On November 3, 2011, the U.S. House of Representatives
voted overwhelmingly to pass the Entrepreneur Access to Capital Act (H.R.
2930). The bill creates an exemption from the registration requirements of the
Securities Act of 1933, adding a new Section 4(6). This section
provides that an offering of securities is exempt if it meets the following
The bill also creates a new category of participant in
the capital markets called an "intermediary." There is not much detail provided
as to what role an intermediary can play in an offering, but the bill
explicitly exempts them from the broker-dealer registration requirements of the
Securities Exchange Act of 1934. So presumably, an intermediary could act as a
compensated finder and be paid a fee to find investors, though none of this is
spelled out, and much will turn on the SEC's interpretive regulations.
The new Section 4A sets out an additional set of criteria
that must be met in order for an offering to qualify under the new Section 4(6)
exemption. Such criteria include: warning investors of the risks involved in an
investment in a start-up, reporting certain information to the SEC, ensuring
that potential investors demonstrate an understanding of the risks involved,
stating a target offering amount and a deadline to reach such amount, carrying
out background checks on the issuer's principals, and refraining from offering
investment advice. If the offering is carried out by an intermediary, then the
burden of complying with Section 4A lies with the intermediary.
The bill also provides that:
The bill instructs the SEC to issue interpretive
regulations for Section 4A and to issue regulations precluding the use of the
Section 4(6) exemption by issuers, intermediaries, or affiliated persons with a
poor disciplinary history. Presumably these rules will mirror the new "bad
actor" exclusions for Rule 506.
Investors who purchase securities under the crowdfunding
exemption would not count towards the 499 investor limit under the Securities
Exchange Act. In addition, securities issued under Section 4(6) will qualify
as federally covered securities, which means they will be exempt from state
The new exemption is complex and will no doubt keep
securities lawyers busy. In a future post, I'll discuss some of the
implications and unanswered questions revolving around the new crowdfunding
 For those of you who might ask "what happened to the
old Section 4(6)," the Dodd Fank Act had already moved the old Section 4(6) to
Section 4(5), and the old Section 4(5) was eliminated.
 Under the Securities Exchange Act of 1934, a company
with more than 499 investors held of record and more than $10 million in assets
must register their securities with the SEC and become a publicly reporting
 Via federal preemption of state law.
Read more articles by Alexander Davie at Strictly Business, a
business law blog for entrepreneurs, emerging companies, and the investment
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