[Federal Register Volume 78, Number 214 (Tuesday, November 5, 2013)]
[Proposed Rules]
[Pages 66427-66602]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-25355]



[[Page 66427]]

Vol. 78

Tuesday,

No. 214

November 5, 2013

Part II





Securities and Exchange Commission





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17 CFR Parts 200, 227, 232 et al.





Crowdfunding; Proposed Rule

Federal Register / Vol. 78 , No. 214 / Tuesday, November 5, 2013 / 
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 227, 232, 239, 240 and 249

[Release Nos. 33-9470; 34-70741; File No. S7-09-13]
RIN 3235-AL37


Crowdfunding

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Securities and Exchange Commission is proposing for 
comment new Regulation Crowdfunding under the Securities Act of 1933 
and the Securities Exchange Act of 1934 to implement the requirements 
of Title III of the Jumpstart Our Business Startups Act. Regulation 
Crowdfunding would prescribe rules governing the offer and sale of 
securities under new Section 4(a)(6) of the Securities Act of 1933. The 
proposal also would provide a framework for the regulation of 
registered funding portals and brokers that issuers are required to use 
as intermediaries in the offer and sale of securities in reliance on 
Section 4(a)(6). In addition, the proposal would exempt securities sold 
pursuant to Section 4(a)(6) from the registration requirements of 
Section 12(g) of the Securities Exchange Act of 1934.

DATES: Comments should be received on or before February 3, 2014.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-09-13 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-09-13. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://sec.gov/rules/proposed.shtml). Comments also 
are available for Web site viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE., Washington, DC 20549, on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
All comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you would like to make publicly available.

FOR FURTHER INFORMATION CONTACT: With regard to requirements for 
issuers, Sebastian Gomez Abero or Jessica Dickerson, Division of 
Corporation Finance, at (202) 551-3500, and with regard to requirements 
for intermediaries, Joseph Furey, Joanne Rutkowski, Leila Bham, Timothy 
White or Carla Carriveau, Division of Trading and Markets, at (202) 
551-5550, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction and Background
    A. Overview of Crowdfunding
    B. Title III of the JOBS Act
    C. Approach to Proposed Rules
II. Discussion of Proposed Regulation Crowdfunding
    A. Crowdfunding Exemption
    1. Limitation on Capital Raised
    2. Investment Limitation
    3. Transaction Conducted Through an Intermediary
    4. Exclusion of Certain Issuers From Eligibility Under Section 
4(a)(6)
    B. Requirements on Issuers
    1. Disclosure Requirements
    2. Ongoing Reporting Requirements
    3. Form C and Filing Requirements
    4. Prohibition on Advertising Terms of the Offering
    5. Compensation of Persons Promoting the Offering
    6. Other Issuer Requirements
    C. Requirements on Intermediaries
    1. Brokers and Funding Portals
    2. Requirements and Prohibitions
    3. Measures To Reduce Risk of Fraud
    4. Account Opening
    5. Requirements With Respect to Transactions
    6. Completion of Offerings, Cancellations and Reconfirmations
    7. Payments to Third Parties
    D. Additional Requirements on Funding Portals
    1. Registration Requirement
    2. Exemption From Broker-Dealer Registration
    3. Safe Harbor for Certain Activities
    4. Compliance
    5. Records To Be Created and Maintained by Funding Portals
    E. Miscellaneous Provisions
    1. Insignificant Deviations From Regulation Crowdfunding
    2. Restrictions on Resales
    3. Information Available to States
    4. Exemption From Section 12(g)
    5. Scope of Statutory Liability
    6. Disqualification
    F. General Request for Comment
III. Economic Analysis
    A. Economic Baseline
    1. Existing Funding Sources Available to Startups and Small 
Businesses
    2. Current Sources of Funding for Startups and Small Businesses 
That Could Be Substitutes or Complements to Crowdfunding
    3. Survival Rates for Startups and Small Businesses
    4. Market Participants
    B. Analysis of Proposed Rules
    1. Broad Economic Considerations
    2. Crowdfunding Exemption
    3. Issuer Requirements
    4. Intermediary Requirements
    5. Additional Funding Portal Requirements
    6. Insignificant Deviations
    7. Relationship With State Law
    8. Exemption From Section 12(g)
    9. Disqualification
    C. Request for Comment
IV. Paperwork Reduction Act
    A. Background
    B. Estimate of Issuers and Intermediaries
    C. Estimate of Burdens
    D. Collections of Information Are Mandatory
    E. Confidentiality
    F. Retention Period of Recordkeeping Requirements
    G. Request for Comment
V. Small Business Regulatory Enforcement Fairness Act
VI. Initial Regulatory Flexibility Act Analysis
    A. Reasons for the Proposed Actions
    B. Objectives
    C. Small Entities Subject to the Proposed Rules
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
    1. Issuers
    2. Intermediaries
    G. Request for Comment
VII. Statutory Authority and Text of Proposed Regulation
Exhibit A

I. Introduction and Background

A. Overview of Crowdfunding

    Crowdfunding is a new and evolving method to raise money using the 
Internet. Crowdfunding serves as an alternative source of capital to 
support a wide range of ideas and ventures. An entity or individual 
raising funds through crowdfunding typically seeks small individual 
contributions from a large number of people.\1\ A

[[Page 66429]]

crowdfunding campaign generally has a specified target amount for funds 
to be raised, or goal, and an identified use of those funds. 
Individuals interested in the crowdfunding campaign--members of the 
``crowd''--may share information about the project, cause, idea or 
business with each other and use the information to decide whether or 
not to fund the campaign based on the collective ``wisdom of the 
crowd.'' \2\ Crowdfunding has been used to fund, for example, artistic 
endeavors, such as films and music recordings, where contributions or 
donations are rewarded with a token of value related to the project 
(e.g., a person contributing to a film's production budget is rewarded 
with tickets to view the film and is identified in the film's credits) 
or where contributions reflect the pre-purchase of a finished product 
(e.g., a music album). A number of entities operate Web sites that 
facilitate crowdfunding in its current form,\3\ with some Web sites 
specializing in certain industries, such as computer-based gaming, 
music and the arts, and other Web sites focusing on particular types of 
entrepreneurs.\4\
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    \1\ See, e.g., C. Steven Bradford, Crowdfunding and the Federal 
Securities Laws, 2012 Colum. Bus. L. Rev. 1, 10 (2012) 
(``Bradford''). Crowdfunding has some similarities to 
``crowdsourcing,'' which is the concept that ``the power of the many 
can be leveraged to accomplish feats that were once the province of 
the specialized few.'' See Jeff Howe, The Rise of Crowdsourcing, 
Wired (Jun. 2006) (``Howe''). Crowdsourcing is an approach for 
problem solving that employs the ``wisdom of crowds,'' where ``the 
very success of a solution is dependent on its emergence from a 
large body of solvers.'' Daren C. Brabham, Crowdsourcing as a Model 
for Problem Solving, 14 Convergence 75, 79-80 (2008) (``Brabham'').
    \2\ See Stephenson Letter; Richard Waters, Startups seek the 
`wisdom of crowds,' Financial Times, Apr. 3, 2012, available at 
http://www.ft.com/intl/cms/s/0/c1f1695c-7da8-11e1-9adc-00144feab49a.html#axzz2b7QxIH5L (``[T]he backers of [crowdfunding] 
argue that the hard work of making investment decisions--filtering 
out the best investments and limiting fraud--can be solved by 
tapping the `wisdom of crowds' over the internet.'').
    \3\ Examples of current crowdfunding Web sites include: 
www.indiegogo.com, www.kickstarter.com, www.kiva.com and 
www.rockethub.com.
    \4\ See Bradford, note 1 at 12-13 (citing ``Unbound: Books Are 
Now in Your Hands'' (http://unbound.co.uk/), specializing in book 
publishing, ``My Major Company'' (http://www.mymajorcompany.com/), 
specializing in music, ``Spot.us: Community-funded Reporting'' 
(http://spot.us/), specializing in journalism, and ``Heifer 
International'' (http://www.heifer.org/) specializing in agriculture 
and ranching). See also Liz Gannes, Crowdfunding for a Cause: 
Nonprofits Can Now Hold Fundraisers on Crowdtilt, AllThingsD (Nov. 
21, 2012), available at http://allthingsd.com/20121121/crowdfunding-for-a-cause-non-profits-can-now-hold-fundraisers-on-crowdtilt/ 
(describing the use of crowdfunding for charitable purposes).
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    The Jumpstart Our Business Startups Act (the ``JOBS Act''),\5\ 
enacted on April 5, 2012, establishes the foundation for a regulatory 
structure for startups and small businesses to raise capital through 
securities offerings using the Internet through crowdfunding.\6\ The 
crowdfunding provisions of the JOBS Act were designed to help provide 
startups and small businesses with capital by making relatively low 
dollar offerings of securities less costly.\7\ They also permit 
Internet-based platforms to facilitate the offer and sale of securities 
without having to register with the Commission as brokers.
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    \5\ Public Law 112-106, 126 Stat. 306 (2012).
    \6\ To facilitate public input on JOBS Act initiatives, the 
Commission solicited comment on each title of the JOBS Act through 
its Web site at http://www.sec.gov/spotlight/jobsactcomments.shtml. 
The public comments we received on Title III are available on our 
Web site at http://www.sec.gov/comments/jobs-title-iii/jobs-title-iii.shtml. Exhibit A of the release includes a citation key to the 
comment letters the Commission received on Title III.
    \7\ See, e.g., 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012) 
(statement of Sen. Carl Levin) (``Right now, the rules generally 
prohibit a company from raising very small amounts from ordinary 
investors without significant costs.''); 157 Cong. Rec. S8458-02 
(daily ed. Dec. 8, 2011) (statement of Sen. Jeff Merkley) (``Low-
dollar investments from ordinary Americans may help fill the void, 
providing a new avenue of funding to the small businesses that are 
the engine of job creation. The CROWDFUND Act would provide startup 
companies and other small businesses with a new way to raise capital 
from ordinary investors in a more transparent and regulated 
marketplace.''); 157 Cong. Rec. H7295-01 (daily ed. Nov. 3, 2011) 
(statement of Rep. Patrick McHenry) (``[H]igh net worth individuals 
can invest in businesses before the average family can. And that 
small business is limited on the amount of equity stakes they can 
provide investors and limited in the number of investors they can 
get. So, clearly, something has to be done to open these capital 
markets to the average investor[.]'').
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    In the United States, crowdfunding in its current form generally 
has not involved the offer of a share in any financial returns or 
profits that the fundraiser may expect to generate from business 
activities financed through crowdfunding.\8\ Such a profit or revenue-
sharing model--sometimes referred to as the ``equity model'' of 
crowdfunding \9\--could trigger the application of the federal 
securities laws because it likely would involve the offer and sale of a 
security.\10\ Under the Securities Act of 1933 (``Securities Act''), 
the offer and sale of securities is required to be registered unless an 
exemption is available. At least one commenter has stated that 
registered offerings are not feasible for raising smaller amounts of 
capital, as is done in a typical crowdfunding transaction, because of 
the costs of conducting a registered offering and the resulting ongoing 
reporting obligations under the Securities Exchange Act of 1934 
(``Exchange Act'') that may arise as a result of the offering.\11\ 
Limitations under existing regulations, including restrictions on 
general solicitation and general advertising and purchaser 
qualification requirements, have made private placement exemptions 
generally unavailable for crowdfunding transactions, which are intended 
to be made to a large number of potential investors and not limited to 
investors that meet specific qualifications.\12\
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    \8\ See Bradford, note 1; Jenna Wortham, Start-Ups Look to the 
Crowd, N.Y. Times at B1 (Apr. 30, 2012); Joan MacLeod Heminway and 
Shelden Ryan Hoffman, Proceed At Your Peril: Crowdfunding and the 
Securities Act of 1933, 78 Tenn. L. Rev. 879 (2011); Thomas Lee 
Hazen, Crowdfunding or Fraudfunding? Social Networks and the 
Securities Laws--Why the Specially Tailored Exemption Must be 
Conditioned on Meaningful Disclosure, 90 N.C.L. Rev. 1735 (2012) 
(``Hazen''); C. Steven Bradford, The New Federal Crowdfunding 
Exemption: Promise Unfulfilled, 40 Sec. Reg. L.J. 1 (2012).
    \9\ See Bradford, note 1 at 33.
    \10\ See Securities Act Section 2(a)(1) and Exchange Act Section 
3(a)(10) (setting forth the definition of a ``security'' under the 
Securities Act and the Exchange Act, respectively). See, e.g., Reves 
v. Ernst & Young, 494 U.S. 56 (1990) (outlining the requirements for 
a note to be considered a security); SEC v. W.J. Howey Co., 328 U.S. 
293 (1946) (setting forth the definition of an investment contract).
    \11\ See Bradford, note 1 at 42.
    \12\ But see Eliminating the Prohibition Against General 
Solicitation and General Advertising in Rule 506 and Rule 144A 
Offerings, Release No. 33-9415 (July 10, 2013) [78 FR 44771 (July 
24, 2013)] (``General Solicitation Adopting Release'') (adopting 
rules to implement Title II of the JOBS Act). Title II of the JOBS 
Act directed the Commission to amend Rule 506 of Regulation D to 
permit general solicitation or general advertising in offerings made 
under Rule 506, provided that all purchasers of the securities are 
accredited investors. Accredited investors include natural persons 
who meet certain income or net worth thresholds. Although this rule 
facilitates the type of broad solicitation emblematic of 
crowdfunding, crowdfunding is premised on permitting sales of 
securities to any interested person, not just to investors who meet 
specific qualifications, such as accredited investors.
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    Moreover, a third party that operates a Web site to effect the 
purchase and sale of securities for the account of others generally 
would, under existing regulations, be required to register with the 
Commission as a broker-dealer and comply with the laws and regulations 
applicable to broker-dealers.\13\ A person that operates such a Web 
site only for the purchase of securities of startups and small 
businesses, however, may find it impractical in view of the limited 
nature of that person's activities and business to register as a 
broker-dealer and operate under the full set of regulatory obligations 
that apply to broker-dealers.
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    \13\ Exchange Act Section 15(a)(1) generally makes it unlawful 
for a broker or dealer to effect any transactions in, or induce the 
purchase or sale of, any security unless that broker or dealer is 
registered with the Commission pursuant to Exchange Act Section 
15(b). 15 U.S.C. 78o(a). See discussion in Section II.D.2 below. 
Because brokers and dealers both register as broker-dealers (i.e., 
there is no separate ``broker'' or ``dealer'' registration under 
Exchange Act Section 15(b)), we also use the term ``broker-dealer'' 
in this release.
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B. Title III of the JOBS Act

    Title III of the JOBS Act (``Title III'') added new Securities Act 
Section

[[Page 66430]]

4(a)(6),\14\ which provides an exemption from the registration 
requirements of Securities Act Section 5 for certain crowdfunding 
transactions. To qualify for the exemption under Section 4(a)(6), 
crowdfunding transactions by an issuer (including all entities 
controlled by or under common control with the issuer) must meet 
specified requirements, including the following:
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    \14\ Title III amended Securities Act Section 4 to add Section 
4(6); however, Title II of the JOBS Act also amended Securities Act 
Section 4 and inserted subsections (a) and (b). The U.S. Code 
implemented the amendment by adding paragraph (6) at the end of 
subsection (a).
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     The amount raised must not exceed $1 million in a 12-month 
period (this amount is to be adjusted for inflation at least every five 
years);
     individual investments in a 12-month period are limited 
to:
    [cir] the greater of $2,000 or 5 percent of annual income or net 
worth, if annual income or net worth of the investor is less than 
$100,000; and
    [cir] 10 percent of annual income or net worth (not to exceed an 
amount sold of $100,000), if annual income or net worth of the investor 
is $100,000 or more (these amounts are to be adjusted for inflation at 
least every five years); and
     transactions must be conducted through an intermediary 
that either is registered as a broker or is registered as a new type of 
entity called a ``funding portal.''
    In addition, Title III:
     adds Securities Act Section 4A, which requires, among 
other things, that issuers and intermediaries that facilitate 
transactions between issuers and investors in reliance on Section 
4(a)(6) provide certain information to investors and potential 
investors, take certain other actions and provide notices and other 
information to the Commission;
     adds Exchange Act Section 3(h), which requires the 
Commission to adopt rules to exempt, either conditionally or 
unconditionally, ``funding portals'' from having to register as brokers 
or dealers pursuant to Exchange Act Section 15(a)(1);
     includes disqualification provisions under which an issuer 
would not be able to avail itself of the Section 4(a)(6) exemption if 
the issuer or other related parties, including an intermediary, was 
subject to a disqualifying event; and
     adds Exchange Act Section 12(g)(6), which requires the 
Commission to adopt rules to exempt from the registration requirements 
of Section 12(g), either conditionally or unconditionally, securities 
acquired pursuant to an offering made in reliance on Section 4(a)(6).
    In this release, we are proposing new rules and forms to implement 
Securities Act Sections 4(a)(6) and 4A and Exchange Act Sections 3(h) 
and 12(g)(6). The proposed rules are described in detail below. Until 
we adopt rules relating to crowdfunding transactions and such rules 
become effective, issuers and intermediaries may not rely on the 
exemption provided under Section 4(a)(6).

C. Approach to Proposed Rules

    We understand that Title III was designed to help alleviate the 
funding gap and accompanying regulatory concerns faced by startups and 
small businesses in connection with raising capital in relatively low 
dollar amounts.\15\ The proposed rules are intended to align 
crowdfunding transactions under Section 4(a)(6) with the central tenets 
of the original concept of crowdfunding, in which the public--or the 
crowd--is presented with an opportunity to invest in an idea or 
business and individuals decide whether or not to invest after sharing 
information about the idea or business with, and learning from, other 
members of the crowd.\16\ In this role, members of the crowd are not 
only sharing information about the idea or business, but also are 
expected to help evaluate the idea or business before deciding whether 
or not to invest.\17\
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    \15\ See note 7.
    \16\ See notes 1 and 2. As discussed in Section II.C.5.c below, 
the proposed rules would require a person to open an account with an 
intermediary before posting comments on the intermediary's platform. 
However, as discussed in Section II.C.5.a below, a person would not 
need to open an account with the intermediary in order to view the 
issuer's disclosure materials.
    \17\ See Hazen, note 8.
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    At the same time, Congress provided important investor protections 
for crowdfunding transactions under Section 4(a)(6), including 
individual investment limits, required disclosures by issuers and the 
use of intermediaries. The proposed rules would require that all 
crowdfunding transactions under Section 4(a)(6) be conducted through a 
registered intermediary on an Internet Web site or other similar 
electronic medium to help ensure that the offering is accessible to the 
public and that members of the crowd can share information and 
opinions. Registered intermediaries are necessary to bring the issuer 
and potential investors together and to provide safeguards to potential 
investors.\18\ The proposed rules also would require that 
intermediaries provide communication channels to facilitate the sharing 
of information that will allow the crowd to decide whether or not to 
fund the idea or business.\19\ The proposed rules further provide 
intermediaries a means by which to facilitate the offer and sale of 
securities without registering as brokers. We are mindful of the timing 
and presentation of information required to be disclosed to investors 
pursuant to the terms of the statute. The proposed rules would require 
that this information be provided to investors at various points in 
time in connection with an offering and through various electronic 
means, such as through filings with the Commission and disclosures 
provided on the intermediary's platform. We believe this approach would 
be most practical and useful to investors in the crowdfunding context.
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    \18\ See 158 Cong. Rec. S1829 (daily ed. Mar. 20, 2012) 
(statement of Sen. Jeff Merkley) (``The Web sites are subject to 
oversight by the SEC and security regulators of their principal 
States . . . This is a key predatory protection to prevent pump-and-
dump schemes.'').
    \19\ See Mollick Letter (stating that allowing ongoing 
discussions between potential investors, community members and 
issuers is a vital aspect of avoiding fraud and improving proposed 
projects).
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    We understand that these proposed rules, if adopted, could 
significantly affect the viability of crowdfunding as a capital-raising 
method for startups and small businesses. Rules that are unduly 
burdensome could discourage participation in crowdfunding. Rules that 
are too permissive, however, may increase the risks for individual 
investors, thereby undermining the facilitation of capital raising for 
startups and small businesses.\20\ We have directed the Commission 
staff, accordingly, to develop a comprehensive work plan to review and 
monitor the use of the crowdfunding

[[Page 66431]]

exemption under Section 4(a)(6) and the rules the Commission adopts to 
implement crowdfunding. Upon adoption of final rules, the Commission 
staff will monitor the market for offerings made in reliance on Section 
4(a)(6), focusing in particular on the types of issuers using the 
exemption, the level of compliance with Regulation Crowdfunding by 
issuers and intermediaries and whether the exemption is promoting new 
capital formation while at the same time providing key protections for 
investors. These efforts will assist the Commission in evaluating the 
development of market practices in offerings made in reliance on 
Section 4(a)(6). These efforts also will facilitate future Commission 
consideration of any potential amendments to the rules implementing 
crowdfunding that would be consistent with the Commission's mission of 
protecting investors, maintaining fair, orderly and efficient markets 
and facilitating capital formation. We urge commenters, as they review 
the proposed rules, to consider and address the role that our 
oversight, enforcement and regulation should play once a crowdfunding 
market under Section 4(a)(6) begins to develop.
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    \20\ One press article, for example, described non-securities-
based crowdfunding campaigns that successfully raised funds but have 
had problems manufacturing and delivering the ``perks'' or products 
that were promised in exchange for contributions. See Matt Krantz, 
Crowd-funding dark side: Sometimes investments go down drain, USA 
Today at B1 (Aug. 15, 2012). Investor confidence in crowdfunding 
could be eroded if such delays occur with regularity in securities-
based crowdfunding and compounded by any prevalence of fraud. See, 
e.g., Laws Provide Con Artists with Personal Economic Growth Plan, 
North American Securities Administrators Association (Aug. 21, 2012) 
(identifying crowdfunding and Internet-based offers of securities as 
a threat to investors), available at http://www.nasaa.org/14679/laws-provide-con-artists-with-personal-economic-growth-plan/. See 
also Adrianne Jeffries, This is What a Kickstarter Scam Looks Like, 
BetaBeat (Apr. 30, 2012), available at http://betabeat.com/2012/04/this-is-what-a-kickstarter-scam-looks-like/. But see Olga Khazan, 
Kickstarter spies a sunglass start-up, Washington Post at A14 (May 
28, 2012) (discussing a successful sunglasses company that used 
crowdfunding for startup funds); Crowdfunding: Invested Central 
raises $120,000, Washington Post at A10 (Jul. 23, 2012) (mentioning 
a company that was able to raise capital through crowdfunding when 
it could not otherwise secure traditional financing for an expansion 
of its business).
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II. Discussion of Proposed Regulation Crowdfunding

A. Crowdfunding Exemption

    New Securities Act Section 4(a)(6) provides an exemption from the 
registration requirements of Securities Act Section 5 for certain 
crowdfunding transactions. To qualify for the exemption under Section 
4(a)(6), crowdfunding transactions by an issuer must meet specified 
requirements, including requirements with regard to the dollar amount 
of the securities that may be sold by an issuer and the dollar amount 
that may be invested by an individual in a 12-month period. The 
crowdfunding transaction also must be conducted through a registered 
intermediary that complies with specified requirements.\21\ Title III 
also provides limitations on who may rely on the exemption and 
establishes a liability scheme for improper use of the exemption. As 
discussed below, the rules we are proposing are designed to aid issuers 
and investors in determining the applicable limitations on capital 
raised and individual investments.
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    \21\ See Section II.C below for a discussion of the requirements 
on intermediaries. See also Section II.D below for a discussion of 
the additional requirements on funding portals.
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1. Limitation on Capital Raised
    The exemption from registration provided by Section 4(a)(6) is 
available to a U.S. issuer provided that ``the aggregate amount sold to 
all investors by the issuer, including any amount sold in reliance on 
the exemption provided under [Section 4(a)(6)] during the 12-month 
period preceding the date of such transaction, is not more than 
$1,000,000.'' \22\ Under Section 4A(h), the Commission is required to 
adjust the dollar amounts in Section 4(a)(6) ``not less frequently than 
once every five 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.''
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    \22\ Securities Act Section 4(a)(6)(A).
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    Several commenters indicated that the $1 million maximum aggregate 
amount is too low.\23\ Several commenters requested that the Commission 
state that the $1 million aggregate limit pertains only to offerings 
under Section 4(a)(6) and does not include all exempt offerings.\24\ 
Two commenters suggested, however, that the calculation of the $1 
million aggregate limit should include all issuer transactions that 
were exempt under Securities Act Section 4(a) during the preceding 12-
month period.\25\ Another commenter requested clarification that the 
limitations and requirements of the offering exemption under Section 
4(a)(6) would not affect other methods of raising capital that do not 
involve the sale of securities, such as contributions from friends and 
family, donation crowdfunding, gifts, grants or loans.\26\ Several 
commenters had concerns about the possible integration \27\ of an 
offering under Section 4(a)(6) with other exempt offerings and 
suggested that the Commission should allow for simultaneous or 
sequential offerings under Regulation D \28\ and Section 4(a)(6) 
without integration.\29\
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    \23\ See High Tide Letter; TechnologyCrowdfund Letter 3 (stating 
that a minimum of $5 million to $10 million is necessary to start 
any business other than a software business); EnVironmental Letter 
(stating that the upper limit should be increased to $5 million or 
higher); VTNGLOBAL Letter (stating that Rule 506 of Regulation D 
permits an unlimited capital raise from accredited investors and 
that the same should apply to crowdfunding).
    \24\ See NSBA Letter (stating that the $1 million limitation 
should pertain only to offerings made in reliance on Section 
4(a)(6)); ABA Letter 1; NCA Letter.
    \25\ See CommunityLeader Letter; Ohio Division of Securities 
Letter.
    \26\ See Crowdfunding Offerings Ltd. Letter 6.
    \27\ The integration doctrine seeks to prevent an issuer from 
improperly avoiding registration by artificially dividing a single 
offering into multiple offerings such that Securities Act exemptions 
would apply to multiple offerings that would not be available for 
the combined offering.
    \28\ 17 CFR 230.501 through 230.508.
    \29\ See ABA Letter 1; Lingam Letter 2 (stating that offerings 
under Regulation D and Section 4(a)(6) should not be integrated if: 
(1) No general solicitation takes place; (2) the Section 4(a)(6) 
offering closes prior to any general solicitation related to a 
Regulation D offering; or (3) the Regulation D and the Section 
4(a)(6) offerings occur simultaneously and the offerings have the 
same economic terms, but the size of the Regulation D offering is 
greater than the size of the Section 4(a)(6) offering); CFIRA Letter 
8 (stating that CFIRA's members have opposing views on whether the 
integration doctrine should be applied to crowdfunded offerings); 
Liles Letter 1; CFIRA Letter 2; CommunityLeader Letter. See also 
Final Report of the 2012 SEC Government-Business Forum on Small 
Business Capital Formation (April 2013) (``2012 SEC Government-
Business Forum''), available at http://www.sec.gov/info/smallbus/sbforumreps.htm (recommending that we consider permitting concurrent 
offerings to be made to accredited investors in excess of the $1 
million limit).
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    Section 4(a)(6) specifically provides for a maximum aggregate 
amount of $1 million sold in reliance on the exemption in any 12-month 
period. The only reference in the statute to changing that amount is 
the requirement that the Commission update the amount not less 
frequently than every five years based on the Consumer Price Index. 
Additionally, statements in the Congressional Record indicate that 
Congress believed that $1 million was a substantial amount for a small 
business.\30\ We do not believe that Congress intended for us to modify 
the maximum aggregate amount permitted to be sold under the exemption 
when promulgating rules to implement the statute.\31\ Therefore, we are 
not proposing to increase the limitation on the aggregate amount sold.
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    \30\ 158 Cong. Rec. S1829 (daily ed. Mar. 20, 2012) (statement 
of Sen. Jeff Merkley) (``[T]he amendment allows existing small 
businesses and startup companies to raise up to $1 million per year. 
That is a substantial amount for a small business.'').
    \31\ Cf. Securities Act Section 4A(b)(1)(D)(iii) (giving the 
Commission discretion to increase the aggregate target offering 
amount that requires audited financial statements).
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    Title III provides that the $1 million limitation applies to the 
``aggregate amount sold to all investors by the issuer, including any 
amount sold in reliance on the exemption provided under [Section 
4(a)(6)].'' Section 4A(g), however, provides that ``[n]othing in the 
exemption shall be construed as preventing an issuer from raising 
capital through means other than [S]ection 4[(a)](6).'' These two 
provisions create statutory ambiguity because the first provision could 
be read to provide for the aggregation of amounts raised in all exempt 
transactions, even those that do not involve crowdfunding, while the 
second provision could be read to provide that nothing in the Section

[[Page 66432]]

4(a)(6) exemption should limit an issuer's capital raising through 
other methods. We believe that the overall intent of providing the 
exemption under Section 4(a)(6) was to provide an additional mechanism 
for capital raising for startup and small businesses and not to affect 
the amount an issuer could raise outside of that exemption. Thus, we 
believe the capital raised in reliance on the exemption provided by 
Section 4(a)(6) should be counted toward the limitation. Capital raised 
through other means should not be counted in determining the aggregate 
amount sold in reliance on Section 4(a)(6). The opposite approach--
requiring aggregation of amounts raised in any exempt transaction--
would be inconsistent with the goal of alleviating the funding gap 
faced by startups and small businesses because it would place a cap on 
the amount of capital startups and small business could raise. An 
issuer that already sold $1 million in reliance on the exemption 
provided under Section 4(a)(6), for example, would be prevented from 
raising capital through other exempt methods and, conversely, an issuer 
that sold $1 million through other exempt methods would be prevented 
from raising capital under Section 4(a)(6).
    In determining the amount that may be available to be offered and 
sold in reliance on Section 4(a)(6) in light of the $1 million 
aggregate amount limitation, an issuer would include amounts sold by 
the issuer (including amounts sold by entities controlled by the issuer 
or under common control with the issuer, as well as any amounts sold by 
any predecessor of the issuer) in reliance on Section 4(a)(6) during 
the preceding 12-month period. The issuer would aggregate any amounts 
previously sold with the amount the issuer intends to raise in reliance 
on the exemption, and under the proposed rules, the combined amount 
could not exceed $1 million. An issuer would not include amounts sold 
in other exempt offerings during the preceding 12-month period. For 
example, if an issuer sold $800,000 pursuant to the exemption provided 
in Regulation D during the preceding 12 months, this amount would not 
be aggregated in an issuer's calculation to determine whether it had 
reached the maximum amount for purposes of Section 4(a)(6).\32\ In 
addition, in determining the amount sold in reliance on Section 4(a)(6) 
during the preceding 12-month period, an issuer would not need to 
consider amounts received through methods that do not involve the offer 
or sale of securities (such as donations it received from a separate 
non-securities-based crowdfunding effort, contributions from friends 
and family, gifts, grants or loans).
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    \32\ In contrast, if an issuer sold $800,000 in a crowdfunding 
transaction pursuant to Section 4(a)(6) during the preceding 12 
months, the issuer would be required to count that amount toward the 
$1 million aggregate amount and, thus, could only offer and sell 
$200,000 more in reliance on Section 4(a)(6).
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    Further, in light of Section 4A(g) and the reasons discussed above, 
we believe that an offering made in reliance on Section 4(a)(6) should 
not be integrated with another exempt offering made by the issuer, 
provided that each offering complies with the requirements of the 
applicable exemption that is being relied upon for the particular 
offering. An issuer could complete an offering made in reliance on 
Section 4(a)(6) that occurs simultaneously with, or is preceded or 
followed by, another exempt offering. An issuer conducting a concurrent 
exempt offering for which general solicitation is not permitted, 
however, would need to be satisfied that purchasers in that offering 
were not solicited by means of the offering made in reliance on Section 
4(a)(6).\33\ Similarly, any concurrent exempt offering for which 
general solicitation is permitted could not include an advertisement of 
the terms of an offering made in reliance on Section 4(a)(6) that would 
not be permitted under Section 4(a)(6) and the proposed rules.\34\
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    \33\ For example, if the prospective investor in a concurrent 
private placement for which general solicitation is not permitted 
became interested in that private placement through some means other 
than the offering made in reliance on Section 4(a)(6), such as 
through a substantive, pre-existing relationship with the issuer or 
direct contact by the issuer or its agents outside of the offering 
made in reliance on Section 4(a)(6), then the fact that the offering 
made in reliance on Section 4(a)(6) was posted publicly on the 
intermediary's platform would not affect the availability of the 
other private placement exemption. On the other hand, if an investor 
first discovers the issuer through a solicitation in a Section 
4(a)(6) offering, that investor would likely not be eligible to 
participate in a concurrent private placement in which general 
solicitation is not permitted.
    \34\ See proposed Rule 204 of Regulation Crowdfunding. See also 
discussion in Section II.B.4 below.
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    Under Section 4(a)(6), the amount of securities sold in reliance on 
Section 4(a)(6) by entities controlled by or under common control with 
the issuer must be aggregated with the amount to be sold by the issuer 
in the current offering to determine the aggregate amount sold in 
reliance on Section 4(a)(6) during the preceding 12-month period. The 
statute does not define the term ``controlled by or under common 
control with'' the issuer; however, the term ``control'' is defined in 
Securities Act Rule 405.\35\ For purposes of determining whether an 
entity is ``controlled by or under common control with'' the issuer, an 
issuer would be required to consider whether it has ``control'' based 
on this definition.\36\
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    \35\ See 17 CFR 230.405 (``The term control (including the terms 
controlling, controlled by and under common control with) means the 
possession, direct or indirect, of the power to direct or cause the 
direction of the management and policies of a person, whether 
through the ownership of voting securities, by contract, or 
otherwise.''). Exchange Act Rule 12b-2 similarly defines the term 
``control.'' See 17 CFR 240.12b-2.
    \36\ See proposed Instruction to paragraph (c) of proposed Rule 
100 of Regulation Crowdfunding.
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    Under the proposed rules, the amount of securities sold in reliance 
on Section 4(a)(6) also would include securities sold by any 
predecessor of the issuer in reliance on Section 4(a)(6) during the 
preceding 12-month period.\37\ We believe this approach is necessary to 
prevent an issuer from exceeding the $1 million limit by reorganizing 
the issuer into a new entity that would otherwise not be limited by 
previous sales made by its predecessor. For example, if an issuer 
reaches the $1 million limit under Section 4(a)(6), we do not believe 
the reorganization of the issuer into a new entity should permit the 
successor to make additional offers and sales in reliance on Section 
4(a)(6) during the relevant 12-month period.
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    \37\ See proposed Rule 100(c) of Regulation Crowdfunding 
(proposing to define issuer to include all entities controlled by or 
under common control with the issuer and any predecessor of the 
issuer).
---------------------------------------------------------------------------

Request for Comment
    1. Should we propose that the $1 million limit be net of fees 
charged by the intermediary to host the offering on the intermediary's 
platform? Why or why not? If so, are there other fees that we should 
allow issuers to exclude when determining the amount to be raised and 
whether the issuer has reached the $1 million limit?
    2. As described above, we believe that issuers should not have to 
consider the amounts raised in offerings made pursuant to other 
exemptions when determining the amount sold during the preceding 12-
month period for purposes of the $1 million limit in Section 4(a)(6). 
Should we require that certain exempt offerings be included in the 
calculation of the $1 million limit? If so, which types of offerings 
and why? If not, why not? As noted above, at this time the Commission 
is not proposing to consider the amounts raised in non-securities-based 
crowdfunding efforts in calculating the $1 million limit in Section 
4(a)(6). Should the Commission propose to require that amounts raised 
in non-securities-based crowdfunding

[[Page 66433]]

efforts be included in the calculation of the $1 million limit? Why or 
why not?
    3. As described above, we believe that offerings made in reliance 
on Section 4(a)(6) should not necessarily be integrated with other 
exempt offerings if the conditions to the applicable exemptions are 
met. How would an alternative interpretation affect the utility of 
crowdfunding as a capital raising mechanism? Are there circumstances 
under which other exempt offers should be integrated with an offer made 
in reliance on Section 4(a)(6)? If so, what are those circumstances? 
Should we prohibit an issuer from concurrently offering securities in 
reliance on Section 4(a)(6) and another exemption? Why or why not? 
Should we prohibit an issuer from offering securities in reliance on 
Section 4(a)(6) within a specified period of time after or concurrently 
with a Rule 506(c) offering under Regulation D involving general 
solicitation? Why or why not? Should we prohibit an issuer from using 
general solicitation or general advertising under Rule 506(c) in a 
manner that is intended, or could reasonably be expected, to condition 
the market for a Section 4(a)(6) offering or generate referrals to a 
crowdfunding intermediary? Why or why not? Should issuers that began an 
offering under Section 4(a)(6) be permitted to convert the offering to 
a Rule 506(c) offering? Why or why not?
    4. Under the proposed rules, whether an entity is controlled by or 
under common control with the issuer would be determined based on 
whether the issuer possesses, directly or indirectly, the power to 
direct or cause the direction of the management and policies of the 
entity, whether through the ownership of voting securities, by contract 
or otherwise. This standard is based on the definition of ``control'' 
in Securities Act Rule 405. Is this approach appropriate? Why or why 
not? Should we define control differently? If so, how?
    5. Under the proposed rules, the definition of issuer would include 
any predecessor of the issuer. Is this approach appropriate? Why or why 
not? Should an issuer aggregate amounts sold by an affiliate of the 
issuer when determining the aggregate amount sold in reliance on 
Section 4(a)(6) during the preceding 12-month period? Why or why not? 
If so, how should we define affiliate?
2. Investment Limitation
    Under Section 4(a)(6)(B), the aggregate amount sold to any investor 
by an issuer, including any amount sold in reliance on the exemption 
during the 12-month period preceding the date of such transaction, 
cannot 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.'' Section 4A(h) further provides that 
these dollar amounts shall be adjusted by the Commission not less 
frequently than once every five years based on the Consumer Price 
Index. As discussed in more detail below, Section 4A(h) also provides 
that the income and net worth of a natural person who is investing in a 
crowdfunding transaction pursuant to Section 4(a)(6) shall be 
calculated in accordance with the Commission's rules regarding the 
calculation of income and net worth of an accredited investor.\38\
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    \38\ The definition of the term ``accredited investor'' is set 
forth in Rule 501(a) of Regulation D [17 CFR 230.501(a)] and 
includes any person who comes within one of the definition's 
enumerated categories of persons, or whom the issuer ``reasonably 
believes'' comes within any of the enumerated categories, at the 
time of the sale of the securities to that person. For natural 
persons, Rule 501(a) defines an accredited investor as a person: (1) 
Whose individual net worth, or joint net worth with that person's 
spouse, exceeds $1 million, excluding the value of the person's 
primary residence (the ``net worth test''); or (2) who had an 
individual income in excess of $200,000 in each of the two most 
recent years, or joint income with that person's spouse in excess of 
$300,000 in each of those years, and has a reasonable expectation of 
reaching the same income level in the current year (the ``income 
test''). Although the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203, 124 Stat. 1376, 1577 (July 21, 
2010), (the ``Dodd-Frank Act'') did not change the amount of the $1 
million net worth test, it did change how that amount is 
calculated--by excluding the value of a person's primary residence. 
This change took effect upon the enactment of the Dodd-Frank Act. In 
December 2011, we amended Rule 501 to incorporate this change into 
the definition of accredited investor. See Net Worth Standard for 
Accredited Investors, Release No. 33-9287 (Dec. 21, 2011) [76 FR 
81793 (Dec. 29, 2011)]. In addition, Section 413(b) of the Dodd-
Frank Act specifically authorizes us to undertake a review of the 
definition of the term ``accredited investor'' as it applies to 
natural persons, it and requires us to undertake a review of the 
definition in its entirety every four years, beginning four years 
after enactment of the Dodd-Frank Act. Release No. 33-9416 (July 10, 
2013) requests public comments on the definition of ``accredited 
investor.''
---------------------------------------------------------------------------

    Several commenters noted that Sections 4(a)(6)(B)(i) and (ii) 
technically subject some investors to two potential investment 
limits.\39\ The language of the statute may be read to create potential 
conflicts or ambiguity between the two investment limits because 
paragraph (i) applies if ``either'' annual income or net worth is less 
than $100,000 and paragraph (ii) applies if ``either'' annual income or 
net worth is equal to or more than $100,000. Accordingly, in any 
situation in which annual income is less than $100,000 and net worth is 
equal to or more than $100,000 (or vice versa), the language of the 
statute may be read to cause both paragraphs to apply. Paragraph (i) 
also fixes the maximum annual investment by an investor at 5 percent of 
``the annual income or net worth of such investor, as applicable'' and 
paragraph (ii) fixes the maximum annual investment by an investor at 10 
percent of ``the annual income or net worth of such investor, as 
applicable'', but neither paragraph (i) nor paragraph (ii) explicitly 
states when that percentage should be applied against the investor's 
annual income and when the percentage should be applied against the 
investor's net worth. Finally, paragraph (i) sets a floor for the 
investment limit of $2,000 per year and paragraph (ii) sets a ceiling 
for the investment limit of $100,000 per year, but the statutory 
language does not explicitly state whether the floor applies if the 
maximum is calculated under paragraph (ii) or whether the ceiling 
applies if the maximum is calculated under paragraph (i). Accordingly, 
discretion is required in interpreting and applying this provision of 
the statute.
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    \39\ See RocketHub Letter 1 (stating that the Commission should 
clarify that the greater of income or net worth will be used to 
determine the investment limit); NASAA Letter (stating that the 
Commission should resolve the ambiguity by requiring the lesser of 
the two investment limits); Ohio Division of Securities Letter 
(stating that the Commission should apply the stricter investment 
limitation); ABA Letter 1; Friedman Letter.
---------------------------------------------------------------------------

    We believe that the appropriate approach to the investment limit 
provision is to provide for an overall investment limit of $100,000, 
but within that overall limit, to provide for a ``greater of'' 
limitation based on annual income and net worth. Under the proposed 
rules, therefore, if both annual income and net worth are less than 
$100,000, then a limit of $2,000 or 5 percent of annual income or net 
worth, whichever is greater, would apply. If either annual income or 
net worth exceeds $100,000, then a limit of 10 percent of annual income 
or net worth, whichever is greater, but not to exceed $100,000, would 
apply. We believe that this clarification would give effect to the 
provision and would be consistent with Congressional intent in 
providing investment limitations; however, we request comment below on 
whether to calculate the investment limit based on

[[Page 66434]]

the lesser of annual income or net worth.
    As required by Section 4A(h), the proposed rules would require a 
natural person's annual income and net worth to be calculated in 
accordance with the Commission's rules for determining accredited 
investor status.\40\ Securities Act Rule 501 specifies the manner in 
which annual income and net worth are calculated for purposes of 
determining accredited investor status.\41\ One commenter stated that 
Section 4(a)(6)(B) is unclear in regard to how to address the joint net 
worth of spouses.\42\ The proposed rules would clarify that an 
investor's annual income and net worth may be calculated jointly with 
the income and net worth of the investor's spouse.\43\ We believe that 
this approach is consistent with the rules for determining accredited 
investor status because the accredited investor definition contemplates 
both individual and joint income and net worth with a spouse as methods 
of calculating annual income and net worth.
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    \40\ See proposed Instruction 1 to paragraph (a)(2) of proposed 
Rule 100 of Regulation Crowdfunding. See also note 9.
    \41\ See Securities Act Rule 501(a)(5) [17 CFR 230.501(a)(5)] 
(net worth) and Securities Act Rule 501(a)(6) [17 CFR 230.501(a)(6)] 
(income). Consistent with these rules, the calculation of a natural 
person's net worth for purposes of the investment limit would 
exclude the value of the primary residence of such person. A natural 
person's income for purposes of the investment limit calculation 
would be the lower of such person's income for each of the two most 
recent years as long as such person has a reasonable expectation of 
the same income level in the current year.
    \42\ See Friedman Letter.
    \43\ See proposed Instruction 2 to paragraph (a)(2) of proposed 
Rule 100 of Regulation Crowdfunding.
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    We also are proposing to allow an issuer to rely on efforts that an 
intermediary takes in order to determine that the aggregate amount of 
securities purchased by an investor will not cause the investor to 
exceed the investor limits,\44\ provided that the issuer does not have 
knowledge that the investor had exceeded, or would exceed, the investor 
limits as a result of purchasing securities in the issuer's 
offering.\45\
---------------------------------------------------------------------------

