Equity Crowdfunding Improvement Act of 2014

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Equity Crowdfunding Improvement Act 
of 2014''.

SEC. 2. CROWDFUNDING.

    (a) Repeal of Existing Law.--The CROWDFUND Act is hereby repealed 
and the provisions of law amended by such Act are revived or restored 
as if such Act had not been enacted.
    (b) New Crowdfunding Law.--The Jumpstart Our Business Startups Act 
is amended--
            (1) by inserting after title II the following:

              ``TITLE III--ENTREPRENEUR ACCESS TO CAPITAL

``SEC. 301. CROWDFUNDING EXEMPTION.

    ``(a) In General.--Section 4(a) of the Securities Act of 1933 (15 
U.S.C. 77d(a)(6)) is amended by adding at the end the following:
            ```(6) transactions involving the offer or sale of 
        securities by an issuer, provided that--
                    ```(A) the aggregate amount sold within the 
                previous 12-month period in reliance upon this 
                exemption is--
                            ```(i) $3,000,000, as such amount is 
                        adjusted by the Commission to reflect the 
                        annual change in the Consumer Price Index for 
                        All Urban Consumers published by the Bureau of 
                        Labor Statistics, or less; or
                            ```(ii) if the issuer provides potential 
                        investors with audited financial statements, 
                        $5,000,000, as such amount is adjusted by the 
                        Commission to reflect the annual change in the 
                        Consumer Price Index for All Urban Consumers 
                        published by the Bureau of Labor Statistics, or 
                        less;
                    ```(B) the aggregate amount sold to any investor 
                who is not an accredited investor in reliance on this 
                exemption within the previous 12-month period does not 
                exceed the greater of--
                            ```(i) $5,000, as such amount is adjusted 
                        by the Commission to reflect the annual change 
                        in the Consumer Price Index for All Urban 
                        Consumers published by the Bureau of Labor 
                        Statistics;
                            ```(ii) 10 percent of the investor's annual 
                        income; or
                            ```(iii) 10 percent of the investor's net 
                        worth;
                    ```(C) in the case of a transaction involving an 
                intermediary between the issuer and the investor, such 
                intermediary complies with the requirements under 
                section 4A(a);
                    ```(D) if the aggregate amount sold within the 
                previous 12-month period in reliance upon this 
                exemption is--
                            ```(i) $500,000 or less, the issuer 
                        provides potential investors with financial 
                        statements that have been certified by the 
                        principal executive officer of the issuer to be 
                        true and complete in all material respects; and
                            ```(ii) more than $500,000 and less than 
                        $3,000,000, the issuer provides potential 
                        investors with financial statements that have 
                        been reviewed by a public accountant who is 
                        independent of the issuer, using professional 
                        standards and procedures for such review; and
                    ```(E) at the time such securities are issued, the 
                issuer is a corporation.'.
    ``(b) Requirement on Intermediaries.--The Securities Act of 1933 
(15 U.S.C. 77a et seq.) is amended by inserting after section 4 the 
following:

```SEC. 4A. REQUIREMENTS ON INTERMEDIARIES WITH RESPECT TO CROWDFUNDING 
              TRANSACTIONS.

    ```(a) Requirements on Intermediaries.--For purposes of section 
4(a)(6), a person acting as an intermediary in a transaction involving 
the offer or sale of securities shall comply with the requirements of 
this subsection if the intermediary--
            ```(1) registers with the Commission as--
                    ```(A) a broker; or
                    ```(B) a person acting as an intermediary who does 
                not--
                            ```(i) offer investment advice or 
                        recommendations;
                            ```(ii) explicitly solicit purchases, 
                        sales, or offers to buy particular securities 
                        offered or displayed on its website or portal;
                            ```(iii) directly compensate employees, 
                        agents, or other persons for direct sale of 
                        securities displayed or referenced on its 
                        website or portal; or
                            ```(iv) manage, possess, or otherwise 
                        handle investor funds or securities;
            ```(2) warns investors, including on the intermediary's 
        website used for the offer and sale of such securities, of the 
        speculative nature generally applicable to investments in 
        startups, emerging businesses, and small issuers, including 
        risks in the secondary market related to illiquidity;
            ```(3) warns investors that they are subject to the 
        restriction on sales requirement described under subsection 
        (d);
            ```(4) takes reasonable measures to reduce the risk of 
        fraud with respect to such transaction;
            ```(5) provides the Commission with the intermediary's 
        physical address, website address, and the names of the 
        intermediary, the chief officer of the intermediary (or person 
        fulfilling a similar role), and any employee of the 
        intermediary responsible for the intermediary's direct 
        compliance with the securities laws (as defined under section 3 
        of the Securities Exchange Act of 1934), and updates such 
        information with the Commission within 6 business days of such 
        information changing;
            ```(6) provides the Commission with continuous investor-
        level access to the intermediary's website;
            ```(7) requires each potential investor to answer questions 
        demonstrating--
