15 U.S.C. § 77d–1 — Requirements with respect to certain small transactions

submitted 93 years ago by Pub. L. 112-106 to r/title-15-COMMERCE-AND-TRADE · 2,049 words · no verdicts yet

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This section sets rules for crowdfunded securities sold through brokers or funding portals. Those middlemen must register, educate investors, and screen issuers for fraud. Issuers must disclose their finances and plans, and misled buyers can sue.

(a) Requirements on intermediaries Anyone acting as a go-between in a small securities sale done under section 77d(6) must: (1) Register with the SEC as a broker, or as a funding portal (as defined in section 78c(a)(80)); (2) Register with the applicable self-regulatory organization (as defined in section 78c(a)(26)); (3) Give investors the disclosures and investor-education materials the SEC requires by rule; (4) Make sure each investor reviews investor-education material set by SEC standards, states clearly that the investor understands they could lose their whole investment, and answers questions showing they understand the risk level of investing in startups and small companies, the risk that they might not be able to sell the investment quickly (illiquidity), and any other matters the SEC requires; (5) Take steps the SEC requires to cut fraud risk, including running a background and securities-enforcement history check on every officer, director, and anyone who owns more than 20 percent of an issuer whose securities it offers; (6) At least 21 days before the first sale to any investor (or another period the SEC sets), share with the SEC and potential investors any information the issuer must provide under subsection (b); (7) Make sure the issuer gets none of the money raised until the total reaches the target offering amount, and let investors cancel their commitment to invest, following SEC rules; (8) Make the efforts the SEC requires to ensure no investor buys, across all issuers in a 12-month period, more crowdfunded securities than the investment limits in section 77d(6)(B) allow; (9) Take steps the SEC requires to protect investors' private information; (10) Never pay promoters, finders, or lead generators for giving it a potential investor's personal identifying information; (11) Bar its own directors, officers, or partners from having any financial stake in an issuer that uses its services; (12) Meet any other requirement the SEC sets to protect investors and serve the public interest. (b) Requirements for issuers To sell securities this way, an issuer must: (1) File with the SEC, and give investors, potential investors, and the broker or funding portal: its name, legal status, address, and website; the names of its directors, officers, and anyone owning more than 20 percent of its shares; a description of its business and business plan; its financial condition — if the offering (combined with all its section 77d(6) offerings in the past 12 months) targets $100,000 or less, its recent tax returns and financial statements certified true by its top executive; if it targets more than $100,000 but not more than $500,000, financial statements reviewed by an independent accountant; if it targets more than $500,000 (or a higher amount the SEC sets), audited financial statements; what the offering's proceeds will be used for; the target offering amount, the deadline to reach it, and regular progress updates; the price to the public or how the price will be set, with investors getting the final price in writing and a real chance to back out before the sale closes; a description of its ownership structure, including the terms of the securities being sold and every other class of security, how the rights of the offered securities could be diluted or limited by other classes, the name and stake of every shareholder who owns more than 20 percent of any class, how the securities are being valued now and might be valued later, and the risks of being a minority owner — including future stock sales, a sale of the company, or deals with related parties; and any other information the SEC requires to protect investors and the public interest. (2) Not advertise the offering's terms, except for notices pointing investors to the funding portal or broker; (3) Not pay anyone to promote the offering through the broker's or funding portal's communication channels unless that person clearly discloses the payment every time, as SEC rules require; (4) File with the SEC, and give investors, yearly reports on its results and finances, as SEC rules set, unless an SEC exception or end date applies; (5) Meet any other requirement the SEC sets to protect investors and serve the public interest. (c) Liability for material misstatements and omissions (1) A person who buys a security in a crowdfunded offering can sue the issuer to get their money back with interest (minus any income already received), by returning the security, or to recover damages if they no longer own it. This kind of lawsuit follows the same rules as under sections 77 l (b) and 77m, as though the claim arose under section 77 l (a)(2). (2) The issuer is liable if it used interstate mail or commerce to make a false statement of a material fact, or left out a material fact needed to keep its statements from being misleading — as long as the buyer did not know about the false statement or omission — and the issuer cannot prove it used reasonable care and still could not have known about it. (3) For this part, "issuer" also means the issuer's directors, partners, top executive and financial officers, controller, or anyone doing those jobs, plus anyone who offered or sold the security. (d) Information available to States The SEC — itself or through the broker or funding portal — must share the information from subsection (b), plus anything else it decides is appropriate, with the securities regulator of every state, territory, and the District of Columbia. (e) Restrictions on sales (1) A buyer cannot resell crowdfunded securities for one year after buying them, unless the sale is: (A) back to the issuer; (B) to an accredited investor; (C) part of an SEC-registered offering; or (D) to a family member or in connection with the buyer's death, divorce, or similar circumstance the SEC allows. (2) Any other limits the SEC sets by rule also apply. (f) Applicability Section 77d(6) crowdfunding does not apply to an issuer that: (1) is not organized under U.S. state, territory, or D.C. law; (2) already has to file reports under section 78m or 78 o (d); (3) is an investment company under section 80a–3, or is excluded from that definition under section 80a–3(b) or (c); or (4) the SEC decides by rule should not qualify. (g) Rule of construction Nothing here stops an issuer from raising money through other methods besides crowdfunding under section 77d(6). (h) Certain calculations (1) The SEC must update the dollar amounts in section 77d(6) and in subsection (b) at least every five years, based on changes in the Consumer Price Index, and announce updates in the Federal Register. (2) A person's income and net worth under section 77d(6)(B) are calculated using the same SEC rules that define an accredited investor's income and net worth.