    \44\ See discussion in Section II.C.5.b.i below.
    \45\ See proposed Instruction 3 to paragraph (a)(2) of proposed 
Rule 100 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In discussing the investment limitations, one commenter requested 
that the Commission distinguish between retail investors and 
institutional or accredited investors and allow institutional and 
accredited investors to invest in excess of the investment limitations 
included in the statute.\46\ Another commenter asked that the 
Commission clarify whether non-U.S. citizens or non-U.S. residents are 
bound by the same investment limits.\47\ Three commenters proposed that 
the Commission create a two-tier regulatory system based on different 
investment limits to reduce the regulatory burden for small, local 
offerings.\48\ One of the commenters suggested that one of the tiers 
could consist of a ``small local offering'' in which investment limits 
would be up to $250 per investor.\49\ The commenter asserted that 
smaller investments could be subject to significantly reduced 
regulation because a $250 investment is unlikely to pose significant 
risk to an investor. The second commenter suggested reducing the 
anticipated personal disclosure requirements for investors who invest 
less than $500 through an intermediary that is a community development 
financial institution.\50\
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    \46\ See CFIRA Letter 2.
    \47\ See TechnologyCrowdFund Letter 5.
    \48\ See ASBC Letter; City First Letter. See also Spinrad Letter 
1 (supporting the two-tier approach described in the ASBC Letter).
    \49\ See ASBC Letter.
    \50\ See City First Letter.
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    The limitations in Section 4(a)(6)(B) apply to any investor seeking 
to participate in a crowdfunding transaction. We believe that Congress 
intended for investment opportunities through crowdfunding transactions 
relying on Section 4(a)(6) to be available to all types of investors 
and established the investment limitations accordingly.\51\ The statute 
provides specific investment limits, and the only reference in the 
statute regarding changing those investment limits is the requirement 
that the Commission update the investment limits not less frequently 
than every five years based on the Consumer Price Index. Therefore, we 
do not believe it would be appropriate to alter those limits for any 
particular type of investor or, at this time, to create a different 
exemption based on different investment limits. Issuers can rely on 
other exemptions to offer and sell securities to accredited investors 
and institutional investors (and, in some cases, investors that do not 
meet the definition of accredited investor). As discussed above, 
concurrent offerings to these types of investors are possible if the 
conditions of the applicable exemption are met. Therefore, as proposed, 
the limitations would apply to all investors, including retail, 
institutional or accredited investors and both U.S. and non-U.S. 
citizens or residents.
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    \51\ See 158 Cong. Rec. S1689 (daily ed. Mar. 15, 2012) 
(statement of Sen. Mark Warner) (``There is now the ability to use 
the Internet as a way for small investors to get the same kind of 
deals that up to this point only select investors have gotten that 
have been customers of some of the best known investment banking 
firms, where we can now use the power of the Internet, through a 
term called crowdfunding.'').
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Request for Comment
    6. While we acknowledge that there is ambiguity in the statutory 
language and there is some comment regarding a contrary reading, we 
believe that the appropriate approach to the investment limitations in 
Section 4(a)(6)(B) is to provide for an overall investment limit of 
$100,000 and, within that limit, to provide for a ``greater of'' 
limitation based on an investor's annual income or net worth. In light 
of ambiguity in the statutory language, we are specifically asking for 
comment as to the question of whether we should instead require 
investors to calculate the investment limitation based on the 
investor's annual income or net worth at the five percent threshold of 
Section 4(a)(6)(B)(i) if either annual income or net worth is less than 
$100,000? Similarly, for those investors falling within the Section 
4(a)(6)(B)(i) framework, should we require them to calculate the five 
percent investment limit based on the lower of annual income or net 
worth? Should we require the same for the calculation of the 10 percent 
investment limit within the Section 4(a)(6)(B)(ii) framework? If we 
were to pursue any of these calculations, would we unnecessarily impede 
capital formation?
    7. The statute does not address how joint annual income or joint 
net worth should be treated for purposes of the investment limit 
calculation. The proposed rules clarify that annual income and net 
worth may be calculated jointly with the annual income and net worth of 
the investor's spouse. Is this approach appropriate? Should we 
distinguish between annual income and net worth and allow only one or 
the other to be calculated jointly for purposes of calculating the 
investment limit? Why or why not? Should the investment limit be 
calculated differently if it is based on the spouses' joint income, 
rather than each spouse's annual income? Why or why not?
    8. We are proposing to permit an issuer to rely on the efforts that 
an intermediary takes in order to determine that the aggregate amount 
of securities purchased by an investor will not cause the investor to 
exceed the investor limits, provided that the issuer does not have 
knowledge that the investor had exceeded, or would exceed, the investor 
limits as a result of purchasing securities in the issuer's offering. 
Is this approach appropriate? Why or why not? Should an issuer be 
required to obtain a written representation from the investor that the 
investor has not and

[[Page 66435]]

will not exceed the limit by purchasing from the issuer? Why or why 
not?
    9. Should institutional and accredited investors be subject to the 
investment limits, as proposed? Why or why not? Should we adopt rules 
providing for another crowdfunding exemption with a higher investment 
limit for institutional and accredited investors? If so, how high 
should the limit be? Are there categories of persons that should not be 
subject to the investment limits? If yes, please identify those 
categories of persons. If the offering amount for an offering made in 
reliance on Section 4(a)(6) is not aggregated with the offering amount 
for a concurrent offering made pursuant to another exemption, as 
proposed, is it necessary to exclude institutional and accredited 
investors from the investment limits since they would be able to invest 
pursuant to another exemption in excess of the investment limits in 
Section 4(a)(6)?
    10. Should we adopt rules providing for another crowdfunding 
exemption with different investment limits (e.g., an exemption with a 
$250 investment limit and fewer issuer requirements), as one commenter 
suggested,\52\ or apply different requirements with respect to 
individual investments under a certain amount, such as $500, as another 
commenter suggested?\53\ Why or why not? If so, should the requirements 
for issuers and intermediaries also change? What investment limits and 
requirements would be appropriate? Would adopting such an exemption be 
consistent with the purposes of Section 4(a)(6)?
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    \52\ See ASBC Letter.
    \53\ See City First Letter.
---------------------------------------------------------------------------

    11. Should we consider additional investment limits on transactions 
made in reliance on Section 4(a)(6) where the purchaser's annual income 
and net worth are both below a particular threshold? If so, what should 
such threshold be and why?
3. Transaction Conducted Through an Intermediary
    Under Section 4(a)(6)(C), a transaction in reliance on Section 
4(a)(6) must be ``conducted through a broker or funding portal that 
complies with the requirements of [S]ection 4A(a).'' We believe that 
requiring an issuer to use only one intermediary, rather than allowing 
the issuer to use multiple intermediaries, to conduct an offering or 
concurrent offerings in reliance on Section 4(a)(6) would help foster 
the creation of a crowd and better accomplish the purpose of the 
statute. As discussed above, a central tenet of the concept of 
crowdfunding is presenting members of the crowd with an idea or 
business so members of the crowd can share information and evaluate the 
idea or business. Allowing an issuer to conduct a single offering or 
simultaneous offerings in reliance on Section 4(a)(6) through more than 
one intermediary would diminish the ability of the members of the crowd 
to effectively share information, because essentially, there would be 
multiple ``crowds.'' Also, because practices among intermediaries may 
differ, were multiple intermediaries to conduct a single offering or 
simultaneous offerings, this could result in significant differences 
among such offerings. Finally, allowing an issuer to conduct an 
offering using more than one intermediary would make it more difficult 
for intermediaries to determine whether an issuer is exceeding the $1 
million aggregate offering limit. Therefore, in addition to requiring 
the use of an intermediary in connection with an offering made in 
reliance on Section 4(a)(6), the proposed rules would prohibit an 
issuer from using more than one intermediary to conduct an offering or 
concurrent offerings made in reliance on Section 4(a)(6).\54\
---------------------------------------------------------------------------

    \54\ See proposed Instruction 1 to paragraph (a)(3) of proposed 
Rule 100 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Although the statute does not expressly require it, we also believe 
that in enacting Section 4(a)(6)(C), Congress contemplated that 
crowdfunding transactions made in reliance on Section 4(a)(6) and 
activities associated with these transactions would occur over the 
Internet or other similar electronic medium that is accessible to the 
public.\55\ We believe that an ``online-only'' requirement enables the 
public to access offering information and share information publicly in 
a way that will allow members of the crowd to decide whether or not to 
participate in the offering and fund the business or idea.\56\ We 
believe that other mechanisms would not offer this opportunity. The 
proposed rules would require that an intermediary, in a transaction 
involving the offer or sale of securities in reliance on Section 
4(a)(6), effect such transactions exclusively through an intermediary's 
platform.\57\ We propose to define the term ``platform'' to mean an 
Internet Web site or other similar electronic medium through which a 
registered broker or a registered funding portal acts as an 
intermediary in a transaction involving the offer or sale of securities 
in reliance on Section 4(a)(6).\58\ The requirement that a transaction 
be conducted exclusively through a platform does not preclude an 
intermediary from performing back office and other administrative 
functions offline. Therefore, we propose to state that intermediaries 
may engage in back office and other administrative functions other than 
on their platforms.\59\ Examples of such functions include document 
maintenance, preparation of notices and confirmations, preparing 
internal policies and procedures, defining and approving business 
security requirements and policies for information technology, and 
preparing information required to be filed or otherwise provided to 
regulators.
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    \55\ In this regard, we note that Section 301 of the JOBS Act 
states that ``[Title III] may be cited as the `Capital Raising 
Online While Deterring Fraud and Unethical Non-Disclosure Act of 
2012' ''. See Section 301 of the JOBS Act. See also 158 Cong. Rec. 
S1689 (daily ed. March 15, 2012) (statement of Sen. Mark Warner) 
(``There is now the ability to use the Internet as a way for small 
investors to get the same kind of deals that up to this point only 
select investors have gotten . . ., where we can now use the power 
of the Internet, through a term called crowdfunding.''); id. at 
S1717 (Statement of Sen. Mary Landrieu) (``this crowdfunding bill--
which is, in essence, a way for the Internet to be used to raise 
capital. . . .'').
    \56\ See note 2 and accompanying text. The Internet is 
considered to be a ``perfect technology capable of aggregating 
millions of disparate, independent ideas in the way markets and 
intelligent voting systems do, without the dangers of `too much 
communication' and compromise.'' Brabham, note 1 (citing James 
Surowiecki, The Wisdom of Crowds xix (2004)).
    \57\ See proposed Rule 100(a)(3) of Regulation Crowdfunding.
    \58\ See proposed Rule 100(d) of Regulation Crowdfunding.
    \59\ See proposed Instruction 2 to paragraph (a)(3) of proposed 
Rule 100 of Regulation Crowdfunding.
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    The proposed rules would accommodate other electronic media that 
currently exist or may develop in the future. For instance, 
applications for mobile communication devices, such as cell phones or 
smart phones, could be used to display offerings and to permit 
investors to make investment commitments. In our releases concerning 
the use of electronic media for delivery purposes, we discussed so-
called ``electronic-only'' offerings as those in which investors are 
permitted to participate only if they agree to accept electronic 
delivery of all documents and other information in connection with the 
offering.\60\ As discussed below, the proposed rules would require that 
an intermediary, in its standard account opening materials,

[[Page 66436]]

obtain from investors consent for such electronic delivery.\61\
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    \60\ See, e.g., Use of Electronic Media by Broker-Dealers, 
Transfer Agents and Investment Advisers for Delivery of Information, 
Release No. 34-37182 (May 9, 1996) [61 FR 24644 (May 15, 1996)]; Use 
of Electronic Media, Release No. 34-42728 (Apr. 28, 2000) [65 FR 
25843 (May 4, 2000)] (``Use of Electronic Media'').
    \61\ See proposed Rule 302(a) of Regulation Crowdfunding. The 
proposed rules would require consent to electronic delivery because 
we believe Congress contemplated that crowdfunding would, by its 
very nature, occur exclusively through electronic media.
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    Some commenters appear to assume that all offers and sales made in 
reliance on Section 4(a)(6) would be conducted online.\62\ One 
commenter recommended that the Commission expressly require that all 
disclosure and affirmations required for crowdfunding transactions take 
place online.\63\ In contrast, another commenter requested that we 
permit some crowdfunding elements to take place offline to encourage 
local community investments through entities such as community banks, 
community development companies and business development companies.\64\ 
This commenter stated that permitting crowdfunding to take place 
offline also will help persons without Internet access to invest. The 
proposed rules would, subject to certain conditions, separately permit 
outreach by third parties and a third party's promotion of an issuer's 
offering through communication channels provided by an 
intermediary.\65\ In addition, an issuer may provide a notice, subject 
to the conditions in the proposed rules, that directs potential 
investors to the intermediary's platform through which the issuer will 
conduct its offering.\66\ Finally, we are not proposing to permit 
offerings to be conducted through means other than the Internet or 
similar electronic medium because we believe that allowing other non-
electronic means would be inconsistent with the underlying principles 
of crowdfunding and the statute. Offerings made by other means would 
not be widely accessible by the public, which would defeat the benefit 
of the collective wisdom of the members of the crowd. We also believe 
that Internet access may be available to the public, such as through 
local public libraries, alleviating one commenter's concern about some 
persons not being able to invest unless the offerings also take place 
offline.
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    \62\ See, e.g., MacDonald Letter (stating that readily-available 
information on the Internet already provides a safeguard for 
crowdfunding investors); NAASA Letter (stating that NASAA is 
considering whether open Internet access to funding portals would 
provide sufficient and updated information to state regulators).
    \63\ See Cera Technology Letter.
    \64\ See Tally Letter.
    \65\ See proposed Rule 205 of Regulation Crowdfunding (promoter 
compensation), proposed Rule 305 of Regulation Crowdfunding 
(payments to third parties) and proposed Rule 402(b)(6) of 
Regulation Crowdfunding (conditional safe harbor), discussed below 
in Sections II.B.5, II.C.7 and II.D.3, respectively.
    \66\ See proposed Rule 204 of Regulation Crowdfunding 
(advertising) discussed below in Section II.B.4.
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Request for Comment
    12. The proposed rules would prohibit an issuer from conducting an 
offering or concurrent offerings in reliance on Section 4(a)(6) using 
more than one intermediary. Is this proposed approach appropriate? Why 
or why not? If issuers were permitted to use more than one 
intermediary, what requirements and other safeguards should or could be 
employed?
    13. Should we define the term ``platform'' in a way that limits 
crowdfunding in reliance on Section 4(a)(6) to transactions conducted 
through an Internet Web site or other similar electronic medium? Why or 
why not?
    14. Should we permit crowdfunding transactions made in reliance on 
Section 4(a)(6) to be conducted through means other than an 
intermediary's electronic platform? If so, what other means should we 
permit? For example, should we permit community-based funding in 
reliance on Section 4(a)(6) to occur other than on an electronic 
platform? \67\ To foster the creation and development of a crowd, to 
what extent would such other means need to provide members of the crowd 
with the ability to observe and comment (e.g., through discussion 
boards or similar functionalities) on the issuer, its business or 
statements made in the offering materials?
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    \67\ See City First Letter and note 355.
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    15. Should we allow intermediaries to restrict who can access their 
platforms? For example, should we permit intermediaries to provide 
access by invitation only or only to certain categories of investors? 
Why or why not? Would restrictions such as these negatively impact the 
ability of investors to get the benefit of the crowd and its assessment 
of an issuer, business or potential investment? Would these kinds of 
restrictions affect the ability of small investors to access the 
capital markets? If so, how?
    16. As noted above, the proposed rules would not require 
intermediaries' back office or other administrative functions to be 
conducted exclusively on their platforms. Do the proposed rules require 
any clarification? Are there other activities in which an intermediary 
may engage that would not be considered back office or administrative 
functions and that should be permitted to occur other than on a 
platform? If so, what activities are they, and why should they be 
permitted to occur other than on a platform?
4. Exclusion of Certain Issuers From Eligibility Under Section 4(a)(6)
    Section 4A(f) excludes certain categories of issuers from 
eligibility to rely on Section 4(a)(6) to engage in crowdfunding 
transactions. These issuers are: (1) Issuers that are not organized 
under the laws of a state or territory of the United States or the 
District of Columbia; (2) issuers that are subject to Exchange Act 
reporting requirements; \68\ (3) investment companies as defined in the 
Investment Company Act of 1940 (the ``Investment Company Act'') \69\ or 
companies that are excluded from the definition of investment company 
under Section 3(b) or 3(c) of the Investment Company Act; \70\ and (4) 
any other issuer that the Commission, by rule or regulation, determines 
appropriate.
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    \68\ These are issuers who are required to file reports with the 
Commission pursuant to Exchange Act Sections 13(a) (15 U.S.C. 
78m(a)) or 15(d) (15 U.S.C. 78o(d)).
    \69\ 15 U.S.C 80a-1 et seq.
    \70\ 15 U.S.C. 80a-3(b) or (c).
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    One commenter suggested that the Commission's rules should specify 
that the crowdfunding exemption under Section 4(a)(6) is not available 
for blank check companies or hedge funds and noted that ``permitting 
these kinds of high-risk and often complex entities to use the 
exemption is not consistent with the statutory goal of deterring fraud 
and unethical non-disclosure in crowdfunding offerings.'' \71\
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    \71\ Commonwealth of Massachusetts Letter.
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    The proposed rules would exclude the categories of issuers 
identified in the statute,\72\ as well as issuers that are disqualified 
from relying on Section 4(a)(6) pursuant to the disqualification 
provisions of Section 302(d) of the JOBS Act.\73\ The proposed rules 
also would exclude an issuer that has sold securities in reliance on 
Section 4(a)(6) if the issuer has not filed with the Commission and 
provided to investors, to the extent required, the ongoing annual 
reports required by Regulation Crowdfunding\74\ during the two years 
immediately preceding the filing of the required new offering 
statement.\75\ We believe that the ongoing reporting requirement should 
benefit investors by enabling them to consider updated

[[Page 66437]]

information about the issuer, thereby allowing them to make more 
informed investment decisions. If issuers fail to comply with this 
requirement, we do not believe that they should have the benefit of 
relying on the exemption under Section 4(a)(6) again until they file, 
to the extent required, the two most recent annual reports.
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    \72\ See proposed Rules 100(b)(1)-(3) of Regulation 
Crowdfunding.
    \73\ See proposed Rule 100(b)(4) of Regulation Crowdfunding. See 
also proposed Rule 503 of Regulation Crowdfunding and Section II.E.6 
below for a discussion of the disqualification provisions.
    \74\ See proposed Rules 202 and 203(b) of Regulation 
Crowdfunding and Section II.B.2 below for a discussion of the 
ongoing reporting requirements.
    \75\ See proposed Rule 100(b)(5) of Regulation Crowdfunding.
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    The proposed rules also would exclude an issuer that has no 
specific business plan or has indicated that its business plan is to 
engage in a merger or acquisition with an unidentified company or 
companies. As described above, crowdfunding is a new and evolving 
method to raise money that serves as an alternative source of capital 
to support a wide range of ideas and ventures. We believe that the 
exemption under Section 4(a)(6) is intended to provide an issuer with 
an early stage project, idea or business an opportunity to share it 
publicly with a wider range of potential investors. Those potential 
investors may then share information with each other about the early 
stage proposal and use that information to decide whether or not to 
provide funding based on the ``wisdom of the crowd.'' Under such 
circumstances, this mechanism requires the public to have sufficient 
information about the issuer's proposal to discuss its merit and 
flaws.\76\
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    \76\ See, e.g., Section 4A(b)(1)(C) (requiring a description of 
the business of the issuer and the anticipated business plan of the 
issuer).
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    At the same time, an early stage proposal may not allow the 
crowdfunding mechanism to work appropriately if the issuer does not 
describe a specific project, idea, or business, or is seeking funding 
for unspecified corporate transactions. In such cases, individuals 
reviewing the proposal may not have sufficient information to formulate 
a considered view of the proposal, or the proposal may be less likely 
to attract enough perspectives to inform a crowd decision. Investors 
who nonetheless choose to participate may therefore be more likely to 
be participating in an issuance that has not been reviewed by the crowd 
in the manner contemplated by the exemption under Section 4(a)(6).
    We are cognizant of the challenges associated with distinguishing 
between early stage proposals that should provide information 
sufficient to support the crowdfunding mechanism and those that cannot 
by their terms do so. We preliminarily believe that an appropriate 
balance can be struck by excluding an issuer that has no specific 
business plan or that has indicated that its business plan is to engage 
in a merger or acquisition with an unidentified company or companies. 
As described below, we do not expect that a specific ``business plan'' 
requires a formal document prepared by management or used for marketing 
to investors.\77\ We understand that issuers engaging in crowdfunding 
transactions may have businesses at various stages of development in 
differing industries, and therefore, we believe that a specific 
``business plan'' could encompass a wide range of project descriptions, 
articulated ideas, and business models. In particular, we recognize 
that the business plan for startups or small businesses seeking to rely 
on Section 4(a)(6) may not be fully developed or highly specific and 
that for many it may be less defined or detailed than the plan 
associated with larger issuers.
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    \77\ See discussion below in Section II.B.1.a.i.(b) below.
---------------------------------------------------------------------------

    With respect to hedge funds, we believe that under Section 
4A(f)(3), hedge funds would be excluded from eligibility to rely on 
Section 4(a)(6) because hedge funds and other private funds typically 
rely on one of the exclusions from the definition of investment company 
under Section 3(c) of the Investment Company Act.\78\
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    \78\ Investment Advisers Act (``Advisers Act'') Form PF defines 
a ``hedge fund'' generally as any ``private fund'' (other than a 
securitized asset fund) that: (1) Pays a performance fee or 
allocation calculated by taking into account unrealized gains (other 
than a fee or allocation the calculation of which may take into 
account unrealized gains solely for the purpose of reducing such fee 
or allocation to reflect net unrealized losses); (2) may borrow an 
amount in excess of one-half of its net asset value (including any 
committed capital) or may have gross notional exposure in excess of 
twice its net asset value (including any committed capital); or (3) 
may sell securities or other assets short or enter into similar 
transactions (other than for the purpose of hedging currency 
exposure or managing duration). See Form PF: Glossary of Terms at 4, 
available at http://www.sec.gov/rules/final/2011/ia-3308-formpf.pdf. 
A ``private fund'' is defined as any issuer that would be an 
investment company as defined in Section 3 of the Investment Company 
Act but for Section 3(c)(1) or 3(c)(7) of that Act. Id. at 7.
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Request for Comment
    17. Section 4A(b)(4) requires that, ``not less than annually, [the 
issuer] file with the Commission and provide to investors reports of 
the results of operations and financial statements of the issuer. . . 
.'' Should an issuer be excluded from engaging in a crowdfunding 
transaction in reliance on Section 4(a)(6), as proposed, if it has not 
filed with the Commission and provided to investors, to the extent 
required, the ongoing annual reports required by proposed Regulation 
Crowdfunding during the two years immediately preceding the filing of 
the required offering statement? Why or why not? Should an issuer be 
eligible to engage in a crowdfunding transaction in reliance on Section 
4(a)(6) if it is delinquent in other reporting requirements (e.g., 
updates regarding the progress of the issuer in meeting the target 
offering amount)? \79\ Why or why not? Should the exclusion be limited 
to a different timeframe (e.g., filings required during the five years 
or one year immediately preceding the filing of the required offering 
statement)?
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    \79\ See Section II.B.1.b below for a discussion of progress 
updates.
---------------------------------------------------------------------------

    18. Is the proposed exclusion of issuers who fail to comply with 
certain ongoing annual reporting requirements too broad? If so, how 
should it be narrowed and why? Should the exclusion cover issuers whose 
affiliates have sold securities in reliance on Section 4(a)(6) if the 
affiliates have not complied with the ongoing annual reporting 
requirements? If so, should this encompass all affiliates? If not, 
which affiliates should it cover? Should we exclude any issuer with an 
officer, director or controlling shareholder who served in a similar 
capacity with another issuer that failed to file its annual reports? 
Why or why not?
    19. What specific risks do investors face with ``idea-only'' 
companies and ventures? Please explain. Do the proposed rules provide 
sufficient protection against the inherent risks of such ventures? Why 
or why not?
    20. Does the exclusion of issuers that do not have a specific idea 
or business plan from eligibility to rely on Section 4(a)(6) strike the 
appropriate balance between the funding needs of small issuers and the 
information requirements of the crowd? Why or why not? Are there other 
approaches that would strike a better balance among those 
considerations? If the proposed approach is appropriate, should we 
define ``specific business plan'' or what criteria could be used to 
identify them? How would any such criteria comport with the disclosure 
obligations described in Section II.B.1.a.i.(b) (description of the 
business) below?
    21. Are there other categories of issuers that should be precluded 
from relying on Section 4(a)(6)? If so, what categories of issuers and 
why?

B. Requirements on Issuers

1. Disclosure Requirements
    Section 4A(b)(1) provides that an issuer offering or selling 
securities in reliance on Section 4(a)(6) must file specified 
disclosures, including financial disclosures, with the Commission, 
provide these disclosures to investors and the relevant broker or

[[Page 66438]]

funding portal and make these disclosures available to potential 
investors. These disclosures include:
     The name, legal status, physical address and Web site 
address of the issuer \80\;
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    \80\ Section 4A(b)(1)(A).
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     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 \81\;
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    \81\ Section 4A(b)(1)(B).
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     a description of the business of the issuer and the 
anticipated business plan of the issuer \82\;
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    \82\ Section 4A(b)(1)(C).
---------------------------------------------------------------------------

     a description of the financial condition of the 
issuer\83\;
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    \83\ Section 4A(b)(1)(D). This provision also establishes a 
framework of tiered financial disclosure requirements based on 
aggregate offering amounts for offerings under Section 4(a)(6) 
within the preceding 12-month period.
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     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 \84\;
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    \84\ Section 4A(b)(1)(E).
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     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 \85\;
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    \85\ Section 4A(b)(1)(F).
---------------------------------------------------------------------------

     the price to the public of the securities or the method 
for determining the price \86\; and
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    \86\ Section 4A(b)(1)(G). This provision also requires 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.'' 
This provision is addressed in Sections II.C.5 and II.C.6 below.
---------------------------------------------------------------------------

     a description of the ownership and capital structure of 
the issuer.\87\ In addition, Section 4A(b)(1)(I) specifies that the 
Commission may require additional disclosures for the protection of 
investors and in the public interest.
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    \87\ Section 4A(b)(1)(H). Specifically, Section 4A(b)(1)(H) 
requires a description of: ``(i) Terms of the securities of the 
issuer being offered and each 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 (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.''
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    Commenters expressed concerns about the extent of the disclosure 
requirements and stated that overly burdensome rules would make offers 
and sales in reliance on Section 4(a)(6) prohibitively expensive.\88\ 
We recognize these concerns and have considered them in determining the 
disclosure requirements that we should propose in this release.
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    \88\ See Vim Funding Letter; ExpertBeacon Letter; CrowdFund 
Connect Letter.
---------------------------------------------------------------------------

    The proposed rules generally describe the type of information that 
issuers would be required to disclose. We expect, however, that an 
issuer, along with the intermediary, would determine the format that 
best conveys the required disclosures and any other information the 
issuer determines is material to investors.\89\ We recognize that there 
are numerous ways to achieve that goal and, as such, we are not 
proposing to mandate a specific disclosure format.\90\ Similarly, to 
the extent some of the required disclosures overlap, issuers would not 
be required to duplicate disclosures.
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    \89\ Section II.B.3 below further discusses the proposed format 
of Form C and requests comments on the format and presentation of 
the information.
    \90\ While the proposed rules do not mandate a specific 
disclosure format, Rule 306 of Regulation S-T (17 CFR 232.306) 
requires that all electronic filings made with the Commission, 
including the filings that would be required under the proposed 
rules, be in English. The proposed rules would not, however, prevent 
an issuer from providing to the relevant intermediary both an 
English and a foreign language version of the information for the 
intermediary to make publicly available through its platform. The 
anti-fraud and civil liability provisions of the Securities Act 
would apply equally to both the English and the foreign language 
version of the information.
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    As discussed further in Section II.B.3, we are proposing to require 
issuers to file the disclosures with the Commission on Form C.\91\ As 
proposed, Form C would be filed in the standard format of eXtensible 
Markup Language (XML). An XML-based fillable form would enable issuers 
to provide information in a convenient medium without requiring the 
issuer to purchase or maintain additional software or technology. This 
would provide the Commission with data about offerings made in reliance 
on Section 4(a)(6). Information not required to be provided in text 
boxes would be filed as attachments to Form C.
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    \91\ Issuers would use Form C to provide the required 
disclosures about the crowdfunding transaction and the information 
required to be filed annually. See Section II.B.3 below.
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Request for Comment
    22. Rule 306 of Regulation S-T requires that all electronic filings 
made with the Commission, including the filings that would be required 
under the proposed rules, be in English. Some startups and small 
businesses, and their potential investors, may principally communicate 
in a language other than English. Should we amend Rule 306 to permit 
filings by issuers under the proposed rules to be filed in the other 
language? Why or why not? If we retain the requirement to make filings 
only in English, will this impose a disproportionate burden on issuers 
and potential investors who principally communicate in a language other 
than English? What will be the impact on capital formation for such 
issuers?
a. Offering Statement Disclosure Requirements
i. Information About the Issuer and the Offering
(a) General Information About the Issuer, Officers and Directors
    Consistent with Sections 4A(b)(1)(A) and (B), we are proposing to 
require an issuer to disclose information about its legal status, 
directors, officers and certain shareholders and how interested parties 
may contact the issuer. Specifically, an issuer would be required to 
disclose:
     Its name and legal status, including its form of 
organization, jurisdiction in which it is organized and date of 
organization \92\;
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    \92\ See proposed Rule 201(a) of Regulation Crowdfunding.
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     its physical address and its Web site address \93\; and
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    \93\ Id.
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     the names of the directors and officers, including any 
persons occupying a similar status or performing a similar function, 
all positions and offices with the issuer held by such persons, the 
period of time in which such person served in the position or office 
and their business experience during the past three years,\94\ 
including:
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    \94\ See proposed Rule 201(b) of Regulation Crowdfunding.
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    [cir] each person's principal occupation and employment, including 
whether any officer is employed by another employer; and
    [cir] the name and principal business of any corporation or other 
organization in which such occupation and employment took place.
    Although the statute does not define ``officer,'' the term is 
defined in Securities Act Rule 405 \95\ and in Exchange Act Rule 3b-
2.\96\ We are proposing to define ``officer'' consistent with these 
existing rules. Thus, an issuer would be required to disclose 
information regarding its president, vice president, secretary, 
treasurer or principal financial officer, comptroller or principal 
accounting officer and any person routinely performing corresponding 
functions with respect to

[[Page 66439]]

any organization, whether incorporated or unincorporated, to the extent 
it has individuals serving in these capacities.
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    \95\ 17 CFR 230.405.
    \96\ 17 CFR 240.3b-2.
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    We are proposing to require disclosure of the business experience 
of directors and officers of the issuer during the past three years. A 
three-year period is less than the five-year period that applies to 
issuers conducting registered offerings \97\ or exempt offerings 
pursuant to Regulation A.\98\ We believe that startups and small 
businesses that may seek to raise capital in reliance on Section 
4(a)(6) generally would be smaller than the issuers conducting 
registered offerings or exempt offerings pursuant to Regulation A; \99\ 
thus, we believe that the less burdensome three-year period would 
reduce the compliance cost for issuers while still providing potential 
investors with sufficient information about the business experience of 
directors and officers of the issuer to make an informed investment 
decision.
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    \97\ See Item 401(e) of Regulation S-K [17 CFR 229.401(e)].
    \98\ See Item 8(c) of Form 1-A [17 CFR 239.90].
    \99\ There is no cap on the amount of proceeds that may be 
raised in a registered offering, and Regulation A limits offerings 
to $5 million.
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    Section 4A(b)(1)(B) requires disclosure of ``the names of . . . 
each person holding more than 20 percent of the shares of the issuer.'' 
In contrast, Section 4A(b)(1)(H)(iii) requires disclosure of the ``name 
and ownership level of each existing shareholder who owns more than 20 
percent of any class of the securities of the issuer'' (emphasis 
added). The proposed rules would require disclosure of the names of 
persons, as of the most recent practicable date, who are the beneficial 
owners of 20 percent or more of the issuer's outstanding voting equity 
securities, calculated on the basis of voting power.\100\ We refer to 
this group of persons as ``20 Percent Beneficial Owners.'' We believe 
that the universe of 20 Percent Beneficial Owners should be the same 
for the disclosure requirements and the disqualification 
provisions\101\ because this would ease the burden on issuers by 
requiring issuers to only identify one set of persons who would be the 
subject of these rules. We believe that assessing beneficial ownership 
based on total outstanding voting securities is consistent with Section 
4A(b)(1)(B). Section 4A(b)(1)(B) is not limited to voting equity 
securities, but we believe the limitation would be necessary to clarify 
how beneficial ownership would be required to be calculated since 
issuers could potentially have multiple classes of securities with 
different voting powers. Assessing beneficial ownership based on 
ownership of total outstanding voting securities, rather than based on 
ownership of any class of securities as potentially contemplated by 
Section 4A(b)(1)(H)(iii), also should ease the burden of compliance 
because there would be fewer 20 Percent Beneficial Owners to track.
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    \100\ See proposed Rule 201(c) of Regulation Crowdfunding.
    \101\ See proposed Rule 503 of Regulation Crowdfunding and 
Section II.E.6 below for a discussion of the proposed 
disqualification provisions. This approach also would be consistent 
with how beneficial ownership is calculated for the Rule 506 
disqualification rules. See Disqualification of Felons and Other 
``Bad Actors'' from Rule 506 Offerings, Release No. 33-9414 (July 
10, 2013) [78 FR 44729 (July 24, 2013)] (``Disqualification Adopting 
Release'').
---------------------------------------------------------------------------

    Neither Section 4A(b)(1)(B) nor Section 4A(b)(1)(H)(iii) states as 
of what date the beneficial ownership should be calculated. The 
proposed rules would require issuers to calculate beneficial ownership 
as of the most recent practicable date.\102\ This is the same 
requirement that applies to issuers conducting registered offerings or 
Exchange Act reporting companies.\103\ We believe that it is 
appropriate to provide issuers relying on Section 4(a)(6) the 
flexibility to calculate beneficial ownership as of the most recent 
practicable date, otherwise such issuers would be subject to a more 
burdensome standard than the one that applies to issuers conducting 
registered offerings or Exchange Act reporting companies.
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    \102\ See proposed Rule 201(c) of Regulation Crowdfunding.
    \103\ See Item 403 of Regulation S-K [17 CFR 229.403].
---------------------------------------------------------------------------

Request for Comment
    23. Under the proposed rules the definition of the term ``officer'' 
is consistent with how that term is defined in Securities Act Rule 405 
\104\ and in Exchange Act Rule 3b-2.\105\ Should we instead define 
``officer'' consistent with the definition of ``executive officer'' in 
Securities Act Rule 405 \106\ and in Exchange Act Rule 3b-7?\107\ Why 
or why not? Which definition would be more appropriate for the types of 
issuers that would be relying on the exemption?
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    \104\ 17 CFR 230.405.
    \105\ 17 CFR 240.3b-2.
    \106\ 17 CFR 230.405.
    \107\ 17 CFR 240.3b-7.
---------------------------------------------------------------------------

    24. Are these proposed disclosure requirements relating to the 
issuer and its officers and directors appropriate? Why or why not? 
Should we only require the disclosures specifically called for by 
statute or otherwise modify or eliminate any of the proposed 
requirements? Should we require any additional disclosures (e.g., 
disclosure about significant employees)? Is there other general 
information about the issuer or its officers and directors that we 
should require to be disclosed? If so, what information and why? For 
example, should we require disclosure of any court orders, judgments or 
civil litigation involving any directors and officers, including any 
persons occupying a similar status or performing a similar function? 
Why or why not? If so, what time period should this disclosure cover 
and why?
    25. The proposed rules would require disclosure of the business 
experience of directors and officers of the issuer during the past 
three years. Is the three-year period an appropriate amount of time? 
Why or why not? If not, please discuss what would be an appropriate 
amount of time and why. Should the requirement to disclose the business 
experience of officers and directors include a specific requirement to 
disclose whether the issuer's directors and officers have any prior 
work or business experience in the same type of business as the issuer? 
Why or why not?
    26. The proposed rules would require disclosure of the names of 
persons who are beneficial owners of 20 percent or more of the issuer's 
outstanding voting equity securities, calculated on the basis of voting 
power. Is this approach appropriate? Why or why not? Should the 
proposed rules require disclosure of the names of beneficial owners of 
20 percent or more of any class of the issuer's voting securities, even 
if such beneficial ownership does not exceed 20 percent of all of the 
issuer's outstanding voting equity securities? Why or why not? Should 
the proposed disclosure requirement apply to the names of beneficial 
owners of 20 percent or more, as proposed, or to more than 20 percent 
of the issuer's outstanding voting equity securities? Why or why not?
    27. The proposed rules would require that beneficial ownership be 
calculated as of the most recent practicable date. Is this approach 
appropriate? Why or why not? Should beneficial ownership be calculated 
as of a different date? For example, should the reported beneficial 
ownership only reflect information as of the end of a well-known 
historical period, such as the end of a fiscal year? Please explain. 
Should there be a maximum amount of time from this calculation date to 
the filing to ensure that the information is current? If so, what 
maximum amount of time would be appropriate?
    28. Should we provide additional guidance on how to calculate 
beneficial ownership on the basis of voting power? If so, what should 
that guidance include? Should the proposed rules

[[Page 66440]]

require disclosure of the name of a person who has investment power 
over, an economic exposure to or a direct pecuniary interest in the 
issuer's securities even if that person is not a 20 Percent Beneficial 
Owner? Why or why not?
(b) Description of the Business
    Consistent with Section 4A(b)(1)(C), we are proposing to require an 
issuer to disclose information about its business and business 
plan.\108\ One commenter noted that the term ``business plan'' 
traditionally referred to a document prepared by management for 
internal use only and more recently has been used to refer to a 
marketing document used to solicit investors.\109\ We do not expect 
issuers to provide those types of documents in response to this 
requirement.\110\ Although two commenters suggested that the Commission 
clarify the term ``business plan,'' \111\ the proposed rules would not 
specify the disclosures that an issuer must include in the description 
of the business and the business plan. We understand that issuers 
engaging in crowdfunding transactions may have businesses at various 
stages of development in differing industries, and therefore, we 
believe that the proposed rules should provide flexibility for issuers 
to disclose the information about their businesses.
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    \108\ See proposed Rule 201(d) of Regulation Crowdfunding.
    \109\ See Ohio Division of Securities Letter.
    \110\ Companies filing a registration statement or other filings 
that require a description of the business include a description of 
the business without providing a formal business plan. See Item 101 
of Regulation S-K [17 CFR 229.101]. Our approach under proposed Rule 
201(d) of Regulation Crowdfunding is consistent with that practice.
    \111\ See Cones Letter; Ohio Division of Securities Letter.
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Request for Comment
    29. Are these proposed disclosure requirements appropriate? Why or 
why not? Should we require any additional disclosures? Should we 
prescribe specific disclosure requirements about the business of the 
issuer and the anticipated business plan of the issuer or provide a 
non-exclusive list of the types of information an issuer should 
consider disclosing? Why or why not? If so, what specific disclosures 
about the issuer's business or business plans should we require or 
include in a non-exclusive list? For example, should we explicitly 
require issuers to describe any material contracts of the issuer, any 
material litigation or any outstanding court order or judgment 
affecting the issuer or its property? Why or why not?
    30. Would more specific line item disclosures be more workable for 
issuers relying on Section 4A or provide more useful guidance for such 
issuers? Would such disclosures be more useful to investors? Why or why 
not? For example, should we require issuers to provide a business 
description incorporating the information that a smaller reporting 
company would be required to provide in a registered offering pursuant 
to Item 101(h) of Regulation S-K? \112\ Why or why not? Should we 
require issuers to provide information regarding their plan of 
operations, similar to that required by Item 101(a)(2) of Regulation S-
K \113\ in registered offerings by companies with limited operating 
histories? Why or why not?
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    \112\ 17 CFR 229.101(h).
    \113\ 17 CFR 229.101(a)(2).
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(c) Use of Proceeds
    The proposed rules, consistent with Section 4A(b)(1)(E), would 
require an issuer to provide a description of the purpose and intended 
use of the offering proceeds.\114\ One commenter suggested that we 
require issuers to be specific and detailed when making this 
disclosure.\115\ We expect that such disclosure would provide a 
sufficiently detailed description of the intended use of proceeds to 
permit potential investors to evaluate the investment. For example, an 
issuer may, among other uses, intend to use the proceeds of an offering 
to acquire assets or businesses, compensate the intermediary or its own 
employees or repurchase outstanding securities of the issuer. In its 
description, an issuer should use its judgment regarding the level of 
detail in its disclosures regarding the assets or businesses that the 
issuer anticipates acquiring, if applicable. If the proceeds will be 
used to compensate the intermediary, the issuer should disclose the 
amount to be used for such compensation. If the proceeds will be used 
to compensate existing employees and/or to hire new employees, the 
issuer should consider disclosing whether the proceeds will be used for 
salaries or bonuses and how many employees it plans to hire, as 
applicable. If the issuer will repurchase outstanding issuer 
securities, it should consider disclosing its plans, terms and purpose 
for repurchasing the securities. An issuer also should consider 
disclosing how long the proceeds will satisfy the operational needs of 
the business. If an issuer does not have definitive plans for the 
proceeds, but instead has identified a range of possible uses, then the 
issuer should identify and describe each probable use and factors 
impacting the selection of each particular use.\116\ If an issuer 
indicates that it will accept proceeds in excess of the target offering 
amount,\117\ the issuer would be required to provide a separate, 
reasonably detailed description of the purpose and intended use of any 
excess proceeds with similar specificity.\118\
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    \114\ See proposed Rule 201(i) of Regulation Crowdfunding.
    \115\ See Williams Letter (stating that an issuer should 
disclose how the issuer arrived at the offering target, an 
itemization of expected expenses within the intended use of the 
proceeds, a contingency plan for the use of the proceeds should 
circumstances change and what will be done with any leftover 
proceeds upon completing the intended use).
    \116\ See proposed Instruction to paragraph (i) of proposed Rule 
201 of Regulation Crowdfunding.
    \117\ See Section II.B.1.a.i(d) below.
    \118\ See proposed Instruction to paragraph (i) of proposed Rule 
201 of Regulation Crowdfunding.
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Request for Comment
    31. Are these proposed disclosure requirements appropriate? Why or 
why not? Should we require any additional disclosures, including 
specifying items required to be disclosed? Is the proposed standard 
sufficiently clear such that it would result in investors being 
provided with an adequate amount of information? If not, how should we 
change the disclosure requirement? Should the rules include a non-
exclusive list of examples that issuers should consider when providing 
disclosure, similar to the examples discussed above?
    32. Under what circumstances, if any, should an issuer be required 
to update the use of proceeds disclosures?
    33. Is there other information regarding the purpose of the 
offering and use of proceeds that we should require to be disclosed? If 
so, what information? Should any of the examples above be included as 
requirements in the rules? Why or why not?
(d) Target Offering Amount and Deadline
    Consistent with Section 4A(b)(1)(F), the proposed rules would 
require issuers to disclose the target offering amount and the deadline 
to reach the target offering amount.\119\ In addition, an issuer would 
be required to disclose whether it will accept investments in excess of 
the target offering amount and, if it will, the issuer would be 
required to disclose, at the commencement of the offering, the maximum 
amount it will

[[Page 66441]]

accept.\120\ For example, if the issuer sets a target offering amount 
of $200,000 but is willing to accept up to $750,000, the issuer would 
be required to disclose both the $200,000 target offering amount and 
the $750,000 maximum offering amount that it will accept.\121\ In 
addition, the issuer would be required to disclose, at the commencement 
of the offering, how shares in oversubscribed offerings would be 
allocated.\122\ If this disclosure is made, we do not believe it would 
be necessary for us to prescribe how oversubscribed offerings would be 
allocated because this approach would allow issuers the flexibility to 
structure the offering as they believe appropriate. At the same time, 
this approach would provide investors with the disclosure they need to 
make an informed investment decision.
---------------------------------------------------------------------------

    \119\ See proposed Rule 201(g) of Regulation Crowdfunding.
    \120\ See proposed Rule 201(h) of Regulation Crowdfunding.
    \121\ The issuer in this case also would need to disclose the 
intended use of the additional proceeds. See proposed Instruction to 
paragraph (i) of proposed Rule 201 of Regulation Crowdfunding. See 
also Section II.B.1.a.i(c) above. In addition, the issuer in this 
case would need to provide audited financial statements at the 
commencement of the offering, rather than financial statements 
reviewed by an independent public accountant as would be required 
for the lower target amount. See Section II.B.1.a.ii below for a 
discussion of the financial statements requirements. As another 
example, an issuer that sets a target offering amount of $80,000 and 
a maximum offering amount of $105,000 would be required to provide 
financial statements reviewed by an independent public accountant 
(rather than tax returns for the most recently completed fiscal year 
and financial statements certified by the principal executive 
officer).
    \122\ See proposed Rule 201(h) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that investors in a crowdfunding transaction would 
benefit from clear disclosure about their right to cancel, the 
circumstances under which an issuer may close an offering early and the 
need to reconfirm the investment commitment under certain 
circumstances, so investors are more aware of their rights to rescind 
an investment commitment.\123\ As such, we propose to require issuers 
to describe the process to cancel an investment commitment or to 
complete the transaction once the target amount is met,\124\ including 
a statement that:
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    \123\ Although not specifically required by Title III, 
Securities Act Section 4A(b)(1)(I) provides us with discretion to 
require issuers engaged in transactions in reliance on Section 
4(a)(6) to provide additional information for the protection of 
investors and in the public interest.
    \124\ See proposed Rule 201(j) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     Investors may cancel an investment commitment until 48 
hours prior to the deadline identified in the issuer's offering 
materials; \125\
---------------------------------------------------------------------------

    \125\ Section II.C.6 below further discusses the proposed 
cancelation provisions and requests comments on the proposed 
approach.
---------------------------------------------------------------------------

     the intermediary will notify investors when the target 
offering amount has been met;
     if an issuer reaches the target offering amount prior to 
the deadline identified in its offering materials, it may close the 
offering early if it provides notice about the new offering deadline at 
least five business days prior to that new deadline (absent another 
material change that would require an extension of the offering and 
reconfirmation of the investment commitment); \126\ and
---------------------------------------------------------------------------

    \126\ Id.
---------------------------------------------------------------------------

     if an investor does not cancel an investment commitment 
before the 48-hour period prior to the offering deadline, the funds 
will be released to the issuer upon closing of the offering and the 
investor will receive securities in exchange for his or her investment.
    We also propose to require issuers to disclose that if an investor 
does not reconfirm his or her investment commitment after a material 
change is made to the offering, the investor's investment commitment 
will be cancelled and committed funds will be returned.\127\ The 
proposed rules also would require issuers to disclose that if the sum 
of the investment commitments does not equal or exceed the target 
offering amount at the time of the offering deadline, no securities 
will be sold in the offering, investment commitments will be cancelled 
and committed funds will be returned.\128\
---------------------------------------------------------------------------

    \127\ See proposed Rule 201(k) of Regulation Crowdfunding.
    \128\ See proposed Rule 201(g) of Regulation Crowdfunding. See 
also Section 4A(a)(7) (requiring intermediaries to ``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 discussion in Section II.C.6 
below.
---------------------------------------------------------------------------

Request for Comment
    34. Are these proposed disclosure requirements appropriate? Why or 
why not? Should we modify or eliminate any of the proposed 
requirements? Should we require any additional disclosures?
    35. The proposed rules would require an issuer willing to accept 
investments in excess of the target offering amount to provide, at the 
commencement of the offering, the disclosure that would be required in 
the event the offer is oversubscribed. Is this approach appropriate? 
Why or why not?
(e) Offering Price
    Consistent with Section 4A(b)(1)(G), the proposed rules would 
require an issuer to disclose the offering price of the securities or 
the method for determining the price, provided that prior to the sale, 
each investor is provided in writing the final price and all required 
disclosures.\129\
---------------------------------------------------------------------------

    \129\ See proposed Rule 201(l) of Regulation Crowdfunding. See 
also Sections II.C.5 and II.C.6 below for a discussion of 
information that issuers would be required to provide to investors.
---------------------------------------------------------------------------