                    ```(A) an understanding of the level of risk 
                generally applicable to investments in startups, 
                emerging businesses, and small issuers;
                    ```(B) an understanding of the risk of illiquidity; 
                and
                    ```(C) such other areas as the Commission, in 
                consultation with self-regulatory organizations (as 
                defined in section 3 of the Securities Exchange Act of 
                1934), may determine appropriate by rule or regulation;
            ```(8) requires the issuer to state a target offering 
        amount and a deadline to reach the target offering amount and 
        ensure the third party custodian described under paragraph (11) 
        withholds offering proceeds until--
                    ```(A) aggregate capital raised from investors 
                other than the issuer is no less than 100 percent of 
                the target offering amount; and
                    ```(B) the issuer has complied with all 
                requirements under this section;
            ```(9) carries out a background check on the executive 
        officers, directors, and shareholders with 15 percent or more 
        voting control of the issuer (or persons fulfilling similar 
        roles) to ensure such persons would not meet the 
        disqualification provisions adopted in accordance with section 
        926 of the Dodd-Frank Wall Street Reform and Consumer 
        Protection Act;
            ```(10) provides the Commission and potential investors 
        with notice of the offering, not later than the first day 
        securities are offered to potential investors, including--
                    ```(A) the issuer's name, legal status, physical 
                address, and website address;
                    ```(B) the names of the executive officers, 
                directors, and shareholders with 15 percent or more 
                voting control of the issuer (or persons fulfilling 
                similar roles);
                    ```(C) the intended use of the proceeds of the 
                offering; and
                    ```(D) the target offering amount and the deadline 
                to reach the target offering amount;
            ```(11) outsources cash functions to a qualified third 
        party custodian, such as a broker or dealer registered under 
        section 15(b)(1) of the Securities Exchange Act of 1934 or an 
        insured depository institution;
            ```(12) maintains such books and records as the Commission 
        determines appropriate;
            ```(13) makes available on the intermediary's website a 
        method of communication that permits the issuer and investors 
        to communicate with one another;
            ```(14) provides the Commission with a notice upon 
        completion of the offering, which shall include the aggregate 
        offering amount and the number of purchasers; and
            ```(15) does not offer investment advice.
    ```(b) Verification of Investor Information.--For purposes of 
section 4(a), an intermediary may rely on a certification by an 
investor as to--
            ```(1) the investor's status as an accredited investor; and
            ```(2) with respect to an unaccredited investor, the 
        investor's annual income, net worth, and the aggregate amount 
        of securities sold to the investor in reliance on the exemption 
        provided by section 4(a) within the previous 12-month period.
    ```(c) Information Available to States.--The Commission shall make 
the notices described under subsections (a)(10) and (a)(14) and the 
information described under subsection (a)(5) available to the States.
    ```(d) Restriction on Sales.--Newly issued securities purchased in 
a transaction made in reliance on section 4(a)(6) may not be resold by 
any person during the 1-year period beginning on the date of original 
purchase, unless such securities are sold to--
            ```(1) the issuer of such securities; or
            ```(2) an accredited investor.
    ```(e) Requirement for Use of Intermediaries When Selling to 
Unaccredited Investors.--With respect to a transaction described under 
section 4(a)(6), an issuer may only enter into a transaction with an 
unaccredited investor through the use of an intermediary, and any 
resale of a security originally issued in reliance on section 4(a)(6) 
may only be made with an unaccredited investor through the use of an 
intermediary.
    ```(f) Rules of Construction.--
            ```(1) No registration as broker.--With respect to a 
        transaction either made pursuant to section 4(a)(6) or 
        involving the resale of a security originally issued pursuant 
        to section 4(a)(6) and involving an intermediary, such 
        intermediary shall not be required to register as a broker 
        under section 15(a)(1) of the Securities Exchange Act of 1934 
        solely by reason of participation in such transaction.
            ```(2) Right to select transactions.--An intermediary may 
        select in which transactions to serve as an intermediary, and 
        such selection shall not be considered investment advice or 
        subject the intermediary to regulation under the Investment 
        Advisers Act of 1940.
            ```(3) Right to terminate transaction.--An intermediary may 
        review the transaction and terminate the transaction at any 
        time if--
                    ```(A) in carrying out the intermediary's due 
                diligence under the transaction, the intermediary 
                determines that termination is appropriate;
                    ```(B) the intermediary is able to return all funds 
                provided by potential investors; and
                    ```(C) the custodian has not transferred the 
                offering proceeds to the issuer.
            ```(4) No preclusion of other capital raising.--Nothing in 
        this section or section 4(a)(6) shall be construed as 
        preventing an issuer from raising capital through securities 
        offerings made in reliance on other exemptions from 
        registration.'.
    ``(c) Rulemaking.--Not later than 120 days after the date of the 
enactment of this title, the Securities and Exchange Commission shall 
issue such rules as may be necessary to carry out section 4A of the 
Securities Act of 1933. In issuing such rules, the Commission shall 
consider the costs and benefits of the action.
