMPTION.—The Securities Act of 

10 1933 (15 U.S.C. 77a et seq.) is amended by inserting after 

11 section 4 the following: 

12 ‘‘SEC. 4A. REQUIREMENTS WITH RESPECT TO CERTAIN 

13 SMALL TRANSACTIONS. 

14 ‘‘(a) REQUIREMENTS ON INTERMEDIARIES.—A per15 son engaged in the business of effecting transactions in 

16 securities for the account of others pursuant to section 

17 4(6) shall— 

18 ‘‘(1) register with the Commission as— 

19 ‘‘(A) a broker; or 

20 ‘‘(B) a funding portal (as defined in sec21 tion 3(a)(80) of the Securities Exchange Act of 

22 1934); 

23 ‘‘(2) register with any applicable self-regulatory 

24 organization (as defined in section 3(a)(26) of the 

25 Securities Exchange Act of 1934); 


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1 ‘‘(3) provide such disclosures, including disclo2 sures related to risks and other investor education 

3 materials, as the Commission shall, by rule, deter4 mine appropriate; 

5 ‘‘(4) ensure that each potential investor— 

6 ‘‘(A) reviews investor-education informa7 tion, in line with standards established by the 

8 Commission, by rule; 

9 ‘‘(B) positively affirms that the investor 

10 understands that the investor is risking the loss 

11 of the entire investment, and that the investor 

12 could bear such a loss; and 

13 ‘‘(C) answers questions demonstrating— 

14 ‘‘(i) an understanding of the level of 

15 risk generally applicable to investments in 

16 startups, emerging businesses, and small 

17 issuers; 

18 ‘‘(ii) an understanding of the risk of 

19 illiquidity; and 

20 ‘‘(iii) an understanding of such other 

21 matters as the Commission determines ap22 propriate, by rule; 

23 ‘‘(5) take such measures to reduce the risk of 

24 fraud with respect to such transactions, as estab25 lished by rule of the Commission, including obtainVerDate Mar 15 2010 01:48 Dec 10, 2011 Jkt 019200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S1970.IS S1970

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1 ing a criminal background check and securities en2 forcement regulatory history check on each officer, 

3 director, and person holding more than 20 percent 

4 of the shares of every issuer whose securities are of5 fered by such person; 

6 ‘‘(6) not later than 1 month prior to the first 

7 day on which securities are offered to any potential 

8 investor (or such other period as the Commission 

9 may establish), provide in writing to the Commission 

10 and each potential investor any information provided 

11 by the issuer pursuant to subsection (b); 

12 ‘‘(7) ensure that all offering proceeds are only 

13 provided to the issuer when the aggregate capital 

14 raised from all investors is equal to the target offer15 ing amount, and allow all investors to cancel their 

16 commitments to invest, as the Commission, by rule, 

17 shall determine appropriate; 

18 ‘‘(8) make such efforts as the Commission de19 termines appropriate, by rule, to ensure that, for 

20 any offering made pursuant to section 4(6), that no 

21 investor exceeds the investment limits set forth in 

22 section 4(6)(B); 

23 ‘‘(9) make such efforts as the Commission de24 termines appropriate, by rule, to ensure that no in25 vestor has purchased securities offered pursuant to 


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1 section 4(6), that in the aggregate from all issuers, 

2 exceed the greater of— 

3 ‘‘(A) $2,000 (as such amount is adjusted 

4 by the Commission, by notice published in the 

5 Federal Register to reflect the annual change in 

6 the Consumer Price Index for All Urban Con7 sumers published by the Bureau of Labor Sta8 tistics); or 

9 ‘‘(B) if the investor has an annual income 

10 of— 

11 ‘‘(i) greater than $50,000 but not 

12 more than $100,000 (as such amounts are 

13 adjusted by the Commission, by notice 

14 published in the Federal Register to reflect 

15 the annual change in the Consumer Price 

16 Index for All Urban Consumers published 

17 by the Bureau of Labor Statistics), 4 per18 cent of the annual income of such investor; 

19 or 

20 ‘‘(ii) greater than $100,000 (as such 

21 amount is adjusted by the Commission by 

22 notice published in the Federal Register to 

23 reflect the annual change in the Consumer 

24 Price Index for All Urban Consumers pub25 lished by the Bureau of Labor Statistics), 


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1 8 percent of the annual income of such in2 vestor; 

3 ‘‘(10) takes such steps to protect the privacy of 

4 information collected from investors as the Commis5 sion shall, by rule, determine appropriate; 