Request for Comment
    36. Are these proposed disclosure requirements appropriate? Why or 
why not? Should we modify or eliminate any of the proposed 
requirements? Should we require any additional disclosures? Please 
explain.
(f) Ownership and Capital Structure
    Consistent with Section 4A(b)(1)(H), the proposed rules would 
require an issuer to provide a description of its ownership and capital 
structure.\130\ This disclosure would include:
---------------------------------------------------------------------------

    \130\ See proposed Rule 201(m) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     The terms of the securities being offered and each other 
class of security of the issuer, including the number of securities 
being offered and/or outstanding, whether or not such securities have 
voting rights, any limitations on such voting rights, how the terms of 
the securities being offered may be modified and a summary of the 
differences between such securities and each other class of security of 
the issuer, and 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;
     a description of how the exercise of the rights held by 
the principal shareholders of the issuer could affect the purchasers of 
the securities;
     the name and ownership level of persons who are 20 Percent 
Beneficial Owners;
     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;
     the risks to purchasers of the securities relating to 
minority ownership in the issuer and the risks associated with 
corporate actions including additional issuances of securities, issuer 
repurchases of securities, a sale of the issuer or of assets of the 
issuer or transactions with related parties; and
     a description of the restrictions on the transfer of the 
securities.
    We believe that investors in crowdfunding transactions would 
benefit from clear disclosure about the terms of the securities being 
offered and each other class of security of the issuer. The proposed 
rules would require disclosure of the number of securities being 
offered and/or outstanding,

[[Page 66442]]

whether or not such securities have voting rights, any limitations on 
such voting rights and a description of the restrictions on the 
transfer of the securities.\131\ Although Section 4A(b)(1)(H) does not 
specifically call for this disclosure, we believe that such disclosure 
would be necessary to provide investors with a more complete picture of 
the issuer's capital structure than would be obtained solely pursuant 
to the statutory requirements. We believe this would help investors 
better evaluate the terms of the offer before making an investment 
decision.
---------------------------------------------------------------------------

    \131\ See proposed Rule 501 of Regulation Crowdfunding and 
Section II.E.2 below for a discussion of restrictions on resales.
---------------------------------------------------------------------------

Request for Comment
    37. Are these proposed disclosure requirements appropriate? Why or 
why not? Should we modify or eliminate any of the proposed 
requirements? Should we require any additional disclosures? Please 
explain.
(g) Additional Disclosure Requirements
    In addition to the statutory disclosure requirements,\132\ we 
propose to require:
---------------------------------------------------------------------------

    \132\ Section 4A(b)(1)(I) provides us with discretion to require 
crowdfunding issuers to provide additional information for the 
protection of investors and in the public interest.
---------------------------------------------------------------------------

     Disclosure of the name, Commission file number and Central 
Registration Depository number (``CRD number'') \133\ (as applicable) 
of the intermediary through which the offering is being conducted; 
\134\
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    \133\ The Financial Industry Regulatory Authority, Inc. 
(``FINRA'') will issue the CRD number.
    \134\ See proposed Rule 201(n) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     disclosure of the amount of compensation paid to the 
intermediary for conducting the offering, including the amount of any 
referral or other fees associated with the offering; \135\
---------------------------------------------------------------------------

    \135\ See proposed Rule 201(o) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     disclosure of certain legends to be included in the 
offering statement; \136\
---------------------------------------------------------------------------

    \136\ See Item 2 of General Instruction III to proposed Form C.
---------------------------------------------------------------------------

     disclosure of the current number of employees of the 
issuer; \137\
---------------------------------------------------------------------------

    \137\ See proposed Rule 201(e) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     a discussion of the material factors that make an 
investment in the issuer speculative or risky; \138\
---------------------------------------------------------------------------

    \138\ See proposed Rule 201(f) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     a description of the material terms of any indebtedness of 
the issuer, including the amount, interest rate, maturity date and any 
other material terms; \139\
---------------------------------------------------------------------------

    \139\ See proposed Rule 201(p) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     disclosure of exempt offerings conducted within the past 
three years; \140\ and
---------------------------------------------------------------------------

    \140\ See proposed Rule 201(q) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     disclosure of certain related-party transactions.\141\
---------------------------------------------------------------------------

    \141\ See proposed Rule 201(r) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Requiring an issuer to identify the name, Commission file number 
and CRD number (as applicable) of the intermediary through which the 
offering is being conducted should assist investors and regulators in 
obtaining information about the offering and facilitate monitoring the 
use of the exemption. It also could help investors obtain background 
information on the intermediary, for instance through filings made by 
the intermediary with the Commission as well as through the Financial 
Industry Regulatory Authority's (``FINRA'') BrokerCheck system for 
brokers \142\ or a similar system, if created, for funding portals.
---------------------------------------------------------------------------

    \142\ See FINRA, FINRA BrokerCheck, available at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/P015175.
---------------------------------------------------------------------------

    In addition, requiring an issuer to disclose the amount of 
compensation paid to the intermediary for conducting the offering, 
including the amount of referral or other fees associated with the 
offering, would permit investors and regulators to determine how much 
of the proceeds of the offering are used to compensate the intermediary 
and to facilitate the monitoring of compensation paid to 
intermediaries.
    The requirement for an issuer to include in the offering statement 
certain specified legends about the risks of investing in a 
crowdfunding transaction is intended to help investors understand the 
general risks of investing in a crowdfunding transaction. In addition, 
the requirement that an issuer include in the offering statement 
certain legends about the required ongoing reports, including how those 
reports would be made available to investors and how an issuer may 
terminate its ongoing reporting obligations, is intended to help 
investors understand an issuer's ongoing reporting obligations and 
inform investors of how they will be able to access those reports.
    The proposed rules also would require disclosure of the material 
factors that make an investment in the issuer speculative or 
risky.\143\ We believe that this risk factor information should help 
investors to better understand the risks of investing in a specific 
issuer's offering.
---------------------------------------------------------------------------

    \143\ See proposed Rule 201(f) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules also would require disclosure of certain 
related-party transactions between the issuer and any director or 
officer of the issuer, any person who is a 20 Percent Beneficial Owner, 
any promoter of the issuer (if the issuer was incorporated or organized 
within the past three years), or immediate family members of the 
foregoing persons.\144\ For purposes of this related-party transactions 
disclosure, ``immediate family member'' would have the same meaning 
that it has in Item 404 of Regulation S-K,\145\ which relates to the 
disclosure of related-party transactions for Exchange Act reporting 
companies. This related-party transactions disclosure should assist 
investors in obtaining a more complete picture of the financial 
relationships between certain related parties and the issuer.
---------------------------------------------------------------------------

    \144\ See proposed Rule 201(r) of Regulation Crowdfunding.
    \145\ 17 CFR 229.404. See proposed Rule 201(r)(4) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    Several commenters suggested that we should model the disclosure 
form after Securities Act Form 1-A \146\ or the North American 
Securities Administrators Association's (``NASAA'') uniform Small 
Company Offering Registration Form (U-7).\147\ The proposed disclosure 
requirements regarding risk factors and related-party transactions are 
similar to those in Form 1-A except that, with respect to the 
disclosure about related-party transactions, the proposed rules would 
require disclosure about transactions since the beginning of the 
issuer's last full fiscal year, rather than the two fiscal years 
required in Form 1-A. Given the early stage of development of the small 
businesses and startups that we expect would seek to raise capital 
pursuant to Section 4(a)(6), as well as the investment limitations 
prescribed by the proposed rules, we believe that limiting the 
disclosure to related-party transactions since the beginning of the 
issuer's last full fiscal year will reduce the burden on issuers while 
still providing investors with sufficient information to evaluate the 
relationship between related parties and the issuer. Also, the proposed 
rules only would require disclosure of related-party transactions in 
excess of five percent of the aggregate amount of capital raised by the 
issuer in reliance on Section 4(a)(6) during the preceding 12-month 
period, inclusive of the amount the issuer seeks to raise in the 
current offering under Section 4(a)(6). For

[[Page 66443]]

example, an issuer seeking to raise $1 million would be required to 
disclose related-party transactions in excess of $50,000, which is the 
same threshold required in Form 1-A. We believe that, in light of the 
sizes and varieties of issuers that may make offerings in reliance on 
Section 4(a)(6), this scaled approach is more appropriate than the 
fixed amount approach used in Form 1-A, which might be disproportionate 
to the size of certain offerings and issuers.
---------------------------------------------------------------------------

    \146\ 17 CFR 239.90. Form 1-A is the form used for securities 
offerings made pursuant to Regulation A.
    \147\ See Commonwealth of Massachusetts Letter; Coan Letter; 
Liles Letter 1; Vim Funding Letter; NASAA Letter.
---------------------------------------------------------------------------

    Two commenters suggested that the Commission require the issuer to 
disclose the total number of employees.\148\ The proposed rules would 
require disclosure of the issuer's current number of employees.\149\ 
This information should assist investors and regulators in obtaining 
information about the size of the businesses using the exemption. This 
information would make data available that could be used to evaluate 
whether the businesses using the exemption are creating additional 
jobs.\150\
---------------------------------------------------------------------------

    \148\ See NASAA Letter; Ohio Division of Securities Letter.
    \149\ See proposed Rule 201(e) of Regulation Crowdfunding.
    \150\ Issuers would be required to disclose the current number 
of employees in the offering document and the ongoing reports, which 
should permit comparison of the number of employees over different 
time periods.
---------------------------------------------------------------------------

    The proposed rules also would require disclosure of the material 
terms of any indebtedness of the issuer, including, among other items, 
the amount, interest rate and maturity date.\151\ We believe this 
information would be important to investors because servicing debt 
could place additional pressures on an issuer in the early stages of 
development.
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    \151\ See proposed Rule 201(p) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In addition, the proposed rules would require disclosure of exempt 
offerings conducted within the past three years.\152\ For each exempt 
offering within the past three years, the proposed rules would require 
a description of the date of the offering, the offering exemption 
relied upon, the type of securities offered and the amount of 
securities sold and the use of proceeds.\153\ We believe that it would 
be important to investors to know of prior offerings of securities. 
This information would better inform investors about the capital 
structure of the issuer and would provide information about how prior 
offerings were valued.
---------------------------------------------------------------------------

    \152\ See proposed Rule 201(q) Regulation Crowdfunding.
    \153\ See proposed Instruction to paragraph (q) of proposed Rule 
201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    38. Are these proposed disclosure requirements appropriate? Why or 
why not? Should we modify or eliminate any of the proposed 
requirements? If so, how and why?
    39. To assist investors and regulators in obtaining information 
about the offering and to facilitate monitoring the use of the 
exemption, the proposed rules would require an issuer to identify the 
name, Commission file number and CRD number (as applicable) of the 
intermediary through which the offering is being conducted. Is there a 
better approach? What other information should be provided? If so, 
please describe it.
    40. Should we require disclosure of the amount of compensation paid 
to the intermediary, as proposed? Why or why not? Should we require 
issuers to separately disclose the amounts paid for conducting the 
offering and the amounts paid for other services? Why or why not?
    41. Should we require the issuer to include certain specified 
legends about the risks of investing in a crowdfunding transaction and 
disclosure of the material factors that make an investment in the 
issuer speculative or risky, as proposed? Why or why not? Should we 
provide examples in our rules of the types of material risk factors an 
issuer should consider disclosing? Why or why not? If so, what should 
those examples be?
    42. Should we require disclosure of certain related-party 
transactions, as proposed? Why or why not? The proposed rules would 
require disclosures of certain transactions between the issuer and 
directors or officers of the issuer, 20 Percent Beneficial Owners, any 
promoter of the issuer, or relatives of the foregoing persons. Is this 
the appropriate group of persons? Should we limit or expand the list of 
persons? If so, how and why?
    43. As proposed, immediate family member, for purposes of related-
party transactions disclosure, would have the same meaning that it has 
in Item 404 of Regulation S-K.\154\ Is this the appropriate approach? 
Why or why not? If not, what would be a more appropriate definition and 
why? For purposes of restrictions on resales of securities issued in 
transactions made in reliance on Section 4(a)(6), ``member of the 
family of the purchaser or the equivalent'' would, as proposed, 
expressly include spousal equivalents.\155\ Should the definition of 
immediate family member for purposes of related-party transactions 
disclosure also expressly include spousal equivalents, or would 
including spousal equivalents create confusion in light of the fact 
that the definition for purposes of related-party transactions already 
includes any persons (other than a tenant or employee) sharing the same 
household? Please explain.
---------------------------------------------------------------------------

    \154\ 17 CFR 229.404. See proposed Rule 201(r)(4) of Regulation 
Crowdfunding.
    \155\ See proposed Rule 501(c) of Regulation Crowdfunding and 
the related instruction thereto. See also Section II.E.2 below for a 
discussion of spousal equivalent.
---------------------------------------------------------------------------

    44. Is it appropriate to limit the disclosure about related-party 
transactions to transactions since the beginning of the issuer's last 
full fiscal year? Why or why not? Is it appropriate to limit disclosure 
to those related-party transactions that exceed five percent of the 
aggregate amount of capital raised by the issuer in reliance on Section 
4(a)(6)? Should we instead require disclosure of all related-party 
transactions or all transactions in excess of an absolute threshold 
amount?
    45. Is it appropriate to require a description of any prior exempt 
offerings conducted within the past three years, as proposed? Why or 
why not? Would another time period (e.g., one year, five years, etc.) 
or no time limit be more appropriate?
    46. Should we require any additional disclosures (e.g., should we 
require disclosure about executive compensation and, if so, what level 
of detail should be required in such disclosure)? If so, what 
disclosures and why?
ii. Financial Disclosure
    Section 4A(b)(1)(D) requires ``a description of the financial 
condition of the issuer.'' It also establishes a framework of tiered 
financial disclosure requirements based on aggregate target offering 
amounts of the offering and all other offerings made in reliance on 
Section 4(a)(6) within the preceding 12-month period:
     issuers offering $100,000 or less are required to file 
with the Commission, provide to investors and the relevant intermediary 
and make available to potential investors income tax returns filed by 
the issuer for the most recently completed year (if any) and financial 
statements that are certified by the principal executive officer to be 
true and complete in all material respects;
     issuers offering more than $100,000, but not more than 
$500,000, are required to file with the Commission, provide to 
investors and the relevant intermediary and make available to

[[Page 66444]]

potential investors financial statements reviewed by a public 
accountant that is independent of the issuer; and
     issuers offering more than $500,000 (or such other amount 
as the Commission may establish) are required to file with the 
Commission, provide to investors and the relevant intermediary and make 
available to potential investors audited financial statements.
    Section 4A(h) further provides that these dollar amounts shall be 
adjusted by the Commission not less frequently than once every five 
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.
(a) Financial Condition Discussion
    Consistent with Section 4A(b)(1)(D), the proposed rules would 
require an issuer to provide a narrative discussion of its financial 
condition.\156\ This discussion should address, to the extent material, 
the issuer's historical results of operations in addition to its 
liquidity and capital resources. If an issuer does not have a prior 
operating history, the discussion should focus on financial milestones 
and operational, liquidity and other challenges. If an issuer has a 
prior operating history, the discussion should focus on whether 
historical earnings and cash flows are representative of what investors 
should expect in the future. An issuer's discussion of its financial 
condition should take into account the proceeds of the offering and any 
other known or pending sources of capital. Issuers also should discuss 
how the proceeds from the offering will affect their liquidity and 
whether these funds and any other additional funds are necessary to the 
viability of the business. In addition, issuers should describe the 
other available sources of capital to the business, such as lines of 
credit or required contributions by principal shareholders.
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    \156\ See proposed Rule 201(s) of Regulation Crowdfunding.
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    We expect that the discussion required by the proposed rule and 
instruction would inform investors about the financial condition of the 
issuer in a manner similar to the management's discussion and analysis 
of financial condition and results of operations (``MD&A'') required by 
Item 303 of Regulation S-K \157\ for registered offerings. Because 
issuers seeking to engage in crowdfunding transactions would likely be 
smaller, less complex and at an early stage of development compared to 
issuers conducting registered offerings or Exchange Act reporting 
companies, we expect that the discussion would not generally need to be 
as lengthy or detailed as the MD&A of Exchange Act reporting companies. 
We are not proposing to prescribe content or format for this 
information, but rather to set forth principles of disclosure. To the 
extent these items of disclosure overlap with the issuer's discussion 
of its business or business plan, issuers are not required to make 
duplicate disclosures. While we are not proposing to mandate a specific 
presentation, we expect issuers to present the required disclosures, 
including any other information that would be material to an investor, 
in a clear and understandable manner.
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    \157\ 17 CFR 229.303.
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Request for Comment
    47. Are these proposed requirements for the discussion of the 
financial condition of the issuer appropriate? Why or why not? Should 
we modify or eliminate any of the requirements in the proposed rule or 
instruction? If so, which ones and why? Should we require any 
additional disclosures? If so, what disclosures and why? Should we 
prescribe a specific format or presentation for the disclosure? Please 
explain.
    48. Should we exempt issuers with no operating history from the 
requirement to provide a discussion of their financial condition? If 
so, why? Should we require such issuers to specifically state that they 
do not have an operating history, as proposed? Why or why not?
    49. In the discussion of the issuer's financial condition, should 
we require issuers to provide specific disclosure about prior capital 
raising transactions? Why or why not? Should we require specific 
disclosure relating to prior transactions made pursuant to Section 
4(a)(6), including crowdfunding transactions in which the target amount 
was not reached? Why or why not?
(b) Financial Disclosures
    As noted above, Section 4A(b)(1)(D) establishes tiered financial 
statement disclosure requirements that are based on aggregate target 
offering amounts within the preceding 12-month period. We received a 
range of comments on this requirement.
    In response to the requirement for issuers offering $100,000 or 
less to file with the Commission, provide to investors and the relevant 
intermediary and make available to potential investors their income tax 
returns for the most recently completed year, one commenter suggested 
that, even if redacted, income tax returns should not be made 
public.\158\ One commenter suggested that financial statements should 
cover the most recently completed fiscal year.\159\ Other commenters 
suggested that issuers offering $100,000 or less should provide 
financial statements prepared in accordance with generally accepted 
accounting principles (``GAAP''), including explanatory notes, even 
though those financial statements would not be subject to an 
independent accountant's review or audit.\160\
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    \158\ See RocketHub Letter 1 (stating that information can be 
taken from the issuer's tax return and entered digitally, by the 
issuer, for inclusion in the offering materials).
    \159\ See CompTIA Letter.
    \160\ See Commonwealth of Massachusetts Letter; NASAA Letter.
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    For issuers offering more than $100,000, but not more than 
$500,000, one commenter suggested that the Commission require the 
financial statement review to be done by accountants in good standing 
for at least five years.\161\ Another commenter stated that issuers in 
existence for less than 12 months should not be required to provide 
independently reviewed financial statements.\162\
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    \161\ See Philipose Letter 1.
    \162\ See CFIRA Letter 2.
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    Several commenters objected to the requirement for issuers to 
provide audited financial statements when offering more than $500,000 
and suggested alternatives.\163\ One

[[Page 66445]]

commenter suggested that an issuer should not be required to provide 
audited financial statements if: (1) The target offering amount is not 
greater than $100,000 (notwithstanding any other transactions made in 
reliance on Section 4(a)(6) within the preceding 12-month period); and 
(2) the issuer has not conducted a transaction in reliance on Section 
4(a)(6) within the preceding six months.\164\ Another commenter 
suggested that issuers should be required to identify the accountant 
used to certify or audit the financial statements.\165\
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    \163\ See CFIRA Letter 2 (stating that the requirement to 
provide audited financial statements should apply solely to issuers 
that have been engaged in their current business for more than 12 
months and which are seeking to raise at least $1,000,000); Vim 
Funding Letter (stating that the statute gives the Commission the 
discretion to raise the threshold at which audits are required, ``in 
theory all the way up to the $1,000,000 level'' and asking that the 
Commission exercise its discretion); RocketHub Letter 1 (stating 
that the threshold for the audit requirement should be raised to an 
amount in excess of $1,000,000 and audited financial statements 
should only be required for issuers that have been in operation for 
more than two years); Parker Letter (stating that the audit 
requirement is an unnecessary expense); Cera Technology Letter 
(stating that the audit requirement should be raised to $1,000,000); 
ABA Letter 1 (stating that the Commission should consider a higher 
threshold, such as $750,000, or identify additional criteria, such 
as revenue levels, that would require audited financial statements); 
Loofbourrow Letter (stating that the Commission should not impose an 
audit requirement); InitialCrowdOffering Letter (stating that the 
requirement for audited financial statements should be eliminated); 
Genedyne Letter 1 (stating that the Commission should not impose an 
audit requirement for offerings under $1,000,000); BrainThrob 
Laboratories Letter (stating that the Commission should defer 
imposing an audit requirement until further study can determine 
whether it is economically beneficial to the investment community); 
Vogele Letter (stating that obtaining audited financial statements 
takes time and new businesses do not have a lot of time). See also 
2012 SEC Government-Business Forum, note 29 (recommending that the 
Commission consider raising the offering amount at which audited 
financial statements are required).
    \164\ See ABA Letter 1.
    \165\ See RocketHub Letter 1 (stating that disclosure of the 
identity of the accountant used to review or audit the financial 
statements would allow investors to conduct diligence on the 
accountant and permit the intermediary to track accountant 
activities and block issuers on their platform from using 
accountants who produce poor quality or fraudulent work).
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    Under the proposed rules, in determining the financial statements 
that would be required, an issuer would need to aggregate the amounts 
offered and sold in reliance on Section 4(a)(6) within the preceding 
12-month period with the target offering amount (or the maximum 
offering amount, including the aggregate amount of any possible 
oversubscriptions if the issuer will accept oversubscriptions) of the 
offering for which disclosure is being provided.\166\ The statute 
refers to aggregate ``offering amounts'' within the preceding 12-month 
period. We are proposing to require issuers to aggregate only amounts 
offered and sold (rather than all offered amounts, including those not 
sold) within the preceding 12-month period with the amount the issuer 
is seeking to raise in the transaction.\167\ We do not believe that 
this provision should require an issuer to aggregate amounts offered in 
prior offerings but not sold (for example, because the target offering 
amount was not met). Otherwise, an issuer that initially sought to 
raise $400,000, did not complete the crowdfunding transaction because 
the target offering amount was not met, and would like to raise 
$200,000 in a second attempt would be required to provide audited 
financial statements rather than financial statements reviewed by a 
public accountant in connection with that $200,000 offering. We believe 
that this result would increase costs to issuers when those issuers 
were unsuccessful in prior offerings within the preceding 12-month 
period. Requiring issuers to aggregate amounts offered and sold should 
still prevent issuers from circumventing the framework of tiered 
financial disclosure requirements by structuring a larger offering as a 
series of smaller offerings.\168\ We do not propose to prohibit issuers 
from providing financial statements that meet the requirements for a 
higher aggregate target offering amount than the proposed rules would 
require.\169\
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    \166\ See proposed Instruction 1 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
    \167\ See also Hutchens Letter (suggesting that the Commission 
``devise a rule that creates a relationship between the amount of 
capital actually raised by an issuer in a crowdfunding offering and 
the degree of financial disclosure the issuer must provide'').
    \168\ For example, we believe aggregating completed offerings 
within the preceding 12-month period is necessary to avoid having an 
issuer who seeks to raise more than $500,000, which requires audited 
financial statements, structure the offering as a series of smaller 
offerings to circumvent this requirement.
    \169\ See proposed Instruction 10 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
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    The proposed rules would require all issuers to file with the 
Commission, provide to investors and the relevant intermediary and make 
available to potential investors a complete set of their financial 
statements (a balance sheet, income statement, statement of cash flows 
and statement of changes in owners' equity), prepared in accordance 
with U.S. generally accepted accounting principles (``U.S. GAAP''), 
covering the shorter of the two most recently completed fiscal years or 
the period since inception of the business.\170\ In proposing this 
requirement we considered commenters' suggestions that we require 
financial statements prepared in accordance with U.S. GAAP,\171\ as 
well as the fact that the same requirement applies to offerings under 
Regulation A.\172\
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    \170\ See proposed Instruction 2 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding. Financial statements prepared 
in accordance with U.S. GAAP are generally self-scaling to the size 
and complexity of the issuer, which should reduce the burden of 
preparing financial statements for many issuers.
    \171\ See Commonwealth of Massachusetts Letter; NASAA Letter.
    \172\ See Part F/S of Form 1-A. [17 CFR 239.90].
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    We considered proposing to require financial statements covering 
only the most recently completed fiscal year, as one commenter 
suggested,\173\ rather than the two most recently completed fiscal 
years; however, we believe that requiring a second year will provide 
investors with a basis for comparison against the most recently 
completed period, without substantially increasing the burden for the 
issuer.\174\ We also considered proposing to require a third year of 
financial statements, but we are concerned that this could be overly 
burdensome for the types of issuers that likely would engage in 
crowdfunding transactions.\175\
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    \173\ See CompTIA Letter.
    \174\ See Smaller Reporting Company Regulatory Relief and 
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan. 
4, 2008)] (in the context of requiring two years, rather than just 
one year, of audited balance sheet data for smaller reporting 
companies, the Commission noted that comparative balance sheets will 
provide a much more meaningful presentation for investors without a 
significant additional burden on smaller reporting companies, since 
the earlier year data should be readily available for the purposes 
of preparing the other financial statements). See also SEC Advisory 
Committee on Smaller Public Companies, Final Report (Apr. 23, 2006), 
available at http://www.sec.gov/info/smallbus/acspc.shtml.
    \175\ Requiring a third year of financial statements also would 
place a greater burden on issuers relying on Section 4(a)(6) than on 
emerging growth companies conducting registered offerings. See 
Section 102(b) of the JOBS Act.
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    During the first 120 days of the issuer's fiscal year, an issuer 
would be able to conduct an offering in reliance on Section 4(a)(6) and 
the related rules using financial statements for the fiscal year prior 
to the most recently completed fiscal year if the financial statements 
for the most recently completed fiscal year are not otherwise available 
or required to be filed.\176\ We believe this accommodation is needed 
because otherwise issuers would not be able to conduct offerings in 
reliance on Section 4(a)(6) for a period of time between the end of 
their fiscal year and the date when the financial statements for that 
period are available.\177\ The issuer could not do this, however, if it 
was otherwise required to provide updated financial statements by the 
ongoing reporting requirements \178\ or financial statements are 
otherwise available.\179\ For example, if an issuer that has a calendar 
fiscal year end conducts an offering in April 2014, it would be 
permitted to include financial statements for the fiscal year ended 
December 31, 2012 if the financial statements for the fiscal year ended

[[Page 66446]]

December 31, 2013 are not yet available. Once more than 120 days have 
passed since the end of the issuer's most recent fiscal year, the 
issuer would be required to include financial statements for its most 
recent fiscal year.\180\ Regardless of the age of the financial 
statements, an issuer would be required to include a discussion of any 
material changes in the financial condition of the issuer during any 
time period subsequent to the period for which financial statements are 
provided, including changes in reported revenue or net income, to 
inform investors of changes to the financial condition of the 
issuer.\181\
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    \176\ See proposed Instruction 8 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
    \177\ Issuers conducting a registered offering after the end of 
their fiscal year also are permitted to use financial statements for 
their prior period until the 90th day after their fiscal-year end 
for non-accelerated filers (or 75th day for accelerated filers and 
60th day for large accelerated filers) if certain conditions are 
satisfied. See Rule 3-01(c) of Regulation S-X [17 CFR 210.3-01(c)].
    \178\ See Section II.B.2 below for a discussion of ongoing 
reporting requirements.
    \179\ Additionally, if the offering period remains open beyond 
120 days after the end of the issuer's fiscal year (resulting in 
financial statements older than 485 days at the time the offering 
closes), then the issuer would be required to update the disclosure 
in the offering statement to include financial statements for the 
most recently completed fiscal year. See proposed Instruction 8 to 
paragraph (t) of proposed Rule 201 of Regulation Crowdfunding.
    \180\ Id.
    \181\ See proposed Instruction 9 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
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    Section 4A(b)(1)(D)(i) requires issuers to file with the 
Commission, provide to investors and the relevant intermediary and make 
available to potential investors income tax returns and financial 
statements. As specified in the statute, we are proposing to require an 
issuer that is conducting an offering of $100,000 or less in reliance 
on Section 4(a)(6) to provide its filed income tax returns for the most 
recently completed fiscal year, if any, and its financial statements 
certified by its principal executive officer.\182\ Although one 
commenter suggested the Commission should provide otherwise,\183\ the 
statute specifically calls for the Commission to require the filing of 
income tax returns. To address the privacy concerns raised by 
commenters with regard to the requirement to provide tax returns, we 
are proposing to require issuers to redact personally identifiable 
information, such as social security numbers, from their tax returns 
before filing. Issuers that offer securities in reliance on Section 
4(a)(6) before filing their tax returns for the most recently completed 
fiscal year would be allowed to use the tax return filed for the prior 
year, provided that the issuer discloses any material changes since 
that prior year. In addition, the issuer would be required to provide 
the tax return for the most recent fiscal year when filed with the U.S. 
Internal Revenue Service (if filed during the offering period). With 
regard to the requirement to provide financial statements that are 
certified to be true and complete in all material respects, we are 
proposing a form of the certification that would be provided by the 
issuer's principal executive officer.\184\
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    \182\ See proposed Rule 201(t)(1) of Regulation Crowdfunding.
    \183\ See RocketHub Letter 1.
    \184\ See proposed Instruction 4 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
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    For offerings of more than $100,000, but not more than $500,000, 
Section 4A(b)(1)(D)(ii) requires issuers to file with the Commission, 
provide to investors and the relevant intermediary and make available 
to potential investors financial statements reviewed by a public 
accountant who is ``independent'' of the issuer, using professional 
standards and procedures or standards and procedures established by the 
Commission for this purpose. The statute does not define the term 
``independent.'' We propose that to qualify as an independent public 
accountant for purposes of this requirement, the accountant would need 
to comply with the Commission's independence rules, which are set forth 
in Rule 2-01 of Regulation S-X.\185\ We believe that accounting 
professionals could benefit from the guidance the Commission and staff 
have provided about these independence rules. We also believe that 
financial statement reviews under these standards could provide 
investors with more confidence regarding the reliability of the 
financial statements.\186\ An issuer subject to this requirement that 
seeks to eventually become an Exchange Act reporting company may have 
an easier transition because the issuer would already be complying with 
our independence rules.\187\
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    \185\ 17 CFR 210.2-01. Rule 2-01 of Regulation S-X is designed 
to ensure that auditors are qualified and independent both in fact 
and in appearance. The rule sets forth restrictions on, including 
but not limited to, financial, employment, and business 
relationships between an accountant and a client and restrictions on 
an accountant providing certain non-audit services to a client. The 
general standard of independence is set forth in Rule 2-01(b). The 
rule does not purport to, and the Commission could not, consider all 
the circumstances that raise independence concerns, and these are 
subject to the general standard in paragraph (b) of Rule 2-01. In 
considering this standard, the Commission looks in the first 
instance to whether a relationship or the provision of a service: 
(a) Creates a mutual or conflicting interest between the accountant 
and the client; (b) places the accountant in the position of 
auditing his or her own work; (c) results in the accountant acting 
as management or an employee of the client; or (d) places the 
accountant in a position of being an advocate for the client.
    \186\ For example, under the Commission's independence rules, an 
auditor cannot provide bookkeeping services to an audit client, so 
investors would be able to rely on the benefits that accompany the 
prohibition against an auditor auditing its own work. See Rule 2-
01(c)(4) of Regulation S-X [17 CFR 210.2-01(c)(4)].
    \187\ Using an accountant that is not independent in accordance 
with our independence rules could result in increased expense and 
delay to the extent that an issuer seeking to become an Exchange Act 
reporting company would need to obtain an audit of the financial 
statements by an accountant complying with the Commission's 
independence standards.
---------------------------------------------------------------------------

    The statute also gives the Commission discretion to determine the 
professional standards and procedures used for the review of the 
financial statements. To implement this requirement, the proposed rules 
would require issuers to provide financial statements reviewed in 
accordance with the Statements on Standards for Accounting and Review 
Services (``SSARS'') issued by the Accounting and Review Services 
Committee of the American Institute of Certified Public Accountants 
(``AICPA'').\188\ We are not proposing new review standards for 
purposes of these rules at this time because we do not believe it is 
necessary. The AICPA's review standard is widely utilized, and we are 
not aware of any other widely utilized standards for reviews. Many 
accountants reviewing financial statements of crowdfunding issuers 
should be familiar with the AICPA's standards and procedures for 
review, which could make it less burdensome for issuers.
---------------------------------------------------------------------------

    \188\ See proposed Rule 201(t)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The issuer would be required to file with the Commission, provide 
to investors and the relevant intermediary and make available to 
potential investors a copy of the public accountant's review 
report.\189\ This should benefit investors by giving them the ability 
to consider any modification that may have been made to the review 
report. It also would serve as a way to identify the accounting firm 
used to review the financial statements. As one commenter 
suggested,\190\ investors then could conduct due diligence on the 
accounting firm by, for example, researching the other offerings made 
in reliance on Section 4(a)(6) in which the accounting firm was 
involved or reviewing the accounting firm's licensure status and any 
publicly-available disciplinary proceedings.
---------------------------------------------------------------------------

    \189\ See proposed Instruction 5 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
    \190\ See RocketHub Letter 1.
---------------------------------------------------------------------------

    For offerings of more than $500,000, consistent with the threshold 
identified in Section 4A(b)(1)(D)(iii), the proposed rules would 
require issuers to file with the Commission, provide to investors and 
the relevant intermediary and make available to potential investors 
audited financial statements. While Congress authorized the Commission 
to establish a different threshold, we are not proposing at this time 
to raise the threshold at which an issuer would be required to provide 
audited financial statements, as some commenters suggested.\191\ We 
note that Congress specifically selected $500,000 as the threshold at 
which to require audited

[[Page 66447]]

financial statements. If we were to raise the threshold to $1 million, 
as suggested by some commenters,\192\ it would eliminate the 
requirement for issuers ever to provide audited financial statements 
because the maximum offering amount under Section 4(a)(6) is $1 
million. Leaving the $500,000 threshold unchanged also would provide 
the Commission, investors and issuers an opportunity to become familiar 
with the new offering exemption before considering possible changes to 
the threshold.
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    \191\ See CFIRA Letter 2; Vim Funding Letter; RocketHub Letter 
1; Cera Technology Letter; Genedyne Letter 1; Schwartz Letter.
    \192\ See CFIRA Letter 2; Vim Funding Letter; Cera Technology 
Letter; Genedyne Letter 1.
---------------------------------------------------------------------------

    Under the proposed rules, the auditor conducting the audit of the 
financial statements would be required to be independent of the issuer 
and the audit would have to be conducted in accordance with the 
auditing standards issued by either the AICPA or the Public Company 
Accounting Oversight Board (``PCAOB'').\193\ The proposed instructions 
to the rules would provide that the auditor would be required to be 
independent of the issuer based on the Commission's independence 
standard in Rule 2-01 of Regulation S-X.\194\ Providing issuers with a 
choice of auditing standards could provide a benefit in a number of 
ways. If an issuer currently has audited financial statements using one 
of the specified standards, the issuer would not need to obtain a new 
audit or engage a different auditor to conduct an audit in order to 
engage in a crowdfunding transaction in reliance on Section 4(a)(6). If 
an issuer chooses to have an audit conducted in accordance with PCAOB 
auditing standards, it generally would not need to obtain a new audit 
in order to file a registration statement with the Commission for a 
registered offering or to register a class of securities under the 
Exchange Act and become an Exchange Act reporting company. The proposed 
rules would not require the audit to be conducted by a PCAOB-registered 
firm. This should mean that a greater number of accountants would be 
eligible to audit the issuers' financial statements, which may reduce 
issuers' costs.
---------------------------------------------------------------------------

    \193\ See proposed Rule 201(t)(3) of Regulation Crowdfunding.
    \194\ 17 CFR 210.2-01.
---------------------------------------------------------------------------

    An issuer would be required to file with the Commission, provide to 
investors and the relevant intermediary and make available to potential 
investors a copy of the audit report.\195\ This should benefit 
investors by serving as a way to identify the accounting firm used to 
audit the financial statements. Investors then could conduct due 
diligence by, for example, researching other offerings made in reliance 
on Section 4(a)(6) in which the accounting firm was involved or 
reviewing the accounting firm's licensure status and any publicly-
available disciplinary proceedings.
---------------------------------------------------------------------------

    \195\ See proposed Instruction 6 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    An issuer that received an unqualified or a qualified audit opinion 
would be in compliance with the audited financial statement 
requirements.\196\ An issuer that received an adverse opinion or a 
disclaimer of opinion, however, would not be in compliance with the 
audited financial statement requirements,\197\ because the auditor 
determined that the financial statements of the issuer do not present 
fairly its financial position, results of operations or cash flows in 
conformity with U.S. GAAP, or that the auditor does not express an 
opinion on the financial statements.
---------------------------------------------------------------------------

    \196\ Id.
    \197\ Id.
---------------------------------------------------------------------------

    Under Rule 2-01 of Regulation S-X, the Commission does not 
recognize as a public accountant any person who: (1) Is not duly 
registered and in good standing as a certified public accountant under 
the laws of the place of his residence or principal office; or (2) is 
not in good standing and entitled to practice as a public accountant 
under the laws of the place of his residence or principal office.\198\ 
We believe that this rule promotes the use of qualified accountants 
that are in compliance with the requirements for their profession for 
the review or audit of the financial statements with respect to all 
offerings, including offerings in reliance on Section 4(a)(6).\199\ We 
are not proposing to require that the public accountant be in good 
standing for at least five years, as one commenter suggested,\200\ 
because that could unnecessarily restrict the pool of available public 
accountants by, for example, excluding accountants who are in good 
standing but who have been in business for fewer than five years.
---------------------------------------------------------------------------

    \198\ See 17 CFR 210.2-01(a).
    \199\ Accountants also would be subject to Rule 102(e) of the 
Rules of Practice and Investigations. See 17 CFR 201.102(e). Under 
Rule 102(e), the Commission can censure, suspend or bar 
professionals who appear or practice before it if it finds such 
professionals, after notice and an opportunity for hearing: (1) Not 
to possess the requisite qualifications to represent others; or (2) 
to be lacking in character or integrity or to have engaged in 
unethical or improper professional conduct; or (3) to have willfully 
violated, or willfully aided and abetted the violation of, any 
provision of the Federal securities laws or the rules and 
regulations thereunder. See 17 CFR 201.102(e)(1)(i), (ii) and (iii).
    \200\ See Philipose Letter 1.
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    We believe that many issuers engaging in crowdfunding transactions 
in reliance on Section 4(a)(6) are likely to be at a very early stage 
of their business development and may not have an operating history. In 
many instances, these issuers will have no more than a business plan 
for which they are seeking investors to help fund. We are not proposing 
to exempt these issuers (or issuers that have been in existence for 
less than 12 months, as one commenter suggested) \201\ from the 
requirement to provide financial statements based on the tiered 
offering amounts. Financial statements prepared in accordance with U.S. 
GAAP are generally self-scaling to the size and complexity of the 
issuer, which reduces the burden of preparing financial statements for 
many early stage issuers. We would not expect that the required 
financial statements would be long or complicated for issuers that are 
recently formed and have limited operating histories. We preliminarily 
believe, nevertheless, that financial statements for such issuers would 
be useful for investors, particularly when presented along with a 
description of the issuer's financial condition. This would give 
investors a more complete picture of the issuer and would highlight its 
early stage of development.
---------------------------------------------------------------------------

    \201\ See CFIRA Letter 2.
---------------------------------------------------------------------------

Request for Comment
    50. Under the statute and the proposed rules, issuers are required 
to file with the Commission, provide to investors and the relevant 
intermediary and make available to potential investors financial 
statements. The proposed rules would require all issuers to provide a 
complete set of financial statements (a balance sheet, income 
statement, statement of cash flows and statement of changes in owner's 
equity) prepared in accordance with U.S. GAAP. Should we define 
financial statements differently than under U.S. GAAP? If so, what 
changes would be appropriate and why? What costs or challenges would be 
associated with the use of a model other than U.S. GAAP (e.g., lack of 
comparability)? What would be the benefits? Please explain.
    51. Should we exempt issuers with no operating history or issuers 
that have been in existence for fewer than 12 months from the 
requirement to provide financial statements, as one commenter 
suggested? \202\ Why or why not? Specifically, what difficulties would 
issuers with no operating history or issuers that have been in 
existence for fewer than 12 months have in providing financial 
statements? Please explain.
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    \202\ Id.
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    52. If we were to exempt issuers with little or no operating 
history from the requirement to provide financial statements, should we 
require

[[Page 66448]]

additional discussion of the fact that the issuer does not have an 
operating history? If so, what additional discussion should we require?
    53. Section 4A(b)(1)(D) establishes tiered financial statement 
requirements based on aggregate target offering amounts within the 
preceding 12-month period. Under the proposed rules, issuers would not 
be prohibited from voluntarily providing financial statements that meet 
the requirements for a higher aggregate target offering amount (e.g., 
an issuer seeking to raise $80,000 provides financial statements 
reviewed by a public accountant who is independent of the issuer, 
rather than the required income tax returns and a certification by the 
principal executive officer). Is this approach appropriate? Why or why 
not?
    54. Should we allow issuers to prepare financial statements using a 
comprehensive basis of accounting other than U.S. GAAP? For example, 
should issuers be allowed to provide financial statements prepared on 
an income tax basis, a cash basis or a modified cash basis of 
accounting? Why or why not? If so, should we allow all issuers to use a 
comprehensive basis of accounting other than U.S. GAAP, or only issuers 
seeking to raise $100,000 or less, or $500,000 or less? Why or why not?
    55. Should we require issuers to provide two years of financial 
statements, as proposed? Should this time period be one year, as one 
commenter suggested,\203\ or three years? Please explain.
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    \203\ See CompTIA Letter.
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    56. Should we require some or all issuers also to provide financial 
statements for interim periods, such as quarterly or semi-annually? Why 
or why not? If so, which issuers and why? Should we require these 
financial statements to be subject to public accountant or auditor 
involvement? If so, what level of involvement is appropriate?
    57. As proposed, subject to certain conditions, issuers would be 
able to conduct an offering during the first 120 days of the issuer's 
fiscal year if the financial statements for the most recently completed 
fiscal year are not yet available. For example, an issuer could raise 
capital in April 2014 by providing financial statements from December 
2012, instead of a more recent period. Is this an appropriate approach? 
If the issuer is a high growth company subject to significant change, 
would this approach result in financial statements that are too stale? 
Should the period be shorter or longer (e.g., 90 days, 150 days, etc.)? 
What quantitative and qualitative factors should we consider in setting 
the period? Should issuers be required to describe any material changes 
in their financial condition for any period subsequent to the period 
for which financial statements are provided, as proposed? Please 
explain if you do not believe this description should be required.
    58. The proposed rules would require issuers offering $100,000 or 
less to provide financial statements that are certified by the 
principal executive officer to be true and complete in all material 
respects. Should we require issuers offering more than $100,000, but 
not more than $500,000, and/or issuers offering more than $500,000 to 
provide financial statements that are certified by the principal 
executive officer to be true and complete in all material respects? Why 
or why not?
    59. Have we adequately addressed the privacy concerns raised by the 
requirement to provide income tax returns? Should we require issuers to 
redact personally identifiable information from any tax returns, as 
proposed? Is there additional information that issuers should be 
required or allowed to redact? In responding, please specify each item 
of information that issuers should be required or allowed to redact and 
why. Under the statute and proposed rules, an issuer must be a business 
organization, rather than an individual. Does this requirement 
alleviate some of the potential privacy concerns? Please explain.
    60. If an issuer has not yet filed its tax return for the most 
recently completed fiscal year, should we allow the issuer to use the 
tax return filed for the prior year and require the issuer to update 
the information after filing the tax return for the most recently 
completed fiscal year, as proposed? Should the same apply to an issuer 
that has not yet filed its tax return for the most recently completed 
fiscal year and has requested an extension of the time to file? Should 
issuers be required, as proposed, to describe any material changes that 
are expected in the tax returns for the most recently completed fiscal 
year? Please explain.
    61. As proposed, the accountant reviewing or auditing the financial 
statements would have to be independent, as set forth in Rule 2-01 of 
Regulation S-X. Should we require compliance with the independence 
standards of the AICPA instead? Why or why not? If so, similar to the 
requirement in Rule 2-01 of Regulation S-X, should we also require an 
accountant to be: (1) Duly registered and in good standing as a 
certified public accountant under the laws of the place of his or her 
residence or principal office; or (2) in good standing and entitled to 
practice as a public accountant under the laws of his or her place of 
residence or principal office? Is there another independence standard 
that would be appropriate? If so, please identify the standard and 
explain why. Alternatively, should we create a new independence 
standard for purposes of Section 4(a)(6)? If so, what would be an 
appropriate standard? Please explain.
    62. As proposed, the accountant reviewing or auditing the financial 
statements must be independent based on the independence standard in 
Rule 2-01 of Regulation S-X. Are there any requirements under Rule 2-01 
that should not apply to the accountant reviewing or auditing the 
financial statements that are filed pursuant to the proposed rules? Why 
or why not? Are there any that would not apply, but should? For 
example, should the accountant reviewing or auditing the financial 
statements of issuers in transactions made in reliance on Section 
4(a)(6) be subject to the partner rotation requirements of Rule 2-
01(c)(6)? Why or why not?
    63. As proposed, an issuer with a target offering amount greater 
than $100,000, but not more than $500,000, would be required to file 
with the Commission, provide to investors and the relevant intermediary 
and make available to potential investors financial statements reviewed 
by an independent public accountant in accordance with the review 
standards issued by the AICPA. Is this standard appropriate, or should 
we use a different standard? Why or why not? If so, what standard and 
why? Alternatively, should we create a new review standard for purposes 
of Section 4(a)(6)? If so, what would be an appropriate standard and 
why would it be more appropriate than the one proposed? What costs 
would be involved for companies and accountants in complying with a new 
review standard? How should the Commission administer and enforce a 
different standard?
    64. Section 4A(b)(1)(D)(iii) requires audited financial statements 
for offerings of more than $500,000 ``or such other amount as the 
Commission may establish, by rule.'' Should we increase the offering 
amount for which audited financial statements would be required? If so, 
to what amount (e.g., $600,000, $750,000, etc.)? Please provide a basis 
for any amount suggested. Should we identify additional criteria other 
than the offering amount, as one commenter

[[Page 66449]]

suggested,\204\ that could be used to determine when to require an 
issuer to provide audited financial statements? If so, what should 
those criteria be?
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    \204\ See ABA Letter 1 (stating that revenue could be a criteria 
for determining when audited financial statements would be 
required).
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    65. Should financial statements be required to be dated within 120 
days of the start of the offering? If so, what standard should apply? 
Should those financial statements be reviewed or audited? Why or why 
not?
    66. Under Rule 502(b)(2)(B)(1)-(2) of Regulation D, if an issuer, 
other than a limited partnership, cannot obtain audited financial 
statements without unreasonable effort or expense, then only the 
issuer's balance sheet must be audited. Should we include a similar 
provision in the proposed rules? Why or why not? Should we provide any 
guidance as to what would constitute unreasonable effort or expense in 
this context? If so, please describe what should be considered to be an 
unreasonable effort or expense. If we were to require an issuer's 
balance sheet to be dated within 120 days of the start of the offering, 
should we allow the balance sheet to be unaudited? Why or why not?
    67. As proposed, an issuer with a target offering amount greater 
than $500,000 could select between the auditing standards issued by the 
AICPA or the PCAOB. Should we instead mandate one of the two standards? 
If so, which standard and why? Alternatively, should we create a new 
audit standard for purposes of Section 4(a)(6)? If so, what would be an 
appropriate standard? What costs would be involved for companies and 
auditors in complying with a new audit standard?
    68. Should we require that all audits be conducted by PCAOB-
registered firms? Why or why not?
    69. Should we consider the requirement to file with the Commission, 
provide to investors and the relevant intermediary and make available 
to potential investors financial statements subject to a review to be 
satisfied if the review report includes modifications? Why or why not? 
Would your response differ depending on the nature of the modification? 
Please explain.
    70. As proposed, an issuer receiving an adverse audit opinion or 
disclaimer of opinion would not satisfy its requirement to file with 
the Commission, provide to investors and the relevant intermediary and 
make available to potential investors audited financial statements. 
Should an issuer receiving a qualified audit opinion be deemed to have 
satisfied this requirement? Should certain qualifications (e.g., non-
compliance with U.S. GAAP) result in the financial statements not 
satisfying the requirement to provide audited financial statements 
while other types of qualifications would be acceptable? If so, which 
qualifications would be acceptable and why?
    71. Should we require that the certified public accountant 
reviewing or auditing the financial statements be in good standing for 
at least five years, as one commenter suggested? \205\ Why or why not? 
Should we require that the public accountant be in good standing for a 
lesser period of time? If so, for how long? Would such a requirement 
restrict the pool of available public accountants? If so, by how much? 
Would such a requirement reduce investor protections? If so, how?
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    \205\ See Philipose Letter 1.
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b. Progress Updates
    Consistent with Section 4A(b)(1)(F), the proposed rules would 
require an issuer to prepare regular updates on its progress in meeting 
the target offering amount.\206\ These updates would be filed with the 
Commission on EDGAR, under cover of Form C, provided to investors and 
the relevant intermediary and made available to potential investors. 
The issuer would check the box for ``Form C-U: Progress Update'' on the 
cover of the Form C and provide the required update in the space 
provided. One commenter suggested that issuers should be exempted from 
issuing status updates and/or reports so long as the funding portal 
publicly displays the progress of the issuer in meeting the target 
offering amount.\207\
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    \206\ See proposed Rules 201(v) and 203(a)(3) of Regulation 
Crowdfunding.
    \207\ See RocketHub Letter 1 (also stating that if the 
Commission mandates the filing of status updates, it should not 
mandate a particular form of update).
---------------------------------------------------------------------------

    As proposed, the rules would require an issuer to file with the 
Commission and provide investors and the relevant intermediary regular 
updates regarding the issuer's progress in meeting the target offering 
amount no later than five business days after the issuer reaches 
particular intervals--i.e., one-half and 100 percent--of the target 
offering amount.\208\ If the issuer will accept proceeds in excess of 
the target offering amount, the issuer also would be required to file 
with the Commission and provide investors and the relevant intermediary 
a final progress update, no later than five business days after the 
offering deadline, disclosing the total amount of securities sold in 
the offering.\209\ If, however, multiple progress updates are triggered 
within the same five-business-day period (e.g., the issuer reaches one-
half of the target offering amount on November 5 and 100 percent of the 
target offering amount on November 8), the issuer could consolidate 
such progress updates into one Form C-U, so long as the Form C-U 
discloses the most recent threshold that was met and the Form C-U is 
filed with the Commission and provided to investors and the relevant 
intermediary by the day on which the first progress update would be 
due.\210\ The proposed rules also would require the intermediary to 
make these updates available to investors and potential investors 
through the intermediary's platform.\211\
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    \208\ See proposed Rule 203(a)(3) of Regulation Crowdfunding.
    \209\ Id.
    \210\ See proposed Instruction 2 to paragraph (a)(3) of proposed 
Rule 203 of Regulation Crowdfunding.
    \211\ See proposed Rule 303(a) of Regulation Crowdfunding and 
Section II.C.5.a below.
---------------------------------------------------------------------------

    We believe that this information would be important to investors by 
allowing them to gauge whether interest in the offer has increased 
gradually or whether it was concentrated at the beginning or at the end 
of the offering period. In addition, we believe that the final progress 
update would be necessary to inform investors of the total amount of 
securities sold by the issuer, especially in cases where an issuer may 
have sold more than the target offering amount. The proposed rules do 
not include an exemption from this requirement when progress updates 
are provided solely on the intermediary's platform. We believe that 
proposing to require that the progress updates be filed with the 
Commission would create a central repository for this information--
information that otherwise might no longer be available on the 
intermediary's platform after the offering terminated. The progress 
updates filed with the Commission also would make data available that 
could be used to evaluate the effects of the Section 4(a)(6) exemption 
on capital formation.
Request for Comment
    72. Views about what constitutes a ``regular update'' may vary, 
particularly when considering the length of the offering. Is the 
requirement to file an update when the issuer reaches one-half and 100 
percent of the target offering amount appropriate? Is the proposed 
requirement to file a final update in offerings in which the issuer 
will accept proceeds in excess of the target offering amount 
appropriate? Why or why not?

