I 

113TH CONGRESS 

2D SESSION H. R. 4564 

To amend the Jumpstart Our Business Startups Act to improve the 

crowdfunding provisions, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

MAY 6, 2014 

Mr. MCHENRY (for himself and Mr. GARRETT) introduced the following bill; 

which was referred to the Committee on Financial Services 

A BILL 

To amend the Jumpstart Our Business Startups Act to 

improve the crowdfunding provisions, 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 ‘‘Equity Crowdfunding 

5 Improvement Act of 2014’’. 

6 SEC. 2. CROWDFUNDING. 

7 (a) REPEAL OF EXISTING LAW.—The 

8 CROWDFUND Act is hereby repealed and the provisions 

9 of law amended by such Act are revived or restored as 

10 if such Act had not been enacted. 

mstockstill on DSK4VPTVN1PROD with BILLS

2 

•HR 4564 IH

1 (b) NEW CROWDFUNDING LAW.—The Jumpstart 

2 Our Business Startups Act is amended— 

3 (1) by inserting after title II the following: 

4 ‘‘TITLE III—ENTREPRENEUR 

5 ACCESS TO CAPITAL 

6 ‘‘SEC. 301. CROWDFUNDING EXEMPTION. 

7 ‘‘(a) IN GENERAL.—Section 4(a) of the Securities 

8 Act of 1933 (15 U.S.C. 77d(a)(6)) is amended by adding 

9 at the end the following: 

10 ‘‘ ‘(6) transactions involving the offer or sale of 

11 securities by an issuer, provided that— 

12 ‘‘ ‘(A) the aggregate amount sold within 

13 the previous 12-month period in reliance upon 

14 this exemption is— 

15 ‘‘ ‘(i) $3,000,000, as such amount is 

16 adjusted by the Commission to reflect the 

17 annual change in the Consumer Price 

18 Index for All Urban Consumers published 

19 by the Bureau of Labor Statistics, or less; 

20 or 

21 ‘‘ ‘(ii) if the issuer provides potential 

22 investors with audited financial statements, 

23 $5,000,000, as such amount is adjusted by 

24 the Commission to reflect the annual 

25 change in the Consumer Price Index for 

mstockstill on DSK4VPTVN1PROD with BILLS

3 

•HR 4564 IH

1 All Urban Consumers published by the Bu2 reau of Labor Statistics, or less; 

3 ‘‘ ‘(B) the aggregate amount sold to any 

4 investor who is not an accredited investor in re5 liance on this exemption within the previous 12- 

6 month period does not exceed the greater of— 

7 ‘‘ ‘(i) $5,000, as such amount is ad8 justed by the Commission to reflect the an9 nual change in the Consumer Price Index 

10 for All Urban Consumers published by the 

11 Bureau of Labor Statistics; 

12 ‘‘ ‘(ii) 10 percent of the investor’s an13 nual income; or 

14 ‘‘ ‘(iii) 10 percent of the investor’s net 

15 worth; 

16 ‘‘ ‘(C) in the case of a transaction involving 

17 an intermediary between the issuer and the in18 vestor, such intermediary complies with the re19 quirements under section 4A(a); 

20 ‘‘ ‘(D) if the aggregate amount sold within 

21 the previous 12-month period in reliance upon 

22 this exemption is— 

23 ‘‘ ‘(i) $500,000 or less, the issuer pro24 vides potential investors with financial 

25 statements that have been certified by the 

mstockstill on DSK4VPTVN1PROD with BILLS

4 

•HR 4564 IH

1 principal executive officer of the issuer to 

2 be true and complete in all material re3 spects; and 

4 ‘‘ ‘(ii) more than $500,000 and less 

5 than $3,000,000, the issuer provides po6 tential investors with financial statements 

7 that have been reviewed by a public ac8 countant who is independent of the issuer, 

9 using professional standards and proce10 dures for such review; and 

11 ‘‘ ‘(E) at the time such securities are 

12 issued, the issuer is a corporation.’. 

13 ‘‘(b) REQUIREMENT ON INTERMEDIARIES.—The Se14 curities Act of 1933 (15 U.S.C. 77a et seq.) is amended 

15 by inserting after section 4 the following: 

16 ‘‘ ‘SEC. 4A. REQUIREMENTS ON INTERMEDIARIES WITH RE17 SPECT TO CROWDFUNDING TRANSACTIONS. 