6 ‘‘(11) not compensate promoters, finders, lead 

7 generators, or other persons to attract or provide the 

8 personal information of any potential investor; 

9 ‘‘(12) prohibit its directors, officers, partners, 

10 or employees (or any person occupying a similar sta11 tus or performing a similar function) from having 

12 any financial interest in an issuer using its services; 

13 and 

14 ‘‘(13) meet such other requirements as the 

15 Commission may, by rule, prescribe. 

16 ‘‘(b) REQUIREMENTS FOR ISSUERS.—For purposes 

17 of section 4(6), an issuer who offers or sells securities 

18 shall— 

19 ‘‘(1) be organized under and subject to the laws 

20 of a State; 

21 ‘‘(2) file with the Commission and provide to 

22 actual and potential investors and the relevant 

23 broker or funding portal— 

24 ‘‘(A) the name, legal status, physical ad25 dress, and website address of the issuer; 


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1 ‘‘(B) the names of the directors and offi2 cers (and any persons occupying a similar sta3 tus or performing a similar function), and each 

4 person holding more than 20 percent of the 

5 shares of the issuer; 

6 ‘‘(C) a description of the business of the 

7 issuer and the anticipated business plan of the 

8 issuer; 

9 ‘‘(D) a description of the financial condi10 tion of the issuer, including— 

11 ‘‘(i) financial statements reviewed by 

12 a public accountant who is independent of 

13 the issuer, using professional standards 

14 and procedures for such review or stand15 ards and procedures established by rule of 

16 the Commission for such purpose; or 

17 ‘‘(ii) for offerings seeking to raise 

18 more than $500,000 (or such other 

19 amount as may be established by the Com20 mission, by rule), audited financial state21 ments; 

22 ‘‘(E) a description of the stated purpose 

23 and intended use of the proceeds of the offering 

24 sought by the issuer; 


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1 ‘‘(F) the target offering amount, the dead2 line to reach the target offering amount, and 

3 regular updates regarding the progress of the 

4 issuer in meeting the target offering amount; 

5 ‘‘(G) the price at which the securities will 

6 be offered for a given ownership stake; 

7 ‘‘(H) a description of the ownership and 

8 capital structure of the issuer, how the securi9 ties being offered are being valued, what the 

10 rights of the securities are, and how rights may 

11 be exercised by the issuer and shareholders; and 

12 ‘‘(I) such other information as the Com13 mission may, by rule, prescribe; 

14 ‘‘(3) not advertise the specific details of the of15 fering, except for notices which direct investors to 

16 the funding portal or broker; 

17 ‘‘(4) file with the Commission and provide to 

18 investors quarterly reports of the results of oper19 ations and financial statements, as the Commission 

20 shall, by rule, determine appropriate, subject to such 

21 exceptions and termination dates as the Commission 

22 may establish, by rule; and 

23 ‘‘(5) comply with such other requirements as 

24 the Commission may prescribe, by rule. 


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1 ‘‘(c) LIABILITY FOR MISSTATEMENTS.—The issuer 

2 and any person who is a director or officer (or any person 

3 occupying a similar status or performing a similar func4 tion) or partner in the issuer shall be liable to any person 

5 acquiring such security that was subject to an offering 

6 pursuant to section 4(6) for any untrue statement of a 

7 material fact or omission to state a material fact required 

8 to be stated in connection with any offering made pursu9 ant to section 4(6). 

10 ‘‘(d) INFORMATION AVAILABLE TO STATES.—The 

11 Commission shall make the information described in sub12 section (b) and such other information as the Commission, 

13 by rule, determines appropriate, available to the appro14 priate securities regulatory authority of each State. 

15 ‘‘(e) RESTRICTIONS ON SALES.—Securities issued 

16 pursuant to a transaction described in section 4(6)— 

17 ‘‘(1) may not be transferred by the purchaser 

18 of such securities during the 2-year period beginning 

19 on the date of purchase, unless such securities are 

20 transferred— 

21 ‘‘(A) to the issuer of the securities; 

22 ‘‘(B) to an accredited investor; 

23 ‘‘(C) as part of an offering registered with 

24 the Commission; or 


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1 ‘‘(D) to a member of the family of the pur2 chaser or the equivalent, or in connection with 

3 the death of the purchaser; and 

4 ‘‘(2) shall be subject to such other limitations 

5 as the Commission shall establish, by rule. 

6 ‘‘(f) RULE OF CONSTRUCTION.—Nothing in this sec7 tion or section 4(6) shall be construed as preventing an 

8 issuer from raising capital through methods not described 

9 under section 4(6).’’. 