[[Page 66450]]

Should we require the progress updates to be filed at different 
intervals (e.g., one-third, two-thirds or some other intervals)? Why or 
why not? Alternatively, should the progress updates be filed after a 
certain amount of the offering time has elapsed (e.g., weekly or 
monthly until the target or maximum is reached or until the offering 
closes)? Should the progress updates be based on reaching other 
milestones or on some other basis? If so, what milestones or other 
basis and why?
    73. As proposed, issuers would have five business days from the 
time they reach the relevant threshold to file a progress update. Is 
this time period appropriate? Why or why not? If not, what would be an 
appropriate time period? Please explain. Should issuers be allowed to 
consolidate multiple progress updates into one Form C-U if multiple 
progress updates are triggered within a five-business-day period, as 
proposed? Why or why not?
    74. Should issuers be required to certify that they have filed all 
the required progress updates prior to the close of the offering? Why 
or why not?
    75. Should we exempt issuers from the requirement to file progress 
updates with the Commission as long as the intermediary publicly 
displays the progress of the issuer in meeting the target offering 
amount? Why or why not? If so, should the Commission establish 
standards about how prominent the display would need to be?
c. Amendments to the Offering Statement
    We are proposing to require that an issuer amend its disclosure for 
any material change in the offer terms or disclosure previously 
provided to investors. The amended disclosure would be filed with the 
Commission on Form C, provided to investors and the relevant 
intermediary and made available to potential investors.\212\ The issuer 
would check the box for ``Form C-A: Amendment'' on the cover of the 
Form C and explain, in summary manner, the nature of the changes, 
additions or updates in the space provided. An issuer would determine 
whether changes in the offer terms or disclosure are material based on 
the facts and circumstances. Information is material if there is a 
substantial likelihood that a reasonable investor would consider it 
important in deciding whether or not to purchase the securities.\213\ 
For example, we believe that a material change to financial condition 
or to the intended use of proceeds would require an amendment to an 
issuer's disclosure. Also, in those instances in which an issuer has 
previously disclosed only the method for determining the price, and not 
the final price, of the securities offered, we believe that 
determination of the final price would be considered a material change 
to the terms of the offer and would have to be disclosed. These are 
not, however, the only possible material changes that would require 
amended disclosure. In addition, as discussed further in Section II.C.6 
below, if any change, addition or update constitutes a material change 
to information previously disclosed, the issuer shall check the box 
indicating that investors must reconfirm their investment commitments. 
Investors would have five business days to reconfirm their investment 
commitments, or the investment commitments would be cancelled.\214\
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    \212\ See proposed Rule 203(a)(2) of Regulation Crowdfunding.
    \213\ See Basic Inc. v. Levinson, 485 U.S. 224 (1988) (quoting 
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)).
    \214\ See proposed Rule 203(a)(2) of Regulation Crowdfunding.
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    Issuers would be permitted, but not required, to amend the Form C 
to provide information with respect to other changes that are made to 
the information presented on the intermediary's platform and provided 
to investors and potential investors.\215\ Issuers amending the Form C 
to provide information that it considers not material would not check 
the box indicating that investors must reconfirm their investment 
commitments.
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    \215\ See proposed Instruction to paragraph (a)(2) of proposed 
Rule 203 of Regulation Crowdfunding.
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Request for Comment
    76. Should we specify that an amendment to an offering statement 
must be filed within a certain time period after a material change 
occurs? Why or why not? What would be an appropriate time period for 
filing an amendment to an offering statement to reflect a material 
change? Why?
    77. If an issuer amends its Form C, should the intermediary be 
required to notify investors? If so, should we specify the method of 
notification, such as via email or other electronic means?
    78. Should establishment of the final price be considered a 
material change that would always require an amendment to Form C and 
reconfirmation, as proposed? Would it be appropriate to require 
disclosure of the final price but not require reconfirmation? Should we 
consider any change to the information required by Section 4A(b)(1) to 
be a material change? Why or why not?
    79. Should we require issuers to amend Form C to reflect all 
changes, additions or updates regardless of materiality so that the 
Form C filed with us would reflect all information provided to 
investors through the intermediary's platform? Why or why not?
2. Ongoing Reporting Requirements
    Section 4A(b)(4) requires, ``not less than annually, [the issuer 
to] 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.''
    One commenter suggested that the Commission should create a 
standardized form or template for this ongoing disclosure.\216\ The 
same commenter suggested that this ongoing disclosure should be 
publicly available and shared with other regulators. Another commenter 
noted that the requirement to file reports not less than annually could 
be difficult to enforce and that it is unclear who would be responsible 
for enforcing the requirement.\217\ The same commenter noted that this 
provision seems to presume the success of every business that raises 
capital through crowdfunding and questioned what would happen when an 
issuer goes out of business. One commenter suggested that financial 
statements included in an annual report should be required to be 
reviewed or audited only if the issuer's total assets exceeded a 
specified amount at the last day of the issuer's fiscal year.\218\ One 
commenter suggested that annual reports should be required to be 
reviewed by a qualified accountant in good standing for at least five 
years.\219\ Two commenters noted that compliance with the exemption 
would not be known at the time of the transaction if the annual reports 
are a condition to the

[[Page 66451]]

exemption under Section 4(a)(6).\220\ One commenter suggested that the 
Commission should require a failed business that issued securities 
pursuant to Section 4(a)(6) to file a final annual report, in the year 
of the failure, that provides final financial statements and discloses 
to investors the material reasons for the liquidation, dissolution, 
wind-down or bankruptcy.\221\
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    \216\ See Commonwealth of Massachusetts Letter.
    \217\ See Crowdfunding Offerings Ltd. Letter 5.
    \218\ See ABA Letter 1 (suggesting that financial statements 
reviewed by an independent accountant be required only if the 
issuer's total assets as of the end of its fiscal year exceeded 
$300,000 and that audited financial statements be required only if 
the issuer's total assets exceeded $750,000 because (i) public 
reporting pursuant to Exchange Act Section 12(g) is based, in part, 
on an asset test and (ii) this would offer a reasonable predicate 
for balancing the relative costs to very small, early-stage issuers 
and the informational benefits to investors).
    \219\ See Philipose Letter 2.
    \220\ See Ohio Division of Securities Letter; Whitaker Letter 
(suggesting that the filing of the annual report should not be a 
condition to satisfying the exemption under Section 4(a)(6)).
    \221\ See Ohio Division of Securities Letter.
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    To implement the ongoing reporting requirement in Section 4A(b)(4), 
the proposed rules would require an issuer that sold securities in 
reliance on Section 4(a)(6) to file a report on EDGAR annually, no 
later than 120 days after the end of the most recent fiscal year 
covered by the report.\222\ Although the statute provides that an 
``issuer who offers or sells securities'' in reliance on Section 
4(a)(6) shall provide ongoing reports, we do not believe the intent was 
to require ongoing reports from a company that has not completed a 
crowdfunding transaction and thus did not issue any securities.
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    \222\ See proposed Rule 202(a) of Regulation Crowdfunding. See 
also proposed Rule 203(b) of Regulation Crowdfunding and proposed 
Instruction to paragraph (b)(1) thereof.
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    To implement the statutory requirement that issuers provide the 
report to investors, we propose to require issuers to post the annual 
report on their Web sites.\223\ We believe that investors in this type 
of Internet-based offering would be familiar with obtaining information 
on the Internet and that providing the information in this manner would 
be cost-effective for issuers. As discussed above, we believe Congress 
contemplated that crowdfunding would, by its very nature, occur over 
the Internet or other similar electronic media accessible to the 
public,\224\ so we are not proposing to require issuers to provide 
physical copies of the report to investors. We also are not proposing 
to require issuers to provide a copy of the annual report, or refer 
investors to the posting of the annual report, via email because we 
believe that many issuers may not have email addresses for the 
investors, especially after the shares issued pursuant to Section 
4(a)(6) are traded by the original purchasers.\225\ To the extent email 
addresses for investors are available to issuers, an issuer could refer 
investors to the posting of the annual report via email.
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    \223\ We are not proposing to require issuers to post the annual 
report on the intermediary's platform because issuers may not 
necessarily have an ongoing relationship with the intermediary 
following an offering. See discussion in Section II.C.4.b below.
    \224\ See note 55.
    \225\ We believe that in order for the issuer to have email 
addresses for the investors, it would need to obtain those email 
addresses from the intermediary, since it would be the intermediary 
that would collect that information when a potential investor opens 
an account. In order for the issuer to have email addresses after 
the shares issued pursuant to Section 4(a)(6) are traded, an issuer 
would need to collect that information from each new investor in 
connection with any sale of the issuer's securities in a secondary 
market.
---------------------------------------------------------------------------

    When filing the annual report with the Commission, an issuer would 
check the box for ``Form C-AR: Annual Report'' on the cover of the Form 
C. The issuer would be required to disclose information similar to the 
information required in the offering statement, including disclosure 
about its financial condition that meets the financial statement 
requirements that were applicable to its offering statement. The issuer 
also would be able to voluntarily provide financial statements that 
meet the requirements for a higher aggregate target offering amount 
than it was required to provide in its offering statement. If an issuer 
undertakes multiple offerings, which individually require different 
levels of financial statements, the issuer would be required to provide 
financial statements that meet the highest standard previously 
provided. We believe that investors who purchased on the basis of the 
higher level of financial statements should continue to receive that 
level of disclosure, and investors in other offerings of the issuer 
should receive the same information.\226\ Although an issuer would not 
be required to provide the offering-specific information that it filed 
at the time of the offering (because the issuer will not be offering or 
selling securities),\227\ it would be required to disclose information 
about the company and its financial condition, as was required in 
connection with the offer and sale of the securities.\228\ This should 
minimize the disclosure burden for issuers to the extent they would be 
able to use the offering materials as a basis to prepare the ongoing 
disclosure. Investors should benefit from receiving annual updates to 
the information they received when making the decision to invest in the 
issuer's securities, which should allow them to continue to be informed 
about issuer developments. Under the statute and the proposed rules, 
the securities will be freely tradable after one year and, therefore, 
this information also would benefit potential future holders of the 
issuer's securities and help them to make more informed investment 
decisions.
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    \226\ For example, if an issuer had previously completed an 
offering with a $200,000 target and an offering with a $700,000 
target, the issuer would be required to provide audited financial 
statements rather than reviewed financial statements. This would be 
the case even if the $200,000 offering was conducted more recently 
than the $700,000 offering.
    \227\ An issuer would not be required to provide information 
about: (1) The stated purpose and intended use of the proceeds of 
the offering; (2) the target offering amount and the deadline to 
reach the target offering amount; (3) whether the issuer will accept 
investments in excess of the target offering amount; (4) whether, in 
the event that the offer is oversubscribed, shares will be allocated 
on a pro-rata basis, first come-first served basis, or other basis; 
(5) the process to complete the transaction or cancel an investment 
commitment once the target amount is met; (6) the price to the 
public of the securities being offered; (7) the terms of the 
securities being offered; (8) the name, Commission file number and 
CRD number (as applicable) of the intermediary through which the 
offering is being conducted; and (9) the amount of compensation paid 
to the intermediary.
    \228\ Issuers would be required to provide disclosure about its 
directors and officers, business, current number of employees, 
financial condition (including financial statements), capital 
structure, significant factors that make an investment in the issuer 
speculative or risky, material indebtedness and certain related-
party transactions.
---------------------------------------------------------------------------

    We are proposing to require issuers to file the annual report until 
one of the following events occurs: (1) The issuer becomes a reporting 
company required to file reports under Exchange Act Sections 13(a) or 
15(d); (2) the issuer or another party purchases or repurchases all of 
the securities issued pursuant to Securities Act Section 4(a)(6), 
including any payment in full of debt securities or any complete 
redemption of redeemable securities; or (3) the issuer liquidates or 
dissolves its business in accordance with state law.\229\ In these 
situations, we believe it is appropriate to terminate an issuer's 
reporting obligations because it will either be required by other 
provisions of the securities laws to provide investors with necessary 
information or it will no longer have investors. Any issuer terminating 
its annual reporting obligations would be required to file on EDGAR, 
within five business days from the date of the terminating event, a 
notice to investors and the Commission that it will no longer file and 
provide annual reports pursuant to the requirements of Regulation 
Crowdfunding.\230\ The issuer would check the box for ``Form C-TR: 
Termination of Reporting'' on the cover of Form C.
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    \229\ See proposed Rule 202(b) of Regulation Crowdfunding.
    \230\ See proposed Rule 203(b)(2) of Regulation Crowdfunding.
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Request for Comment
    80. Should we require ongoing annual reports, as proposed? Why or 
why not? Should we require ongoing reporting more frequently than 
annually? Why or

[[Page 66452]]

why not? If so, how often (e.g., semi-annually or quarterly)?
    81. Two commenters noted that compliance with the exemption would 
not be known at the time of the transaction if the annual reports are a 
condition to the exemption under Section 4(a)(6).\231\ Should the 
requirement to provide ongoing annual reports be a condition to the 
exemption under Section 4(a)(6)? If so, for how long (e.g., until the 
first annual report is filed, until the termination of an issuer's 
reporting obligations or some other period)? Please explain.
---------------------------------------------------------------------------

    \231\ See Ohio Division of Securities Letter; Whitaker Letter.
---------------------------------------------------------------------------

    82. Should we require that the annual reports be provided to 
investors by posting the reports on the issuer's Web site and filing 
them on EDGAR, as proposed? Should we require issuers also to directly 
notify investors of the availability of the annual report, such as by 
email or other electronic means? Should we instead require issuers to 
deliver the annual reports directly to investors? If so, should we 
specify the method of delivery (e.g., email or other electronic means, 
U.S. mail or some other method)? Would investors have an electronic 
relationship with the issuer after the offering terminates? If not, how 
would an issuer notify or deliver a copy of the annual report to the 
investor? Would issuers continue to have an ongoing relationship with 
intermediaries once the offering is completed? If so, should we also 
require that the issuer post its annual report on the intermediary's 
platform? Why or why not?
    83. After completion of the offering, should we require that 
investors be represented by a nominee or other party who could help to 
facilitate physical delivery of the annual report to investors? Why or 
why not? Should the nominee or other party have other responsibilities, 
such as speaking on behalf of and representing the interests of 
investors (e.g., when the issuer wishes to take certain corporate 
actions that could impact or dilute the rights of investors, 
distribution of dividend payments, etc.)? If a nominee or other party 
should be required, what structure should this arrangement take and 
why?
    84. Are the proposed ongoing disclosure requirements appropriate? 
Why or why not? Should we modify or eliminate any of the proposed 
requirements?
    85. Should the discussion of the issuer's financial condition 
address changes from prior periods? Why or why not? Should the number 
of years covered by the financial statements be the same as in the 
offering statement? Why or why not? If not, what should they be?
    86. Should we require that reviewed or audited financial statements 
be provided only if the total assets of the issuer at the last day of 
its fiscal year exceeded a specified amount, as one commenter 
suggested? \232\ Why or why not? If so, what level of total assets 
would be appropriate (e.g., $1 million, $10 million, or some other 
amount)? Are there other criteria (other than total assets) that we 
should consider? Please explain.
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    \232\ See ABA Letter 1.
---------------------------------------------------------------------------

    87. The proposed rules would require any issuer terminating its 
annual reporting obligations to file on EDGAR, within five business 
days from the date of the terminating event, a notice to investors and 
the Commission that it will no longer file and provide annual reports. 
Is this approach appropriate? Why or why not? Should we require issuers 
to file the notice earlier (e.g., within two business days of the 
event) or later (e.g., within 10 business days of the event)? If so, 
what would be an appropriate amount of time after the event and why?
    88. Should an issuer be able to terminate its annual reporting 
obligation in circumstances other than those provided in the proposed 
rules? For example, should an issuer be allowed to terminate its 
reporting obligation after filing a certain number of annual reports, 
as one commenter suggested,\233\ so long as the issuer does not engage 
in additional transactions in reliance on Section 4(a)(6) (e.g., after 
filing one annual report, two annual reports or some other number of 
annual reports)? Why or why not? If so, what would be an appropriate 
number of annual reports? Should all issuers be allowed to terminate 
their reporting obligations or only issuers that have not sold more 
than a certain amount of securities in reliance on Section 4(a)(6)? If 
so, what would be an appropriate amount of securities (e.g., $100,000, 
$500,000, or some other amount)? Should an issuer be allowed to 
terminate its reporting obligation following the issuer's or another 
party's purchase or repurchase of a significant percentage of the 
securities issued in reliance on Section 4(a)(6) (including any payment 
of a significant percentage of debt securities or redemption of a 
significant percentage of redeemable securities), or receipt of consent 
to cease reporting from a specified percentage of the unaffiliated 
security holders? Why or why not? If so, what would be an appropriate 
percentage (greater than 50 percent, 75 percent or some other 
percentage)? Should an issuer be allowed to terminate its reporting 
obligation if the securities issued in reliance on Section 4(a)(6) are 
held by less than a specified number of holders of record, as suggested 
by a commenter? \234\ Why or why not? If so, what would be an 
appropriate number of holders of record (less than 500, 300 or some 
other number)?
---------------------------------------------------------------------------

    \233\ See Schwartz Letter.
    \234\ See ABA Letter 1.
---------------------------------------------------------------------------

    89. If an issuer files a petition for bankruptcy, what effect 
should that filing have on the issuer's reporting obligations? Please 
explain.
    90. Should issuers be required to file reports to disclose the 
occurrence of material events on an ongoing basis? What events would be 
material and therefore require disclosure? Should we identify a list of 
material events that would trigger a report, similar to the list in 
Form 8-K \235\ (such as changes in control, bankruptcy or receivership, 
material acquisitions or dispositions of assets, issuances of 
securities and changes to the rights of security holders)? Or should we 
require that all material events be reported without specifying any 
particular events? How many days after the occurrence of the material 
event should the issuer be required to file the report? Please explain.
---------------------------------------------------------------------------

    \235\ 17 CFR 249.308. Form 8-K is a report that public companies 
must file to announce major events that shareholders should know 
about on a more current basis. Form 8-K includes a specific list of 
the types of events that trigger a public company's obligation to 
file a current report, including matters relating to the company's 
business and operations, financial information, securities and 
trading markets, accountants and financial statements, corporate 
governance and management, asset-backed securities, exhibits and 
other matters that are not specifically called for by Form 8-K that 
the company considers to be of importance to security holders. 
Generally, a Form 8-K must be filed within four business days from 
the date of the event that triggered the report.
---------------------------------------------------------------------------

    91. We have the authority to include exceptions to the ongoing 
reporting requirements in Section 4A(b)(4). Should we consider 
excepting certain issuers from ongoing reporting obligations (e.g., 
those raising a certain amount, such as $100,000 or less)? Should any 
exception always apply or only after a certain number of reports have 
been filed? Please explain.
3. Form C and Filing Requirements
    Section 4A(b)(1) does not specify a format that issuers must use to 
present the required disclosures and file these disclosures with the 
Commission. Several commenters stated that the Commission should 
require the disclosure on a form modeled after, or

[[Page 66453]]

require the use of NASAA's Small Company Offering Registration Form (U-
7).\236\ One commenter suggested using Form 1-A, which is used for 
securities offerings made pursuant to Regulation A,\237\ as a 
model.\238\ One commenter requested that we create a form for issuers 
that ``simplifies the process and provides legal certainty for 
investors, intermediaries and issuers,'' \239\ while another commenter 
suggested that we adopt a ``simple, uniform, easy-to-understand yet 
comprehensive template prospectus that is similar in principle to the 
mutual fund industry's summary prospectus.'' \240\ Another commenter 
recommended that disclosure be simple, allow for standardization and 
take into account the size and stage of development of the issuer.\241\ 
One commenter suggested we create a disclosure template that would 
allow issuers to complete certain fields by inserting the required 
disclosure.\242\ Another commenter suggested we require a single 
offering document incorporating disclosures that intermediaries and 
issuers are required to make.\243\
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    \236\ See Coan Letter; Liles Letter 1; Vim Funding Letter; NASAA 
Letter.
    \237\ 17 CFR 230.251 et seq.
    \238\ See Commonwealth of Massachusetts Letter.
    \239\ CFIRA Letter 2.
    \240\ The Motley Fool Letter.
    \241\ See 2012 SEC Government-Business Forum, note 29.
    \242\ See ABA Letter 1.
    \243\ See Ohio Division of Securities Letter.
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    We are proposing to require issuers to file the mandated disclosure 
on EDGAR using new Form C.\244\ As proposed, Form C would require 
certain disclosures to be presented in a specified format, while 
allowing the issuer to customize the presentation of other disclosures 
required by Section 4A(b)(1) and the related rules. This approach 
should provide key offering information in a standardized format and 
give issuers flexibility in the presentation of other required 
disclosures. We believe this flexibility is important given that we 
expect that issuers engaged in crowdfunding transactions in reliance on 
Section 4(a)(6) would encompass a wide variety of industries at 
different stages of business development.
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    \244\ An issuer that does not already have EDGAR filing codes, 
and to which the Commission has not previously assigned a user 
identification number, which we call a ``Central Index Key (CIK)'' 
code, would need to obtain the codes by filing electronically a Form 
ID [17 CFR 239.63; 249.446; 269.7 and 274.402] at https://www.filermanagement.edgarfiling.sec.gov. The applicant also would be 
required to submit a notarized authenticating document as a Portable 
Document Format (PDF) attachment to the electronic filing. The 
authenticating document would need to be manually signed by the 
applicant over the applicant's typed signature, include the 
information contained in the Form ID and confirm the authenticity of 
the Form ID. See 17 CFR 232.10(b)(2).
---------------------------------------------------------------------------

    We propose to require issuers to use an XML-based fillable form to 
input certain information.\245\ This XML-based fillable form would 
support the assembly and transmission of those required disclosures to 
EDGAR on Form C.\246\ It also would help the Commission to collect 
certain key information about each offering to monitor the 
implementation of the crowdfunding exemption under Section 4(a)(6). For 
example, the Commission could monitor the types of issuers using the 
exemption, including the issuers' size, location, securities offered 
and offering amounts and the intermediaries through which the offerings 
are taking place. Monitoring the implementation of the crowdfunding 
exemption also would give the Commission more information to evaluate 
whether the rules include appropriate investor protections and 
facilitate capital formation. Issuers could customize the presentation 
of the rest of their disclosures and file those disclosures as exhibits 
to the Form C. For example, an issuer could provide the required 
disclosures by uploading to EDGAR, as an exhibit to Form C, a text 
version of the relevant information presented on the intermediary's 
platform, including a transcript of any video presentation and a 
description of any charts or graphs.
---------------------------------------------------------------------------

    \245\ See proposed Instruction to paragraph (a)(1) of proposed 
Rule 203 of Regulation Crowdfunding. Issuers would input in the 
proposed XML-based filing the following information: name, legal 
status and contact information of the issuer; name, Commission file 
number and CRD number (as applicable) of the intermediary through 
which the offering will be conducted; the amount of compensation 
paid to the intermediary to conduct the offering, including the 
amount of referral and other fees associated with the offering; type 
of security offered; number of securities offered; offering price; 
target offering amount and maximum offering amount (if different 
from the target offering amount); whether oversubscriptions will be 
accepted and, if so, how they will be allocated; deadline to reach 
the target offering amount; current number of employees of the 
issuer; and selected financial data for the prior two fiscal years.
    \246\ The Commission would disseminate the information in a 
format that provides normal text for reading and XML-tagged data for 
analysis. Currently the Commission's OnlineForms Web site (https://www.onlineforms.edgarfiling.sec.gov) supports the assembly and 
transmission of XML filings required by Exchange Act Section 16 (15 
U.S.C. 78p).
---------------------------------------------------------------------------

    Under the proposed rules, Form C would be used for all of an 
issuer's filings with the Commission.\247\ The issuer would check one 
of the following boxes on the cover of the Form C to indicate the 
purpose of the Form C filing:
---------------------------------------------------------------------------

    \247\ See proposed Rule 203 of Regulation Crowdfunding.
---------------------------------------------------------------------------

     ``Form C: Offering Statement'' for issuers filing the 
initial disclosures required for an offering made in reliance on 
Section 4(a)(6);
     ``Form C-A: Amendment'' for issuers seeking to amend a 
previously-filed Form C for an offering;
     ``Form C-U: Progress Update'' for issuers filing a 
progress update required by Section 4A(b)(1)(H) and the related rules;
     ``Form C-AR: Annual Report'' for issuers filing the annual 
report required by Section 4A(b)(4) and the related rules; and
     ``Form C-TR: Termination of Reporting'' for issuers 
terminating their reporting obligations pursuant to Section 4A(b)(4) 
and the related rules.

We believe that the use of one form would be more efficient than 
requiring multiple forms and would simplify the filing process for 
issuers and their preparers. EDGAR would automatically provide each 
filing with an appropriate tag depending on which box the issuer checks 
so that investors could distinguish between the different filings.\248\
---------------------------------------------------------------------------

    \248\ EDGAR would tag the offering statement as ``Form C,'' any 
amendments to the offering statement as ``Form C-A,'' progress 
updates as ``Form C-U,'' annual reports as ``Form C-AR'' and 
termination reports as ``Form C-TR.''
---------------------------------------------------------------------------

    Section 4A(b)(1) requires issuers to file the offering information 
with the Commission, provide it to investors and the relevant 
intermediary and make it available to potential investors.\249\ Under 
the proposed rules, issuers would satisfy the requirement to file the 
information with the Commission by filing the Form C: Offering 
Statement, including any amendments and progress updates, on EDGAR. To 
satisfy the requirement to provide the disclosures to the relevant 
intermediary, we propose that issuers provide to the relevant 
intermediary a copy of the disclosures filed with the Commission on 
EDGAR.\250\ To satisfy the requirement to

[[Page 66454]]

provide the disclosures to investors and make them available to 
potential investors, we propose that issuers provide the information to 
investors electronically by referring investors to the information on 
the intermediary's platform.\251\ Issuers could refer investors through 
a posting on the issuer's Web site or by email.\252\ We believe that 
investors in this type of Internet-based offering would be familiar 
with obtaining information on the Internet and that providing the 
information in this manner would be cost-effective for issuers. As 
discussed above, we believe Congress contemplated that crowdfunding 
would, by its very nature, occur over the Internet or other similar 
electronic medium that is accessible to the public,\253\ so we are not 
proposing to require issuers to provide physical copies of the 
information to investors. We propose to allow issuers to refer 
investors to the information on the intermediary's platform through a 
posting on the issuer Web site or by email, rather than requiring 
email, because we believe that many issuers may not have email 
addresses for investors.\254\
---------------------------------------------------------------------------

    \249\ Section 4A(b)(4) requires issuers to file with the 
Commission and provide to investors, not less than annually, reports 
of the results of operations and financial statements of the issuer. 
As discussed above in Section II.B.2, to satisfy this requirement, 
the proposed rules would require an issuer to post the annual report 
on its Web site and file it on EDGAR. See proposed Rule 202(a) of 
Regulation Crowdfunding.
    \250\ See proposed Instruction 1 to paragraph (a) of proposed 
Rule 203 of Regulation Crowdfunding. We anticipate that issuers 
seeking to engage in an offering in reliance on Section 4(a)(6) may 
likely work with an intermediary to prepare the disclosure that 
would be provided on the intermediary's platform and filed on EDGAR. 
In some cases, intermediaries may offer, as part of their service, 
to file the disclosure on EDGAR on behalf of the issuer.
    \251\ See proposed Instruction 2 to paragraph (a) of proposed 
Rule 203 of Regulation Crowdfunding.
    \252\ Id.
    \253\ See note 55.
    \254\ See note 225. To the extent that intermediaries have the 
email addresses of investors and potential investors (e.g., as a 
result of investors and potential investors opening an account with 
the intermediary), intermediaries could provide an issuer's 
disclosures to investors and potential investors through email.
---------------------------------------------------------------------------

Request for Comment
    92. Should we require a specific format that issuers must use to 
disclose the information required by Section 4A(b)(1) and the related 
rules?
    93. Should issuers be required to file the Form C with the 
Commission in electronic format only, as proposed? Alternatively, 
should we permit issuers to file the Form C in paper format? What are 
the relative costs and benefits of permitting the filing of the Form C 
in paper format? Should issuers be precluded from relying on the 
hardship exemptions in Rules 201 and 202 of Regulation S-T? \255\ Why 
or why not?
---------------------------------------------------------------------------

    \255\ 17 CFR 232.201 and 232.202. These hardship exemptions 
allow filers, under certain conditions, to submit their filings and 
exhibits in paper form instead of electronically.
---------------------------------------------------------------------------

    94. In what format would the information about an issuer be 
presented on an intermediary's platform? Will there be written text, 
graphics, charts or graphs, or video testimonials by the founder or 
other key stakeholders? Will the information be presented in a way that 
would allow for the filing of the information as an exhibit to Form C 
on EDGAR? If not, how should the rules address these types of 
materials?
    95. Should we require different forms for each type of required 
filing? Would the use of one form with different EDGAR tags for each 
type of filing create confusion among investors who review the issuer's 
filings? Would it create confusion for issuers that are filing the 
forms? Please explain.
    96. Should we allow issuers to refer investors and potential 
investors to the information on the intermediary's platform? Are the 
proposed methods (Web site posting or email) to refer investors 
effective and appropriate? Would issuers have access to the investors' 
email addresses? Are there other methods we should consider? If so, 
what methods and why?
4. Prohibition on Advertising Terms of the Offering
    Section 4A(b)(2) provides that an issuer shall ``not advertise the 
terms of the offering, except for notices which direct investors to the 
funding portal or broker.'' We received a number of comments regarding 
this provision. One commenter stated that the inability to market an 
offering will prevent startups from reaching their desired goal.\256\ 
One commenter suggested that we should allow issuers unrestricted use 
of advertising, both on the Internet and through conventional forms of 
advertising.\257\ Another commenter suggested that communications 
between the issuer and investors should be limited to communication 
channels controlled by the intermediary and that direct communications 
between an issuer and investors should be discouraged.\258\ Another 
commenter stated that it is unclear what constitutes a notice for these 
purposes and that issuers should be able to promote their offerings as 
long as investors register with the intermediary and participate in the 
offering through that intermediary.\259\ Another commenter suggested 
that issuers should be able to promote their offerings through ``their 
own platforms'' as long as all such notices include a link directly to 
the registered intermediary.\260\ One commenter suggested that an 
issuer should be permitted to place a notice consisting of the basic 
terms of the offering on the issuer's Web site or at its place of 
business.\261\ Alternatively, the commenter suggested an issuer should 
be permitted to include such notice in correspondence to its customers 
or mailing list subscribers.\262\
---------------------------------------------------------------------------

    \256\ See VTNGLOBAL Letter.
    \257\ See Loofbourrow Letter.
    \258\ See CommunityLeader Letter.
    \259\ See Crowdfunding Offerings Ltd. Letter 5.
    \260\ See CFIRA Letter 2.
    \261\ See NCA Letter (stating that the Commission should clarify 
whether the rules will permit notices to state the offering period, 
whether investors may contact the issuer's management to discuss the 
offering or whether the notices may include names of accredited 
investors participating in the offering).
    \262\ Id.
---------------------------------------------------------------------------

    Another commenter stated that the advertising prohibition should 
not be read to restrict notices that: (1) Alert the public to the 
issuer's project or company; (2) state that the public may participate 
in the fundraising; or (3) direct the public to the funding 
platform.\263\ Another commenter suggested notices should be allowed to 
include: (1) The type of security being offered; (2) the offering 
amount; (3) the opening and closing date of the offering; and (4) the 
issuer's line of business or whether the offering will fund a new line 
of business.\264\ One commenter suggested that, given the limitations 
on the number of characters allowed by some social media sites, we 
should allow notices that do not require lengthy legends or 
disclosure.\265\ Another commenter suggested that we define the term 
``advertising'' and provide a model form that can be used by issuers to 
direct investors to the intermediary.\266\ Another commenter suggested 
that we require issuers to file all advertising and other materials 
that the issuers create relating to offerings made in reliance on 
Section 4(a)(6).\267\ One commenter suggested that we allow advertising 
of non-financial elements of a transaction in the case of offerings 
conducted through an intermediary that is a community development 
financial institution.\268\
---------------------------------------------------------------------------

    \263\ See RocketHub Letter 1.
    \264\ See NSBA Letter.
    \265\ See CFIRA Letter 1 (providing examples of notices varying 
in length from zero to 1,500 characters).
    \266\ See CompTIA Letter.
    \267\ See Commonwealth of Massachusetts Letter.
    \268\ See City First Letter.
---------------------------------------------------------------------------

    Under the proposed rules, an issuer could publish a notice 
advertising the terms of an offering in reliance on Section 4(a)(6), 
provided that the notice includes the address of the intermediary's 
platform on which additional information about the issuer and the 
offering may be found.\269\ Consistent with Section 4A(b)(2), an issuer 
would not otherwise be permitted to advertise, directly or indirectly, 
the terms of an offering made in reliance on Section 4(a)(6). While we 
understand

[[Page 66455]]

the importance that potential issuers likely will place on the ability 
to advertise, the statute specifically restricts the ability of issuers 
to advertise the terms of offerings made in reliance on Section 
4(a)(6). Limiting the advertising of the terms of the offering to the 
information permitted in the notice is intended to direct investors to 
the intermediary's platform and to make investment decisions with 
access to the disclosures necessary for them to make informed 
investment decisions.
---------------------------------------------------------------------------

    \269\ See proposed Rule 204 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would allow notices advertising the terms of the 
offering to include no more than the following: (1) A statement that 
the issuer is conducting an offering, the name of the intermediary 
through which the offering is being conducted and a link directing the 
potential investor to the intermediary's platform; (2) the terms of the 
offering; and (3) factual information about the legal identity and 
business location of the issuer, limited to the name of the issuer of 
the security, the address, phone number and Web site of the issuer, the 
email address of a representative of the issuer and a brief description 
of the business of the issuer.\270\ Under the proposed rules, ``terms 
of the offering'' would include: (1) The amount of securities offered; 
(2) the nature of the securities; (3) the price of the securities; and 
(4) the closing date of the offering period.\271\
---------------------------------------------------------------------------

    \270\ See proposed Rule 204(b) of Regulation Crowdfunding. While 
notices would not be required to include all of this information, 
they would be required to, at a minimum, direct investors and 
potential investors to the intermediary's platform on which 
additional information about the issuer and the offering may be 
found. See proposed Rule 204(a) of Regulation Crowdfunding.
    \271\ See proposed Instruction to proposed Rule 204 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    The permitted notices would be similar to the ``tombstone ads'' 
permitted under Securities Act Rule 134,\272\ except that the notices 
would be required to direct investors to the intermediary's platform 
through which the offering is being conducted,\273\ such as by 
including a link directing the potential investor to the platform.\274\ 
We are not proposing to impose limitations on how the issuer 
distributes the notices. For example, issuers could place notices in 
newspapers or could post notices on social media sites. We believe this 
approach would allow issuers to leverage social media to attract 
potential investors, while at the same time protecting potential 
investors by limiting the ability of issuers to advertise the terms of 
the offering without providing the required disclosures.
---------------------------------------------------------------------------

    \272\ 17 CFR 230.134.
    \273\ See proposed Rule 204(a) of Regulation Crowdfunding.
    \274\ See proposed Rule 204(b)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules also would allow an issuer to communicate with 
investors and potential investors about the terms of the offering 
through communication channels provided by the intermediary on the 
intermediary's platform, so long as the issuer identifies itself as the 
issuer in all communications. We believe that one of the central tenets 
of the concept of crowdfunding is that the members of the crowd decide 
whether or not to fund an idea or business after sharing information 
with each other. As part of those communications, we believe it is 
important for the issuer to be able to respond to questions about the 
terms of the offering or even challenge or refute statements made 
through the communication channels provided by the intermediary. 
Therefore, we have not proposed to restrict issuers from participating 
in those communications.
    The proposed rules would not restrict an issuer's ability to 
communicate other information that does not refer to the terms of the 
offering. We believe that this is consistent with the statute because 
Section 4A(b)(2) only appears to impose a restriction on the 
advertising of the terms of the offer. To prohibit communications that 
do not refer to the terms of the offering would place a greater burden 
on issuers relying on Section 4(a)(6) than on issuers in registered 
offerings. For example, Securities Act Rule 169 \275\ permits non-
Exchange Act reporting issuers engaged in an initial public offering to 
continue to publish, subject to certain exclusions and conditions, 
regularly released factual business information that is intended for 
use by persons other than in their capacity as investors or potential 
investors.\276\ We believe that permitting issuers to continue to 
engage in communications that do not refer to the terms of the offering 
during the pendency of offering made in reliance on Section 4(a)(6) 
would increase the likelihood of the success of an issuer's business 
because the issuer could continue to advertise its products or 
services, so long as it does so without discussing the terms of the 
offering.
---------------------------------------------------------------------------

    \275\ 17 CFR 230.169.
    \276\ Id. See also Securities Offering Reform, Release No. 33-
8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)].
---------------------------------------------------------------------------

Request for Comment
    97. Should we require issuers to file with the Commission or 
provide to the intermediary a copy of any notice directing investors to 
the intermediary's platform? Why or why not?
    98. The proposed rules would define ``terms of the offering'' to 
include: (1) The amount of securities offered; (2) the nature of the 
securities; (3) the price of the securities; and (4) the closing date 
of the offering period. Is this definition appropriate? Why or why not? 
Should the definition be modified to eliminate or include other items? 
If so, which ones and why? Should we provide further guidance as to the 
meaning of ``terms of the offering?'' Please explain.
    99. Should we restrict the media that may be used for the 
advertising of notices (e.g., prohibit advertising via television, 
radio or phone calls)? If so, why and what media should we restrict? 
What media should we permit? Please explain.
    100. Should we require a specific format for issuer notices? Should 
we provide examples of notices that would comply with the requirements?
    101. Should we further restrict or specify the information that 
could be included in a notice of the offering? If so, how and why? Is 
the information that we have proposed to permit in notices sufficient 
to inform potential investors of an offering? Should we permit the 
issuer to include any additional information in the notice if, for 
example, the offering aims to promote a particular social cause, such 
as driving economic growth in underinvested communities, as one 
commenter suggested? \277\ If so, what information and why? Should we 
allow any additional information to be included in the notices for all 
offerings made in reliance on Section 4(a)(6)? Please explain. Should 
we impose restrictions on the timing or frequency of notices? Why or 
why not? If so, what restrictions would be appropriate?
---------------------------------------------------------------------------

    \277\ See City First Letter.
---------------------------------------------------------------------------

    102. Should we limit the issuer's participation in communication 
channels provided by the intermediary on the intermediary's platform? 
Why or why not? If so, what limitations would be appropriate?
    103. The proposed rules would allow an issuer to communicate with 
investors and potential investors about the terms of an offering 
through communication channels provided by the intermediary on the 
intermediary's platform, so long as the issuer identifies itself as the 
issuer in all communications. Is this approach appropriate? Why or why 
not? If not, why not?
    104. The proposed rules would not restrict an issuer's ability to 
communicate information that does not refer to the terms of the 
offering. Is this

[[Page 66456]]

approach appropriate? Why or why not? If not, what limitations should 
we include on an issuer's communications that do not refer to the terms 
of the offering and why?
5. Compensation of Persons Promoting the Offering
    Section 4A(b)(3) provides that an issuer shall ``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.''
    We received comments offering varying views on this provision. One 
commenter noted that it is unclear precisely what this provision 
attempts to prohibit or protect against.\278\ Another commenter 
suggested the rules should distinguish between an issuer hiring an 
individual or entity for promotion, where investors may not be aware of 
the commercial relationship between the parties, and more standard web-
based advertising, including through search engines or trending 
topics.\279\ This commenter suggested that we should not adopt rules 
that may interfere with promotional compensation, but rather, we should 
require simple disclosure of a commercial relationship when it would 
not otherwise be apparent. One commenter suggested that the rules 
should provide that a clear statement of the compensation amount paid 
to promoters (or a formula for determining the same) in the disclosure 
document would satisfy this disclosure obligation.\280\ Another 
commenter suggested that if the issuer will use any promoters in 
connection with the offering, the issuer should identify the promoters 
and disclose the amount and structure of promoter compensation.\281\
---------------------------------------------------------------------------

    \278\ See Crowdfunding Offerings Ltd. Letter 5 (asking a number 
of questions about what constitutes direct or indirect compensation, 
whether it is acceptable to promote offerings if no compensation is 
paid and whether the provision covers third parties who may have an 
interest in the offering and who pay for the promotion).
    \279\ See RocketHub Letter 1.
    \280\ See Schwartz Letter.
    \281\ See Commonwealth of Massachusetts Letter.
---------------------------------------------------------------------------

    Consistent with the statute, the proposed rules \282\ would 
prohibit an issuer from compensating, or committing to compensate, 
directly or indirectly, any person to promote the issuer's offering 
through communication channels provided by the intermediary unless the 
issuer takes reasonable steps to ensure that the person clearly 
discloses the receipt (both past and prospective) of compensation each 
time the person makes a promotional communication.\283\ In this regard, 
we anticipate that an issuer could, for example, contractually require 
any promoter to include the required statement about receipt of 
compensation, confirm that the promoter is adhering to the 
intermediary's terms of use that require promoters to affirm whether or 
not they are compensated by the issuer, monitor communications made by 
such persons and take the necessary steps to have any communications 
that do not have the required statement removed promptly from the 
communication channels, or retain a person specifically identified by 
the intermediary to promote all issuers on its platform. We anticipate 
that communication channels provided by the intermediary would provide 
a forum through which potential investors could share information to 
help the members of the crowd decide whether or not to fund the issuer.
---------------------------------------------------------------------------

    \282\ See proposed Rule 205 of Regulation Crowdfunding. See also 
proposed Rule 303(c)(4) and the discussion in Section II.C.5.c below 
for requirements on intermediaries as they relate to disclosure in 
intermediary-provided communication channels of certain compensation 
and promotional activities.
    \283\ The receipt of transaction-based compensation in 
connection with the offer and sale of a security could cause a 
person to be a broker required to register with us under Exchange 
Act Section 15(a)(1) [15 U.S.C. 78o(a)(1)]. Issuers also would need 
to consider the application of Securities Act Section 17(b) [15 
U.S.C. 77q] to these activities. Section 17(b) provides that ``[i]t 
shall be unlawful for any person, by the use of any means or 
instruments of transportation or communication in interstate 
commerce or by the use of the mails, to publish, give publicity to, 
or circulate any notice, circular, advertisement, newspaper, 
article, letter, investment service, or communication which, though 
not purporting to offer a security for sale, describes such security 
for a consideration received or to be received, directly or 
indirectly, from an issuer, underwriter, or dealer, without fully 
disclosing the receipt, whether past or prospective, of such 
consideration and the amount thereof.''
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    We believe that it would be important for potential investors to 
know whether persons using these communication channels are the issuer, 
persons acting on behalf of the issuer or persons receiving 
compensation from the issuer to promote the issuer's offering because 
of the potential for self-interest or bias in communications by these 
persons. As such, the proposed rules would apply broadly to persons 
acting on behalf of the issuer, regardless of whether or not they are 
compensated or they receive compensation specifically for the 
promotional activities. For example, the proposed rules would apply to 
persons hired specifically to promote the offering, as well as to 
individuals who are otherwise employed by the issuer or who undertake 
promotional activities on behalf of the issuer. A founder or an 
employee of the issuer who engages in promotional activities on behalf 
of the issuer through the communication channels provided by the 
intermediary would be required to disclose, with each posting, that he 
or she is engaging in those activities on behalf of the issuer.
    The proposed rules also would specify that the issuer shall not 
compensate or commit to compensate, directly or indirectly, any person 
to promote its offerings outside of the communication channels provided 
by the intermediary, unless the promotion is limited to notices that 
comply with the advertising rules discussed above in Section 
II.B.4.\284\ This prohibition should prevent issuers from circumventing 
the restrictions on advertising by compensating a third party to do 
what the issuer cannot do directly.
---------------------------------------------------------------------------

    \284\ See proposed Rule 205(b) of Regulation Crowdfunding.
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Request for Comment
    105. The proposed rules would prohibit an issuer from compensating 
or committing to compensate, directly or indirectly, any person to 
promote its offering outside of the communication channels provided by 
the intermediary, unless the promotion is limited to notices that 
direct investors to the intermediary's platform. Is this approach 
appropriate? Why or why not?
    106. The proposed rules would require issuers to take reasonable 
steps to ensure that persons promoting the issuer's offering through 
communication channels provided by the intermediary disclose the 
receipt (both past and prospective) of direct or indirect compensation 
each time they make a promotional communication. Is this an appropriate 
approach to the statutory requirement for issuers to ensure that 
promoters make the required disclosures? If not, what standard should 
we apply and why?
    107. Should we require that any person who receives compensation 
from the issuer to promote an issuer's offering through communication 
channels provided by the intermediary register with, or otherwise 
provide notice to, the intermediary? If so, should we require that 
person to disclose the amount of the compensation and the structure of 
the compensation arrangement to the intermediary? Why or why not? If 
so, what would be the purpose of such a requirement?

