H. Rept. 115-383 - MICRO OFFERING SAFE HARBOR ACT115th Congress (2017-2018)
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115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-383
======================================================================
MICRO OFFERING SAFE HARBOR ACT
_______
November 1, 2017.--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. 2201]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 2201) 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 without amendment
and recommend that the bill do pass.
Purpose and Summary
On April 27, 2017, Representative Tom Emmer introduced H.R.
2201 the ``Micro Offering Safe Harbor Act'', which amends the
Securities Act of 1933 (Securities Act) to exempt certain
micro-offerings from the Act's registration requirements. An
issuer of securities would not violate the Act when making a
non-public securities offering if all of the following
requirements are met: (1) 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; (2) 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 (3) the aggregate amount of all securities
sold by the issuer does not exceed $500,000 over a 12-month
period.
Background and Need for Legislation
The Micro Offering Safe Harbor Act amends the Securities
Act to exempt certain securities offerings from the Act's
registration requirements. 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 commonly the result of the
disproportionate burden that securities regulations--written
for large public companies--place on small companies when they
seek to go public to raise equity capital.
A large portion of startups rely on small, nonpublic
offerings (also known as ``private placements''), such as a
``friends and family'' round, to raise initial, early-stage,
seed capital. However, the Securities Act does not clearly
define what constitutes a public offering, or conversely, a
nonpublic offering, which then makes it easy for early-stage
companies to unintentionally run afoul of the Act when it seeks
to offer securities to potential investors in a private
placement.
Since the enactment of the federal securities laws 1933,
``transactions by an issuer not involving any public offering''
have been exempt. To address the uncertainty such language
imposes on early-stage companies, the Micro Offering Safe
Harbor Act finally defines the ``nonpublic offering'' exemption
under the Securities Act and provides small businesses with
needed clarity and confidence to know that their offering is
not a Securities Act violation.
As an example, H.R. 2201 could allow the owner of a local
restaurant chain or a start-up business to make a presentation
to 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 asking friends or family for money, which
can be time consuming, and to completing a private offering
under Securities and Exchange Commission (SEC) Regulation D,
which can be costly for a small business.
H.R. 2201 does not remove or inhibit either the SEC or the
Department of Justice's authority to prosecute securities
fraud. With anti-fraud protections still in place, the
legislation appropriately scales federal rules and regulatory
compliance costs for small businesses and provides another
practical option for entrepreneurs to raise the capital
necessary to start or grow their business. Under H.R. 2201,
small private companies will not have to incur formidable legal
costs and contend with regulatory uncertainty, as the SEC will
not have to take any action to authorize a micro-offering.
Hearings
The Committee on Financial Services held a hearing
examining matters relating to H.R. 2201 on March 22, 2017,
April 26, 2017, and July 18, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
October 11, 2017 and October 12, 2017, and ordered H.R. 2201 to
be reported favorably to the House without amendment by a
recorded vote of 34 yeas to 26 nays (Record vote no. FC-92), a
quorum being present.
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
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House without amendment. The
motion was agreed to by a recorded vote of 34 yeas to 26 nays
(Record vote no. FC-92), a quorum being present.
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. 2201
will allow small businesses to access capital needed to grow by
amending the Securities Act of 1933 to clarify what constitutes
a ``nonpublic 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 nonpublic 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.
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, October 30, 2017.
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. 2201, 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,
Director.
Enclosure.
H.R. 2201--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 agency. Some transactions are
exempt from this prohibition. H.R. 2201 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. 2201, CBO expects only a relatively small number
of securities transactions would be covered under the expanded
exemption that are not currently covered by other existing
exemptions. As a result, and on the basis of information from
the SEC, CBO estimates that implementing H.R. 2201 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 appropriation actions
consistent with that authority.
Enacting H.R. 2201 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
CBO estimates that enacting H.R. 2201 would not increase
net direct spending or on-budget deficits in any of the four
consecutive 10-year periods beginning in 2028.
H.R. 2201 would preempt state laws that govern state-level
registration of security offerings by exempting 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. 2201 contains no private-sector mandates as defined in
UMRA.
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Logan Smith (for intergovernmental
mandates). The estimate was approved by H. Samuel Papenfuss,
Deputy Assistant Director for Budget Analysis.
Federal Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
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
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This Section cites H.R. 2201 as the ``Micro Offering Safe
Harbor Act.''