18 ‘‘ ‘(a) REQUIREMENTS ON INTERMEDIARIES.—For 

19 purposes of section 4(a)(6), a person acting as an inter20 mediary in a transaction involving the offer or sale of secu21 rities shall comply with the requirements of this subsection 

22 if the intermediary— 

23 ‘‘ ‘(1) registers with the Commission as— 

24 ‘‘ ‘(A) a broker; or 

mstockstill on DSK4VPTVN1PROD with BILLS

5 

•HR 4564 IH

1 ‘‘ ‘(B) a person acting as an intermediary 

2 who does not— 

3 ‘‘ ‘(i) offer investment advice or rec4 ommendations; 

5 ‘‘ ‘(ii) explicitly solicit purchases, 

6 sales, or offers to buy particular securities 

7 offered or displayed on its website or por8 tal; 

9 ‘‘ ‘(iii) directly compensate employees, 

10 agents, or other persons for direct sale of 

11 securities displayed or referenced on its 

12 website or portal; or 

13 ‘‘ ‘(iv) manage, possess, or otherwise 

14 handle investor funds or securities; 

15 ‘‘ ‘(2) warns investors, including on the 

16 intermediary’s website used for the offer and sale of 

17 such securities, of the speculative nature generally 

18 applicable to investments in startups, emerging busi19 nesses, and small issuers, including risks in the sec20 ondary market related to illiquidity; 

21 ‘‘ ‘(3) warns investors that they are subject to 

22 the restriction on sales requirement described under 

23 subsection (d); 

24 ‘‘ ‘(4) takes reasonable measures to reduce the 

25 risk of fraud with respect to such transaction; 

mstockstill on DSK4VPTVN1PROD with BILLS

6 

•HR 4564 IH

1 ‘‘ ‘(5) provides the Commission with the 

2 intermediary’s physical address, website address, 

3 and the names of the intermediary, the chief officer 

4 of the intermediary (or person fulfilling a similar 

5 role), and any employee of the intermediary respon6 sible for the intermediary’s direct compliance with 

7 the securities laws (as defined under section 3 of the 

8 Securities Exchange Act of 1934), and updates such 

9 information with the Commission within 6 business 

10 days of such information changing; 

11 ‘‘ ‘(6) provides the Commission with continuous 

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

13 ‘‘ ‘(7) requires each potential investor to answer 

14 questions demonstrating— 

15 ‘‘ ‘(A) an understanding of the level of risk 

16 generally applicable to investments in startups, 

17 emerging businesses, and small issuers; 

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

19 illiquidity; and 

20 ‘‘ ‘(C) such other areas as the Commission, 

21 in consultation with self-regulatory organiza22 tions (as defined in section 3 of the Securities 

23 Exchange Act of 1934), may determine appro24 priate by rule or regulation; 

mstockstill on DSK4VPTVN1PROD with BILLS

7 

•HR 4564 IH

1 ‘‘ ‘(8) requires the issuer to state a target offer2 ing amount and a deadline to reach the target offer3 ing amount and ensure the third party custodian de4 scribed under paragraph (11) withholds offering pro5 ceeds until— 

6 ‘‘ ‘(A) aggregate capital raised from inves7 tors other than the issuer is no less than 100 

8 percent of the target offering amount; and 

9 ‘‘ ‘(B) the issuer has complied with all re10 quirements under this section; 

11 ‘‘ ‘(9) carries out a background check on the ex12 ecutive officers, directors, and shareholders with 15 

13 percent or more voting control of the issuer (or per14 sons fulfilling similar roles) to ensure such persons 

15 would not meet the disqualification provisions adopt16 ed in accordance with section 926 of the Dodd17 Frank Wall Street Reform and Consumer Protection 

18 Act; 

19 ‘‘ ‘(10) provides the Commission and potential 

20 investors with notice of the offering, not later than 

21 the first day securities are offered to potential inves22 tors, including— 

23 ‘‘ ‘(A) the issuer’s name, legal status, phys24 ical address, and website address; 

mstockstill on DSK4VPTVN1PROD with BILLS

8 

•HR 4564 IH

1 ‘‘ ‘(B) the names of the executive officers, 

2 directors, and shareholders with 15 percent or 

3 more voting control of the issuer (or persons 

4 fulfilling similar roles); 

5 ‘‘ ‘(C) the intended use of the proceeds of 

6 the offering; and 

7 ‘‘ ‘(D) the target offering amount and the 

8 deadline to reach the target offering amount; 

9 ‘‘ ‘(11) outsources cash functions to a qualified 

10 third party custodian, such as a broker or dealer 

11 registered under section 15(b)(1) of the Securities 

12 Exchange Act of 1934 or an insured depository in13 stitution; 

14 ‘‘ ‘(12) maintains such books and records as the 

15 Commission determines appropriate; 

16 ‘‘ ‘(13) makes available on the intermediary’s 

17 website a method of communication that permits the 

18 issuer and investors to communicate with one an19 other; 

20 ‘‘ ‘(14) provides the Commission with a notice 

21 upon completion of the offering, which shall include 

22 the aggregate offering amount and the number of 

23 purchasers; and 

24 ‘‘ ‘(15) does not offer investment advice. 