[[Page 66457]]

    108. Should the issuer provide disclosure of any person who 
receives compensation from the issuer to promote an issuer's offering? 
Why or why not?
6. Other Issuer Requirements
    Some commenters addressed issues relating to oversubscriptions, the 
offering price, the type of securities that may be offered and how 
those securities should be valued.\285\
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    \285\ Securities Act Section 4A(b)(5) states that issuers shall 
``comply with such other requirements as the Commission may, by 
rule, prescribe, for the protection of investors and in the public 
interest.''
---------------------------------------------------------------------------

a. Oversubscriptions
    Two commenters suggested that we should permit an issuer to raise 
capital in excess of the target offering amount, subject to certain 
conditions.\286\ The proposed rules would not limit an issuer's ability 
to accept investments in excess of the target offering amount, subject 
to the $1 million annual limitation.\287\ Issuers, however, would be 
required to provide disclosure to investors concerning this 
possibility.\288\ Some commenters suggested that the rules require a 
defined range for permissible oversubscriptions.\289\ We believe, 
however, that limits on oversubscriptions are not necessary if an 
issuer discloses how much it would be willing to accept in 
oversubscriptions, how the oversubscriptions would be allocated and the 
intended purpose of those additional funds.\290\ We believe that this 
approach would provide investors, prior to the sale, with useful 
information to make an informed investment decision about an issuer 
that is seeking investments in excess of the target offering amount.
---------------------------------------------------------------------------

    \286\ See ABA Letter 1 (stating that if the maximum amount 
exceeds the target offering amount, the issuer should be required to 
disclose: (1) The maximum amount that it could raise; (2) the total 
amount of securities that would be issued should the maximum amount 
be raised; (3) the anticipated use of proceeds should the maximum 
amount be raised; and (4) financial statements that would have been 
required had the target offering amount been equal to the maximum 
amount); Hutchens Letter (stating that issuers should be allowed to 
raise capital in excess of the target offering amount so long as the 
amount raised does not fall within a higher tier of financial 
statement requirements).
    \287\ See proposed Rule 201(h) of Regulation Crowdfunding.
    \288\ Id. Issuers also would need to allow investors to cancel 
the commitment to purchase the securities in the same way as it 
would have done had it not accepted oversubscriptions. See Section 
II.C.6 below for a discussion of the right to cancel the purchase 
commitment.
    \289\ See RocketHub Letter 1; CFIRA Letter 5; Hutchens Letter.
    \290\ See Section II.B.1.a.i(d) above for a discussion of the 
disclosure requirements if the issuer will accept investments in 
excess of the target offering amount.
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Request for Comment
    109. Should we require that oversubscribed investments be allocated 
using a pro-rata, first-come, first-served or other method, rather than 
leaving that decision up to the issuer? Please explain.
    110. Should we limit the maximum oversubscription amount to a 
certain percentage of the target offering amount? If so, what should 
the limit be and why?
    111. Should we allow issuers to accept commitments in excess of the 
$1 million limitation so that if an investor withdraws his or her 
investment commitment prior to the closing of the offering, the issuer 
would still be able to raise $1 million? If so, should we require that 
investments in excess of $1 million be allocated using a pro-rata, 
first-come, first-served or other method, or should we leave that 
decision up to the issuer? Please explain.
b. Offering Price
    One commenter suggested that the Commission should require issuers 
to set a fixed price for the offering and prohibit any dynamic pricing 
(e.g., pricing per share that increases with the passage of time) 
because dynamic pricing schemes may apply time pressure on the 
investment decision.\291\ We are not proposing to require issuers to 
set a fixed price or prohibit dynamic pricing because we believe that 
the statute contemplated flexible pricing by providing that issuers may 
disclose the method for determining the price provided that the final 
price and required disclosures are provided to each investor prior to 
the sale. We also believe that the proposed cancellation rights would 
address the concerns about time pressure on the investment decision 
because investors would have a reasonable opportunity to cancel the 
investment commitment after the price is fixed.\292\
---------------------------------------------------------------------------

    \291\ See Spinrad Letter 1.
    \292\ See Section II.C.6 below for a discussion of cancellation 
rights.
---------------------------------------------------------------------------

Request for Comment
    112. Should we require issuers to set a fixed price at the 
commencement of an offering or prohibit dynamic pricing? Why or why 
not?
c. Types of Securities Offered and Valuation
    We received comments about the types of securities that could be 
offered and the valuation of securities offered. One commenter 
suggested that the Commission should not prescribe eligible types of 
securities because markets and securities may evolve.\293\ Instead, the 
commenter urged the Commission to set forth minimum disclosure 
requirements for issuers and intermediaries to use when communicating 
the price and structure of offered securities. Another commenter 
suggested that the Commission require issuers to disclose their 
valuation and the factors they considered when determining such 
valuation.\294\ Another commenter suggested that the Commission should 
prescribe a maximum valuation and ban certain dilution practices.\295\ 
Another commenter suggested that if an offering exceeds certain 
valuation limitations (based, for instance, on company financial 
ratios), then the Commission should require that the shares held by 
company insiders be subject to a lock-up that would terminate after a 
period of time or after the company meets certain financial 
benchmarks.\296\ Another commenter indicated that there are significant 
costs to properly ascertaining future valuations and that such a 
requirement could only be applied to corporations.\297\
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    \293\ See RocketHub Letter 1.
    \294\ See Sjogren Letter.
    \295\ See The Motley Fool Letter (stating that the Commission 
should specify a maximum valuation for issuers, perhaps at two, 
five, or 10 times the aggregate issue limit and should implement a 
rule to protect investors from issuers that might sell a special 
class of shares to the crowdfunding public that they eventually 
dilute in future offerings).
    \296\ See Commonwealth of Massachusetts Letter (stating that the 
Commission should require disclosure about the risks of buying 
securities of an early-stage company at a high valuation).
    \297\ See CrowdFund Connect Letter (stating that the Commission 
should clarify that an issuer would satisfy the requirement to 
describe how the securities being offered are being valued by 
providing an operating and management statement that clearly defines 
capital distributions).
---------------------------------------------------------------------------

    The proposed rules would neither limit the type of securities that 
may be offered in reliance on Section 4(a)(6) nor prescribe a method 
for valuing the securities. In this regard, we note that the statute 
refers to ``securities'' and does not limit the types of securities 
that could be offered pursuant to the exemption. In addition, the 
statute does not require the use of a specific valuation method or ban 
any dilution practices. Issuers would be required to describe the terms 
of the securities and the valuation method in their offering 
materials.\298\ We believe this approach is consistent with the statute 
and will provide flexibility to issuers to determine the types of 
securities that they offer to investors and how those securities are 
valued, while providing investors with the information they

[[Page 66458]]

need to make an informed investment decision.
---------------------------------------------------------------------------

    \298\ See proposed Rule 201(m) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules do not limit the types of securities that may be 
offered in reliance on Section 4(a)(6), and thus, debt securities may 
be offered and sold in crowdfunding transactions. In general, the 
issuance of a debt security raises questions about the applicability of 
the Trust Indenture Act of 1939 (``Trust Indenture Act'').\299\ The 
Trust Indenture Act applies to any debt security sold through the use 
of the mails or interstate commerce, including debt securities sold in 
transactions that are exempt from Securities Act registration. A debt 
security sold in reliance on Section 4(a)(6) would need to be issued 
under a qualified indenture \300\ or under an indenture that is exempt 
from qualification.\301\ The Trust Indenture Act and related rules 
provide exemptions in some circumstances. For example, Trust Indenture 
Act Section 304(b) provides an exemption for any transaction that is 
exempted from the provisions of Securities Act Section 5 by Section 4 
thereof.\302\ We believe an issuer offering debt securities in reliance 
on Section 4(a)(6) would be able to rely on this exemption.\303\ Based 
on the availability of this exemption from the requirements of the 
Trust Indenture Act, we are not proposing a specific exemption from the 
requirements of the Trust Indenture Act for offerings of debt 
securities made in reliance on Section 4(a)(6).
---------------------------------------------------------------------------

    \299\ 15 U.S.C. 77aaa et seq.
    \300\ See Trust Indenture Act Section 309 [15 U.S.C. 77iii].
    \301\ See Trust Indenture Act Section 304 [15 U.S.C. 77ddd].
    \302\ 15 U.S.C. 77ddd(b).
    \303\ Trust Indenture Act Section 304(a)(8) [15 U.S.C. 
77ddd(a)(8)] and Rule 4a-1 [17 CFR 260.4a-1] also provide an 
exemption to issue up to $5 million of debt securities without an 
indenture in any 12-month period.
---------------------------------------------------------------------------

Request for Comment
    113. Should we limit the types of securities that may be offered 
and sold in reliance on Section 4(a)(6) (e.g., should the exemption be 
limited to offers and sales of equity securities)? If so, to what 
securities should crowdfunding be limited and why? Should we create a 
separate exemption for certain types of offerings of limited types of 
securities, as one commenter proposed? \304\
---------------------------------------------------------------------------

    \304\ See City First Letter.
---------------------------------------------------------------------------

    114. Is it anticipated that issuers may want to conduct 
crowdfunding offerings of securities under Section 4(a)(6) alongside 
non-securities-based crowdfunding, such as a crowdfunding campaign for 
donations or rewards? If so, please describe how these offerings may be 
structured. Are there any issues in particular that our rules should 
address in the context of such simultaneous crowdfunding offerings? 
Please explain.
    115. Should we require or prohibit a specific valuation 
methodology? If so, what method and why? Should we specify a maximum 
valuation allowed as suggested by one commenter? \305\ Why or why not?
---------------------------------------------------------------------------

    \305\ See The Motley Fool Letter.
---------------------------------------------------------------------------

C. Requirements on Intermediaries

1. Brokers and Funding Portals
    Securities Act Section 4(a)(6)(C) requires a crowdfunding 
transaction to be conducted through a broker or funding portal that 
complies with the requirements of Securities Act Section 4A(a). The 
term ``broker'' is generally defined in Exchange Act Section 3(a)(4) as 
any person that effects transactions in securities for the account of 
others. Exchange Act Section 3(a)(80),\306\ as added by Section 304 of 
the JOBS Act, defines the term ``funding portal'' as any person acting 
as an intermediary in a transaction involving the offer or sale of 
securities for the account of others, solely pursuant to Securities Act 
Section 4(a)(6), that does not: (1) Offer investment advice or 
recommendations; (2) solicit purchases, sales or offers to buy the 
securities offered or displayed on its platform or portal; (3) 
compensate employees, agents or other person for such solicitation or 
based on the sale of securities displayed or referenced on its platform 
or portal; (4) hold, manage, possess or otherwise handle investor funds 
or securities; or (5) engage in such other activities as the 
Commission, by rule, determines appropriate.
---------------------------------------------------------------------------

    \306\ The JOBS Act inadvertently created two Sections 3(a)(80) 
in the Exchange Act, the other being the definition of ``emerging 
growth company'' (added by Section 101(b) of Title I of the JOBS 
Act).
---------------------------------------------------------------------------

    Because a funding portal would be engaged in the business of 
effecting securities transactions for the accounts of others through 
crowdfunding, it would meet the Exchange Act definition of broker.\307\ 
The proposed rules would define ``funding portal'' consistent with the 
statutory definition of ``funding portal,'' substituting the word 
``broker'' for the word ``person,'' \308\ to state explicitly and make 
clear that funding portals are brokers under the federal securities 
laws. We are not proposing at this time to exercise our discretion 
under Section 3(a)(80)(E) to prohibit any activities in which a funding 
portal may engage, other than those identified in the statute.\309\
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    \307\ See discussion in Section II.D.2 below.
    \308\ See proposed Rule 300(c)(2) of Regulation Crowdfunding.
    \309\ In proposing Regulation Crowdfunding, we propose 
requirements that are tailored to the limited brokerage activities 
in which funding portals may engage. Even where requirements 
proposed for funding portals are the same as those imposed on 
brokers, such as the AML requirements discussed in Section II.D.4 
below, due to the limited nature of funding portals' activities, the 
compliance burden on funding portals should be less extensive than 
those applicable to full service brokers under the existing 
regulatory regime for broker-dealers.
---------------------------------------------------------------------------

    The proposed rules would not only apply to funding portals, but 
also to their associated persons in many instances. The proposed rules 
would define the term ``person associated with a funding portal or 
associated person of a funding portal'' to mean any partner, officer, 
director or manager of a funding portal (or any person occupying a 
similar status or performing similar functions), any person directly or 
indirectly controlling or controlled by a funding portal, or any 
employee of a funding portal, but would exclude any persons whose 
functions are solely clerical or ministerial.\310\ The rules would 
provide, however, that excluded persons nevertheless would be subject 
to our authority under Exchange Act Sections 15(b)(4) and 15(b)(6) 
because they are associated with a broker.\311\ This definition is 
consistent with, and modeled on, the definition of ``person associated 
with a broker or dealer or associated person of a broker or dealer'' 
under Exchange Act Section 3(a)(18).\312\
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    \310\ See proposed Rule 300(c)(1) of Regulation Crowdfunding.
    \311\ Exchange Act Section 15(b)(4) (15 U.S.C. 78o(b)(4)) 
authorizes the Commission to bring administrative proceedings 
against a broker when the broker violates the federal securities 
laws (and for other misconduct) and provides for the imposition of 
sanctions, up to and including the revocation of a broker's 
registration. Exchange Act Section 15(b)(6) (15 U.S.C. 78o(b)(6)) 
provides similar enforcement authority against the persons 
associated with a broker, including barring persons from associating 
with any Commission registrant. See note 559.
    \312\ 15 U.S.C. 78c(a)(18).
---------------------------------------------------------------------------

Request for Comment
    116. Are there other funding portal activities, other than those in 
Exchange Act Section 3(a)(80), that we should prohibit? If so, which 
activities and why? Are there any prohibitions that should be modified 
or removed? If so, which ones and why?
    117. Do we need to provide further guidance concerning which 
provisions of the Exchange Act and the rules and regulations thereunder 
would apply to funding portals? If so, what further guidance is 
necessary and why?

[[Page 66459]]

2. Requirements and Prohibitions
a. Registration and SRO Membership
    Securities Act Section 4A(a)(1) requires that a person acting as an 
intermediary in a crowdfunding transaction register with the Commission 
as a broker or as a funding portal. The proposed rules would implement 
this requirement by providing that a person acting as an intermediary 
in a transaction involving the offer or sale of securities made in 
reliance on Section 4(a)(6) must be registered with the Commission as a 
broker under Exchange Act Section 15(b) or as a funding portal pursuant 
to Securities Act Section 4A(a)(1) and proposed Rule 400 of Regulation 
Crowdfunding.\313\
---------------------------------------------------------------------------

    \313\ See proposed Rule 300(a)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    One commenter requested transparency in the registration process, 
stating that intermediaries' completed registration materials should be 
accessible to the public.\314\ Brokers currently register with the 
Commission using Form BD. Information on that form regarding the 
broker's credentials, including current registrations or licenses and 
employment and disciplinary history, is publicly available on FINRA's 
BrokerCheck.\315\ As discussed below, we are proposing to make the 
information that a funding portal provides on proposed Form Funding 
Portal, other than personally identifiable information or other 
information with a significant potential for misuse, accessible to the 
public.\316\ One commenter urged the Commission to grant funding 
portals a one-year moratorium from having to register.\317\ We are not 
proposing such a moratorium because the statute clearly states that a 
person acting as an intermediary in a crowdfunding transaction made in 
reliance on Section 4(a)(6) must be registered with the Commission 
either as a broker or as a funding portal.
---------------------------------------------------------------------------

    \314\ See Commonwealth of Massachusetts Letter. See also 
Schwartz Letter (stating that the registration document should be 
made public because it would likely include many relevant 
disclosures, which would make it possible for the intermediary to 
file a single document to satisfy both the registration and 
disclosure requirements).
    \315\ See FINRA, note 142.
    \316\ See discussion in Section II.D.1 below.
    \317\ See Loofbourrow Letter.
---------------------------------------------------------------------------

    Another commenter requested clarification on whether a person 
acting as an intermediary in a transaction under Section 4(a)(6) would 
be required to register with us as an exchange, as defined in Exchange 
Act Section 3(a)(1), or as an alternative trading system.\318\ As 
discussed above, Section 4A(a)(1) requires an intermediary that 
facilitates crowdfunded issuances of securities to register with us 
either as a broker or as a funding portal. Facilitating crowdfunded 
transactions alone would not require an intermediary to register as an 
exchange or as an alternative trading system (i.e., registration as a 
broker-dealer subject to Regulation ATS). To the extent that an 
intermediary facilitates secondary market activity in securities issued 
in reliance on Section 4(a)(6), the intermediary would be required to 
register as an exchange or as an alternative trading system if it met 
the criteria in Exchange Act Rule 3b-16.\319\ We note, however, that a 
funding portal, by definition, is limited to acting as an intermediary 
in transactions involving the offer or sale of securities for the 
account of others solely pursuant to Section 4(a)(6),\320\ which are 
primary issuances of securities. Thus, a funding portal could not 
effect secondary market transactions in securities.
---------------------------------------------------------------------------

    \318\ See ABA Letter 1.
    \319\ See 17 CFR 240.3b-16 (subject to the exceptions provided 
in part (b) of the rule, an organization, association or group of 
persons would generally be considered a market place or facility for 
bringing together purchasers and sellers of securities or for 
otherwise performing, with respect to securities, the functions 
commonly performed by a stock exchange, ``if such organization, 
association, or group of persons (1) Brings together the orders for 
securities of multiple buyers and sellers; and (2) Uses established, 
non-discretionary methods (whether by providing a trading facility 
or by setting rules) under which such orders interact with each 
other, and the buyers and sellers entering such orders agree to the 
terms of a trade.'').
    \320\ See Section II.C.1 above.
---------------------------------------------------------------------------

    Exchange Act Section 4A(a)(2) requires an intermediary to register 
with any applicable self-regulatory organization (``SRO''), as defined 
in Exchange Act Section 3(a)(26).\321\ Exchange Act Section 3(h)(1)(B) 
separately requires, as a condition of the exemption from broker 
registration, a funding portal to be a member of a national securities 
association that is registered with the Commission under Exchange Act 
Section 15A. The proposed rules would implement these provisions by 
requiring an intermediary in a transaction involving the offer or sale 
of securities made in reliance on Section 4(a)(6) to be a member of 
FINRA or any other national securities association registered under 
Exchange Act Section 15A.\322\ Today, FINRA is the only registered 
national securities association.
---------------------------------------------------------------------------

    \321\ 15 U.S.C. 78c(a)(26). Exchange Act Section 3(a)(26) 
defines an ``SRO'' to mean ``any national securities exchange, 
registered securities association, or registered clearing agency, or 
(solely for the purposes of [S]ections [19(b), 19(c), and 23 of the 
Exchange Act]) the Municipal Securities Rulemaking Board established 
by [S]ection [15B of the Exchange Act.]'' Id.
    \322\ See proposed Rule 300(a)(2) of Regulation Crowdfunding. We 
have proposed definitions for the terms ``intermediary'' and ``SRO'' 
in proposed Rule 300(c)(3) and 300(c)(5) of Regulation Crowdfunding, 
respectively. Intermediary would mean a broker registered under 
Section 15(b) of the Exchange Act or a funding portal registered 
under proposed Rule 400 and would include, where relevant, an 
associated person of the registered broker or registered funding 
portal. SRO is proposed to have the same meaning as in Section 
36(a)(26) of the Exchange Act. See also Section II.D.1 below for a 
discussion regarding proposed Rule 400 of Regulation Crowdfunding, 
which addresses registration requirements for funding portals.
---------------------------------------------------------------------------

    One commenter generally objected to the requirement for an 
intermediary to be a member of a registered national securities 
association.\323\ As we noted above, the statute clearly requires a 
funding portal to be a member of a registered national securities 
association. Likewise, under Section 15(b)(8) of the Exchange Act, a 
broker-dealer that is engaged in crowdfunding activities must be a 
member of a national securities association.\324\ We believe that 
requiring intermediary membership in a registered national securities 
association should help to ensure consistent regulation of 
intermediaries with fewer opportunities for regulatory gaps. In 
regulating broker-dealers that effect securities transactions with 
members of the public, FINRA has the most members and is responsible 
for conducting broker-dealer examinations of its members, mandating 
disclosures by its members, writing rules governing the conduct of its 
members and associated persons \325\ and informing and educating the 
investing public.\326\ FINRA investigates and brings enforcement 
actions against FINRA members and their associated persons who are 
suspected of violating its rules and the federal securities laws.\327\ 
While FINRA has primary responsibility for examining its members,\328\ 
the Commission staff generally examines broker-dealers if specific firm 
or industry risks have been identified or when fraud and rule 
violations may have occurred. Because the statute requires a national 
securities association to write rules expressly for funding

[[Page 66460]]

portals,\329\ we anticipate that funding portals would be subjected to 
requirements targeted to their limited business model and not the more 
comprehensive requirements applicable to brokers. We anticipate that 
the regulatory framework FINRA creates for funding portals would play 
an important role in the oversight of these entities and, through the 
information that FINRA shares with the Commission, the Commission's 
ability to effectively regulate registered funding portals' 
activities.\330\
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    \323\ See Priore Letter.
    \324\ The statute also permits brokers-dealers to be members of 
a national securities exchange if the broker-dealer effects 
transactions in securities solely on that exchange.
    \325\ 15 U.S.C. 78o-3.
    \326\ FINRA, Inc., http://www.finra.org/AboutFINRA/P125239 (last 
visited Oct. 15, 2012).
    \327\ See, e.g., 15 U.S.C. 78o-3(b)(2); Testimony Before the 
Senate Subcommittee on Securities, Insurance, and Investment 
Committee on Banking, Housing, and Urban Affairs, 111th Cong. 8 
(2010) (testimony of Stephen Luparello, Vice Chairman, FINRA).
    \328\ 15 U.S.C. 78o-3.
    \329\ See Exchange Act Section 3(h)(2) [15 U.S.C. 78c(h)(2)].
    \330\ Id.
---------------------------------------------------------------------------

    In response to commenters' requests that we clarify the applicable 
SRO for crowdfunding intermediaries, and to address any confusion about 
which entity or entities may serve as an SRO for crowdfunding brokers 
and funding portals, we are expressly identifying FINRA as a registered 
national securities association within the meaning of the statute.\331\ 
While FINRA currently is the only registered national securities 
association, we are not foreclosing the possibility that another 
national securities association could register with us in the future. 
In that event, the proposed rule would permit funding portals to become 
members of the new association (should one become established in the 
future) instead of, or in addition to, FINRA.\332\
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    \331\ See NCA Letter; NSBA Letter.
    \332\ For requirements to register as a national securities 
association, see Exchange Act Section 15A [15 U.S.C. 78o-3].
---------------------------------------------------------------------------

    FINRA currently provides licensing and qualification requirements 
for associated persons of brokers. While we are not proposing any such 
requirement for persons associated with a funding portal, FINRA (or any 
other registered national securities association) could propose such 
requirements, as well as requirements dealing with supervision of 
funding portal personnel and appropriate compliance structures.\333\ 
FINRA, like all SROs, is required to file all proposed rules with us 
under Exchange Act Section 19(b) \334\ and Rule 19b-4.\335\ In general, 
the Commission reviews proposed SRO rules and rule changes, publishes 
them for comment, approves or disapproves them, or the rules become 
effective immediately or by operation of law.
---------------------------------------------------------------------------

    \333\ Exchange Act Section 15(b)(7) (15 U.S.C. 78o(b)(7)) 
requires that natural persons associated with brokers and dealers 
that are registered under Exchange Act Section 15(a)(1) (15 U.S.C. 
78o(a)(1)) meet such standards of training, experience, competence 
and such other qualifications as the Commission finds necessary or 
appropriate in the public interest. The Commission historically has 
not exercised this authority but instead has relied on and deferred 
to the ``substantive content of the SROs' entry requirements imposed 
on securities personnel in the various qualification categories.'' 
See Requirement of Broker-Dealers to Comply with SRO Qualification 
Standards, Release No. 34-32261 (May 4, 1993). See also Sections 
II.D.1 and II.D.2 below for a discussion regarding proposed Rules 
400 and 401 of Regulation Crowdfunding.
    \334\ 15 U.S.C. 78s(b).
    \335\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

Request for Comment
    118. We have named FINRA expressly in the proposed rules as an 
applicable registered national securities association for crowdfunding 
intermediaries. Is this helpful? Is this appropriate? Why or why not? 
Are there other entities considering applying to become registered 
national securities associations?
    119. The proposed rules would require that an intermediary be a 
member of FINRA or of any other applicable national securities 
association. Is this an appropriate approach? At present, FINRA is the 
only registered national securities association. If we were in the 
future to approve the registration of another national securities 
association under Exchange Act Section 15A, would it be appropriate for 
us to require membership in both the existing and new association? Why 
or why not?
    120. No intermediary can engage in crowdfunding activities without 
being registered with the Commission and becoming a member of FINRA or 
another registered national securities association. We recognize that 
while there is an established framework for brokers to register with 
the Commission and become members of FINRA, no such framework is yet in 
place for funding portals. We do not intend to create a regulatory 
imbalance that would unduly favor either brokers or funding 
portals.\336\ Are there steps we should take to ensure that we do not 
create a regulatory imbalance? \337\ Please explain.
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    \336\ We note, however, that a registered broker could 
nonetheless have a competitive advantage to the extent it would be 
able to provide a wider range of services than a registered funding 
portal could provide in connection with crowdfunding transactions 
made in reliance on Section 4(a)(6). Unlike a funding portal, a 
registered broker-dealer could make recommendations, engage in 
solicitations and handle investor funds and securities. In addition, 
a registered broker-dealer, but not a funding portal, could 
potentially facilitate a secondary market for securities sold 
pursuant to Section 4(a)(6). See Exchange Act Section 3(a)(80) [15 
U.S.C. 78c(a)(80)] (providing that a funding portal may act as an 
intermediary solely in securities transactions effected pursuant to 
Securities Act Section 4(a)(6), which are offerings by issuers and 
not resales).
    \337\ See NCA Letter (stating that registered brokers should not 
be permitted to engage in crowdfunding activities until funding 
portals also become registered with, and members of, SROs).
---------------------------------------------------------------------------

    121. The proposed rules do not independently establish licensing or 
other qualification requirements for intermediaries and their 
associated persons. The applicable registered national securities 
associations may or may not seek to impose such requirements. Should 
the Commission consider establishing these requirements? Should the 
Commission consider establishing requirements only if the associations 
do not? Would licensing or other qualifications for intermediaries and 
their associated persons be necessary, for example, to provide 
assurances that those persons are sufficiently knowledgeable and 
qualified to operate a funding portal? Why or why not? If so, what 
types of licensing or other qualifications should we consider?
b. Financial Interests
    Exchange Act Section 4A(a)(11) requires an intermediary to 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. The proposed rules would 
implement this prohibition by importing the language of the statute, 
and also by extending this prohibition to the intermediary itself. The 
proposed rules would add that these persons are not only prohibited 
from having any financial interest in an issuer using its services, but 
also would specifically be prohibited from receiving a financial 
interest in the issuer as compensation for services provided to, or for 
the benefit of, the issuer, in connection with the offer and sale of 
its securities.\338\ The proposed rules would interpret ``any financial 
interest in an issuer,'' for purposes of Securities Act Section 
4A(a)(11), to mean a direct or indirect ownership of, or economic 
interest in, any class of the issuer's securities.
---------------------------------------------------------------------------

    \338\ See proposed Rule 300(b) of Regulation Crowdfunding.
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    One commenter sought clarification of whether Section 4A(a)(11) 
prohibits an intermediary--as an entity--from accepting equity from an 
issuer as compensation for its services.\339\ In the commenter's view, 
Section 4A(a)(11) should be interpreted as prohibiting an intermediary 
from having a financial interest in an issuer only at the time of the 
offering and not thereafter. Another commenter stated that permitting a 
funding portal to have a financial interest in an issuer would align 
the funding portal's interests with those of

[[Page 66461]]

potential investors and that full disclosure of any financial interest 
should quell any potential concerns.\340\ Another commenter stated that 
Section 4A(a)(11) does not expressly prohibit an intermediary, as an 
entity, from having a financial interest in an issuer and that this 
should be permitted under certain circumstances.\341\
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    \339\ See NCA Letter.
    \340\ See Dex Offshore Letter 1. See also Dex Offshore Letter 2 
(stating that allowing funding portals to have an equity interest in 
an issuer would align the funding portals with investors, much like 
venture capital or private equity models, and that transparent 
disclosure would quell any concerns related to portals maintaining 
equity interests in issuers).
    \341\ See EarlyShares Letter 2 (stating that the following 
principles should govern a funding portal's financial interest in an 
issuer: first, to prevent any potential unfair advantage, an 
intermediary should only be able to invest on the same terms under 
which the crowd invests; second, any material nonpublic information 
that the intermediary (or any person acting on behalf of the 
intermediary) possessed prior to and/or after taking a financial 
interest in an issuer must be disclosed on the platform in a secure 
manner, consistent with the disclosure of other material nonpublic 
information that investors will receive through the issuer's profile 
page on an intermediary's platform; third, because under Securities 
Act Section 4A(e), an intermediary will be bound by the same one-
year restriction on sales period as any other investor, there would 
be no risk that investors would be misled by a ``false start'' or 
``pump-and-dump'' scheme; and finally, an intermediary's interest 
should remain anonymous throughout the investment campaign, to avoid 
having the intermediary's interest be considered ``investment advice 
or recommendations,'' in violation of the prohibitions in the 
definition of funding portal).
---------------------------------------------------------------------------

    We believe the prohibition in Section 4A(a)(11) is designed to 
protect investors from the conflicts of interest that may arise when 
the persons facilitating a crowdfunding transaction have a financial 
stake in the outcome. The proposed rules would extend the prohibition 
on holding a financial interest to the intermediary itself,\342\ 
because we believe that the same concerns apply to the intermediary as 
to its directors, officers or partners (or any person occupying a 
similar status or performing a similar function). The existence of a 
financial interest in an issuer may create an incentive to advance that 
issuer's fundraising efforts over those of other issuers, which could 
potentially adversely affect investors. For similar reasons, the 
proposed rules also would prohibit receipt of a financial interest in 
an issuer as compensation for services provided to or on behalf of an 
issuer.\343\ The proposed rules would define ``financial interest in an 
issuer'' to mean a direct or indirect ownership of, or economic 
interest in, any class of the securities of an issuer.\344\
---------------------------------------------------------------------------

    \342\ See proposed Rule 300(b) of Regulation Crowdfunding. See 
also Securities Act Section 4A(a)(12) (granting us discretionary 
authority to include other requirements on intermediaries for the 
protection of investors and the public interest).
    \343\ See id.
    \344\ See proposed Rule 300(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    As discussed above, one commenter suggested that an investor's and 
intermediary's interests may be aligned if an intermediary were allowed 
to take a financial interest in an issuer. We are concerned that the 
promise of a financial stake in the outcome could give an intermediary 
an incentive to ensure the success of its own investment in the issuer, 
to the disadvantage of investors and other issuers using the 
intermediary's platform, particularly if the financial interest is 
provided to the intermediary on different terms than to other 
investors.
Request for Comment
    122. Should we permit an intermediary to receive a financial 
interest in an issuer as compensation for the services that it provides 
to the issuer? Why or why not? If we were to permit this arrangement, 
the proposed rules on disclosure requirements for issuers would require 
the arrangement to be disclosed to investors in the offering material. 
Are there other conditions that we should require? If so, please 
identify those conditions and explain.
    123. If an intermediary receives a financial interest in an issuer, 
should it be permitted to provide future services as long as it retains 
the interest? Why or why not?
    124. One commenter suggested that an intermediary should be able to 
receive a financial interest under the same terms as other investors 
participating in an offering made in reliance on Section 4(a)(6).\345\ 
We request comment on this suggestion. How could an intermediary 
address potential conflicts of interest that may arise from this 
practice? Would disclosure of the arrangement be sufficient? Please 
explain.
---------------------------------------------------------------------------

    \345\ See EarlyShares Letter 2.
---------------------------------------------------------------------------

    125. The proposed rules define ``financial interest in an issuer,'' 
for purposes of Securities Act Section 4A(a)(11), to mean a direct or 
indirect ownership of, or economic interest in, any class of the 
issuer's securities. Should we define the term more broadly to include 
other potential forms of a financial interest? For example, should the 
term include a contract between an intermediary and an issuer or the 
issuer's directors, officers or partners (or any person occupying a 
similar status or performing a similar function), for the intermediary 
to provide ancillary or consulting services to the issuer after the 
offering? Should it include an arrangement under which the intermediary 
is a creditor of an issuer? Should it include any carried interest or 
other arrangement that provides the intermediary or its associated 
persons with an interest in the financial or operating success of the 
issuer, other than fixed or flat-rate fees for services performed? 
Should any other interests or arrangements be specified in the term 
``financial interest in an issuer?'' If so, what are they and what 
concerns do they raise?
    126. In light of the reasons for the prohibition, should there be a 
de minimis exception? Why or why not? If so, what would be an 
appropriate de minimis amount? For example, would a one percent holding 
be an appropriate amount? Would another amount be more appropriate? 
Please explain. Should there be disclosure requirements for any de 
minimis exception? Why or why not?
    127. Should we impose any other requirements or prohibitions on 
intermediaries? If so, what requirements or prohibitions and why?
3. Measures To Reduce Risk of Fraud
    Securities Act Section 4A(a)(5) requires an intermediary to ``take 
such measures to reduce the risk of fraud with respect to [transactions 
made in reliance on Section 4(a)(6)], 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.'' The proposed rules would 
implement this provision by requiring an intermediary to have a 
reasonable basis for believing that the issuer is in compliance with 
relevant regulations and has established means to keep accurate records 
of holders of the securities it offers, and by requiring that the 
intermediary deny access if it believes the issuer or its offering 
would present a potential for fraud.\346\
---------------------------------------------------------------------------

    \346\ See proposed Rule 301 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Specifically, the proposed rules would require an intermediary to 
have a reasonable basis for believing that an issuer seeking to offer 
and sell securities in reliance on Section 4(a)(6), through the 
intermediary's platform, complies with the requirements in Securities 
Act Section 4A(b) and the related requirements in Regulation

[[Page 66462]]

Crowdfunding.\347\ While an issuer has an independent obligation to 
comply with these requirements, we believe it would help to reduce the 
risk of fraud if an intermediary were to also have an obligation to 
have a reasonable basis to believe that the issuer is in 
compliance.\348\ The proposed rules would permit intermediaries to 
reasonably rely on representations of the issuer, absent knowledge or 
other information or indications that the representations are not true. 
While we do not propose to specify particular actions an intermediary 
must take in satisfying this requirement, we anticipate that in the 
course of its interactions with potential issuers, an intermediary may 
determine whether it could in fact reasonably rely on an issuer's 
representations and have a reasonable basis to believe the issuer is in 
compliance.
---------------------------------------------------------------------------

    \347\ See proposed Rule 301(a) of Regulation Crowdfunding.
    \348\ See Section II.E.5 below for a discussion relating to 
intermediaries' potential statutory liability for statements made by 
issuers and intermediaries' policies and procedures. Proposed Rule 
403(a) of Regulation Crowdfunding would require funding portals to 
have policies and procedures designed to achieve compliance with 
federal securities laws, while intermediaries that are brokers would 
be subject to FINRA rules requiring similar policies and procedures. 
See discussion in Section II.D.4 below.
---------------------------------------------------------------------------

    The proposed rules also would require an intermediary to have a 
reasonable basis for believing that an issuer has established means to 
keep accurate records of the holders of the securities it would offer 
and sell through the intermediary's platform.\349\ The ability to keep 
track of the ownership of an issuer's securities is necessary to 
protect investors and critical for maintaining the integrity of 
securities transactions made in reliance on Section 4(a)(6), both with 
respect to the initial offering and any subsequent transfers of the 
securities. The statute does not assign responsibility in this regard 
but intermediaries would be well-positioned to make this determination, 
given that they would be interacting with the issuer, and particularly 
if they are advising the issuer to some extent about the offering.\350\ 
One commenter stated that a direct registration system provides the 
best solution to policing transfers at a low cost and that, to the 
extent physical certificates are issued, they should include legends 
similar to those required for restricted securities.\351\
---------------------------------------------------------------------------

    \349\ See proposed Rule 301(b) of Regulation Crowdfunding.
    \350\ See discussion in Section II.D.3 below relating to 
proposed Rule 402(b)(5) of Regulation Crowdfunding.
    \351\ See RocketHub Letter 1. See also STA Letter.
---------------------------------------------------------------------------

    Another commenter suggested that the Commission should require the 
use of registered transfer agents, which are already subject to SEC 
regulations and examinations, to maintain records of share ownership 
and transfers in connection with crowdfunding transactions.\352\ This 
commenter stated that small issuers may not have the resources to 
properly execute the routine services that registered transfer agents 
provide, including procedures to: record and balance registered 
shareowner positions; follow shareholder instructions (and retain 
records of the instruction) to change an address or transfer their 
interests as a result of death, divorce or sale (including signature 
guarantees where necessary); escheat unclaimed assets under state laws; 
or address lost or stolen certificates.
---------------------------------------------------------------------------

    \352\ See STA Letter.
---------------------------------------------------------------------------

    We are not proposing to require a particular form or method of 
recordkeeping of securities, nor are we proposing to require that an 
issuer use a transfer agent or any other third party. We recognize the 
importance of accurate recordkeeping for investors and issuers, and 
that the failure to accurately record or maintain shareholder records 
of an issuer, or to prevent fraudulent transfers, can have significant 
negative impacts for both investors and issuers.\353\ Among other 
things, investors without accurate records of their ownership of shares 
can find it difficult to prove such ownership in connection with a sale 
of their shares or execution of a corporate transaction. We believe 
that accurate recordkeeping can be accomplished by diligent issuers or 
through a variety of third parties. Accordingly, under the proposed 
rules, the recordkeeping function may be provided by the issuer, a 
broker, a transfer agent or some other (registered or unregistered) 
person.\354\ In certain business models, for example, it may be 
possible for other regulated entities, such as banks, to provide this 
function.\355\
---------------------------------------------------------------------------

    \353\ See, e.g., STA Letter.
    \354\ An intermediary that is a funding portal could not provide 
these services, however, because by statute, it cannot ``hold, 
manage, possess, or otherwise handle investor funds or securities.'' 
See Exchange Act Section 3(a)(80)(D) [15 U.S.C. 78c(a)(80)].
    \355\ See City First Letter (indicating that there was interest 
in leveraging resources of Community Development Financial 
Institutions, which are certified by the U.S. Department of Treasury 
and include community development banks, credit unions, loan funds, 
and venture capital funds, with crowdfunded capital).
---------------------------------------------------------------------------

    Requiring a direct registration system to monitor transfers could 
create additional costs to implement that we have not required in 
connection with any types of securities offerings, and thus we are not 
proposing to require it here. Similarly, we are not proposing to 
require the use of a registered transfer agent. While requiring a 
registered transfer agent to be involved after the offering could 
introduce a regulated entity with experience in maintaining accurate 
shareholder records, a transfer agent is not necessary for accurate 
recordkeeping. Issuers and other third parties can also be well-
positioned to keep accurate records of the holders of the securities an 
issuer would offer and sell through an intermediary's platform.\356\
---------------------------------------------------------------------------

    \356\ Transfer agent registration is required with respect to 
securities registered under Exchange Act Section 12 (15 U.S.C. 78l). 
Because securities issued pursuant to a transaction relying on 
Section 4(a)(6) will not be registered under Exchange Act Section 
12, as explained above, we are not proposing to require the use of 
transfer agents on the transfers of these securities. Nevertheless, 
issuers relying on Section 4(a)(6) could choose to engage a 
registered transfer agent to provide these services. See Exchange 
Act Section 17A(c)(1) [15 U.S.C. 78q-1]. See also id.
---------------------------------------------------------------------------

    In satisfying this requirement that an intermediary have a 
reasonable basis to believe that an issuer has established means to 
keep accurate records of the securities it would offer and sell through 
the intermediary's platform, the intermediary may rely on an issuer's 
representations concerning the means it has established, unless the 
intermediary has reason to question the reliability of the 
representations.\357\ To keep accurate records, an issuer may need to 
have established means to perform a range of functions with respect to 
shareholder records. The precise scope of the needed functions will 
depend on the nature of the issuer and its securities. Such functions 
could include, for example, the ability to (1) monitor the issuance of 
the securities the issuer would offer and sell through the 
intermediary's platform, (2) maintain a master security holder list 
reflecting the owners of those securities, (3) maintain a transfer 
journal or other such log recording any transfer of ownership, (4) 
effect the exchange or conversion of any applicable securities, (5) 
maintain a control book demonstrating the historical registration of 
those securities, and (6) countersign or legend physical certificates 
of those securities. For some issuers, not all of these functions may 
be needed.
---------------------------------------------------------------------------

    \357\ See proposed Rule 301(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    There are a number of ways by which an issuer could demonstrate or 
represent that it has established the necessary recordkeeping means. 
The issuer itself may have capabilities to maintain accurate records of 
its

