By Cydney Posner
Here's the Senate's analog to the House crowdfunding bill, H.R. 2930, which passed the House last week (see my article of 11/7/11). This bill, S. 1791, the "Democratizing Access to Capital Act of 2011," was introduced in the first week of November by Senator Scott Brown. The bill was referred to committee.
S. 1791 amends Section 4 of the Securities Act to exempt transactions involving the issuance, through a "crowdfunding intermediary," of securities in an aggregate annual amount of $1 million or less, with individual investments in the securities limited to an aggregate annual amount not to exceed $1,000. (The House bill has a $2 million cap if audited financials are provided and allows use of the exemption without an intermediary.) As conditions to the exemption, the issuer must disclose to investors all rights of investors (including complete information about the risks, obligations, benefits, history and costs of the offering), be an incorporated entity under State law and file prescribed notices with the SEC. The SEC would be required to adopt disqualification provisions. The securities issued would be "restricted securities" subject to a one-year holding period. Holders purchasing securities under this exemption would not be considered "holders" for purposes of the 500-shareholder threshold to register under the Exchange Act, and these securities would be treated as "covered securities " under NSMIA (preempting state law). A "crowdfunding intermediary" is defined as an intermediary that is open to and accessible to the general public, provides public communication portals for investors and potential investors, warns investors of resale restrictions and the speculative nature generally applicable to investments in startups (including liquidity risks in the secondary market), takes reasonable measures to reduce the risk of fraud, prohibits its employees from investing in the offerings or having any financial interest in the issuers, does not offer investment advice or recommendations, questions investors on their investing competence, withholds capital until at least 60% of the target amount of capital is raised, performs a background check on the issuer's principals, outsources cash management functions, maintains proper books and records, defines and makes available the process for raising and resolving a complaint, and provides the SEC with notice of the offering, specific information and access to its website. Crowdfunding intermediaries would not be considered "brokers" or "dealers."