Section 2. Exemptions for micro-offerings
This section amends Section 4 of the Securities Act of 1933
to clarify the exemptions from federal securities laws for
nonpublic offerings. Specifically, small businesses are exempt
if they meet all of the following requirements: each investor
has a substantive pre-existing relationship with an officer,
director, or shareholder of the issuer; there are 35 or fewer
purchasers of securities from the issuer that are sold in
reliance on the applicable exemption over a 12-month period;
and the amount of securities sold by the issuer does not exceed
$500,000 over a 12-month period. 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):
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):
SECURITIES ACT OF 1933
* * * * * * *
TITLE I--
* * * * * * *
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;
(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.
(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
advertising.--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, dealer, or agent that shall be paid or
given, directly or indirectly, 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.
(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.--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:
(1) 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.
(2) 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.
(3) 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.
* * * * * * *
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 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
offerings.--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; [or]
(G) section 4(a)(7)[.]; or
(H) section 4(a)(8).
(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.
(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
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)(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.
* * * * * * *
MINORITY VIEWS
H.R. 2201, the so-called ``Micro-Offering Safe Harbor Act
of 2017'' would put investors at risk by allowing companies to
sell unregistered securities without important guardrails that
normally apply to such transactions. Specifically, the bill
eliminates all of the existing investor protections for
unregistered securities offerings, provided that: (1) the
securities are sold to investors with a substantive pre-
existing relationship with individuals affiliated with the
company; (2) there are 35 or fewer purchasers of the offered
securities; and (3) the company has not sold more than $500,000
of securities in the year prior to the transaction.
Federal securities laws generally prohibit a company from
selling its securities unless it either registers them with the
Securities and Exchange Commission (SEC), or qualifies for an
exemption. Because unregistered offerings are subject to
reduced disclosure requirements and often involve illiquid
securities, these exemptions include protections intended to
mitigate risks to investors. For example, the SEC's Regulation
Crowdfunding and Regulation A permit small businesses to raise
capital via unregistered securities offerings, provided that
the businesses supply investors with important disclosures
about the offerings. Both exemptions also include limitations
on the dollar amount of securities an individual investor can
purchase. Similarly, Regulation D exempts certain offerings
from registration with the SEC, but imposes limitations on
solicitation and the financial sophistication and risk-
tolerance of purchasers. H.R. 2201 leaves out the investor
protections characteristic of these exemptions.
One particularly troubling aspect of H.R. 2201 is that
unregistered securities purchased under the exemption would not
be characterized as ``restricted,'' and could thus be sold off
to other investors immediately. As history demonstrates, the
failure to restrict resale of unregistered securities could
expose investors to abusive ``pump and dump'' schemes.
Previously, Rule 504 of Regulation D permitted a company to
generally solicit and sell up to $1 million in unregistered
securities without any restrictions on resale. In 1999,
however, the SEC revised Rule 504 to prohibit general
solicitation and establish a holding period for those
securities unless the offering meets certain state law
requirements. The revisions followed SEC findings that ``the
freely tradable nature of these securities may have facilitated
some later fraudulent secondary transactions in the over-the-
counter markets for securities of `microcap' companies.''
Additionally, state securities regulators, who often have
primary regulatory responsibility over small, local securities
offerings, have raised serious concerns with H.R. 2201. For
example, the North American Securities Administrators
Association stated that the bill's failure to disqualify ``bad
actors'' would allow investors to be sold private securities by
``persons having been convicted of crimes or subject to one or
more previous state enforcement actions, without any disclosure
to the investor, and without any notice to state or federal
regulators.''
Democrats do not support creating statutory exemptions that
leave investors vulnerable to fraud and repeated exploitation
by bad actors.
For these reasons, we oppose H.R. 2201.
Maxine Waters.
Joyce Beatty.
Ed Perlmutter.
Bill Foster.
Keith Ellison.
Wm. Lacy Clay.
Ruben J. Kihuen.
David Scott.
Michael E. Capuano.
Carolyn B. Maloney.
Gregory W. Meeks.
Denny Heck.
Nydia M. Velazquez.
Stephen F. Lynch.
Daniel T. Kildee.
Gwen Moore.
Emanuel Cleaver.
Juan Vargas.
Al Green.
Vicente Gonzalez.
[all]