[[Page 66463]]

securities and, as noted above, may represent such capabilities to the 
intermediary. The intermediary also may be able to establish a 
reasonable belief, for example, if the issuer has engaged a broker, 
transfer agent, or other third party that can provide the requisite 
recordkeeping services, including a third party providing such services 
tailored to crowdfunding issuers.
    The proposed rules would require an intermediary to deny access to 
its platform, if the intermediary has a reasonable basis for believing 
that an issuer, or any of its officers, directors (or any person 
occupying a similar status or performing a similar function) or 20 
Percent Beneficial Owners, is subject to a disqualification under the 
proposed rules or if the intermediary believes that the issuer or the 
offering presents the potential for fraud or otherwise raises concerns 
regarding investor protection.\358\ The rules would require an 
intermediary to conduct a background and securities enforcement 
regulatory history check on each issuer whose securities are to be 
offered by the intermediary, as well as on each of its officers, 
directors (or any person occupying a similar status or performing a 
similar function) and 20 Percent Beneficial Owners. While the statute 
requires that these checks be conducted on persons holding more than 20 
percent of the outstanding equity of the issuer, the proposed rules 
would extend this requirement to apply to the 20 Percent Beneficial 
Owners. This proposed requirement is consistent with the issuer 
disclosure requirements and with the issuer disqualification 
provisions.\359\ Using the same standard here would be consistent with 
and reinforce the disclosure requirements and disqualification 
provisions applicable to issuers and would provide investors with 
protections and additional comfort when making investment decisions. At 
this time, we believe that requiring these background checks would be 
sufficient to meet the aims of Section 4A(a)(5) without imposing an 
undue burden, which could in turn discourage the use of the exemption 
provided in Section 4(a)(6).
---------------------------------------------------------------------------

    \358\ See proposed Rule 301(c) of Regulation Crowdfunding.
    \359\ See proposed Rules 201 and 503 of Regulation Crowdfunding, 
as well as the discussion in Section II.B.1 above and Section II.E.6 
below.
---------------------------------------------------------------------------

    A number of commenters requested guidance on the acceptable scope 
of background and securities enforcement regulatory history checks that 
an intermediary would be required to conduct.\360\ One commenter 
suggested that the background check should consist of: A review of 
credit reports, verification of necessary business or professional 
licenses, evidence of corporate good standing, uniform commercial code 
checks and a CRD \361\ snapshot report.\362\ Another stated that the 
scope of the background and securities enforcement regulatory history 
check should be commensurate with the size of the transaction and that 
we should establish a minimum level of diligence that an intermediary 
must undertake to promulgate an effective mechanism against fraud.\363\ 
The commenter further stated that such minimum level should be below 
that required of registered broker-dealers.\364\ Other commenters 
requested guidance on the actions that an intermediary should take with 
respect to information uncovered during a background check.\365\
---------------------------------------------------------------------------

    \360\ See CompTIA Letter; NASAA Letter; CrowdFund Connect 
Letter.
    \361\ CRD is a central licensing and registration system for the 
U.S. securities industry and its regulators. It includes a 
computerized database of registration records, as well as 
qualification, employment and complaint histories.
    \362\ See NASAA Letter (stating that these types of checks and 
reviews are necessary to ensure bad actors are not permitted to 
raise money in lightly regulated public offerings). Compare 
RocketHub Letter 1 (stating that intermediaries should query 
commonly-used databases for criminal background checks, bankruptcy 
filings and tax liens, as well as cross reference against the 
Department of Treasury's (``Treasury'') Office of Foreign Asset 
Control sanctions lists and Specially Designated Nationals and 
Blocked Persons lists).
    \363\ See CFIRA Letter 2 (stating that because there is no 
mandated infrastructure that intermediaries are required to use, 
each intermediary should utilize an infrastructure that incorporates 
some type of fraud deterrence and fraud detection system, whether 
proprietary or licensed through a third party; that, in order to 
deter fraud, funding portals should have a video interface ``whereby 
each issuer is required to give a short presentation on their 
business which is capable of being viewed live and saved for later 
viewing at any time by a potential investor;'' and that in terms of 
detecting fraud, we should require intermediaries to build certain 
fraud detection systems into the functionality of their platforms).
    \364\ See id.
    \365\ See NSBA Letter; Arctic Island Letter.
---------------------------------------------------------------------------

    We are not proposing to establish specific procedures for 
intermediaries to follow to reduce the risk of fraud beyond conducting 
the prescribed background and securities enforcement regulatory history 
checks. We believe that this proposed approach would allow an 
intermediary to use its experience and judgment, as well as its concern 
for the reputational integrity of its platform and crowdfunding 
pursuant to Section 4(a)(6) in general, to design systems and processes 
to help reduce the risk of fraud in securities-based crowdfunding. In 
this regard, the proposed rules would require an intermediary to deny 
access to an issuer if it has information that is not necessarily the 
basis for a disqualification under proposed rules, but that the 
intermediary nevertheless believes presents the potential for fraud or 
otherwise raises concerns regarding investor protection.\366\ For this 
particular proposed requirement to deny access, the intermediary would 
not be required to have a reasonable basis for its belief. This is 
because we believe it is important to provide intermediaries discretion 
in taking steps to reduce the risk of fraud as Congress intended, which 
would strengthen investor protection. The proposed rules also require 
that if this information becomes known to the intermediary after it has 
granted the issuer access to its platform, the intermediary must 
promptly remove the offering from its platform, cancel the offering and 
return to investors any funds they may have committed. Under the 
proposed rules, an intermediary would also be required to deny access 
to an issuer if it believes that it is unable to adequately or 
effectively assess the risk of fraud of the issuer or its potential 
offering. For example, if certain officers of the issuer reside in a 
jurisdiction where background checks and securities enforcement 
regulatory history checks are not readily available to the 
intermediary, the intermediary may determine that it is unable to 
assess the risk of fraud of the issuer, and thus must deny the issuer 
access to its platform.
---------------------------------------------------------------------------

    \366\ For example, in conducting the background checks on the 
officers and directors of an issuer, an intermediary may learn that 
an officer or director misrepresented his or her experience or 
background. In this situation, an intermediary may determine that 
the misrepresentation was intentional or material (e.g., it was not 
the result of an inadvertent clerical error) and is an indication 
that an offering by the issuer would present potential for fraud or 
otherwise raises concerns regarding investor protection. The 
intermediary would then be required to deny access to its platform 
to the issuer.
---------------------------------------------------------------------------

    Some commenters stated that background checks could help reduce 
fraud if intermediaries were required to prominently display the 
results of the background checks on their platforms.\367\ We believe 
that requiring intermediaries to conduct the checks and deny access to 
persons subject to disqualification satisfies the statutory requirement 
and achieves the underlying goal of the provision, which is to restrict 
the ability of certain parties to use the exemption. We do not believe 
it would be necessary to make publicly available the results of the 
background

[[Page 66464]]

checks, especially as such a requirement could add to the cost of 
administration and could expose the individuals in question to harm, 
for example, if there were errors in the information made publicly 
available. Therefore, we are not proposing to require intermediaries to 
make publicly available the results of background checks. Other 
commenters suggested creating an online database of securities law 
violators,\368\ or otherwise making certain information available so 
that investors could conduct their own background checks on officers 
and directors of an issuer,\369\ which could help lower costs on 
intermediaries and, indirectly, on issuers, associated with conducting 
an offering pursuant to Section 4(a)(6). We are not persuaded at this 
time that the administrative costs of posting the information, which 
the intermediary might not be able to verify, would be justified.
---------------------------------------------------------------------------

    \367\ See Arctic Island Letter; The Motley Fool Letter (stating 
the information should be displayed insofar as it bears on the 
honesty of the individual checked).
    \368\ See CrowdFund Connect Letter.
    \369\ See Cera Technology Letter.
---------------------------------------------------------------------------

    Some commenters expressed concern over the costs and burdens 
associated with conducting background and securities enforcement 
regulatory history checks.\370\ One commenter stated that it is 
important to control the expense of background checks to avoid making 
the cost of raising capital prohibitive to the issuer.\371\ While we 
are mindful of the costs associated with conducting these checks, the 
statutory requirement is clear. To help mitigate the costs, however, 
the proposed rules provide intermediaries with flexibility in how they 
would meet this requirement, while still helping to reduce the risk of 
fraud.
---------------------------------------------------------------------------

    \370\ See CrowdFund Connect Letter; Cera Technology Letter; 
Schwartz Letter (stating that the Commission should not add to the 
costs of background and securities enforcement regulatory history 
checks by tacking on additional antifraud measures).
    \371\ See CrowdFund Connect Letter (further stating that the 
requirement should be worded in a way ``as to be compatible with the 
numerous online sites that currently provide criminal background 
checks and that only felonies be reported'').
---------------------------------------------------------------------------

    We anticipate that an intermediary may use the services of a third 
party to gather the information to conduct the required background and 
regulatory checks on issuers and their control persons.\372\ The 
intermediary, of course, would remain responsible for compliance with 
the requirements of Section 4A(a)(5) and proposed Rule 301(c).\373\
---------------------------------------------------------------------------

    \372\ See discussion in Sections III.B.4 and IV.C below.
    \373\ An intermediary should investigate and understand the 
procedures used by the third party to determine the reasonableness 
of the reliance on a third party. Furthermore, depending on how an 
arrangement is structured or the services provided, a third-party 
service provider could come within the meaning of the term 
associated person of a broker or dealer in Exchange Act Section 
3(a)(18) (15 U.S.C. 78c(a)(18)). See also National Association of 
Securities Dealers (``NASD'' n/k/a FINRA), Outsourcing, Notice to 
Members 05-48 (July 2005), available at http://www.finra.org/Industry/Regulation/Notices/2005/p014736.
---------------------------------------------------------------------------

Request for Comment
    128. We are not proposing to require that an issuer relying on 
Section 4(a)(6) engage a transfer agent due, in part, to the potential 
costs we believe such a requirement would impose on issuers. What would 
be the potential benefits and costs associated with having a regulated 
transfer agent for small issuers? Are there other less costly means by 
which an issuer could rely on a qualified third party to assist with 
the recordkeeping related to its securities?
    129. The proposed rules incorporate a ``reasonable basis'' standard 
for intermediaries to determine whether issuers comply with the 
requirements in Securities Act Section 4A(b) and the related 
requirements of Regulation Crowdfunding, as well as for satisfying the 
requirement that the issuer has established means to keep accurate 
records of the holders of the securities it would offer and sell 
through the its platform.\374\ Is a ``reasonable basis'' the 
appropriate standard for intermediaries making such determinations? Why 
or why not? Is it appropriate for one determination but not the other? 
If so, please explain which one and why. What other standard would be 
more appropriate, and why? What circumstances in the crowdfunding 
context should not be considered to constitute a reasonable basis? 
Should we permit an intermediary to reasonably rely on the 
representation of an issuer with respect to one or both determinations?
---------------------------------------------------------------------------

    \374\ See proposed Rule 301(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    130. The proposed rules incorporate a ``reasonable basis'' standard 
for intermediaries to determine whether an issuer would be subject to a 
disqualification. In contrast, there is no reasonableness standard for 
intermediaries' requirement under the proposed rules to deny access to 
an issuer if it believes the issuer or the offering presents potential 
for fraud or otherwise raises concerns regarding investor protection. 
Is it appropriate to have these two different standards under the 
proposed rules? Why or why not? If one of these standards is not 
appropriate, please explain what would be a more appropriate standard 
and why.
    131. The proposed rules would implement Section 4A(a)(5) by 
requiring the intermediary to conduct a background and securities 
enforcement regulatory history check aimed at determining whether an 
issuer or any of its officers, directors (or any person occupying a 
similar status or performing a similar function) or 20 Percent 
Beneficial Owners is subject to a disqualification, presents potential 
for fraud or otherwise raises concerns regarding investor protection. 
Is this approach appropriate? Why or why not? If not, why not? Would 
another approach be more appropriate? Why or why not?
    132. Should we require intermediaries to make the results of the 
proposed background checks publicly available? Why or why not? Would 
doing so raise privacy concerns?
    133. Should we specify the steps that an intermediary must take in 
obtaining background and securities enforcement regulatory history 
checks on the issuer and its officers, directors (or any person 
occupying a similar status or performing a similar function) and 20 
Percent Beneficial Owners? Should we require, for example, an 
intermediary to check publicly-available databases, such as FINRA's 
BrokerCheck and the Commission's Investment Adviser Public Disclosure 
program? Why or why not? Are there third parties who would be in a 
position to provide these types of services? Please discuss.
    134. Should we require intermediaries to conduct specific checks or 
other steps (such as a review of credit reports, verification of 
necessary business or professional licenses, evidence of corporate good 
standing, Uniform Commercial Code checks or a CRD snapshot report)? Why 
or why not? Separately, should we specify a minimum or baseline level 
of due diligence to help establish a reasonable basis? Why or why not? 
If so, what should that level include? For instance, should it include 
a review or a verification of certain publicly available information 
about an issuer and its officers, directors (or any person occupying a 
similar status or performing a similar function) and 20 Percent 
Beneficial Owners? Should it include searches related or tailored to 
their location or place of incorporation, assets including real 
property and liens on those assets? Are there items it should or should 
not include? Please explain.
    135. Are there resources available to an intermediary that enable 
it to collect the information necessary for making a determination 
regarding disqualification or the potential for fraud or potential 
concerns as to investor protection? If so, which resources? Are there 
aspects of the proposed issuer disqualification rule that would make it 
difficult for an

[[Page 66465]]

intermediary to assess whether the issuer is subject to a 
disqualification? If so, please explain. Are there additional events or 
factors relevant to reducing the risk of fraud that intermediaries 
should be required to check? Please explain.
    136. Section 4A(a)(5) authorizes the Commission to specify measures 
to reduce the risk of fraud, in addition to background checks. Are 
there other risks of fraud which are not contemplated by the proposed 
rules? Are there any additional measures that we should specifically 
require? Please discuss any suggested measures, and explain. For 
example, should we require intermediaries to monitor investment 
commitments and cancellations or take any other actions to detect 
potential attempts to promote an issuer's securities? If so, which 
actions and why?
    137. Should the intermediary be required to report to the 
Commission (or another agency) issuers that are denied access? Why or 
why not?
4. Account Opening
    Under the proposed rules, an investor seeking to invest in an 
offering conducted in reliance on Section 4(a)(6) would need to open an 
account with an intermediary and provide consent to electronic delivery 
of materials. The intermediary also would be required to deliver to the 
investor educational materials, as discussed below.
a. Accounts and Electronic Delivery
    The proposed rules would prohibit an intermediary or its associated 
persons from accepting an investment commitment unless the investor has 
opened an account with the intermediary and the intermediary has 
obtained from the investor consent to electronic delivery of 
materials.\375\ We are not proposing to specify any particular type or 
form of information that an intermediary must obtain from an investor 
in order to open an account; however, we anticipate that at a minimum 
the intermediary would obtain basic identifying and contact 
information, such as full name, physical address and email 
address.\376\ Because we believe that Congress contemplated that 
crowdfunding would, by its very nature, occur exclusively through 
electronic media, the proposed rules require that investors consent to 
electronic delivery.\377\
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    \375\ See proposed Rule 302(a)(1) of Regulation Crowdfunding.
    \376\ Intermediaries also are subject to anti-money laundering 
obligations, including those relating to customer identification. 
See discussion in Section II.D.4 below regarding proposed Rule 
403(b) of Regulation Crowdfunding.
    \377\ See Use of Electronic Media, note 60 (citing Use of 
Electronic Media for Delivery Purposes, Release No. 34-36345 (Oct. 
6, 1995) [60 FR 53548, 53454 (Oct. 13, 1995)]).
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    The proposed rules also would require an intermediary to provide 
all information it is required to provide under Subpart C, such as 
educational materials, notices and confirmations, through electronic 
means.\378\ We also propose to require that, unless otherwise 
permitted, an intermediary must provide the information through an 
electronic message that contains the information, through an electronic 
message that includes a specific link to the information as posted on 
the intermediary's platform, or through an electronic message that 
provides notice of what the information is and that it is located on 
the intermediary's platform or on the issuer's Web site. The proposed 
rules would state that electronic messages include, but are not limited 
to, email messages. According to the proposed rule, for example, in 
complying with requirements to provide notices to investors under 
proposed Rule 304(b), the intermediary must provide those notices 
electronically to investors, such as through an email message 
containing or attaching the notice. With respect to the provision of 
issuer materials as required under proposed Rule 303(a), however, the 
proposed rule specifies that the intermediary must make the information 
publicly available on its platform. Therefore, the intermediary would 
only need to post the information on its platform in a manner complying 
with proposed Rule 303(a) and would not be required to send any 
electronic messages with regard to its posting.
---------------------------------------------------------------------------

    \378\ See proposed Rule 302(a)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that requiring consent to electronic delivery of 
documents relating to the offering, and requiring that intermediaries 
provide information electronically, would facilitate the ability of the 
investor, intermediary and issuer to comply with, and act in a timely 
manner, with respect to certain proposed requirements of Regulation 
Crowdfunding (such as the requirement for investors to reconfirm 
investment commitments within five business days of receiving notice of 
material changes).\379\ As such, under the proposed rules, offerings 
made in reliance on Section 4(a)(6) would be ``electronic-only,'' such 
that all information to be provided by intermediaries must be provided 
electronically, and investors would be permitted to participate only if 
they agree to accept electronic delivery of all documents in connection 
with the offering.\380\
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    \379\ See discussion in Section II.C.6 below and proposed Rule 
304(c) of Regulation Crowdfunding. We also note that, to the extent 
intermediaries are required to provide notices or other material to 
investors, it would not be sufficient for the intermediary simply to 
make the notice or material available for investors to access, such 
as by posting it on its platform or through social media sites; 
rather, the intermediary would need to deliver the notice or 
material to the investor, such as by email or other electronic 
delivery methods. See Use of Electronic Media, note 60 at 25853 
(discussing the ``access equals delivery'' concept).
    \380\ See proposed Rule 100(a)(3) of Regulation Crowdfunding. 
See also discussion in Section II.A.4 above, particularly the text 
accompanying note 55, regarding the requirement that crowdfunding 
transactions made in reliance on Section 4(a)(6) be conducted 
exclusively through an intermediary's platform. See also Use of 
Electronic Media, note 60 (citing Use of Electronic Media for 
Delivery Purposes, Release No. 34-36345 [60 FR 53548, 53454 (Oct. 
13, 1995)]).
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Request for Comment
    138. Should we specify the types of information that an 
intermediary must obtain from an investor as part of the account-
opening process? If so, what information and why? How would this 
information differ from what intermediaries would be required to obtain 
to fulfill their anti-money laundering obligations? \381\
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    \381\ See Section II.D.4.b below for a discussion of the anti-
money laundering provisions applicable to intermediaries.
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    139. Should we permit any exceptions to the proposed requirements 
to obtain consent to electronic delivery? If so, why and under what 
circumstances? If an investor does not receive materials 
electronically, how would he or she be able to participate fully in an 
offering made in reliance on Section 4(a)(6)?
    140. Are there any other means of providing information 
electronically by an intermediary that are not covered in the proposed 
rules but that should be covered? Are there any means proposed to be 
included that should be eliminated or modified? If so, what means are 
they? For example, should intermediaries be permitted to post 
information in an investor's account on its platform, without sending a 
notification that it is posted there? Why or why not? Should different 
types of information be required to be provided through different 
means? Please explain.
b. Educational Materials
    Section 4A(a)(3) states that an intermediary must ``provide such 
disclosures, including disclosures related to risks and other investor 
education materials, as the Commission shall, by rule, determine 
appropriate,'' but it does not elaborate on the scope of

[[Page 66466]]

this requirement. As described in further detail below, the proposed 
rules would require the intermediary to deliver to investors, at 
account opening, educational materials that are in plain language and 
otherwise designed to communicate effectively specified information. 
Intermediaries also would be required to make the current version of 
the educational materials available on their platforms and to make 
revised materials available to all investors before accepting any 
additional investment commitments or effecting any further transactions 
in securities offered and sold in reliance on Section 4(a)(6).\382\
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    \382\ See proposed Rule 302(b) of Regulation Crowdfunding.
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    The proposed rules would require the materials to include:
     The process for the offer, purchase and issuance of 
securities through the intermediary;
     the risks associated with investing in securities offered 
and sold in reliance on Section 4(a)(6);
     the types of securities that may be offered on the 
intermediary's platform and the risks associated with each type of 
security, including the risk of having limited voting power as a result 
of dilution;
     the restrictions on the resale of securities offered and 
sold in reliance on Section 4(a)(6);
     the types of information that an issuer is required to 
provide in annual reports, the frequency of the delivery of that 
information, and the possibility that the issuer's obligation to file 
annual reports may terminate in the future;
     the limitations on the amounts investors may invest, as 
set forth in Section 4(a)(6)(B);
     the circumstances in which the issuer may cancel an 
investment commitment;
     the limitations on an investor's right to cancel an 
investment commitment;
     the need for the investor to consider whether investing in 
a security offered and sold in reliance on Section 4(a)(6) is 
appropriate for him or her; and
     that following completion of an offering, there may or may 
not be any ongoing relationship between the issuer and intermediary.

The proposed disclosures relating to the risks of investing in 
securities offered and sold in reliance on Section 4(a)(6), investors' 
cancellation rights, resale restrictions and issuer reporting are 
generally drawn from the statutory requirements.\383\ These items of 
information are basic terms, relevant to transactions conducted in 
reliance on Section 4(a)(6), of which all investors should be aware 
before making an investment commitment. The circumstances in which an 
investor can cancel an investment commitment and obtain a return of his 
or her funds are particularly important to an investor's understanding 
of the investment process. Information on resale restrictions could 
affect an investor's decision to consider any offerings made pursuant 
to Section 4(a)(6).
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    \383\ See Securities Act Sections 4A(a)(4), 4A(a)(7), 4A(e), and 
4A(b)(4).
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    We are proposing to require intermediaries to provide educational 
material about the types of securities available for purchase on their 
platforms and the risks associated with each type of security, 
including the risk of having limited voting power as a result of 
dilution.\384\ As one commenter noted, some forms of securities may 
have limited rights with respect to voting, input into management 
decisions or redemption, among others, and also may be subject to 
dilution.\385\ Because we are not restricting the types of securities 
that an issuer may offer through Section 4(a)(6) transactions, this 
requirement would help investors understand the various types of 
securities that could be available on the platform and their associated 
risks.
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    \384\ See proposed Rule 302(b)(1)(ii) of Regulation 
Crowdfunding.
    \385\ See Commonwealth of Massachusetts Letter (stating that the 
investor education materials and other disclosures should make clear 
to investors the risks of their crowdfunding investments, including 
that investors may not have any meaningful voting power as minority 
shareholders and that their investment may not be readily liquid). 
See also 2012 SEC Government-Business Forum, note 29 (recommending 
that certain investor education materials, such as those relating to 
dilution, may need to be mandated by the Commission).
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    We also are proposing to require intermediaries to provide 
educational material regarding the limitation on the amounts investors 
may invest pursuant to Section 4(a)(6)(B) and the proposed rules.\386\ 
We believe it is important that investors are made aware of and 
understand the limits to which they would be subject, prior to making 
any investment commitments. As noted above, we are proposing to permit 
intermediaries to reasonably rely on investors' representations 
concerning compliance with the investment limitation requirements.\387\ 
We believe providing these educational materials should enhance the 
accuracy of investor representations, because an investor may be less 
likely to inadvertently make an inaccurate representation that he or 
she complies with the investment limits after being presented with an 
explanation of what those limits are, how they apply and how they are 
calculated.
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    \386\ See proposed Rule 100(a)(2) of Regulation Crowdfunding.
    \387\ See proposed Rule 303(b)(1) of Regulation Crowdfunding.
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    In addition, we are proposing to require that intermediaries 
provide, in the educational materials, a notice that the intermediary 
may or may not continue to have a relationship with the issuer 
following completion of the offering.\388\ We believe that persons 
opening an account with an intermediary, for instance because they are 
interested in the offering of a particular issuer, could mistakenly 
assume that the intermediary will have an ongoing relationship with the 
issuer. Such persons also could assume that, following an offering 
conducted through the intermediary's platform through which they 
purchased securities, the intermediary would be the primary contact for 
investors wishing to obtain information about, or wishing to 
communicate with, the issuer or wishing to participate in secondary 
trading of the issuer's securities. Because intermediaries may not 
necessarily have an ongoing relationship with the issuer following an 
offering, and funding portals would not be permitted to be involved in 
secondary trading, we believe it would be helpful to require 
intermediaries to alert investors about this limitation the time they 
open accounts.
---------------------------------------------------------------------------

    \388\ See proposed Rule 302(b)(1)(viii) of Regulation 
Crowdfunding.
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    One commenter suggested that the user experience for investors 
engaging in crowdfunding transactions should be a ``painless process'' 
and that investors should be subject to mandatory investor education 
prior to investing.\389\ Another commenter suggested that, in order to 
protect investors, intermediaries should be required to provide a 
glossary explaining each type of security available for purchase in 
each of the offerings on its portal.\390\ We are proposing to require 
intermediaries to provide educational material about the types of 
securities available for purchase on their platforms and the risks 
associated with each type of security; however, in order to provide 
intermediaries with flexibility in how they present or format this 
information, we are not proposing to require that it be presented as a 
glossary. One commenter suggested that a warning on the front page of 
an issuer's offering materials should suffice for the

[[Page 66467]]

purposes of Section 4A(a)(3).\391\ We do not believe that a disclaimer 
in isolation would be sufficient information to satisfy the statutory 
educational requirement.\392\
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    \389\ See Vim Funding Letter.
    \390\ See CFIRA Letter 2.
    \391\ See InitialCrowdOffering Letter (stating that the 
following type of language should be used: ``you should purchase 
these shares only if you can afford a complete loss of your 
investment'').
    \392\ See also discussion in Section II.C.5.b below and proposed 
Rule 303(b)(2)(i) of Regulation Crowdfunding.
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    Other commenters requested that the Commission prepare and make 
available investor educational material or model text for use by 
intermediaries.\393\ Other commenters requested that the Commission 
clarify whether educational materials may be provided to investors 
through electronic means, such as through the Internet or email.\394\ 
One commenter requested that intermediaries be given ``wide latitude'' 
to experiment with different methods of investor education.\395\ We are 
not proposing to require a particular format or manner of presentation, 
other than the requirement that the materials be provided 
electronically.\396\ Rather than requiring specific text or a 
particular format or presentation, we believe that the better approach 
is to provide each intermediary with sufficient flexibility to prepare 
educational materials in a manner reasonably designed to provide the 
required information, based on the types of offerings on the 
intermediary's platform and the types of investors drawn to its 
platform.\397\ Under the proposed rules, the educational materials may 
be in any electronic format, including electronic and video format, 
that the intermediary determines is effective in communicating the 
contents of the educational material.\398\
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    \393\ See, e.g., NASAA Letter (providing model language for use 
in investor education material and recommending that the material 
state that: (1) Investments in small businesses and start-up 
companies are often risky; (2) according to the U.S. Small Business 
Administration, half of all new businesses fail within five years; 
(3) because of these risks, investors should only invest if they can 
afford to lose the entire investment; and (4) an investor should not 
invest if the investor has an immediate need for the return of the 
funds). See also Tri Valley Law Letter; NSBA Letter. But see 2012 
SEC Government-Business Forum, note 29 (recommending that while some 
investor education materials may need to be mandated by the 
Commission, the industry should work together to standardize 
educational materials).
    \394\ See RocketHub Letter 1; Spinrad Letter 1.
    \395\ See Schwartz Letter.
    \396\ See proposed Rule 302(a)(2) of Regulation Crowdfunding and 
discussion in Section II.C.4.a above.
    \397\ See 2012 SEC Government-Business Forum, note 29 
(recommending that the market for transactions in reliance on 
Section 4(a)(6) should be permitted to develop best practices 
wherever possible).
    \398\ As discussed in Section II.C.3 above, proposed Rule 302(a) 
of Regulation Crowdfunding would require that an intermediary obtain 
an investor's consent to such electronic delivery.
---------------------------------------------------------------------------

    Because the proposed rules require that the educational materials 
convey the specified pieces of information accurately, an intermediary 
would be required to update these materials over time as, for instance, 
the types of offerings on its platform change. For example, if an 
intermediary decides to expand the types of securities it offers 
through its platform, the intermediary would be required to update its 
educational materials. Similarly, an intermediary would be required to 
periodically review and update other aspects of its educational 
materials, such as the discussion of risk factors, as necessary. The 
proposed rules would require an intermediary to keep its educational 
materials accurate and thus current, which would require it to make the 
most current version of its educational materials available on its 
platform. In addition, to the extent an intermediary makes a material 
revision to its educational materials, it would be required to make the 
revised educational materials available to all investors before 
accepting any investment commitments.\399\ We believe that this 
requirement is consistent with the Internet-based nature of 
crowdfunding. We also believe that this requirement would benefit 
investors, by helping to ensure that they have information about key 
aspects of investing through the intermediary's platform that may have 
changed since the last time they received the materials, prior to 
making investment commitments, as those key aspects could influence 
their investment decisions. Because these materials must be accurate, 
and thereby current, a change in the types of offerings conducted on an 
intermediary's platform would trigger an update. We believe requiring 
intermediaries to provide updated material on this basis, rather than 
at any regular intervals, should help to minimize the ongoing burden on 
intermediaries.
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    \399\ Pursuant to proposed Rule 303(b)(2)(i) of Regulation 
Crowdfunding, the intermediary would be required to obtain, from 
each investor, a representation that the investor has reviewed these 
educational materials before accepting an investment commitment from 
the investor.
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Request for Comment
    141. Is the scope of information proposed to be required in an 
intermediary's educational materials appropriate? Why or why not? Is 
there other information that we should require an intermediary to 
provide as part of the educational materials? If so, what information 
and why?
    142. Should any of the proposed requirements be modified or 
deleted, and if so, which requirements and why?
    143. Should we prescribe the text or content of educational 
materials for intermediaries to use? Why or why not? Should we provide 
models that intermediaries could use? Why or why not?
    144. Should we specifically prohibit certain types of electronic 
media from being used to communicate educational material? If so, which 
ones and why?
    145. Should we require intermediaries to submit the educational 
materials to us or FINRA (or other applicable national securities 
association) for review? Why or why not? If we should require 
submission of materials, should we require submission before or after 
use, when they are first used, when the intermediary changes them or at 
some other point(s) in time? Please explain.
    146. Should we require intermediaries to provide educational 
material at additional or different specified points in time, rather 
than only when the investor begins to open an account or make an 
investment commitment? Why or why not? If so, why would that be 
preferable to requiring updates on an as-needed basis? For example, 
should educational material be provided on a quarterly, semi-annual, or 
annual basis? Should this material be provided again to investors who 
have not logged onto or accessed an intermediary's platform for a 
specified period of time? Why or why not? If so, what should that 
period of time be?
c. Promoters
    Section 4A(b)(3) provides that an issuer shall ``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.'' As discussed above, the proposed rules 
would include this prohibition.\400\
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    \400\ See proposed Rule 205 of Regulation Crowdfunding and the 
discussion in Section II.B.5 above.
---------------------------------------------------------------------------

    We also propose to require the intermediary to inform investors, at 
the account opening stage, that any person who promotes an issuer's 
offering for compensation, whether past or prospective, or who is a 
founder or an employee of an issuer that engages in promotional 
activities on behalf of the

[[Page 66468]]

issuer on the intermediary's platform, must clearly disclose in all 
communications on the platform the receipt of the compensation and the 
fact that he or she is engaging in promotional activities on behalf of 
the issuer.\401\ We believe that requiring intermediaries to inform 
investors about these disclosure obligations at the outset of their 
relationship should help to ensure and monitor issuers' compliance with 
Section 4A(b)(3) and the proposed rules, as it would alert investors 
that information about the participation of issuers or representatives 
of issuers would have to be disclosed at a later time. Promoters also 
would need to disclose this information \402\ each time they post a 
comment in the communication channels on the platform.\403\
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    \401\ See proposed Rule 302(c) of Regulation Crowdfunding.
    \402\ In addition to the information proposed Rule 302(c) 
requires, promoters would also be required to disclose the amount of 
compensation pursuant to Section 17(b) of the Securities Act (15 
U.S.C. 77q(b)).
    \403\ See proposed Rule 303(c)(4) of Regulation Crowdfunding. We 
recognize that after opening an account, an investor may come to be 
compensated by, or become an employee of, an issuer or potential 
issuer. For this reason, proposed Rule 303(c)(4) would require an 
intermediary to require that any person, when posting a comment in 
the communication channels, clearly disclose with each posting 
whether he or she is a founder or an employee of an issuer engaging 
in promotional activities on behalf of the issuer, or receives 
compensation, whether in the past or prospectively, to promote an 
issuer's offering. We anticipate that an intermediary could comply 
with this requirement in part by, for example, establishing a ``pop-
up'' window which reminds the investor of the requirement each time 
the investor accesses, or attempts to post a comment on, the 
communication channels on the intermediary's platform. See 
discussion in Section II.C.5 below. See also proposed Rule 205 of 
Regulation Crowdfunding.
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Request for Comment
    147. Should the proposed rules require intermediaries to take any 
different or additional steps to help achieve compliance with the 
requirement for promoters to disclose the receipt of compensation? If 
so, what other steps would be appropriate and why?
    148. Should the proposed disclosures to investors be required to be 
made at some time other than at account opening? For instance, should 
the reminder about disclosure obligations be made each time an investor 
accesses the intermediary's platform or the communication channels 
provided by the intermediary? Why or why not?
    149. The proposed rules would require disclosure be made to 
investors, in relation to obligations of any person who receives 
compensation, whether in the past or prospectively, to promote an 
issuer's offering, or who is a founder or an employee of an issuer that 
engages in promotional activities on behalf of the issuer on the 
intermediary's platform. Should the obligations apply to other classes 
of persons as well, such as affiliates of the issuer, regardless of 
whether they are engaged in promotional activities? Why or why not?
d. Compensation Disclosure
    The proposed rules would require the intermediary, when 
establishing an account for an investor, to clearly disclose the manner 
in which it will be compensated in connection with offerings and sales 
of securities made in reliance on Section 4(a)(6).\404\ This 
requirement would help to ensure investors are aware of any potential 
conflicts of interest of an intermediary that arise from the manner in 
which the intermediary is compensated. While the JOBS Act does not 
require this disclosure, we believe that providing this information to 
investors before they invest would help to ensure that they are making 
informed investment decisions.\405\
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    \404\ See proposed Rule 302(d) of Regulation Crowdfunding. See 
also proposed Rule 303(f) of Regulation Crowdfunding.
    \405\ See Staff of the U.S. Securities and Exchange Commission, 
Study on Investment Advisers and Broker-Dealers: As Required by 
Section 913 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Jan. 2011) (``Study on Investment Advisers and 
Broker-Dealers''), available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf, for more information about how compensation 
disclosure impacts investment decisions.
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Request for Comment
    150. Is the requirement for an intermediary to disclose how it is 
compensated an appropriate requirement? Why or why not? Would a time 
other than at account opening be more appropriate for this disclosure? 
Please explain.
    151. Should the proposed rules include any additional requirements 
with regard to disclosure of compensation? If so, what other 
requirements would be appropriate and why?
    152. While the proposed rules do not specify the types of 
information that an intermediary must obtain from an investor at the 
account opening stage, we recognize that this stage provides an 
opportunity for intermediaries to collect certain demographic 
information about investors. Although some information intermediaries 
would collect from investors might already be required under their 
anti-money laundering obligations or pursuant to registered national 
securities association rules, there is some information about investors 
which might not be required to be collected but which, without 
involving disclosure of any personally identifiable information of 
investors, could help us and the applicable national securities 
association to better understand the level of investor sophistication 
in this market and investor protection needs, among other things. For 
instance, connecting certain demographic information to offering 
characteristics and outcomes could help in the evaluation of the 
effectiveness of crowdfunding in raising capital for startups and small 
businesses. The information that could be collected includes, for 
example, demographic information about investors that excludes any 
personally identifiable information and is aggregated on a per offering 
basis, indicating characteristics such as education level, income, 
wealth, geographic distance from the issuer and professional 
affiliations. At the same time, we recognize that requiring the 
collection of this data could likely increase the burden on investors 
and intermediaries participating in transactions conducted pursuant to 
Section 4(a)(6). Should we require intermediaries to collect and 
provide some or all of this information to us and the applicable 
national securities association? Should some or all of this information 
be made more widely available? Why or why not? If so, which metrics 
should we require, and in what format, if any, should we require it be 
provided? To what extent do brokers already collect this information 
for offerings in which they are involved? Is there a particular point 
in time or method that would be more appropriate or convenient for 
intermediaries to collect this information? Would a requirement for 
intermediaries to collect this information at the account opening stage 
discourage investors from opening accounts with intermediaries, and 
ultimately limit the ability of issuers to raise capital in reliance on 
the exemption in Section 4(a)(6)? Please explain.
5. Requirements With Respect to Transactions
a. Issuer Information
    Section 4A(a)(6) requires each intermediary to make available to 
the Commission and potential investors, 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), any information provided 
by the issuer pursuant to Section 4A(b). The proposed rules would 
implement this

[[Page 66469]]

provision by requiring each intermediary in a transaction involving the 
offer or sale of securities in reliance on Section 4(a)(6) to make 
available to the Commission and to potential investors any information 
required to be provided by the issuer under Rules 201 and 203(a) of 
proposed Regulation Crowdfunding.\406\ The proposed rules would further 
require that: (1) An intermediary make this information publicly 
available on the intermediary's platform, in a manner that reasonably 
permits a person accessing the platform to save, download or otherwise 
store the information; \407\ (2) this information be made publicly 
available on the intermediary's platform for a minimum of 21 days 
before any securities are sold in the offering, during which time the 
intermediary may accept investment commitments; \408\ and (3) this 
information, including any additional information provided by the 
issuer,\409\ remain publicly available on the intermediary's platform 
until the offer and sale of securities is completed or cancelled. An 
intermediary would be prohibited from requiring any person to establish 
an account with the intermediary in order to access this information.
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    \406\ See proposed Rule 303(a) of Regulation Crowdfunding.
    \407\ While we are not requiring that intermediaries make the 
relevant information available in any particular format, we note 
that issuers would be required to file the information on EDGAR. See 
proposed Rule 203 of Regulation Crowdfunding. See also Section 
II.B.3 above for a discussion of the filing requirements applicable 
to issuers.
    \408\ Accordingly, the offering could not close at any time 
before the end of the 21st day after the issuer disclosure materials 
are made available on the intermediary's platform.
    \409\ Additional information could include, for example, 
information required to be filed with the Commission in a specific 
format (e.g., on EDGAR) under proposed Rules 201 and 203(a) of 
Regulation Crowdfunding, but prepared in a different presentation 
format, for example on slides, on the intermediary's platform.
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    We believe that this approach also would satisfy the requirement 
under Section 4A(d) for the Commission to ``make [available to the 
states], or . . . cause to be made [available] by the relevant broker 
or funding portal, the information'' issuers are required to provide 
under Section 4A(b) and the rules thereunder. This approach should help 
investors, the Commission, FINRA (and any other applicable registered 
national securities association) and other interested parties, such as 
state regulators, to access information without impediment. The 
proposed rules should help to ensure that an investor has an adequate 
opportunity to evaluate the investment opportunity and determine 
whether it is suitable for him or her.\410\ Finally, we do not believe 
that any person should be required to open an account with, or 
otherwise provide personal information to, an intermediary before 
reviewing the materials related to an offering or the educational 
materials provided by the intermediary.
---------------------------------------------------------------------------

    \410\ See proposed Rule 303(a)(1) of Regulation Crowdfunding. 
See also proposed Rules 303(a)(2) and 303(a)(3) of Regulation 
Crowdfunding. Intermediaries have broad recordkeeping obligations 
that would include any written materials that are used as part of an 
intermediary's business, which include issuer materials made 
available on its platform. Registered brokers would have to maintain 
records pursuant to Exchange Act Section 17 and the rules 
thereunder. 15 U.S.C. 78q; 17 CFR 240.17a et seq. Funding portals 
would be subject to the recordkeeping requirements of proposed Rule 
406 of Regulation Crowdfunding. See discussion in Section II.D.5 
below.
---------------------------------------------------------------------------

    One commenter expressed the view that an intermediary should not be 
required to send information to the Commission before listing an 
offering on its platform.\411\ The proposed rules would permit an 
intermediary to make issuer information available to both the 
Commission and potential investors simultaneously through its platform. 
Another commenter recommended that the private placement memorandum 
provided by the issuer should be reviewed by a properly qualified 
securities representative prior to the intermediary providing the 
information to potential investors.\412\ We are not proposing at this 
time to impose such a requirement. Although review by a securities 
professional could provide some degree of additional investor 
protection, we are mindful of Congress' intent that these offerings 
present a cost-effective method of raising capital. Further, the 
proposed rules would provide a safeguard for investors by requiring an 
intermediary to have a reasonable basis for believing that an issuer 
complies with the requirements of Section 4A(b) and Regulation 
Crowdfunding, and to deny access to an issuer or cancel its offering, 
if the intermediary believes that the issuer or the offering presents 
the potential for fraud or otherwise raises concerns regarding investor 
protection.\413\
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    \411\ See Crowdfunding Offerings Ltd. Letter 2.
    \412\ See Arctic Island Letter.
    \413\ See proposed Rule 302 of Regulation Crowdfunding and 
discussion in Section II.C.3 above.
---------------------------------------------------------------------------

Request for Comment
    153. Should we require intermediaries to continue to display issuer 
materials for some period of time after completion of the offering? Why 
or why not? If such a requirement were used, which time period would be 
appropriate? Why? What would be the potential costs and benefits 
associated with any such requirement?
    154. Section 4A(a)(6) requires an intermediary to make available 
the information that an issuer is required to provide under Section 
4A(b). Should we require an intermediary to make efforts to ensure that 
an investor who has made an investment commitment has actually reviewed 
the relevant issuer information? Why or why not? If so, how could we 
implement this?
    155. Instead of, or in addition to, requiring that intermediaries 
make issuer information available on their platforms, should we require 
that intermediaries deliver this information to investors? Why or why 
not? If so, should we specify a particular medium, such as email or a 
screen the investor must click through?
    156. Should we consider timeframes other than the minimum 21 days 
from the time an issuer offers securities on an intermediary's 
platform, during which the offering information should be made 
available?
    157. Should some or all of the issuer's offering materials be 
required to remain on an intermediary's platform after the close of an 
offering? Why or why not? If so, for how long?
b. Investor Qualification
i. Compliance With Investment Limitations
    Section 4(a)(6)(B) imposes certain limitations on the aggregate 
amount of securities that can be sold to an investor in reliance on 
Section 4(a)(6) during a 12-month period. Section 4A(a)(8) further 
imposes an obligation on intermediaries to ensure that no investor 
exceeds those limits. The proposed rules would implement this latter 
requirement by providing that, before permitting an investor to make an 
investment commitment on its platform, an intermediary must have a 
reasonable basis to believe that the investor satisfies the investment 
limitations under Section 4(a)(6)(B) and Regulation Crowdfunding.\414\
---------------------------------------------------------------------------

    \414\ See proposed Rule 303(b)(1) of Regulation Crowdfunding. 
See also Section II.A.2 above for a further discussion of the 
limitations on investments.
---------------------------------------------------------------------------

    Three commenters stated that it would be difficult for an 
intermediary to determine whether an investor has exceeded the 
investment limitations because an investor may not always use the same 
intermediary.\415\ Another commenter stated that it is unclear how an 
intermediary will be able to verify the investment limits, unless the

[[Page 66470]]

intermediary is permitted to rely upon an investor's representations 
regarding his or her prior crowdfunding investments.\416\ Another 
commenter raised concerns that an investor may be able to establish 
multiple user accounts with a single intermediary and thereby exceed 
the maximum investment limit, despite the best efforts of the 
intermediary.\417\ Another commenter suggested that each intermediary 
should be required to monitor investor activity only on its own 
platform.\418\ The commenter further stated that before completing an 
investment through an intermediary, investors should be required to 
make representations to an intermediary regarding any investments made 
through another intermediary within the last year. Another commenter 
suggested that the Commission should permit intermediaries to create 
and use a centralized database for aggregate checks.\419\
---------------------------------------------------------------------------

    \415\ See Cera Technology Letter; Crowdfunding Offerings Letter 
3; Schwartz Letter.
    \416\ See NSBA Letter. See also 2012 SEC Government-Business 
Forum, note 30 (recommending that investors should be permitted to 
self-certify as to their statutory investment limits and that 
funding portals should be permitted to rely on certifications made 
by third parties as to investment limits).
    \417\ See Grow VC Letter (stating that the Commission should 
require the following measures: ``closely monitoring investment 
activity in any user account; requiring each user account to provide 
unique bank account details which are not used by any other user 
account; and requiring the investor to represent and warrant that 
such investor understands the maximum investment limit and will not 
exceed such limits'').
    \418\ See RocketHub Letter 1.
    \419\ See Spinrad Letter 1 (stating that the underlying database 
would consist of information representing users, offerings, 
transactions and other elements of the market, and it would be used 
to ensure that investors do not purchase beyond the annual limits, 
even from multiple issuers across multiple intermediaries).
---------------------------------------------------------------------------

    We recognize that it would be difficult for intermediaries to 
monitor or independently verify whether each investor remains within 
his or her investment limits for each particular offering in which he 
or she intends to participate. While the proposed rules would permit 
reliance on a centralized database providing information about 
particular investors, if it could help provide an intermediary with a 
reasonable basis for a conclusion, we understand that none currently 
exists. For these reasons, the proposed rules provide that an 
intermediary may rely on an investor's representations concerning 
compliance with investment limitation requirements based on the 
investor's annual income and net worth and the amount of the investor's 
other investments in securities sold in reliance on Section 4(a)(6) 
through other intermediaries. For example, an intermediary may choose 
to satisfy this requirement by providing a function on its platform 
that prompts investors to enter amounts of their annual income, net 
worth, and the amount of total investments made over the past 12 months 
on all intermediaries' platforms, that would then generate the amount 
of investment the investor would be permitted to make at that time 
pursuant to the investment limitations. The intermediary could not rely 
on an investor's representations if the intermediary had reason to 
question the reliability of the representation. In this regard, it 
would not be reasonable for an intermediary to ignore other investments 
made by an investor in securities sold in reliance on Section 4(a)(6) 
through an account with that intermediary or other information or facts 
about an investor within its possession.
Request for Comment
    158. Is the proposed approach for establishing compliance with 
investment limits appropriate? Why or why not? Is there another 
approach that we should consider? Please explain.
    159. As mentioned above, we are proposing that an intermediary may 
rely on the representations of a potential investor. Is this an 
appropriate approach? Why or why not? Is there another approach we 
should consider? Please explain.
    160. Should we require an intermediary to avail itself of readily 
available information concerning investor limits, such as a centralized 
database containing information relating to whether particular 
investors were in compliance with the investment limits, should one 
become established? Why or why not?
    161. Should we require intermediaries to request other intermediary 
accounts that an investor may have before accepting an investment 
commitment? Why or why not?
ii. Acknowledgement of Risk
    Section 4A(a)(4) requires an intermediary to ensure that each 
investor: (1) Reviews the educational materials discussed above; (2) 
positively affirms that the investor understands that he or she is 
risking the loss of the entire investment and that the investor could 
bear such a loss; and (3) answer questions demonstrating an 
understanding of the level of risk generally applicable to investments 
in startups, emerging businesses and small issuers, the risk of 
illiquidity and such other matters as the Commission determines 
appropriate. As discussed above, the proposed rules would require an 
intermediary to provide to investors certain educational materials in 
connection with the opening of an account.\420\ The proposed rules 
would further require an intermediary, each time before accepting an 
investment commitment, to obtain from the investor a representation 
that the investor has reviewed the intermediary's educational 
materials, understands that the entire amount of his or her investment 
may be lost and is in a financial condition to bear the loss of the 
investment.\421\ The intermediary also must ensure each time before 
accepting an investment commitment that each investor answers questions 
demonstrating the investor's understanding that there are restrictions 
on the investor's ability to cancel an investment commitment \422\ and 
obtain a return of his or her investment, that it may be difficult for 
the investor to resell the securities, and that the investor should not 
invest any funds in a crowdfunding offering unless he or she can afford 
to lose the entire amount of his or her investment.
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    \420\ See proposed Rule 302(b) of Regulation Crowdfunding and 
discussion in Section II.C.4.b above.
    \421\ See proposed Rule 303(b)(2) of Regulation Crowdfunding.
    \422\ We proposed this requirement under discretionary authority 
granted in Section 4A(a)(4)(C)(iii). As discussed in Section 
II.C.4.b above, in relation to the educational materials, we believe 
that it is important for investors to receive this information 
before making any investment commitments.
---------------------------------------------------------------------------