10 (c) RULEMAKING.—Not later than 1 year after the 

11 date of enactment of this Act, the Securities and Ex12 change Commission (in this Act referred to as the ‘‘Com13 mission’’) shall issue such rules as may be necessary to 

14 carry out section 4(6) and section 4A of the Securities 

15 Act of 1933, as added by this Act. 

16 (d) DISQUALIFICATION.—Not later than 1 year after 

17 the date of enactment of this Act, the Commission shall, 

18 by rule, establish disqualification provisions that are sub19 stantially similar to the disqualification provisions con20 tained in the regulations adopted in accordance with sec21 tion 926 of the Dodd-Frank Wall Street Reform and Con22 sumer Protection Act (15 U.S.C. 77d note)— 

23 (1) under which an issuer shall not be eligible 

24 to offer securities pursuant to section 4(6) of the Se25 curities Act of 1933, as added by this Act; and 


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1 (2) under which a funding portal or broker 

2 shall not be eligible to effect transactions for the ac3 count of others pursuant to section 4(6) of the Secu4 rities Act of 1933, as added by this Act. 

5 SEC. 3. EXCLUSION OF CROWDFUNDING INVESTORS FROM 

6 SHAREHOLDER CAP. 

7 Section 12(g) of the Securities Exchange Act of 1934 

8 (15 U.S.C. 78l(g)) is amended by adding at the end the 

9 following: 

10 ‘‘(6) EXCLUSION FOR PERSONS HOLDING CER11 TAIN SECURITIES.—The Commission may, as appro12 priate, exempt from this subsection securities ac13 quired pursuant to an offering made under section 

14 4(6) of the Securities Act of 1933.’’. 

15 SEC. 4. FUNDING PORTAL REGULATION. 

16 (a) EXEMPTION.— 

17 (1) IN GENERAL.—Section 3 of the Securities 

18 Exchange Act of 1934 (15 U.S.C. 78c) is amended 

19 by adding at the end the following: 

20 ‘‘(h) LIMITED EXEMPTION FOR FUNDING POR21 TALS.—The Commission shall, by rule, as the Commission 

22 determines appropriate, exempt funding portals from the 

23 registration requirements of section 15(a)(1), condi24 tionally or unconditionally, provided that such funding 

25 portals remain subject to such examination by the ComVerDate Mar 15 2010 01:48 Dec 10, 2011 Jkt 019200 PO 00000 Frm 00013 Fmt 6652 Sfmt 6201 E:\BILLS\S1970.IS S1970

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1 mission and a national securities association and to such 

2 other requirements under this title as the Commission de3 termines appropriate under such rule.’’. 

4 (2) RULEMAKING.—A rule to carry out section 

5 3(h) of the Securities Exchange Act of 1934 (15 

6 U.S.C. 78c), as added by this subsection, shall be 

7 issued not later than 1 year after the date of enact8 ment of this Act. 

9 (b) DEFINITION.—Section 3(a) of the Securities Ex10 change Act of 1934 (15 U.S.C. 78c(a)) is amended by 

11 adding at the end the following: 

12 ‘‘(80) FUNDING PORTAL.—The term ‘funding 

13 portal’ means any person engaged in the business of 

14 effecting transactions in securities for the account of 

15 others, solely pursuant to section 4(6) of the Securi16 ties Act of 1933 (15 U.S.C. 77d(6)) that does not— 

17 ‘‘(A) offer investment advice or rec18 ommendations; 

19 ‘‘(B) solicit purchases, sales, or offers to 

20 buy the securities offered or displayed on its 

21 website or portal; 

22 ‘‘(C) compensate employees, agents, or 

23 other third parties for such solicitation or based 

24 on the sale of securities displayed or references 

25 on its website or portal; 


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1 ‘‘(D) hold, manage, possess, or otherwise 

2 handle investor funds or securities; or 

3 ‘‘(E) engage in such other activities as the 

4 Commission may, by rule, determine appro5 priate.’’. 

6 SEC. 5. FRAUD RESPONSE REVIEW. 

7 The Commission shall conduct a review of the effects 

8 of the provisions of this Act on investor protection— 

9 (1) once every 6 months during the first 2 

10 years after the date of enactment of this Act; 

11 (2) annually during the 3 years following the 2- 

12 year period referred to in paragraph (1); and 

13 (3) not less frequently than once every 5 years 

14 thereafter. 

Æ 


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