mstockstill on DSK4VPTVN1PROD with BILLS

9 

•HR 4564 IH

1 ‘‘ ‘(b) VERIFICATION OF INVESTOR INFORMATION.— 

2 For purposes of section 4(a), an intermediary may rely 

3 on a certification by an investor as to— 

4 ‘‘ ‘(1) the investor’s status as an accredited in5 vestor; and 

6 ‘‘ ‘(2) with respect to an unaccredited investor, 

7 the investor’s annual income, net worth, and the ag8 gregate amount of securities sold to the investor in 

9 reliance on the exemption provided by section 4(a) 

10 within the previous 12-month period. 

11 ‘‘ ‘(c) INFORMATION AVAILABLE TO STATES.—The 

12 Commission shall make the notices described under sub13 sections (a)(10) and (a)(14) and the information described 

14 under subsection (a)(5) available to the States. 

15 ‘‘ ‘(d) RESTRICTION ON SALES.—Newly issued securi16 ties purchased in a transaction made in reliance on section 

17 4(a)(6) may not be resold by any person during the 1- 

18 year period beginning on the date of original purchase, 

19 unless such securities are sold to— 

20 ‘‘ ‘(1) the issuer of such securities; or 

21 ‘‘ ‘(2) an accredited investor. 

22 ‘‘ ‘(e) REQUIREMENT FOR USE OF INTERMEDIARIES

23 WHEN SELLING TO UNACCREDITED INVESTORS.—With 

24 respect to a transaction described under section 4(a)(6), 

25 an issuer may only enter into a transaction with an 

mstockstill on DSK4VPTVN1PROD with BILLS

10 

•HR 4564 IH

1 unaccredited investor through the use of an intermediary, 

2 and any resale of a security originally issued in reliance 

3 on section 4(a)(6) may only be made with an unaccredited 

4 investor through the use of an intermediary. 

5 ‘‘ ‘(f) RULES OF CONSTRUCTION.— 

6 ‘‘ ‘(1) NO REGISTRATION AS BROKER.—With re7 spect to a transaction either made pursuant to sec8 tion 4(a)(6) or involving the resale of a security 

9 originally issued pursuant to section 4(a)(6) and in10 volving an intermediary, such intermediary shall not 

11 be required to register as a broker under section 

12 15(a)(1) of the Securities Exchange Act of 1934 

13 solely by reason of participation in such transaction. 

14 ‘‘ ‘(2) RIGHT TO SELECT TRANSACTIONS.—An 

15 intermediary may select in which transactions to 

16 serve as an intermediary, and such selection shall 

17 not be considered investment advice or subject the 

18 intermediary to regulation under the Investment Ad19 visers Act of 1940. 

20 ‘‘ ‘(3) RIGHT TO TERMINATE TRANSACTION.— 

21 An intermediary may review the transaction and ter22 minate the transaction at any time if— 

23 ‘‘ ‘(A) in carrying out the intermediary’s 

24 due diligence under the transaction, the intermstockstill on DSK4VPTVN1PROD with BILLS

11 

•HR 4564 IH

1 mediary determines that termination is appro2 priate; 

3 ‘‘ ‘(B) the intermediary is able to return all 

4 funds provided by potential investors; and 

5 ‘‘ ‘(C) the custodian has not transferred 

6 the offering proceeds to the issuer. 

7 ‘‘ ‘(4) NO PRECLUSION OF OTHER CAPITAL

8 RAISING.—Nothing in this section or section 4(a)(6) 

9 shall be construed as preventing an issuer from rais10 ing capital through securities offerings made in reli11 ance on other exemptions from registration.’. 

12 ‘‘(c) RULEMAKING.—Not later than 120 days after 

13 the date of the enactment of this title, the Securities and 

14 Exchange Commission shall issue such rules as may be 

15 necessary to carry out section 4A of the Securities Act 

16 of 1933. In issuing such rules, the Commission shall con17 sider the costs and benefits of the action. 

18 ‘‘(d) DISQUALIFICATION.—Not later than 120 days 

19 after the date of the enactment of this title, the Securities 

20 and Exchange Commission shall by rule or regulation es21 tablish disqualification provisions under which an issuer 

22 shall not be eligible to utilize the exemption under section 

23 4(a)(6) of the Securities Act of 1933 based on the discipli24 nary history of the issuer or its predecessors, affiliates, 

25 officers, directors, or persons fulfilling similar roles. The 

mstockstill on DSK4VPTVN1PROD with BILLS

12 

•HR 4564 IH

1 Commission shall also establish disqualification provisions 

2 under which an intermediary shall not be eligible to act 

3 as an intermediary in connection with an offering utilizing 

4 the exemption under section 4(a)(6) of the Securities Act 

5 of 1933 based on the disciplinary history of the inter6 mediary or its predecessors, affiliates, officers, directors, 

7 or persons fulfilling similar roles. Such provisions shall be 

8 substantially similar to the disqualification provisions con9 tained in the regulations adopted in accordance with sec10 tion 926 of the Dodd-Frank Wall Street Reform and Con11 sumer Protection Act (15 U.S.C. 77d note). 