    A commenter requested guidance on the steps intermediaries must 
take to ensure that an investor understands the educational materials 
intermediaries are required to provide.\423\ One commenter expressed 
concern that the requirements in Section 4A(a)(4) could be intimidating 
to potential investors and recommended that we require very short 
affirmations that could easily be understood.\424\ Another commenter 
stated that the level of understanding that an investor can prove is 
too

[[Page 66471]]

subjective to be useful and that an intermediary could not design a 
system to guarantee that an investor understands a disclosure.\425\ We 
agree that it would not be possible for an intermediary to ensure that 
all investors understand the risk disclosure. The requirements of the 
proposed rules are intended to require intermediaries to provide 
investors with meaningful disclosures concerning the risks of any 
potential investment and obtain answers demonstrating an understanding 
of the required statutory elements.\426\ The questionnaire required 
under the proposed rules should help to address concerns of commenters 
that Section 4A(a)(4) requires more than a mere self-
certification.\427\
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    \423\ See CFIRA Letter 2.
    \424\ See Cera Technology Letter (stating that a check-the-box 
type approach could be used, as well as the following draft text: 
``I understand that I could easily lose all of the money I invest in 
this company,'' or ``I understand that X% of start-ups in this 
category fail''). See also Liles Letter 2 (stating that asking 
potential investors to take a test to demonstrate understanding of 
risks would be unorthodox and awkward at best and that a signed 
acknowledgement by investors that they understand each enumerated 
warning about the specific risks in the investment would suffice for 
compliance with the risk disclosure requirement); Verdant Ventures 
Letter (stating that a check-the-box type of approach could be used 
on funding portal Web sites to acknowledge the understanding of risk 
specifically for investors who are making low investments of $100 to 
$500 and that the regulation levels should be adjusted 
proportionally to larger individual dollar investments, and 
therefore, low contribution amounts should be subject to less 
regulation).
    \425\ See Crowdfunding Offerings Ltd. Letter 2.
    \426\ See proposed Rule 303(b)(2) of Regulation Crowdfunding.
    \427\ See proposed Rule 303(b)(2)(ii) of Regulation 
Crowdfunding. See, e.g., Spinrad Letter 1; NASAA Letter (stating 
that intermediaries ``should [at a minimum] be required to design 
their web portals to require investors to click through a page that 
indicates they have read the investor-education information and to 
require investors to correctly answer a series of specific questions 
that are controlled by the Commission,'' and further stating that 
such requirements should be a precondition for membership or 
registration of an investor with a funding portal); The Motley Fool 
Letter (stating that a more involved process than a simple check-
the-box type approach should be used to verify that investors 
acknowledge and understand the risks and that multiple choice 
questions should be used and tailored to testing whether potential 
investors understand the nature of crowdfunding risk, the potential 
for fraud, their legal rights and responsibilities and the 
probability of losing their entire investment). See also 
TechnologyCrowdFund Letter 1 (stating that the Commission should 
require each individual seeking to invest more than $2,000 to take 
an on-line course with a quiz on the possible pitfalls of 
crowdfunding).
---------------------------------------------------------------------------

    One commenter requested that the Commission develop a model form of 
acknowledgment that intermediaries can use and retain to satisfy the 
requirements of Section 4A(a)(4).\428\ Another commenter suggested that 
intermediaries should have flexibility to try different methods of 
obtaining this acknowledgement.\429\ We are not proposing a model form 
of acknowledgement or questionnaire. Rather, the proposed rules would 
permit an intermediary to develop the representation and questionnaire 
in any format that is reasonably designed to demonstrate the investor's 
receipt of the information and compliance with the other requirements 
under the proposed rules. As with the educational material 
requirements, we believe that an intermediary's familiarity with its 
business and likely investor base would make it best able to determine 
the format in which to present the material required under the proposed 
rules.\430\ As one commenter suggested, an intermediary could design a 
multiple choice quiz that would not permit an investor to successfully 
make an investment commitment until the investor has correctly answered 
a specific number of questions.\431\ Other formats that could be used 
are questions that must be answered ``Yes'' or ``No,'' or ``True'' or 
``False.'' Any format used must be reasonably designed to demonstrate 
receipt and understanding of the information. Thus, the requirements of 
proposed Rule 303(b) would not be satisfied if, for example, an 
intermediary were to pre-select answers for an investor. We propose to 
give intermediaries flexibility in how they fulfill this requirement 
because we do not want to foreclose viable alternatives. There are many 
ways, especially on a web-based system, to convey information to, and 
obtain effective acknowledgement from, investors.
---------------------------------------------------------------------------

    \428\ See CompTIA Letter.
    \429\ See Schwartz Letter.
    \430\ See proposed Rule 303(b)(2)(i) of Regulation Crowdfunding.
    \431\ See Spinrad Letter 1 (stating that if an investor were to 
answer a question incorrectly, an issuer could, for example, push 
the investor education material to investors for further review, or 
alternatively could, through a pop-up feature, explain the correct 
answer and then permit the investor to choose the right answer). See 
also note 427.
---------------------------------------------------------------------------

    The proposed rules would require an intermediary to obtain an 
investor representation and completed questionnaire before accepting 
any investment commitment. Accordingly, the intermediary would be 
required to obtain these items each time an investor seeks to make an 
investment commitment.\432\ This proposed requirement is intended to 
help ensure that investors engaging in transactions made in reliance on 
Section 4(a)(6) are fully informed and reminded of the risks associated 
with their particular investment before making any investment 
commitment.
---------------------------------------------------------------------------

    \432\ See proposed Rule 303(b)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Another commenter suggested that intermediaries should be required 
to designate a key person who will bear the responsibility to ensure 
that all investors demonstrate an understanding of the level of risks 
applicable to investments.\433\ We are not proposing this requirement 
at this time. Although Section 4A(a)(4) requires an intermediary to 
ensure that each investor positively affirms that he or she understands 
the risks of investing in securities sold in reliance on Section 
4(a)(6), at this time, we believe that each intermediary should have 
flexibility to design its own compliance program in a manner that is 
effective for it in light of its business model, types of offerings and 
any other relevant considerations.\434\
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    \433\ See Commonwealth of Massachusetts Letter.
    \434\ FINRA (or any other applicable registered national 
securities association) could seek to impose a compliance structure 
that may require such designation. Any proposed requirement by FINRA 
(or any other applicable registered national securities association) 
would be filed with us pursuant to the Exchange Act and the rules 
thereunder. 17 CFR 240.19b-4.
---------------------------------------------------------------------------

Request for Comment
    162. Should we require intermediaries to have investors acknowledge 
issuer-specific or security-specific risks as part of the transaction 
process? Why or why not? If so, to what extent?
    163. Are there considerations relating to investor acknowledgments 
we should take into account, other than those discussed above? Is the 
proposed requirement to obtain an acknowledgement as to investors' 
understanding of their ability to cancel investment commitments 
appropriate? Why or why not? Should we require acknowledgement of 
investors' understanding of any other matters? Why or why not? If so, 
which ones and why?
    164. Are there any matters apart from the risks identified above 
that we should require to be addressed in the investor 
acknowledgements? If so, which ones, and why? How should they be 
addressed?
    165. Should we provide a recommended form of questions and 
representations? Why or why not? If so, should the Commission provide 
the form as a starting point, and not a safe harbor, so that 
intermediaries can adapt the questions and representations to 
particular offerings? Why or why not?
c. Communication Channels
    The proposed rules would require an intermediary to provide, on its 
platform, channels through which investors can communicate with one 
another and with representatives of the issuer about offerings made 
available on the intermediary's platform, subject to certain 
conditions.\435\ While the JOBS Act does not impose this requirement, 
we believe that Congress contemplated that there would be such a 
mechanism in place for offerings made in reliance on Section 
4(a)(6).\436\ Some commenters

[[Page 66472]]

refer to communication channels as an integral part of crowdfunding. 
For example, one commenter suggested that intermediaries should provide 
a mechanism for communication between issuers and investors, without 
necessarily requiring the communication itself to take place.\437\ 
Others have urged us to encourage dialogue among potential investors 
and issuers as a key component of the crowdfunding model, suggesting 
that it would contribute to low levels of fraud.\438\ One commenter 
also maintained that there is value in allowing interested parties 
generally, such as experts and journalists, to participate in these 
discussions, as well as maintaining transparency regarding the identity 
of those participating in the discussions.\439\
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    \435\ See proposed Rule 303(c) of Regulation Crowdfunding.
    \436\ See 158 Cong. Rec. S2231 (daily ed. Mar. 29, 2012) 
(statement of Sen. Scott Brown) (``In addition to facilitating 
communication between issuers and investors, intermediaries should 
allow fellow investors to endorse or provide feedback about issuers 
and offerings, provided that these investors are not employees of 
the intermediary. Investors' credentials should be included with 
their comments to aid the collective wisdom of the crowd.'').
    \437\ See RocketHub Letter 1.
    \438\ See Mollick Letter, Lucas Letter. One commenter raised a 
concern about communications being construed as investment advice by 
funding portals. See Grow VC Letter. See also Section II.D.3 below 
for a discussion of the proposed safe harbor for funding portals.
    \439\ See Mollick Letter.
---------------------------------------------------------------------------

    The communication channels we are proposing would provide a 
centralized and transparent means for members of the public that have 
opened an account with an intermediary to share their views about 
investment opportunities and to communicate with representatives of the 
issuer to better assess the issuer and investment opportunity. Also, 
though communications among investors could occur outside the 
intermediary's platform, communications by an investor with a 
crowdfunding issuer or its representatives about the terms of the 
offering would be required to occur through these channels,\440\ on the 
single platform through which the offering is conducted.\441\ This 
requirement should provide transparency and accountability, and thereby 
further the protection of investors.
---------------------------------------------------------------------------

    \440\ See proposed Rule 204 of Regulation Crowdfunding and 
discussion in Section II.B.4 above.
    \441\ See proposed Rule 100(a)(3) of Regulation Crowdfunding and 
discussion in Section II.A.3 above.
---------------------------------------------------------------------------

    Under the proposed rules, an intermediary that is a funding portal 
would be prohibited from participating in any communications in these 
channels, apart from establishing guidelines for communication and 
removing abusive or potentially fraudulent communications.\442\ For 
example, a funding portal could establish guidelines pertaining to the 
length or size of individual postings in the communication channels and 
could remove postings that include offensive or incendiary language. 
Intermediaries that are funding portals are prohibited from providing 
investment advice or recommendations. In contrast, intermediaries that 
are brokers may provide investment advice and recommendations, subject 
to certain conditions.\443\
---------------------------------------------------------------------------

    \442\ See proposed Rule 303(c) of Regulation Crowdfunding.
    \443\ The Investment Advisers Act of 1940 excludes from the 
definition of investment adviser any broker or dealer whose 
performance of investment advisory services is ``solely incidental'' 
to the conduct of its business as a broker or dealer and who 
receives no ``special compensation'' for those advisory services. 
See Advisers Act Section 202(a)(11)(C) [15 U.S.C. 80b-2(a)(11)(C)]. 
See also Study on Investment Advisers and Broker-Dealers, note 405 
at 15-16 (discussing the terms used in this exclusion). As such, 
brokers that are not registered as investment advisers are able to 
provide investment advice, provided they meet these two 
requirements. Subject to applicable rules, brokers also can make 
recommendations concerning securities, if they have a reasonable 
basis to believe that the recommendations are suitable. See, e.g., 
FINRA Rule 2111 (``Suitability'').
---------------------------------------------------------------------------

    The proposed rules would require the intermediary to make the 
communications on the channels publicly available for viewing. For 
instance, an intermediary could not restrict viewing of the 
communications to only those investors who have opened accounts with 
it. We believe that this requirement is consistent with the concept of 
crowdfunding, as it provides transparent crowd discussions about a 
potential investment opportunity. The proposed rule would, however, 
require the intermediary to permit only those persons who have opened 
accounts with it to post comments. While we recognize that this 
requirement could narrow the range of views represented by excluding 
posts by anyone who has not opened an account with the intermediary, we 
believe that this proposed requirement would help to establish 
accountability for comments made in the communication channels. Among 
other things, the records required to be kept by intermediaries should 
help to track the origins of any abusive or potentially fraudulent 
comments made through the communication channels. Without this measure, 
we believe there could be greater risk of the communications including 
unfounded, potentially abusive, biased statements aimed unjustifiably 
to promote or discredit the issuer and improperly influence the 
investment decisions of members of the crowd.
    The proposed rules also would require any person posting a comment 
in the communication channels to clearly and prominently disclose with 
each posting whether he or she is a founder or an employee of an issuer 
engaging in promotional activities on behalf of the issuer, or is 
otherwise compensated, whether in the past or prospectively, to promote 
the issuer's offering. This disclosure would apply to officers, 
directors and other representatives of the issuer, and also would be 
required of an intermediary that is a broker or its associated persons. 
Although the statute requires issuers, but not intermediaries, to 
disclose compensation to promoters of an offering, we believe that 
intermediaries, as the hosts of the communication channels, would be 
well placed to take measures to ensure that promoters are clearly 
identified in their communication channels, in accordance with Section 
4A(b)(3).\444\ This requirement would be consistent with Section 
4A(b)(3), which requires issuers to take steps required by the 
Commission and established by rule, to ensure disclosure of 
compensation or promotional activity ``upon each instance of such 
promotional communication.''
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    \444\ See discussion in Section II.B.5 above.
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Request for Comment
    166. Should we require intermediaries to provide communication 
channels, as proposed, on their platforms? Why or why not? If not, what 
other methods of communication could, or should, be used and why?
    167. Are the proposed conditions imposed on the requirement to 
provide communication channels appropriate? Why or why not? For 
example, should the communications on the channels be available for 
public viewing or participation? Why or why not? What other 
restrictions, if any, should communication channels be subject to, and 
why? For example, should we require more specific actions for 
intermediaries to take in order to ensure adequate disclosure of 
issuers' and promoters' communications? If so, what actions and why?
    168. Under the proposed rules, we limit the ability to post in the 
communication channels to only those persons who have opened accounts 
with the intermediaries and thereby identified themselves to the 
intermediaries. Is this restriction adequate? Why or why not? Would it 
be appropriate to permit anyone, including persons who have not 
identified themselves in any way, to post comments in intermediaries'

[[Page 66473]]

communication channels? Why or why not?
    169. The proposed rules would require any person posting a comment 
in the communication channels to disclose with each posting whether he 
or she is a founder or an employee of an issuer engaging in promotional 
activities on behalf of the issuer, or is otherwise compensated, 
whether in the past or prospectively, to promote the issuer's offering. 
Should we impose this requirement on other types of persons as well, 
such as affiliates of the issuer, regardless of whether they are 
engaging in promotional activities? Why or why not?
    170. Should we require the intermediary to maintain the 
communication channels of its platform during the post-offering period, 
in order to permit communication between investors and the issuer after 
the offering has completed? Why or why not? If so, for how long after 
the offering is completed (e.g., for one month, for six months, for one 
year, or longer) should the intermediary be required to maintain the 
channels?
d. Notice of Investment Commitment
    The proposed rules would require an intermediary, upon receipt of 
an investment commitment from an investor, to promptly give or send to 
the investor a notification disclosing: (1) The dollar amount of the 
investment commitment; (2) the price of the securities, if known; (3) 
the name of the issuer; and (4) the date and time by which the investor 
may cancel the investment commitment.\445\ This notification would be 
required to be provided by email or other electronic media, and to be 
documented in accordance with applicable recordkeeping rules.\446\ The 
proposed notification is intended, among other things, to provide the 
investor with a written record of the basic terms of the transaction, 
as well as a reminder regarding his or her ability to cancel the 
investment commitment.
---------------------------------------------------------------------------

    \445\ See proposed Rule 303(d) of Regulation Crowdfunding. The 
statutory requirements for intermediaries do not expressly address 
an intermediary's obligation to notify an investor of receipt of the 
investor's commitment, although the statutory provision provides us 
with authority to do so in our rules. See Section 4A(a)(12).
    \446\ Intermediaries that are brokers would be subject to the 
recordkeeping requirements of Exchange Act Rules 17a-3 and 17a-4, 
and intermediaries that are funding portals would be subject to 
recordkeeping requirements under proposed Rule 404 of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    171. Would the notifications we are proposing to require be useful 
to investors? Why or why not? Should we provide further specificity as 
to when notice must be provided?
    172. Are there any other circumstances under which an investor 
should receive a notice? If so, under what other circumstances?
e. Maintenance and Transmission of Funds
    Securities Act Section 4A(a)(7) requires that an intermediary 
``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, . . . as the Commission shall, 
by rule, determine appropriate.'' The proposed rules would implement 
this provision and address the maintenance and protection of investor 
funds, pending completion of a transaction made in reliance on Section 
4(a)(6).\447\
---------------------------------------------------------------------------

    \447\ See proposed Rule 303(e) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would require an intermediary that is a 
registered broker to comply with established requirements in Exchange 
Act Rule 15c2-4 \448\ for the maintenance and transmission of investor 
funds.\449\ Application of Exchange Act Rule 15c2-4(b) to an 
intermediary that is a broker in the crowdfunding context, would 
require, in relevant part, that money or other consideration received 
is promptly deposited in a separate bank account, as agent or trustee 
for the persons who have the beneficial interest therein, until the 
appropriate event or contingency has occurred, and then the funds would 
be promptly transmitted or returned to the persons entitled thereto; or 
all such funds would be promptly transmitted to a bank, which has 
agreed in writing to hold such funds in escrow for the persons who have 
the beneficial interests therein and to transmit or return such funds 
directly to the persons entitled thereto when the appropriate event or 
contingency has occurred. Under Section 4A(a)(7), proceeds are to be 
transmitted to the issuer only if the target offering amount is met or 
exceeded. As explained in the adopting release to Rule 15c2-4, this 
rule was designed to prevent fraud ``either upon the person on whose 
behalf the distribution is being made or upon the customer to whom the 
payment is to be returned if the distribution is not completed.'' \450\
---------------------------------------------------------------------------

    \448\ 17 CFR 240.15c2-4.
    \449\ See proposed Rule 303(e)(1) of Regulation Crowdfunding.
    \450\ Adoption of Rule 15c2-4 under the Securities Exchange Act 
of 1934, Release No. 34-6737 (Feb. 21, 1962) [27 F.R. 2089 (Mar. 3, 
1962)].
---------------------------------------------------------------------------

    The proposed rules would establish separate requirements for an 
intermediary that is a funding portal.\451\ Because a funding portal 
cannot receive any funds, it would be required to direct investors to 
transmit money or other consideration directly to a qualified third 
party that has agreed in writing \452\ to hold the funds for the 
benefit of the investors and the issuer and to promptly transmit or 
return the funds to the persons entitled to such funds.\453\ The 
proposed rules would define ``qualified third party'' to mean a bank 
\454\ that has agreed in writing either (i) to hold the funds in escrow 
for the persons who have the beneficial interests in the funds and to 
transmit or return the funds directly to the persons entitled to them 
when the appropriate event or contingency has occurred; or (ii) to 
establish a bank account (or accounts) for the exclusive benefit of 
investors and the issuer. We have chosen to specify that the qualified 
third party would be a bank because investors, as well as 
intermediaries and issuers, would then be afforded the protections of 
existing regulations that apply to banks, in particular those 
pertaining to the safeguarding of customer funds.\455\
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    \451\ See proposed Rule 303(e)(2) of Regulation Crowdfunding.
    \452\ This written agreement would be required to be maintained 
by the funding portal pursuant to proposed Rule 404 of Regulation 
Crowdfunding. See discussion in Section II.D.5 below.
    \453\ In the crowdfunding context, it is expected that the 
intermediary would be making the determination as to whether the 
contingency, i.e., the target offering amount, has been met.
    \454\ See Exchange Act Section 3(a)(6) [15 U.S.C. 78c(a)(6)] 
(defining ``bank'').
    \455\ For example, protections afforded to bank accounts include 
FDIC deposit insurance. See Federal Deposit Insurance Corp., FDIC 
Deposit Insurance Coverage, http://www.fdic.gov/deposit/deposits/dis/.
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    The proposed rules also would require an intermediary that is a 
funding portal to promptly direct transmission of funds from the 
qualified third party to the issuer when the aggregate amount of 
investment commitments from all investors is equal to or greater than 
the target amount of the offering and the cancellation period for each 
investor has expired,\456\ but no earlier than 21 days after the date 
on which the intermediary makes publicly available on its platform the 
information required to be provided by the issuer such as information 
about the issuer and the offering pursuant to Rules 201 and 203(a) of 
proposed Regulation Crowdfunding.\457\ We believe that this approach is 
consistent

[[Page 66474]]

with the requirements in (1) Section 4A(a)(7) providing for the 
transfer of funds to an issuer when the issuer's target offering amount 
has been met, (2) Section 4A(a)(6) providing that issuer information be 
made available to investors for at least 21 days prior to the first day 
on which securities are sold in the offering, and (3) Section 
4A(b)(1)(G) providing that investors must be allowed a reasonable 
opportunity to rescind their investment commitment. Under our proposed 
rules, an intermediary could permit a minimum-maximum offering, for 
example, in which the minimum would serve as the target offering 
amount.\458\
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    \456\ See Section II.C.6 below for a discussion of the 
cancellation period.
    \457\ See proposed Rule 303(e)(3)(i) of Regulation Crowdfunding. 
See also Exchange Act Rule 10b-9 [17 CFR 240.10b-9].
    \458\ In a minimum-maximum offering, a minimum amount of 
securities must be sold within the offering period in order for a 
contingency to be satisfied, and the amount of securities sold may 
not exceed a pre-determined maximum. See Vim Funding Letter 
(suggesting that minimum and maximum offerings will allow issuers to 
focus on achieving ``funding milestones'' and the amount of funding 
they believe they need, while an ``all or nothing'' offering will 
likely incentivize issuers to seek smaller raises because of the 
possibility of failing at raising a larger amount). Compare 
AppleSeedz Letter (stating that an ``all or nothing'' offering would 
best protect investors). See also Section II.B.1.a.i(c) above for a 
discussion of the issuer's disclosure requirements about the use of 
proceeds in a minimum-maximum offering.
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    The proposed rules also would require an intermediary that is a 
funding portal to promptly direct the return of funds to an investor 
when an investment commitment has been cancelled (including when there 
has been a failure to obtain effective reconfirmation when there has 
been a material change).\459\ The proposed rules also would require an 
intermediary that is a funding portal promptly to direct the return of 
funds to investors when an issuer does not complete an offering.\460\ 
This could occur if an issuer does not receive investment commitments 
that meet its minimum target amount during the offering period. There 
also may be other circumstances in which an issuer chooses to cancel 
its offering.\461\
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    \459\ See proposed Rule 303(e)(3)(ii) of Regulation 
Crowdfunding.
    \460\ See proposed Rule 303(e)(3)(iii) of Regulation 
Crowdfunding.
    \461\ See proposed Rule 304(d) and discussion in Section II.C.6 
below regarding offerings that are not completed.
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    Some commenters suggested that investors should be able to transmit 
funds for an investment commitment through a mechanism such as those 
provided by Automated Clearing House (``ACH''), PayPal, Inc. or a 
linked bank account.\462\ We are not proposing to limit or require a 
particular payment mechanism, so as to provide both intermediaries and 
investors with flexibility in the means of payment, but we note that 
under the statute and the proposed rules, an intermediary that is a 
funding portal may not hold, manage, possess or otherwise handle 
investor funds or securities.\463\ One commenter urged us not to permit 
the use of credit cards to fund an investment because investors could 
claim charge-backs \464\ after a security is sold.\465\ Two commenters 
\466\ advocated permitting the use of credit cards for certain types of 
crowdfunding offerings, with one noting that this payment method 
involves customary Internet disclosures on the part of the 
investor.\467\ Again, we are not proposing to limit payment mechanisms, 
but we note that an intermediary could, in its discretion, decline to 
accept certain payment methods, such as credit cards, or accept them 
only in certain circumstances.\468\
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    \462\ See Vim Funding Letter (stating that investors should be 
able to authorize an intermediary to save investor banking 
information, in much the same way that consumers today can link a 
bank account to their online brokerage account); Arctic Island 
Letter (stating that funds should be transferred only to a bank in 
the United States).
    \463\ See Exchange Act Section 3(a)(80)(D) [15 U.S.C. 
78c(a)(80)(D)] and discussion in Section II.D.3 below.
    \464\ In the United States, credit card customers have charge 
reversal rights under Regulation Z (12 CFR 226.13) of the Truth in 
Lending Act (15 U.S.C. 1666) and debit card holders are afforded 
such rights under Regulation E (12 CFR 205.6) of the Electronic Fund 
Transfer Act (15 U.S.C. 1693(b)).
    \465\ See RocketHub Letter 1.
    \466\ See City First Letter; RFPIA Letter 5.
    \467\ See City First Letter.
    \468\ We note that an investor's use of his or her right to 
dispute credit card charges could inhibit the ability of an issuer 
to meet its target or to provide accurate disclosures to investors 
and the Commission regarding the progress it has made toward, and 
whether it has, reached the target offering amount. This potential 
impact would affect offerings conducted through brokers and funding 
portals alike. We also note that pursuant to Exchange Act Section 
3(a)(80)(D) (15 U.S.C. 78c(a)(80)(D)), a funding portal would be 
statutorily prohibited from extending credit or margin to customers.
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    One commenter recommended that we prohibit purchases by an issuer 
or its officers, directors, control persons and other affiliates from 
counting toward meeting the target offering amount and obtaining a 
release of the funds held in escrow.\469\ The commenter expressed 
concern that, without this prohibition, issuers that are unable to 
attract sufficient interest from unaffiliated investors could ``game'' 
the system by accepting affiliated investor funds in an offering that 
otherwise would have failed. We believe that this commenter's concern 
is reflected in the purpose and intent of the JOBS Act's crowdfunding 
provisions. In particular, we believe it would be contrary to the 
intent and purpose of the statute and the proposed rules to declare an 
offering ``sold'' on the basis of ``non-bona fide sales designed to 
create the appearance of a successful completion of the offering.'' 
\470\ As we have said in other contexts, non-bona fide purchases would 
include ``purchases by the issuer through nominee accounts or purchases 
by persons whom the issuer has agreed to guarantee against loss.'' 
\471\ Although we are not restricting directors and officers of an 
issuer from purchasing securities in an offering, we expect 
intermediaries to scrutinize any purchases by these individuals for 
``red flags,'' such as repeated investment commitments and 
cancellations, that would indicate that the purchase was designed to 
create an impression that the offering has reached, or will reach, its 
target amount.\472\
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    \469\ See NASAA Letter.
    \470\ See Requirements of Rules 10b-9 and 15c2-4 under the 
Securities Exchange Act of 1934 Relating to Issuers, Underwriters 
and Broker-Dealers Engaged in an ``All or None'' Offering, Release 
No. 34-11532, 7 SE.C. Docket 403, 1975 WL 163128, at 1 (July 11, 
1975).
    \471\ Id.
    \472\ Intermediaries are required to cancel an offering if they 
believe the issuer or offering presents the potential for fraud or 
otherwise raises concerns regarding investor protection. See 
proposed Rule 301(c)(2) of Regulation Crowdfunding and discussion in 
Section II.C.3 above.
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    Several commenters urged us to adopt net capital standards for 
funding portals.\473\ We are not proposing net capital standards for 
funding portals primarily because they are prohibited from handling, 
managing or possessing investor funds or securities. We believe that 
the requirements relating, in particular, to transmission of proceeds 
under the proposed rules would help ensure that investor funds are 
protected, without requiring funding portals to maintain net capital. 
We are, however, proposing to require funding portals to obtain 
fidelity bonds, as discussed below.\474\
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    \473\ See, e.g., Risingtidefunding.com Letter (stating that 
capital standards should be limited); Arctic Island Letter (stating 
that funding portals should be required to maintain net capital that 
is at least equivalent to that of broker-dealers that handle 
customer funds).
    \474\ See discussion in Section II.D.1.c below.
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Request for Comment
    173. Are the proposed requirements for fund maintenance and 
transmission appropriate? Are there other types of custody arrangements 
that we should specifically permit? Why or why not? If so, what types 
of arrangements should we permit and how would they protect investor 
funds?
    174. Should we prohibit any variations of a contingency offering, 
like minimum-maximum offerings? Why or why not? Should we require that 
offerings made in reliance on Section

[[Page 66475]]

4(a)(6) be conducted on an ``all-or-none'' basis? Why or why not?
    175. Instead of a requirement to transmit funds ``promptly,'' as 
proposed, should we establish fixed deadlines for transmission, such as 
three business days? Why or why not?
    176. Should we expressly incorporate into the rules prior 
Commission, SRO and staff guidance regarding Exchange Act Rule 15c2-4 
on, among other things: (1) The meaning of the phrase ``distribution''; 
\475\ (2) the meaning of ``prompt transmittal''; \476\ (3) the payment 
mechanics for escrow arrangements; \477\ (4) ``receipt of offering 
proceeds'' in the context of payment by check; \478\ (5) ``prompt 
deposit,'' as it applies to the use of segregated deposit accounts; and 
(6) specifics as to who could act as the ``agent or trustee'' 
maintaining the segregated deposit account? \479\ Why or why not? 
Should any other specific guidance regarding Rule 15c2-4 be explicitly 
incorporated into the rules? Please explain.
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    \475\ See, e.g., Baikie & Alcantara, Inc., Release No. 34-19410 
(Jan. 6, 1983). See also Letter from Larry E. Bergmann, Assistant 
Director, Division of Market Regulation, Securities and Exchange 
Commission to Linda A. Wertheimer, Chairman, Subcommittee on 
Partnerships, Trusts and Unincorporated Associations, Federal 
Regulation of Securities Committee, American Bar Association (Oct. 
16, 1984) (explaining that a ``distribution'' is any offering of 
securities, whether or not registered, that ``is distinguished from 
ordinary trading transactions by the magnitude of the offering and 
the presence of special selling efforts and selling methods.'').
    \476\ See NASD (n/k/a FINRA), Notice to Members 84-64 (Nov. 26, 
1984). See also NASD, Notice to Members 84-7 (Jan. 30, 1984).
    \477\ Id.
    \478\ See NASD (n/k/a FINRA), Notice to Members 94-7 (Jan. 24, 
1994).
    \479\ Id.
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    177. Should we expand the definition of ``qualified third party'' 
to include entities other than a bank? Why or why not? If so, which 
ones? Please explain how other entities could adequately safeguard 
customers' funds and securities?
    178. Should we require funding portals to maintain a certain amount 
of net capital? Why or why not? If so, what would be an appropriate 
amount, and how should that amount be determined?
    179. Should we require or prohibit certain methods of payments for 
the purchase of securities under Section 4(a)(6)? Why or why not? Are 
there any particular concerns raised by different methods? Would it 
depend upon whether a broker-dealer or funding portal is facilitating 
the transaction? Why or why not?
f. Confirmation of Transaction
    The proposed rules would require that an intermediary, at or before 
the completion of a transaction made pursuant to Section 4(a)(6), give 
or send to each investor a notification disclosing: (1) The date of the 
transaction; (2) the type of security that the investor is purchasing; 
(3) the identity, price and number of securities purchased by the 
investor, as well as the number of securities sold by the issuer in the 
transaction and the price(s) at which the securities were sold; (4) 
certain specified terms of the security, if it is a debt or callable 
security; and (5) the source and amount of any remuneration received or 
to be received by the intermediary in connection with the transaction, 
whether from the issuer or from other persons.\480\ This notification 
would be required to be provided by email or other electronic media, 
and to be documented in accordance with applicable recordkeeping 
rules.\481\ As the Commission has long stated, transaction 
confirmations serve an important and basic investor protection function 
by, among other things, conveying information and providing a reference 
document that allows investors to verify the terms of their 
transactions, acting as a safeguard against fraud and providing 
investors a means by which to evaluate the costs of their 
transactions.\482\ Each of the transaction items of information 
proposed to be required is intended to assist investors in 
memorializing and assessing their transactions. The requirement for an 
intermediary to disclose to an investor the source and amount of any 
remuneration received or to be received should help to highlight 
potential conflicts of interest the intermediary may have.
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    \480\ See Proposed Rule 303(f)(1) of Regulation Crowdfunding. 
The statutory requirements for intermediaries do not expressly 
address an intermediary's obligation to provide investors 
confirmation of a transaction, but the statute provides us with 
authority to do so in our rules. See Section 4A(a)(12).
    \481\ Intermediaries that are brokers would be subject to the 
recordkeeping requirements of Exchange Act Rules 17a-3 and 17a-4, 
and intermediaries that are funding portals would be subject to 
recordkeeping requirements under proposed Rule 404 of Regulation 
Crowdfunding.
    \482\ See Confirmation of Transactions, Release No. 34-34962 
(Nov. 10, 1994) [59 FR 59612, 59613 (Nov. 17, 1994)].
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    An intermediary that gives or sends to each investor the 
notification described above would be exempt from the requirements of 
Exchange Act Rule 10b-10 for the subject transaction.\483\ The 
confirmation terms are similar to, but not as extensive as, those under 
Rule 10b-10. We believe that this difference is appropriate given the 
more limited scope of an intermediary's role in crowdfunding 
transactions. For example, Rule 10b-10 requires disclosure regarding 
such matters as payment for order flow,\484\ riskless principal 
transactions,\485\ payment of odd-lot differentials \486\ and asset-
backed securities.\487\ These items generally would not be relevant to 
crowdfunding securities transactions or an intermediary's participation 
in such transactions, and their inclusion in a crowdfunding securities 
confirmation may be confusing to investors. We believe, therefore, that 
if an intermediary satisfies the notification requirements of the 
proposed rules, the intermediary would have provided investors with 
sufficient relevant information regarding the crowdfunding security, 
and so would not be required to meet the additional requirements of 
Rule 10b-10.
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    \483\ See proposed Rule 303(f)(2) of Regulation Crowdfunding. 
Exchange Act Rule 10b-10 (17 CFR 240.10b-10) generally requires a 
broker-dealer effecting a customer transaction in securities (other 
than U.S. savings bonds or municipal securities) to provide a 
notification to its customer, at or before completion of a 
securities transaction, that discloses certain information specific 
to the transaction. Specifically, Rule 10b-10 requires the 
disclosure of the date, time, identity, prices and number of 
securities bought or sold; the capacity in which the broker-dealer 
acted (e.g., as agent or principal); yields on debt securities; and 
under specified circumstances, the amount of remuneration the 
broker-dealer will receive from the customer and any other parties. 
With regard to the specified circumstances mentioned above, the 
remuneration disclosures of Rule 10b-10 generally are required, but 
certain exclusions apply. For example, the remuneration disclosures 
are generally required where a broker or dealer is acting as agent 
for a customer or some other person. In the case where remuneration 
is received or to be received by the broker from such customer in 
connection with the transaction, the disclosures are not required 
where the remuneration paid by such customer is determined pursuant 
to written agreement with such customer, otherwise than on a 
transaction basis. 17 CFR 240.10b-10(a)(2)(i)(B). In contrast, the 
remuneration disclosures of proposed Rule 303(f)(2)(vi) would be 
required across all crowdfunding transactions where remunerations 
are received or are to be received. Given the limitations on the 
dollar amount of securities that could be offered, as well as the 
limits on individual investment amounts, in transactions relying on 
Section 4(a)(6), we would not expect investors or potential 
investors to negotiate individualized compensation agreements.
    \484\ 17 CFR 240.10b-10(a)(2)(i)(C).
    \485\ 17 CFR 240.10b-10(a)(2)(ii).
    \486\ 17 CFR 240.10b-10(a)(3).
    \487\ 17 CFR 240.10b-10(a)(7).
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Request for Comment
    180. Are the proposed items of disclosure appropriate? Should we 
require more or less disclosure? Please explain. Should the disclosure 
items differ from those in Rule 10b-10? Are there any proposed 
disclosures that should be modified or deleted? Why or why not? If so, 
what different items should be included and why? Should the proposed 
notification requirements

[[Page 66476]]

be deemed to be satisfied if an intermediary complies with Rule 10b-10? 
Why or why not? If we take this approach, would this confuse investors?
    181. As mentioned above, we do not expect that investors would 
negotiate individualized compensation agreements with intermediaries in 
the crowdfunding context. Is this expectation appropriate? Why or why 
not? Should the proposed rules require disclosure of these 
arrangements, and if so, in a way that would be similar to or different 
from what is required under Rule 10b-10? Please explain.
6. Completion of Offerings, Cancellations and Reconfirmations
    Section 4A(a)(7) requires an intermediary to allow investors to 
cancel their commitments to invest as the Commission shall, by rule, 
determine appropriate. As discussed above, Section 4A(b)(1)(G) requires 
issuers to provide investors, ``prior to sale, . . . a reasonable 
opportunity to rescind the commitment to purchase the securities.''
    Commenters suggested a range of approaches to these statutory 
requirements. Some commenters favored a ``rolling'' rescission right, 
similar to the three business day rescission right provided in the 
Truth in Lending Act,\488\ under which an investor could cancel an 
investment commitment within 24 \489\ or 48 hours \490\ of making the 
initial commitment. Other commenters suggested permitting investors to 
cancel their investment commitments at any time prior to a specified 
date. For example, one commenter recommended permitting investors to 
cancel a commitment for up to three days before the target date.\491\ 
Another commenter suggested that an investor should be permitted to 
cancel a commitment until the moment that the target offering amount is 
reached, but not thereafter.\492\ Another commenter recommended a ten-
day window, after a target offering amount is met, during which 
investors could cancel a commitment to invest.\493\ Another commenter 
recommended that an investor be permitted to cancel a commitment until 
the date the offering closes.\494\ In contrast, one commenter 
recommended that an investor be permitted to cancel a commitment only 
if the offering fails to meet the target amount or for other limited 
purposes.\495\
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    \488\ 15 U.S.C. 1601 et seq.; 12 CFR 226.
    \489\ See RocketHub Letter 1 (stating that: (1) A system could 
be used whereby commitments to invest would be considered 
``pending'' for 24 hours, during which an investor would be able to 
cancel his or her investment commitment; after the 24-hour period 
expires, an investor's commitment status would be changed from 
``pending'' to ``committed,'' and the investor's funds would be held 
in escrow until transferred to the issuer; (2) if an offering did 
not reach its target offering amount before a specific deadline, an 
investor's funds should be returned; (3) a short rescission period 
will protect investors from ``pump & dump'' schemes and minimize an 
issuer's exposure to the risk of a funding ``short fall''; (4) a 
longer rescission period is unnecessary because Title III requires a 
minimum offering period of 21 days, giving potential investors 
enough time to review an offering before making an investment 
commitment; and (5) because Title III contemplates that issuers 
could raise capital ``greater than a target offering amount,'' the 
issuer also must establish an offering cap that would limit 
oversubscriptions).
    \490\ See NCA Letter (stating that this will prevent commitments 
from being made solely for the purpose of attracting new investors 
(i.e., ``pumping'' the offering) and that cancellation should be 
permitted when there is a change in investment terms or materially 
adverse information is subsequently disclosed).
    \491\ See RFPIA Letter 3 (further stating that the Commission 
should impose penalties on issuers if they abuse this provision).
    \492\ See Cera Technology Letter (stating that permitting 
investors to cancel a commitment to invest after the funding goal is 
reached could cause an entire fundraising round to collapse).
    \493\ See Crowdfunding Offerings Ltd. Letter 2 (stating that 
funding portals should be permitted to have an open and closed 
period for rescinding a commitment to invest; that this option is 
necessary in the event that an investor cancels his or her 
commitment to invest during the window; and that a competitor could 
commit to invest and then cancel that commitment at a critical 
moment during the fundraising effort, causing the offering to fall 
short of the target offering amount).
    \494\ See CFIRA Letter 9.
    \495\ See Schwartz Letter.
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    We believe that the principles underlying crowdfunding indicate 
that investors should have the full benefit of the views of other 
potential investors regarding offerings made in reliance on Section 
4(a)(6), even after they have made investment commitments.\496\ The 
proposed rules, therefore, would give investors an unconditional right 
to cancel an investment commitment for any reason until 48 hours prior 
to the deadline identified in the issuer's offering materials.\497\ 
Under this approach, an investor could reconsider his or her investment 
decision with the benefit of the views of the crowd and other 
information, until the final 48 hours of the offering. Thereafter, an 
investor would not be able to cancel any investment commitments made 
within the final 48 hours (except in the event of a material change to 
the offering, as discussed below). We believe that the other approaches 
suggested by commenters, described above, could either terminate the 
cancellation right too early, so that investors would not be able to 
benefit from the views of the crowd and other information they obtain, 
or too late, so that the issuer would be subject to uncertainty as to 
whether it had met the target offering amount. We believe that the 
proposed rules strike an appropriate balance between giving investors 
the continuing benefit of the collective views of the crowd and then, 
if desired, to cancel their investment commitments, while providing 
issuers with certainty about their ability to close an offering at the 
end of the offering period.
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    \496\ See, e.g., 158 Cong. Rec. S5474-03 (daily ed. July 26, 
2012) (statement of Sen. Jeff Merkley) (``Two important investor 
protections in the Crowdfund Act are the public review period and 
withdrawal rights. They are designed to allow investors the chance 
to carefully consider offerings, permitting the `wisdom of the 
crowd' to develop, rather than perhaps just the `excitement of the 
crowd.' '').
    \497\ See proposed Rule 304(a) of Regulation Crowdfunding.
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    Pursuant to the proposed rules, if an issuer reaches the target 
offering amount prior to the deadline identified in its offering 
materials, it may close the offering once the target offering amount is 
reached, provided that: (1) The offering will have remained open for a 
minimum of 21 days; (2) the intermediary provides notice about the new 
offering deadline at least five business days prior to the new offering 
deadline; (3) investors are given the opportunity to reconsider their 
investment decision and to cancel their investment commitment until 48 
hours prior to the new offering deadline; and (4) at the time of the 
new offering deadline, the issuer continues to meet or exceed the 
target offering amount.\498\ We believe these conditions are 
appropriate, as they would result in adequate notice being provided to 
investors and are consistent with the statutory provisions that 
offering materials are made available for at least 21 days before any 
securities can be sold to an investor,\499\ that proceeds be provided 
to the issuer only once the target offering amount has been met \500\ 
and that investors are provided an opportunity to cancel their 
commitments.\501\
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    \498\ See proposed Rule 304(b) of Regulation Crowdfunding. 
Consistent with the cancellation provision for an offering that does 
not close prior to the deadline identified in its offering 
materials, an investor would not be able to cancel any investment 
commitments made within the final 48 hours prior to the new offering 
deadline (except in the event of a material change to the offering).
    \499\ See Section 4A(a)(6).
    \500\ See Section 4A(a)(7).
    \501\ See id.
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    If there is a material change to the terms of an offering \502\ or 
to the