the actual law source: uscode.house.gov ↗public domain

(a) Requirements on intermediaries

A person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others pursuant to section 77d(6) 1 of this title shall—

(1)

(A)

a broker; or

(B)

a funding portal (as defined in section 78c(a)(80) 2 of this title);

(2)

(3)

provide such disclosures, including disclosures related to risks and other investor education materials, as the Commission shall, by rule, determine appropriate;

(4)

ensure that each investor—

(A)

reviews investor-education information, in accordance with standards established by the Commission, by rule;

(B)

positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and

(C)

answers questions demonstrating—

(i)

an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;

(ii)

an understanding of the risk of illiquidity; and

(iii)

an understanding of such other matters as the Commission determines appropriate, by rule;

(5)

take such measures to reduce the risk of fraud with respect to such transactions, as established by the Commission, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person;

(6)

not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the Commission may establish), make available to the Commission and to potential investors any information provided by the issuer pursuant to subsection (b);

(7)

ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the Commission shall, by rule, determine appropriate;

(8)

make such efforts as the Commission determines appropriate, by rule, to ensure that no investor in a 12-month period has purchased securities offered pursuant to section 77d(6) ¹ of this title that, in the aggregate, from all issuers, exceed the investment limits set forth in section 77d(6)(B) ¹ of this title;

(9)

take such steps to protect the privacy of information collected from investors as the Commission shall, by rule, determine appropriate;

(10)

not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor;

(11)

prohibit its directors, officers, or partners (or any person occupying a similar status or performing a similar function) from having any financial interest in an issuer using its services; and

(12)

meet such other requirements as the Commission may, by rule, prescribe, for the protection of investors and in the public interest.

(b) Requirements for issuers

For purposes of section 77d(6) ¹ of this title, an issuer who offers or sells securities shall—

(1)

file with the Commission and provide to investors and the relevant broker or funding portal, and make available to potential investors—

(A)

the name, legal status, physical address, and website address of the issuer;

(B)

the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer;

(C)

a description of the business of the issuer and the anticipated business plan of the issuer;

(D)

a description of the financial condition of the issuer, including, for offerings that, together with all other offerings of the issuer under section 77d(6) ¹ of this title within the preceding 12-month period, have, in the aggregate, target offering amounts of—

(i)

$100,000 or less—

(I)

the income tax returns filed by the issuer for the most recently completed year (if any); and

(II)

financial statements of the issuer, which shall be certified by the principal executive officer of the issuer to be true and complete in all material respects;

(ii)

more than $100,000, but not more than $500,000, financial statements reviewed by a public accountant who is independent of the issuer, using professional standards and procedures for such review or standards and procedures established by the Commission, by rule, for such purpose; and

(iii)

more than $500,000 (or such other amount as the Commission may establish, by rule), audited financial statements;

(E)

a description of the stated purpose and intended use of the proceeds of the offering sought by the issuer with respect to the target offering amount;

(F)

the target offering amount, the deadline to reach the target offering amount, and regular updates regarding the progress of the issuer in meeting the target offering amount;

(G)

the price to the public of the securities or the method for determining the price, provided that, prior to sale, each investor shall be provided in writing the final price and all required disclosures, with a reasonable opportunity to rescind the commitment to purchase the securities;