12 ‘‘(e) TREATMENT OF CROWDFUNDING INVESTMENT

13 COMPANIES.—Section 3(c) of the Investment Company 

14 Act of 1940 (15 U.S.C. 80a–3(c)) is amended by adding 

15 at the end the following: 

16 ‘‘ ‘(15) Any person substantially all of whose 

17 business is confined to investing in securities pur18 chased in a transaction made in reliance on section 

19 4(a)(6) of the Securities Act of 1933.’. 

20 ‘‘SEC. 302. EXCLUSION OF CROWDFUNDING INVESTORS 

21 FROM SHAREHOLDER CAP. 

22 ‘‘Section 12(g)(5) of the Securities Exchange Act of 

23 1934 (15 U.S.C. 78l(g)(5)) is amended— 

24 ‘‘(1) by striking ‘(5) For the purposes’; and in25 serting the following: 

mstockstill on DSK4VPTVN1PROD with BILLS

13 

•HR 4564 IH

1 ‘‘ ‘(5) DEFINITIONS.— 

2 ‘‘ ‘(A) IN GENERAL.—For the purposes’; 

3 and 

4 ‘‘(2) by adding at the end the following: 

5 ‘‘ ‘(B) EXCLUSION FOR PERSONS HOLDING

6 CERTAIN SECURITIES.—For purposes of this 

7 subsection, securities originally issued in trans8 actions described under section 4(a)(6) of the 

9 Securities Act of 1933 shall neither be deemed 

10 to be nor counted towards the definition of 

11 ‘‘held of record’’.’. 

12 ‘‘SEC. 303. PREEMPTION OF STATE LAW. 

13 ‘‘(a) IN GENERAL.—Section 18(b)(4) of the Securi14 ties Act of 1933 (15 U.S.C. 77r(b)(4)) is amended— 

15 ‘‘(1) by redesignating subparagraphs (C) and 

16 (D) as subparagraphs (D) and (E), respectively; and 

17 ‘‘(2) by inserting after subparagraph (B) the 

18 following: 

19 ‘‘ ‘(C) section 4(a)(6);’. 

20 ‘‘(b) CLARIFICATION OF THE PRESERVATION OF

21 STATE ENFORCEMENT AUTHORITY.— 

22 ‘‘(1) IN GENERAL.—The amendments made by 

23 subsection (a) relate solely to State registration, doc24 umentation, and offering requirements, as described 

25 under section 18(a) of the Securities Act of 1933 

mstockstill on DSK4VPTVN1PROD with BILLS

14 

•HR 4564 IH

1 (15 U.S.C. 77r(a)), and shall have no impact or lim2 itation on other State authority to take enforcement 

3 action with regard to an issuer, intermediary, or any 

4 other person or entity using the exemption from reg5 istration provided by section 4(a)(6) of such Act. 

6 ‘‘(2) CLARIFICATION OF STATE JURISDICTION

7 OVER UNLAWFUL CONDUCT OF INTERMEDIARIES, 

8 ISSUERS, AND CUSTODIANS.—Section 18(c)(1) of the 

9 Securities Act of 1933 is amended by striking ‘with 

10 respect to fraud or deceit, or unlawful conduct by a 

11 broker or dealer, in connection with securities or se12 curities transactions.’ and inserting the following: ‘, 

13 in connection with securities or securities trans14 actions, with respect to— 

15 ‘‘ ‘(A) fraud or deceit; 

16 ‘‘ ‘(B) unlawful conduct by a broker or 

17 dealer; and 

18 ‘‘ ‘(C) with respect to a transaction de19 scribed under section 4(a)(6), unlawful conduct 

20 by an intermediary, issuer, or custodian.’.’’; and 

21 (2) in the table of contents for such Act by 

22 amending the items relating to title III to read as 

23 follows: 

‘‘TITLE III—ENTREPRENEUR ACCESS TO CAPITAL 

‘‘Sec. 301. Crowdfunding exemption. 

mstockstill on DSK4VPTVN1PROD with BILLS

15 

•HR 4564 IH

‘‘Sec. 302. Exclusion of crowdfunding investors from shareholder cap. 

‘‘Sec. 303. Preemption of State law.’’. 

Æ 

mstockstill on DSK4VPTVN1PROD with BILLS