    ``(d) Disqualification.--Not later than 120 days after the date of 
the enactment of this title, the Securities and Exchange Commission 
shall by rule or regulation establish disqualification provisions under 
which an issuer shall not be eligible to utilize the exemption under 
section 4(a)(6) of the Securities Act of 1933 based on the disciplinary 
history of the issuer or its predecessors, affiliates, officers, 
directors, or persons fulfilling similar roles. The Commission shall 
also establish disqualification provisions under which an intermediary 
shall not be eligible to act as an intermediary in connection with an 
offering utilizing the exemption under section 4(a)(6) of the 
Securities Act of 1933 based on the disciplinary history of the 
intermediary or its predecessors, affiliates, officers, directors, or 
persons fulfilling similar roles. Such provisions shall be 
substantially similar to the disqualification provisions contained in 
the regulations adopted in accordance with section 926 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 77d 
note).
    ``(e) Treatment of Crowdfunding Investment Companies.--Section 3(c) 
of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)) is amended 
by adding at the end the following:
            ```(15) Any person substantially all of whose business is 
        confined to investing in securities purchased in a transaction 
        made in reliance on section 4(a)(6) of the Securities Act of 
        1933.'.

``SEC. 302. EXCLUSION OF CROWDFUNDING INVESTORS FROM SHAREHOLDER CAP.

    ``Section 12(g)(5) of the Securities Exchange Act of 1934 (15 
U.S.C. 78l(g)(5)) is amended--
            ``(1) by striking `(5) For the purposes'; and inserting the 
        following:
            ```(5) Definitions.--
                    ```(A) In general.--For the purposes'; and
            ``(2) by adding at the end the following:
                    ```(B) Exclusion for persons holding certain 
                securities.--For purposes of this subsection, 
                securities originally issued in transactions described 
                under section 4(a)(6) of the Securities Act of 1933 
                shall neither be deemed to be nor counted towards the 
                definition of ``held of record''.'.

``SEC. 303. PREEMPTION OF 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(a)(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 the 
        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, intermediary, or 
        any other person or entity using the exemption from 
        registration provided by section 4(a)(6) of such Act.
            ``(2) Clarification of state jurisdiction over unlawful 
        conduct of intermediaries, issuers, and custodians.--Section 
        18(c)(1) of the Securities Act of 1933 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, with respect to--
                    ```(A) fraud or deceit;
                    ```(B) unlawful conduct by a broker or dealer; and
                    ```(C) with respect to a transaction described 
                under section 4(a)(6), unlawful conduct by an 
                intermediary, issuer, or custodian.'.''; and
            (2) in the table of contents for such Act by amending the 
        items relating to title III to read as follows:

              ``TITLE III--ENTREPRENEUR ACCESS TO CAPITAL

``Sec. 301. Crowdfunding exemption.
``Sec. 302. Exclusion of crowdfunding investors from shareholder cap.
``Sec. 303. Preemption of State law.''.

Summary:  Equity Crowdfunding Improvement Act of 2014 - Repeals the CROWDFUND Act. Amends the Jumpstart Our Business Startups Act to exempt from the registration requirements and prohibitions of the Securities Act of 1933 any transactions involving the offer or sale of crowdfunded securities by an issuer if specified requirements are met. (Crowdfunding is a method of capital formation where groups of people pool money, typically composed of small individual contributions, and often via internet platforms, to either invest in a company or support an effort by others to accomplish a specific goal.) Prescribes among these requirements that the aggregate amount sold within the previous 12-month period in reliance upon the crowdfunding exemption be either: (1) $3 million, adjusted for inflation, or less; or (2) $5 million, adjusted for inflation, or less if the issuer provides potential investors with audited financial statements. Requires also that, in the case of a transaction involving an intermediary between the issuer and the investor, that the intermediary comply with certain requirements. Requires as well that if the aggregate amount sold within the previous 12-month period in reliance upon this exemption is: (1) $500,000 or less, the issuer provide potential investors with financial statements issuer-certified to be true and complete in all material respects; or (2) between $500,000 and $3 million, the issuer provide potential investors with financial statements reviewed by a public accountant independent of the issuer. Prohibits the aggregate amount sold to an unaccredited investor within the previous 12-month period in reliance upon the crowdfunding exemption from exceeding either the greater of: (1) $5,000, adjusted for inflation; (2) 10% of the annual income; or (3) 10% of the investor's net worth. Requires finally that the issuer be a corporation at the time such securities are issued. Prescribes requirements governing a person functioning as intermediary between the issuer and the investor. Requires an intermediary to direct the issuer to: (1) state a target offering amount and a deadline to reach it, and (2) ensure that the third party custodian withholds offering proceeds until the aggregate capital raised from other investors is at least 100% of the target offering amount. Requires an intermediary to undertake background checks on the issuer's executive officers, directors, and shareholders with 15% or more voting control.   Requires an issuer to use intermediaries when selling to unaccredited investors.  Permits an intermediary to select the transactions in which it serves as an intermediary.  Amends the Investment Company Act of 1940 to exempt from treatment as an investment company any person substantially all of whose business is confined to investing in securities purchased in crowdfunding investment companies under this Act.  Amends the Securities Act of 1933 to exempt such crowdfunded securities from state regulation of securities offerings; but retains state jurisdiction over the unlawful conduct of intermediaries, issuers, and custodians.