(H)

a description of the ownership and capital structure of the issuer, including—

(i)

terms of the securities of the issuer being offered and each other class of security of the issuer, including how such terms may be modified, and a summary of the differences between such securities, including how the rights of the securities being offered may be materially limited, diluted, or qualified by the rights of any other class of security of the issuer;

(ii)

a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered;

(iii)

the name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer;

(iv)

how the securities being offered are being valued, and examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions; and

(v)

the risks to purchasers of the securities relating to minority ownership in the issuer, the risks associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions with related parties; and

(I)

such other information as the Commission may, by rule, prescribe, for the protection of investors and in the public interest;

(2)

not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker;

(3)

not compensate or commit to compensate, directly or indirectly, any person to promote its offerings through communication channels provided by a broker or funding portal, without taking such steps as the Commission shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication;

(4)

not less than annually, file with the Commission and provide to investors reports of the results of operations and financial statements of the issuer, as the Commission shall, by rule, determine appropriate, subject to such exceptions and termination dates as the Commission may establish, by rule; and

(5)

comply with such other requirements as the Commission may, by rule, prescribe, for the protection of investors and in the public interest.

(1) Actions authorized

(A) In general

Subject to paragraph (2), a person who purchases a security in a transaction exempted by the provisions of section 77d(6) ¹ of this title may bring an action against an issuer described in paragraph (2), either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if such person no longer owns the security.

(B) Liability

An action brought under this paragraph shall be subject to the provisions of section 77l(b) of this title and section 77m of this title, as if the liability were created under section 77l(a)(2) of this title.

(2) Applicability

An issuer shall be liable in an action under paragraph (1), if the issuer—

(A)

by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by any means of any written or oral communication, in the offering or sale of a security in a transaction exempted by the provisions of section 77d(6) ¹ of this title, makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, provided that the purchaser did not know of such untruth or omission; and

(B)

does not sustain the burden of proof that such issuer did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.

(3) Definition

As used in this subsection, the term “issuer” includes any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officer, and controller or principal accounting officer of the issuer (and any person occupying a similar status or performing a similar function) that offers or sells a security in a transaction exempted by the provisions of section 77d(6) ¹ of this title, and any person who offers or sells the security in such offering.

(d) Information available to States

The Commission shall make, or shall cause to be made by the relevant broker or funding portal, the information described in subsection (b) and such other information as the Commission, by rule, determines appropriate, available to the securities commission (or any agency or office performing like functions) of each State and territory of the United States and the District of Columbia.

(e) Restrictions on sales

Securities issued pursuant to a transaction described in section 77d(6) ¹ of this title—

(1)

may not be transferred by the purchaser of such securities during the 1-year period beginning on the date of purchase, unless such securities are transferred—

(A)

to the issuer of the securities;

(B)

to an accredited investor;

(C)

as part of an offering registered with the Commission; or

(D)

to a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance, in the discretion of the Commission; and

(2)

shall be subject to such other limitations as the Commission shall, by rule, establish.

(f) Applicability

Section 77d(6) ¹ of this title shall not apply to transactions involving the offer or sale of securities by any issuer that—

(1)

is not organized under and subject to the laws of a State or territory of the United States or the District of Columbia;

(2)

is subject to the requirement to file reports pursuant to section 78m of this title or section 78o(d) of this title;

(3)

is an investment company, as defined in section 80a–3 of this title, or is excluded from the definition of investment company by section 80a–3(b) of this title or section 80a–3(c) of this title; or

(4)

the Commission, by rule or regulation, determines appropriate.

(g) Rule of construction

Nothing in this section or section 77d(6) ¹ of this title shall be construed as preventing an issuer from raising capital through methods not described under section 77d(6) ¹ of this title.

(h) Certain calculations

(1) Dollar amounts

Dollar amounts in section 77d(6) ¹ of this title and subsection (b) of this section shall be adjusted by the Commission not less frequently than once every 5 years, by notice published in the Federal Register to reflect any change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics.

(2) Income and net worth

The income and net worth of a natural person under section 77d(6)(B) ¹ of this title shall be calculated in accordance with any rules of the Commission under this subchapter regarding the calculation of the income and net worth, respectively, of an accredited investor.

Source credit: (May 27, 1933, ch. 38, title I, § 4A, as added Pub. L. 112–106, title III, § 302(b), Apr. 5, 2012, 126 Stat. 315.)

history & why it existsrecord from the source credit

1933Enacted · Pub. L. 112-106 · 126 Stat. 315

A history note hasn’t been published yet. The record shows enactment by Pub. L. 112-106 on 1933-05-27.

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