[[Page 66477]]

information provided by the issuer regarding the offering, the proposed 
rules would require the intermediary to give or send to any potential 
investors who have made investment commitments notice of the material 
change, stating that the investor's investment commitment will be 
cancelled unless the investor reconfirms his or her commitment within 
five business days of receipt of the notice.\503\ We recognize that 
complying with this requirement could result in certain offerings being 
extended beyond the offering period specified in the offering 
statement. If the investor fails to reconfirm his or her investment 
within those five business days, the proposed rules would require an 
intermediary, within five business days thereafter, to: (1) Provide or 
send the investor a notification disclosing that the investment 
commitment was cancelled, the reason for the cancellation and the 
refund amount that the investor should expect to receive; and (2) 
direct the refund of investor funds. We believe that when material 
changes arise during the course of an offering, an investor who had 
made a prior investment commitment should have a reasonable period 
during which to review the new information and to decide whether to 
invest. This notification would be required to be provided by email or 
other electronic media, and to be documented in accordance with 
applicable recordkeeping rules.\504\
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    \502\ We note that in those instances where an issuer has 
previously disclosed in its offering materials only the method for 
determining the price of the securities offered and not the final 
price of those securities, setting of the final price would be 
considered a material change. See Section II.B.2 above. We also note 
if the material change is to close the offering once the target 
offering amount is reached, which would be prior to the deadline 
identified in the offering materials, then the procedures required 
under proposed Rule 304(b), and not 304(c), would apply. See 
discussion in this Section II.C.6 above.
    \503\ See proposed Rule 304(c)(1) of Regulation Crowdfunding.
    \504\ Intermediaries that are brokers would be subject to the 
recordkeeping requirements of Exchange Act Rules 17a-3 and 17a-4, 
and intermediaries that are funding portals would be subject to 
recordkeeping requirements under proposed Rule 404 of Regulation 
Crowdfunding.
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    Finally, if an issuer does not complete an offering because the 
target is not reached or the issuer decides to terminate the offering, 
the proposed rules would require an intermediary, within five business 
days, to: (1) Give or send to each investor who had made an investment 
commitment a notification disclosing the cancellation of the offering, 
the reason for the cancelation, and the refund amount that the investor 
should expect to receive; (2) direct the refund of investor funds; and 
(3) prevent investors from making investment commitments with respect 
to that offering on its platform.\505\ This notification would be 
required to be provided by email or other electronic media, and to be 
documented in accordance with applicable recordkeeping rules.\506\
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    \505\ See proposed Rule 304(d) of Regulation Crowdfunding.
    \506\ Intermediaries that are brokers would be subject to the 
recordkeeping requirements of Exchange Act Rules 17a-3 and 17a-4, 
and intermediaries that are funding portals would be subject to 
recordkeeping requirements under proposed Rule 404 of Regulation 
Crowdfunding.
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Request for Comment
    182. Are the proposed requirements for cancellations and 
notifications appropriate? Why or why not? Should investors be 
permitted to withdraw commitments at any time until the offering 
closes? Should investors be provided with additional time to cancel 
their commitments after the closing of the offering if the commitment 
was made within 48 hours of the offering deadline? Would some time 
period other than 48 hours be more appropriate? Do the proposed rules, 
whereby an investor cannot cancel commitments made within 48 hours of 
the offering deadline, strike the appropriate balance between (1) 
giving investors the ability to cancel commitments in light of new 
views expressed in the crowd and (2) providing issuers with certainty 
about their ability to close an offering by meeting the target offering 
amount? Please explain. What are the advantages and disadvantages of 
any alternative time period? Should no new investment commitments be 
permitted after a date that is two full business days prior to the 
beginning of the 48-hour period when investments are no longer 
cancellable? Why or why not?
    183. Should an investor be required to reconfirm his or her 
commitment to invest when a material change has occurred? Why or why 
not? Is the five business day period for reconfirmation after material 
changes appropriate? Would another time period be more appropriate? If 
so, what time period and why?
    184. The proposed rules provide a mechanism by which existing 
disclosure materials can be modified in the event of a material change, 
with the original offering remaining open. Should the proposed rules 
require that an offering be cancelled in the event of a material 
change, and then, if the issuer desires, reopened in a new offering 
that includes the revised disclosure? Why or why not?
    185. Are there any other circumstances under which an investor 
should receive a notification? If so, under what other circumstances? 
Should we provide further specificity on when notifications must be 
provided?
    186. Under the proposed rules, in the event of a cancellation an 
intermediary would be required to provide a notice to prospective 
investors within five business days. Is this requirement appropriate? 
Should the time period be longer or shorter, such as 3 business days or 
10 business days? Why or why not? Should we include any other 
notification requirements in the event an offering is canceled? If so, 
what requirement should we include and why?
7. Payments to Third Parties
    Section 4A(a)(10) provides that an intermediary in a transaction 
made in reliance on Section 4(a)(6) shall not compensate ``promoters, 
finders, or lead generators for providing the broker or funding portal 
with the personal identifying information of any potential investor.''
    One commenter noted that the terms ``promoters,'' ``finders'' and 
``lead generators'' are not defined in the statute.\507\ The commenter 
also expressed concern that promoters, finders and lead generators 
could provide a broker or funding portal with potential investors' 
personally identifiable information as long as the broker or funding 
portal did not directly compensate them.\508\
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    \507\ See Crowdfunding Offerings Letter 2.
    \508\ See id. (stating that there could be circumstances in 
which a third party stands to gain in some way by a successful 
crowdfunding effort).
---------------------------------------------------------------------------

    Another commenter stated that ``personal identifying information'' 
should be clearly defined.\509\ While agreeing that funding portals 
should not be permitted to compensate third parties for personally 
identifiable information of potential investors, the commenter asserted 
that funding portals, but not registered brokers, should be allowed to 
compensate promoters, finders or lead generators for directing 
potential issuers or investors to view either the portal itself or 
specific offerings.\510\ The commenter further stated that revenue 
sharing arrangements should not be restricted when these relationships 
are not promoter-, finder- or lead generator-based.\511\
---------------------------------------------------------------------------

    \509\ See RocketHub Letter 1.
    \510\ See id.
    \511\ See id.
---------------------------------------------------------------------------

    The proposed rules would broadly prohibit an intermediary from 
compensating any person for providing it with the personally 
identifiable information of any investor or potential investor.\512\ 
The term ``personally identifiable information'' would be defined to 
mean any information that

[[Page 66478]]

can be used to distinguish or trace an individual's identity, either 
alone or when combined with other personal or identifying information 
that is linked or linkable to a specific individual.\513\ Personally 
identifiable information could include, for example, any information, 
such as name, social security number, date or place of birth, mother's 
maiden name or biometric records, that can be used to identify an 
individual, as well as any other information that is linked directly to 
an individual, such as financial, employment, educational or medical 
information. We believe that any person compensated for providing the 
personally identifiable information of potential investors would be 
acting as a promoter, finder or lead generator within the meaning of 
Section 4A(a)(10). Thus, the proposed rules would prohibit compensation 
broadly to ``any person.''
---------------------------------------------------------------------------

    \512\ See proposed Rule 305(a) of Regulation Crowdfunding.
    \513\ See proposed Rule 305(c) of Regulation Crowdfunding. The 
proposed definition is consistent with those used in other 
government agency reports that discuss strategies for protecting 
personally identifiable information. See, e.g., Government 
Accountability Office (``GAO''), Privacy: Alternatives Exist for 
Enhancing Protection of Personally Identifiable Information, GAO-08-
536, at 1 n.1 (May 2008); GAO, Information Security: Protecting 
Personally Identifiable Information, GAO-08-343, at 5 n.9 (Jan. 
2008). See also Erika McCallister, Tim Grance and Karen Scarfone, 
Guide to Protecting the Confidentiality of Personally Identifiable 
Information (PII): Recommendations of the National Institute of 
Standards and Technology, U.S. Department of Commerce, National 
Institute of Standards and Technology, Special Publication 800-122, 
at ES-1 (Apr. 2010).
---------------------------------------------------------------------------

    The proposed rules would, however, permit an intermediary to 
compensate a person for directing issuers or potential investors to the 
intermediary's platform if (1) the person does not provide the 
intermediary with the personally identifiable information of any 
potential investor, and (2) the compensation, unless it is paid to a 
registered broker or dealer, is not based, directly or indirectly, on 
the purchase or sale of a security offered in reliance on Section 
4(a)(6) on or through the intermediary's platform.\514\ The proposed 
rules would not permit a funding portal to compensate third parties by 
commission or other transaction-based compensation unless that third 
party is a registered broker or dealer and thereby subject to an 
established regulatory and oversight regime that provides important 
safeguards to investors. We believe that the prohibition on 
transaction-based compensation in the proposed rules would help to 
remove the incentive for high-pressure sales tactics and other abusive 
practices.\515\ Under the proposed rules, an intermediary could pay a 
person a flat fixed fee \516\ to direct other persons to the 
intermediary's platform through, for example, hyperlinks or search term 
results, if the intermediary received no personally identifiable 
information. Although the statute is clear that an intermediary cannot 
pay for the personally identifiable information of potential investors, 
we do not believe Congress intended to disrupt current practices, such 
as paying for advertising based on Internet search rankings. It would 
be acceptable under the proposed rules, therefore, for an intermediary 
to make payments to advertise its existence, provided that in doing so, 
it does not pay for the personally identifiable information of 
investors or potential investors.\517\
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    \514\ See proposed Rule 305(b) of Regulation Crowdfunding. We 
note that the receipt of direct or indirect transaction-based 
compensation would strongly indicate that the recipient is acting as 
a broker. As such, the party receiving the compensation in the 
scenario described needs to consider whether it would be required to 
register as a broker
    \515\ See Persons Deemed Not to Be Brokers, Release No. 34-22172 
(June 27, 1985) [50 FR 27,940, 27942 (July 9, 1985)] (``Compensation 
based on transactions in securities can induce high pressure sales 
tactics and other problems of investor protection that require 
application of broker-dealer regulation.''). See also 158 Cong. Rec. 
S5474-03 (daily ed. July 26, 2012) (statement of Sen. Jeff Merkley) 
(``[T]he limitation on off-platform advertising is intended to 
prohibit issuers--including officers, directors, and 20 percent 
shareholders--from promoting or paying promoters to express opinions 
outside the platform that would go beyond pointing the public to the 
funding portal. Such paid testimonials and manufactured excitement 
would represent a prohibited form of off-site advertising if those 
disclosures were not present. Whether on or off the platform, paid 
advertising must clearly be disclosed as such. In short, the 
investor deserves a transparent medium for making healthy 
decisions.'').
    \516\ A flat fixed fee is one that is not based on the success 
of the offering, and so would not be transaction-based compensation. 
As noted above, receipt of transaction-based compensation would 
strongly indicate that the recipient is acting as a broker, and the 
party receiving this kind of compensation needs to consider whether 
it would be required to register as a broker.
    \517\ See also proposed Rule 402 of Regulation Crowdfunding and 
discussion in Section II.D.3 below.
---------------------------------------------------------------------------

Request for Comment
    187. Should we permit an intermediary to compensate a third party 
for directing potential investors to the intermediary's platform under 
the limited circumstances described above? Why or why not? Should any 
disclosures be required? Why or why not? Please identify reasonable 
alternatives to this approach, if any.
    188. What other concerns may be relevant in the context of third 
parties referring others to intermediaries, and how could they be 
addressed? For example, should compensation be limited in some 
additional way? Please explain.

D. Additional Requirements on Funding Portals

1. Registration Requirement
a. Generally
    Securities Act Section 4A(a)(1) requires that an intermediary 
facilitating a transaction made in reliance on Section 4(a)(6) register 
with the Commission as a broker or a funding portal. The statute does 
not, however, prescribe the manner in which a funding portal would 
register with the Commission.\518\ Securities Act Section 4A(a)(12) 
requires intermediaries to comply with requirements as the Commission 
may, by rule, prescribe for the protection of investors and in the 
public interest. Exchange Act Section 3(h)(1)(C) also permits us to 
impose, as part of our authority to exempt funding portals from broker 
registration, ``such other requirements under [the Exchange Act] as the 
Commission determines appropriate.''
---------------------------------------------------------------------------

    \518\ Compare Exchange Act Section 15(b) [15 U.S.C. 78o(b)] 
(prescribing the manner of registration of broker-dealers).
---------------------------------------------------------------------------

    Some commenters asked specifically for clarification on the nature 
of a funding portal's registration requirements.\519\ One commenter 
suggested that we permit a funding portal to have multiple intermediary 
Web sites under a single registration application.\520\ The commenter 
argued that this will permit a registered funding portal to offer 
issuers the opportunity to offer their securities on a funding portal 
Web site that is specific as to parameters such as industry, geography, 
community and affinity group, which would result in a better organized 
market for both issuers and investors.
---------------------------------------------------------------------------

    \519\ See NSBA Letter; RocketHub Letter 1. See also Applied 
Dynamite Letter (stating that the requirements for those who wish to 
be intermediaries in offerings pursuant to Rule 506 of Regulation D 
should be harmonized with those for funding portals, and that we 
should provide for a common registration process for the two). We 
note, however, that Securities Act Section 4(b)(1) provides an 
exemption from broker-dealer registration for certain portals 
facilitating transactions pursuant to Rule 506 of Regulation D, as 
revised by Section 201 of the JOBS Act.
    \520\ See NCA Letter.
---------------------------------------------------------------------------

    One commenter asked us to consider the creation of a ``Registered 
Portal-Check,'' similar to the BrokerCheck system maintained by FINRA, 
to provide greater transparency to participants in Section 4(a)(6) 
transactions.\521\ Another commenter

[[Page 66479]]

asked us to require that funding portals, like issuers engaged in 
crowdfunding transactions in reliance on Section 4(a)(6), be organized 
under and subject to the laws of a State or territory of the United 
States or the District of Columbia.\522\
---------------------------------------------------------------------------

    \521\ See CFIRA Letter 2 (further stating that the system should 
``clearly identify the registration status of a funding portal and 
its management, display any regulatory actions against such portal 
and provide a hyperlink to its Web site'').
    \522\ See Liles Letter 2 (stating that this requirement would 
strengthen the ability of the Commission and other U.S. authorities 
to make surprise audits or investigations of, or bring enforcement 
action against, a funding portal).
---------------------------------------------------------------------------

    We are proposing to establish a streamlined registration process 
under which a funding portal would register with the Commission by 
filing a form with information consistent with, but less extensive 
than, the information required for broker-dealers on Form BD.\523\ 
Under the proposed rules, a funding portal would register by completing 
a Form Funding Portal, which includes information concerning the 
funding portal's principal place of business, its legal organization 
and its disciplinary history, if any; business activities, including 
the types of compensation the funding portal would receive; control 
affiliates of the funding portal and disclosure of their disciplinary 
history, if any; FINRA membership or membership with any other 
registered national securities association; and the funding portal's 
Web site address(es) or other means of access.\524\ We also are 
proposing, as discussed in greater detail below, not to permit 
nonresident entities to register as funding portals unless they comply 
with certain conditions designed to provide the Commission and FINRA 
(or any other registered national securities association) with 
appropriate tools for supervising such entities.
---------------------------------------------------------------------------

    \523\ See 158 Cong. Rec. S2230-31 (daily ed. Mar. 29, 2012) 
(statement of Sen. Scott Brown) (``As the Securities and Exchange 
Commission works to implement this new law, it is my hope that it 
will recognize that the funding portal registration process is meant 
to be more streamlined and less burdensome than traditional broker-
dealer registration''); 158 Cong. Rec. S1817-29 (daily ed. Mar. 20, 
2012) (statement of Sen. Jeff Merkley) (``Our amendment provides two 
pathways: The first pathway is for a portal to register as a broker-
dealer. The second is streamlined funding portal registration.'').
    \524\ See proposed Rule 400(a) of Regulation Crowdfunding. We 
discuss below the information required to be included in the form.
---------------------------------------------------------------------------

    The funding portal's registration would become effective the later 
of: (1) 30 calendar days after the date that the registration is 
received by the Commission; or (2) the date the funding portal is 
approved for membership in FINRA or any other registered national 
securities association. This approach is intended to help ensure that a 
funding portal is subject to regulation by the Commission and FINRA or 
any other national securities association before it can engage in 
business with the public.
    We also are proposing to require a funding portal to file an 
amendment to Form Funding Portal within 30 days of any of the 
information previously submitted on Form Funding Portal becoming 
inaccurate for any reason.\525\
---------------------------------------------------------------------------

    \525\ See proposed Rule 400(b) of Regulation Crowdfunding. A 
similar process exists for registered broker-dealers under Exchange 
Act Rule 15b3-1 (17 CFR 240.15b3-1).
---------------------------------------------------------------------------

    The proposed rules would permit a funding portal that succeeds to 
and continues the business of a registered funding portal to also 
succeed to the registration of the predecessor on Form Funding 
Portal.\526\ The registration would be deemed to remain effective as 
the registration of the successor, if the successor, within 30 days 
after such succession, files a registration on Form Funding Portal and 
the predecessor files a withdrawal on Form Funding Portal.\527\ The 
rule would further provide that, if succession is based solely on a 
change of the predecessor's date or state of incorporation, form of 
organization or composition of a partnership, the successor may, within 
30 days after the succession, amend the notice registration of the 
predecessor on Form Funding Portal to reflect these changes. Form 
Funding Portal would require the successor to provide certain 
information, such as the name and Commission file number of the 
predecessor. The successor also would be required to briefly describe 
details of the succession, including any assets or liabilities not 
assumed by the successor.
---------------------------------------------------------------------------

    \526\ See proposed Rule 400(c) of Regulation Crowdfunding.
    \527\ Under the proposed rules, the registration of the 
predecessor funding portal would be deemed withdrawn 45 days after 
the notice registration on Form Funding Portal is filed by the 
successor. A similar process exists for registered broker-dealers 
under Exchange Act Rule 15b1-3 (17 CFR 240.15b1-3).
---------------------------------------------------------------------------

    The proposed rules are intended to provide an efficient 
registration mechanism for a person that becomes a successor to a 
funding portal.\528\ The provisions on succession are intended to be 
used only when there is a direct and substantial business nexus between 
the predecessor and the successor.\529\ The proposed rules would not be 
designed for use by a funding portal in order to sell its registration, 
eliminate substantial liabilities, spin off personnel or facilitate the 
transfer of a ``shell'' organization that does not conduct a funding 
portal business. To require that there be a legitimate connection 
between the predecessor and the successor, the instructions to the 
proposed Form Funding Portal would limit the term ``successor'' to an 
entity that assumes or acquires substantially all of the assets and 
liabilities of the predecessor funding portal's business. In addition, 
the proposed rule would not apply where the predecessor funding portal 
intends to continue to engage in funding portal activities.\530\
---------------------------------------------------------------------------

    \528\ We are proposing to treat funding portal successions in a 
manner consistent with broker-dealer successions. See Registration 
of Successors to Broker-Dealers and Investment Advisers, Release No. 
34-31661 (Dec. 28, 1992) [58 FR 7 (Jan. 4, 1993)].
    \529\ We are proposing that a direct and substantial nexus exist 
between a predecessor and successor funding portal to be consistent 
with the applicable rules for broker-dealer successions.
    \530\ See proposed Rule 400(c)(1) of Regulation Crowdfunding, 
which requires the predecessor funding portal to file a withdrawal 
on Form Funding Portal as a condition of the successor registration.
---------------------------------------------------------------------------

    In certain circumstances, the proposed rule would allow the 
successor to file an amendment to the predecessor's Form Funding 
Portal. Successions by amendment would be limited to those successions 
that result from a formal change in the structure or legal status of 
the funding portal but do not result in a change in control.\531\ 
Assuming that there is no change in control, succession by amendment 
would be available for changes in the form of organization, in legal 
status and in composition of a partnership.
---------------------------------------------------------------------------

    \531\ See proposed Rule 400(c)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In all other successions, the successor would be able to operate 
under the registration of the predecessor for a limited period of time 
only if it files its own completed application for registration on Form 
Funding Portal within 30 days after such succession. Examples of the 
types of successions that would require this type of application filing 
would include, but not be limited to, acquisitions and consolidations.
    The proposed rules would require a funding portal to promptly file 
a withdrawal of registration on Form Funding Portal upon ceasing to 
operate as a funding portal.\532\ The withdrawal would be effective on 
the later of 30 days after receipt by the Commission, after the funding 
portal is no longer operational, within such longer period of time as 
to which the funding portal consents or within such period of time as 
to which the Commission, by order, may determine as necessary or 
appropriate in the public interest or for the protection of 
investors.\533\ This

[[Page 66480]]

delaying provision would provide time to evaluate whether a withdrawal 
is the result of a legitimate winding down of a funding portal's 
business or whether there are additional factors to consider in 
connection with the funding portal's withdrawal that are relevant to 
the protection of investors. Based on such information, we would 
determine whether any actions, including enforcement proceedings, 
should be taken against the withdrawing funding portal.
---------------------------------------------------------------------------

    \532\ See proposed Rule 400(d) of Regulation Crowdfunding.
    \533\ A similar process exists for registered broker-dealers 
under Exchange Act Section 15(b)(5) (15 U.S.C. 78o(b)(5)) and Rule 
15b6-1 (17 CFR 240.15b6-1) thereunder.
---------------------------------------------------------------------------

    The proposed rules \534\ provide that each application for 
registration, amendment thereto, successor registration or withdrawal 
would be considered filed when a complete Form Funding Portal is 
submitted with the Commission or its designee. The proposed rules also 
require duplicate originals of the application to be filed with 
surveillance personnel designated by the registered national securities 
association of which the funding portal is a member.
---------------------------------------------------------------------------

    \534\ See proposed Rule 400(e) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Under the approach to registration that we are proposing, and as 
described by the requirements of proposed Form Funding Portal 
(discussed below), a funding portal would be able to operate multiple 
Web site addresses under a single funding portal registration, provided 
the funding portal discloses on Form Funding Portal all the Web sites 
and names under which it does business. Allowing for multiple Web site 
addresses might allow a funding portal to customize each address to fit 
its specific needs, such as appealing to certain industries or 
investors while reducing regulatory costs. We recognize that permitting 
multiple Web site addresses by a single registrant could result in 
investors being confused about the identity of the registrant. We 
believe, however, that the potential for confusion is justified by the 
value of the additional flexibility afforded to intermediaries.\535\
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    \535\ We note that brokers are currently required to prominently 
disclose in any retail communications their name, or the name under 
which their broker-dealer business is primarily conducted as 
disclosed on their registration form. See FINRA Rule 2210(d)(3).
---------------------------------------------------------------------------

    One commenter requested that we implement a system similar to the 
BrokerCheck system operated by FINRA for registered funding 
portals.\536\ We are not proposing that the Commission create such a 
system at this time because, as discussed below, the information in a 
funding portal's completed Form Funding Portal would be available for 
public viewing through the Commission's Web site or other such 
electronic system, as determined by the Commission in the future, 
subject to the redaction of certain personally identifiable 
information, or other information with a significant potential for 
misuse, of the contact person(s) or other identified individuals of the 
funding portal.
---------------------------------------------------------------------------

    \536\ See CFIRA Letter 2.
---------------------------------------------------------------------------

Request for Comment
    189. Is the proposed method for registration appropriate? Why or 
why not? Are there methods that would be less burdensome to potential 
funding portals while not impairing investor protection? If so, what 
are those methods?
    190. Should we impose other restrictions or prohibitions on 
affiliations of the funding portal, such as affiliation with a 
registered broker-dealer or registered transfer agent? If so, what are 
they and why?
    191. Should the Commission, as proposed, permit a funding portal to 
have multiple intermediary Web sites under a single registration 
application? Why or why not?
b. Form Funding Portal
    A funding portal seeking to register with the Commission would need 
to file a completed Form Funding Portal with the Commission.\537\ We 
propose to make a blank Form Funding Portal available through the 
Commission's Web site or such other electronic database, as determined 
by the Commission in the future.
---------------------------------------------------------------------------

    \537\ See proposed Rule 400(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    To access the registration system and enter information on Form 
Funding Portal, a funding portal would have to first establish an 
account and obtain credentials (i.e., username and password). We 
propose that an applicant would need to fill out general user 
information fields, including name, address, phone number, email 
address, organization name and employer identification number, and user 
account information (i.e., username and password), and select and 
answer a security question. Once accepted by the registration system, 
the applicant would receive an email notification that the account has 
been established, and the applicant would be able to access and 
complete Form Funding Portal. We anticipate that applicants ordinarily 
would obtain access credentials the same day that they are requested.
    In order to complete Form Funding Portal, a funding portal would be 
required to check a box indicating the purpose for which the funding 
portal is filing the form:
     To register as a funding portal with the Commission, 
through an initial application;
     to amend any part of the funding portal's most recent Form 
Funding Portal, including a successor registration; or
     to withdraw from registration as a funding portal with the 
Commission.
    If the funding portal is submitting an amendment or withdrawing 
from registration, it also would be necessary to provide the Commission 
file number assigned to the funding portal at the time of its initial 
application to register. This information would be used to cross-
reference amendments and withdrawals to the original registration, thus 
allowing Form Funding Portal to be used for the initial application to 
register, amendments to registration and withdrawal from registration.
    We intend proposed Form Funding Portal to be a streamlined version 
of Form BD. We believe Form BD is an appropriate model for Form Funding 
Portal, because funding portals are limited purpose brokers that are 
conditionally exempt from registration as broker-dealers. There are 
certain questions on Form BD that we believe are not applicable to 
funding portals. For example, a funding portal is prohibited from 
holding or maintaining customer funds or securities; therefore, 
proposed Form Funding Portal, unlike Form BD, does not include any 
questions about holding customer funds and securities. Funding portals 
also are restricted in their activities in ways that broker-dealers are 
not; thus, proposed Form Funding Portal includes particular questions 
that address these differences. For example, because a funding portal 
is prohibited from holding and maintaining customer funds, proposed 
Form Funding Portal would request information about a funding portal's 
escrow arrangements. As funding portals also are subject to certain 
compensation restrictions, Form Funding Portal would require a 
description of the funding portal's compensation arrangements.
    Form Funding Portal seeks to strike a balance between efficiency in 
completing the form and requesting sufficient information from funding 
portals. The proposed form consists of eight sections, including items 
related to: identifying information, form of organization, successions, 
control persons, disclosure information, non-securities related 
business, escrow, and compensation arrangements, and withdrawal. These 
items would require an applicant to provide certain basic

[[Page 66481]]

identifying and contact information concerning its business; list its 
direct owners and executives; identify persons that directly or 
indirectly control the funding portal, control the management or 
policies of the funding portal and persons the funding portal controls; 
and supply information about its litigation and disciplinary history 
and the litigation and disciplinary history of its associated 
persons.\538\ In addition, an applicant would be required to describe 
any non-securities related business activities and supply information 
about its escrow arrangements, compensation arrangements with issuers 
and fidelity bond.\539\ Upon a filing to withdraw from registration, a 
funding portal would be required to provide certain books and records 
information. In addition, as discussed in detail below,\540\ applicants 
that are incorporated in or organized under the laws of a jurisdiction 
outside of the United States or its territories, or whose principal 
place of business is not in the United States or its territories, would 
be required to complete Schedule C to Form Funding Portal, which 
requires information about the applicant's arrangements to have an 
agent for service of process in the United States, as well as an 
opinion of counsel addressing the ability of the applicant to provide 
the Commission and the national securities association of which it is a 
member with prompt access to its books and records and to submit to 
onsite inspection and examination by the Commission and the national 
securities association.
---------------------------------------------------------------------------

    \538\ This information would be used to determine whether to 
approve an application for registration, to decide whether to revoke 
registration, to place limitations on the applicant's activities as 
a funding portal and to identify potential problem areas on which to 
focus during examinations. If an applicant or its associated person 
has a disciplinary history, then the applicant could be required to 
complete the appropriate Disclosure Reporting Page (``DRP''), either 
Criminal, Regulatory, Civil Judicial, Bankruptcy, Bond or Judgment.
    \539\ See Section II.D.1.c. below.
    \540\ See Section II.D.1.d. below.
---------------------------------------------------------------------------

    We propose that a person duly authorized to bind the funding portal 
be required to sign Form Funding Portal in order to execute the 
documents.\541\ A person executing Form Funding Portal and Schedule C 
(if applicable) would be required to represent that the person has 
executed the form on behalf of, and is duly authorized to bind, the 
funding portal; the information and statements contained in the form 
and other information filed are current, true and complete; and if the 
person is filing an amendment, to the extent that any information 
previously submitted is not amended, such information is currently 
accurate and complete.\542\ The funding portal also would be required 
to consent that service of any civil action brought by, or notice of 
any proceeding before, the Commission or any national securities 
association of which it is a member, in connection with the funding 
portal's investment-related business, may be given by registered or 
certified mail to the funding portal's contact person at the main 
address, or mailing address, on the form.\543\
---------------------------------------------------------------------------

    \541\ See execution statement of proposed Form Funding Portal.
    \542\ See id.
    \543\ See id.
---------------------------------------------------------------------------

    We believe that this information is important for our oversight of 
funding portals, including, among other things, assessing a funding 
portal's application and performing examinations of funding portals, 
and that it is pertinent to investors and issuers. We propose to make 
all current Forms Funding Portal, including amendments and registration 
withdrawal requests, immediately accessible and searchable by the 
public, with the exception of certain personally identifiable 
information or other information with significant potential for misuse 
(including the contact employee's direct phone number and email address 
and any IRS Employer Identification Number, social security number, 
date of birth, or any other similar information).\544\ Making these 
documents publicly available and searchable would enhance transparency 
of the registration process and the funding portal industry as it 
develops, while the limited redactions would appropriately protect the 
privacy of the individuals involved.
---------------------------------------------------------------------------

    \544\ See the proposed Instructions to Form Funding Portal.
---------------------------------------------------------------------------

Request for Comment
    192. What type of web-based registration should the Commission use 
for accessing Form Funding Portal? Would a system like EDGAR be 
appropriate, or would a different type of system be preferable? Why?
    193. Should we consider alternatives to creating a new form for 
funding portal registration? Should we amend the existing Form BD to 
provide for funding portal registration? Why or why not? Which 
questions on Form BD would be relevant to funding portals and why? Are 
there other questions we should include for funding portals that are 
not on the proposed Form Funding Portal or in existing Form BD? If so, 
which questions and why?
    194. Are there types of information (other than personally 
identifiable information) required by proposed Form Funding Portal that 
should not be made readily accessible to the public? If so, what types 
of information and why?
    195. Should we require the identifying and contact information 
requested on Form Funding Portal, or should it be modified in any way? 
Should additional information be required? If so, which information and 
why?
    196. Are the proposed disclosures in Form Funding Portal unduly 
burdensome? Are there certain requirements that should be eliminated or 
modified? Which requirements and why? Would such changes be consistent 
with investor protection?
    197. Should proposed Form Funding Portal be modified to request 
from funding portals a narrative description of their compliance 
programs and due diligence procedures with respect to issues? Would 
some other form of reporting be more useful? Why or why not?
    198. Are the proposed representations required of a person who 
executes Form Funding Portal appropriate? Should the Commission require 
attestations? If so, from whom?
    199. Should we require any other information from a funding portal 
that is withdrawing from registration?
c. Fidelity Bond
    The proposed rules would require, as a condition of registration, 
that a funding portal have in place, and thereafter maintain for the 
duration of such registration, a fidelity bond \545\ that: (1) Has a 
minimum coverage of $100,000; (2) covers any associated person of the 
funding portal unless otherwise excepted in the rules set forth by 
FINRA or any other registered national securities association of which 
it is a member; and (3) meets any other applicable requirements, as set 
forth by FINRA or any other registered national securities association 
of which it is a member.\546\
---------------------------------------------------------------------------

    \545\ A fidelity bond is a type of insurance that aims to 
protect its holder against certain types of losses, including but 
not limited to those caused by the malfeasance of the holder's 
officers and employees, and the effect of such losses on the 
holder's capital. See Release No. 34-63961 (Feb. 24, 2011) [76 FR 
11542 (Mar. 2, 2011)].
    \546\ See proposed Rule 400(f) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Although not mandated by the statute, we believe that a fidelity 
bond requirement would help insure against the loss of investor funds 
that might occur if, for example, a funding portal were to violate the 
prohibition set forth in Section 304(b) of the JOBS Act on holding, 
managing, possessing or otherwise handling investor funds or 
securities. This is a meaningful

[[Page 66482]]

protection because funding portals would not be members of the 
Securities Investor Protection Corporation (``SIPC''). If a firm is a 
SIPC member and goes out of business, then the cash and securities held 
for each customer by that firm are generally protected up to $500,000, 
including a $250,000 limit for cash.\547\ Because funding portals are 
non-SIPC members,\548\ funding portal customers would not receive this 
SIPC protection. Furthermore, given that we are not proposing to 
require, pursuant to our discretionary authority, that funding portals 
be subject to minimum net capital requirements, a fidelity bond would 
provide a single layer of protection, in the event of such losses. 
While the proposed rule imposes this requirement as a condition to 
registration, we anticipate that, like the fidelity bond requirement 
registered broker-dealers are currently subject to pursuant to SRO 
rules, specific requirements of the fidelity bond for funding portals 
would be set forth in rules of FINRA or any other registered national 
securities association. In recognition of the limits on the amounts 
investors may invest, and the amounts issuers may raise, through 
crowdfunding, as provided in Section 4(a)(6), we propose to require 
that funding portals' fidelity bonds have an amount of coverage that is 
equivalent to the minimum amount of coverage registered broker-dealers 
are required to have under FINRA Rule 4360, which is $100,000.\549\ 
Furthermore, we believe that fidelity bond coverage would be most 
effective if it covers actions by not only the funding portal entity, 
but also all of its associated persons.
---------------------------------------------------------------------------

    \547\ See the Securities Investor Protection Act of 1970, Pub. 
L. No. 91-598 (1970).
    \548\ Membership in SIPC applies only to persons registered as 
brokers or dealers under Section 15(b) of the Exchange Act. See 15 
U.S.C. 78ccc(a)(2).
    \549\ See FINRA Rule 4360. Introducing brokers, like funding 
portals, do not hold customer funds and securities. Introducing 
brokers are required to maintain a minimum bond of $100,000 under 
current SRO rules, and we are proposing the same minimum amount for 
funding portals.
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Request for Comment
    200. Is it appropriate for us to require a funding portal to have a 
fidelity bond? Why or why not?
    201. With respect to the fidelity bond requirement, is the proposed 
coverage of $100,000 appropriate for funding portals? If not, what 
other amount or formula for calculating the required amount would be 
more appropriate and why?
    202. Is it appropriate to require the fidelity bond to cover 
associated persons of the funding portal? Why or why not?
    203. Are there other specific terms of a fidelity bond that we 
should consider requiring? If so, what terms and why?
    204. Apart from requiring a funding portal to have a fidelity bond, 
is there some other requirement that could be imposed on funding 
portals, like insurance or something similar to SIPC, which would 
further protect investors? If so, what type of requirement and why?
d. Requirements for Nonresident Funding Portals
    Although there is no statutory requirement that funding portals be 
domestic entities, we are mindful of our ability to effectively oversee 
this new category of registrants--as well as more generally the 
development of the new crowdfunding market and role of intermediaries 
in that market--given the greater challenges entailed in supervising, 
examining, and enforcing the requirements that would be applicable to 
activities of intermediaries based outside the United States.\550\ At 
the same time, we recognize that the use of funding portals located 
outside the United States could provide more choices for U.S. issuers 
seeking to engage an intermediary to facilitate a crowdfunding 
offering, and potentially expand those issuers' access to investors 
located abroad. In seeking to strike an appropriate balance among these 
considerations, we propose not to permit nonresident entities to 
register as funding portals unless they comply with certain conditions 
designed to provide the Commission and FINRA (or any other registered 
national securities association) with appropriate tools for supervising 
such entities.
---------------------------------------------------------------------------

    \550\ The exemption under Section 4(a)(6) is not available for a 
transaction involving the offer or sale of securities by an issuer 
that is not organized under and subject to the laws of a State or 
territory of the United States or the District of Columbia. See 
Section 4A(f), discussed in Section II.A.3 above.
---------------------------------------------------------------------------

    Under the proposed rules, registration pursuant to Rule 400 of 
Regulation Crowdfunding by a nonresident funding portal (a funding 
portal incorporated in or organized under the laws of any jurisdiction 
outside of the United States or its territories, or having its 
principal place of business outside the United States or its 
territories) \551\ would be first conditioned upon there being an 
information sharing arrangement in place between the Commission and the 
competent regulator in the jurisdiction under the laws of which the 
nonresident funding portal is organized or where it has its principal 
place of business that is applicable to the nonresident funding portal. 
The proposed rules would further require a nonresident funding portal 
to (1) obtain a written consent and power of attorney appointing an 
agent for service of process in the United States (other than the 
Commission or a Commission member, official or employee), upon whom may 
be served any process, pleadings, or other papers in any action; (2) 
furnish the Commission with the name and address of its agent for 
services of process on Schedule C of Form Funding Portal; (3) certify 
that it can, as a matter of law, provide the Commission and any 
national securities association of which it is a member with prompt 
access to its books and records and can, as a matter of law, submit to 
onsite inspection and examination by the Commission; and (4) provide 
the Commission with an opinion of counsel and certify on Schedule C on 
Form Funding Portal that the firm can, as a matter of law, provide the 
Commission and such national securities association with prompt access 
to its books and records and can, as a matter of law, submit to onsite 
inspection and examination by the Commission and the national 
securities association.\552\
---------------------------------------------------------------------------

    \551\ See proposed Rule 400(g)(1) of Regulation Crowdfunding.
    \552\ See proposed Rule 400(g) of Regulation Crowdfunding. 
Exchange Act Section 3(h)(1)(C) permits us to impose, as part of our 
authority to exempt funding portals from broker registration, ``such 
other requirements under [the Exchange Act] as the Commission 
determines appropriate.''
---------------------------------------------------------------------------

    In general, the requirements for nonresident funding portals that 
we are proposing are consistent with those we have proposed for other 
nonresident entities subject to our regulation.\553\ These requirements 
aim to ensure that funding portals that are not based in the United 
States, or that are subject to laws other than those of the United 
States, would nevertheless be accessible to us and other relevant 
regulators for purposes of accessing the books and records of, 
conducting examinations and inspections of, and enforcing U.S. laws and 
regulations with respect to, these entities.
---------------------------------------------------------------------------

    \553\ See, e.g., Registration of Security-Based Swap Dealers and 
Major Security-Based Swap Participants, Release No. 34-65543 (Oct. 
12, 2011) [76 FR 65784 (Oct. 24, 2011)], at 65799-65801. See also 
Cross-Border Security-Based Swap Activities; Re-Proposal of 
Regulation SBSR and Certain Rules and Forms Relating to the 
Registration of Security-Based Swap Dealers and Major Security-Based 
Swap Participants, Release No. 34-69490 (May 1, 2013) [78 FR 30968 
(May 23, 2013)].
---------------------------------------------------------------------------

    Requirements for a nonresident funding portal to obtain an agent 
for service of process in the United States, and to furnish the 
Commission with the name and address of this agent, are important to 
facilitate enforcement of the federal securities laws and the rules 
thereunder by the Commission and

[[Page 66483]]

others (e.g., the U.S. Department of Justice and any other agency or 
entity with law enforcement authority). The proposed rules also would 
require a registered nonresident funding portal to promptly appoint a 
successor agent if it discharges its identified agent for service of 
process or if its agent for service of process is unwilling or unable 
to accept service on its behalf. A registered funding portal must 
promptly amend Schedule C to its Form Funding Portal if its agent, or 
the agent's name or address, changes. Finally, the proposed rules would 
require the registered nonresident funding portal to maintain, as part 
of its books and records, the agreement with the agent for service of 
process for at least three years after termination of the agreement.
    The proposed rules would require that each nonresident funding 
portal provide an opinion of counsel and certify, as a matter of law, 
that it can provide the Commission, and the national securities 
association of which it is a member, with prompt access to its books 
and records and submit to onsite inspections and examinations. We 
believe that this proposed certification and supporting opinion of 
counsel are important to confirm that each nonresident funding portal 
is in the position to provide the Commission and the national 
securities association with information that is necessary for us and 
the national securities association to effectively fulfill our 
regulatory oversight responsibilities.\554\ Commenters have previously 
brought to our attention that it may conflict with the laws of certain 
jurisdictions to provide such an opinion.\555\ Failure to make this 
certification or provide an opinion of counsel would provide a basis to 
deny an application for registration.
---------------------------------------------------------------------------

    \554\ See Exchange Act Section 3(h)(1)(A).
    \555\ See comment letter from Sarah A. Miller, Chief Executive 
Officer, Institute of International Bankers, dated August 21, 2013, 
available at https://www.sec.gov.edgekey.net/comments/s7-34-10/s73410.shtml. See also comment letters from Patrick Pearson, 
European Commission, dated August 21, 2013, and Kenneth E Bentsen, 
Jr., Executive Vice President, Public Policy and Advocacy, 
Securities Industry and Financial Markets Association, dated 
December 16, 2011, available at https://www.sec.gov.edgekey.net/comments/s7-34-10/s73410.shtml; comment letter from Carlos Tavares, 
Vice-Chairman, European Securities and Markets Authority, dated 
January 17, 2011, available at http://www.sec.gov/comments/s7-35-10/s73510-19.pdf.
---------------------------------------------------------------------------

    The requirement for an information sharing agreement is designed to 
provide the Commission greater assurance that it will be able to obtain 
the information about a nonresident funding portal necessary for the 
Commission's oversight of the nonresident funding portal. The home 
country regulator may possess information concerning, for example, the 
funding portal's affiliations, contractual relationships with issuers, 
and the nature and extent of measures taken to protect investors. In 
this context, particularly in the event that evidence arises of 
potential fraudulent or other unlawful activity by a nonresident 
funding portal, the ability to obtain information and secure the 
cooperation of the home country regulator according to established 
practices and protocols should help to address the increased challenges 
that may arise from oversight of entities located outside the United 
States.
    A registered nonresident funding portal also would be required to 
re-certify, on Schedule C to Form Funding Portal, within 90 days after 
any relevant changes in its legal or regulatory framework, and provide 
a revised opinion of counsel confirming that, as a matter of law, the 
entity will continue to meet its obligations to provide the Commission 
and the national securities association with prompt access to its books 
and records and to be subject to inspection and examination. Failure to 
make this certification or provide an opinion of counsel may be a basis 
for the Commission to revoke the nonresident funding portal's 
registration.
Request for Comment
    205. Is the term nonresident funding portal defined appropriately? 
If not, how should it be modified? Please explain.
    206. Should the Commission impose additional or different 
conditions for nonresident funding portals than those proposed? If so, 
what conditions, and why? Should any be eliminated? Why or why not? 
What effect might such conditions have on the development of the 
industry and the market, and on issuers and investors? Please explain.
    207. If, as a matter of law, it would be impossible or impractical 
for a nonresident funding portal to obtain the required opinion of 
counsel, what other actions or requirements could address our concern 
that we and the national securities association would be able to have 
direct access to books and records and adequately examine and inspect 
the funding portal?
    208. Should any of the proposed requirements be more specific? For 
example, should only certain types of entities (such as law firms) be 
allowed to act as U.S. agents for service of process? Please explain.
    209. Should a nonresident funding portal be required to appoint a 
U.S. agent for purposes of all potential legal proceedings, including 
those from nongovernmental entities? Why or why not?
    210. Should we require the opinion of counsel if it might 
contradict the laws of a jurisdiction where an intermediary is 
incorporated? Why or why not? If not, should we impose an alternative 
requirement?
    211. Should we specify that the opinion of counsel contain any 
additional information? For instance, should we require the opinion to 
reference the applicable local law or, in the case of an amendment, the 
manner in which the local law was amended? Please explain.
2. Exemption From Broker-Dealer Registration
    Exchange Act Section 3(h)(1) directs the Commission to exempt, 
conditionally or unconditionally, a registered funding portal from the 
requirement to register as a broker or dealer under Exchange Act 
Section 15(a), provided that the funding portal: (1) Remains subject to 
the examination, enforcement and other rulemaking authority of the 
Commission; (2) is a member of a registered national securities 
association; and (3) is subject to other requirements that the 
Commission determines appropriate. The proposed rules would exempt a 
registered funding portal from the broker registration requirements of 
Exchange Act Section 15(a)(1), in connection with its activities as a 
funding portal.\556\
---------------------------------------------------------------------------

    \556\ See proposed Rule 401(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    But for the exemption from registration Congress directed, a 
funding portal would be required to register as a broker under the 
Exchange Act.\557\ The obligations imposed under the JOBS Act on an 
entity acting as an intermediary in a crowdfunding transaction would 
bring that entity within the definition of ``broker'' under Exchange 
Act Section 3(a)(4). A funding portal would be ``effecting transactions 
in securities for the account of others'' by, among other things, 
ensuring that investors comply with the conditions of Securities Act

[[Page 66484]]

Section 4A(a)(4) and (8), making the securities available for purchase 
through the funding portal, and ensuring the proper transfer of funds 
and securities as required by Securities Act Section 4A(a)(7).\558\ In 
addition, a funding portal's receipt of compensation linked to the 
successful completion of the offering also would be indicative of 
acting as a broker in connection with these transactions.
---------------------------------------------------------------------------

    \557\ See Exchange Act Section 3(a)(4)(A) [15 U.S.C. 
78c(a)(4)(A)] (defining ``broker'' as ``any person engaged in the 
business of effecting transactions in securities for the account of 
others''). An entity acting as an intermediary in the offer and sale 
of securities pursuant to Section 4(a)(6), as contemplated in Title 
III of the JOBS Act, would not come within the meaning of 
``dealer,'' which is defined in Exchange Act Section 3(a)(5)(A) (15 
U.S.C. 78c(a)(4)(A)), because it would not be engaging in the 
business of buying and selling securities for its own account. See 
also Exchange Act Section 15(a) [15 U.S.C. 15o(a)] and proposed Rule 
300(b) of Regulation Crowdfunding.
    \558\ At the same time, there are statutory restrictions on the 
scope of services that a funding portal could provide. Among other 
things, a funding portal could act as an intermediary only in 
transactions involving the offer or sale of securities pursuant to 
Securities Act Section 4(a)(6). Further, a funding portal, by 
definition, could not offer investment advice or recommendations; 
solicit purchases, sales, or offers to buy the securities offered or 
displayed on its Web site or portal; compensate persons for such 
solicitation or based on the sale of securities displayed or 
referenced on its Web site or portal; or hold manage, possess or 
otherwise handle investor funds or securities. See generally 
Exchange Act Section 3(a)(80).
---------------------------------------------------------------------------

    Pursuant to Exchange Act Section 3(h)(1), as stated above, we are 
proposing rules that would exempt an intermediary that is registered as 
a funding portal from the requirement to register as a broker-dealer 
under Exchange Act 15(a)(1). Consistent with the JOBS Act, the funding 
portal would remain subject to the full range of our examination and 
enforcement authority.\559\ In this regard, the proposed rules would 
require that a funding portal permit the examination and inspection of 
all of its business and business operations that relate to its 
activities as a funding portal, such as its premises, systems, 
platforms and records, by representatives of the Commission, and of the 
national securities association of which it is a member.\560\ The 
proposed rules also would impose certain recordkeeping 
requirements.\561\
---------------------------------------------------------------------------

    \559\ See Exchange Act Section 3(h)(1)(C). See also Securities 
Act Section 20 [15 U.S.C. 77t] and Exchange Act Sections 21 and 21C 
[15 U.S.C. 78u and 78u-3]. In addition, we highlight that Exchange 
Act Sections 15(b)(4) and 15(b)(6) (15 U.S.C. 78o(b)(4) and 
78o(b)(6)) apply to brokers (including funding portals) regardless 
of whether or not they are registered with the Commission as 
brokers. Exchange Act Section 15(b)(4) authorizes the Commission to 
bring administrative proceedings against a broker when the broker 
violates the federal securities laws (and for other misconduct) and 
provides for the imposition of sanctions, up to and including the 
revocation of a broker's registration. Exchange Act Section 15(b)(6) 
provides similar enforcement authority against the persons 
associated with a broker, including barring persons from associating 
with any Commission registrant. See Section II.D.3 below for further 
discussion, in response to commenters' concerns, about the scope of 
permissible activities in which funding portals may engage under the 
safe harbor of proposed Rule 402.
    \560\ See proposed Rule 403 of Regulation Crowdfunding. See also 
discussion in Section II.D.4 below.
    \561\ See proposed Rule 404 of Regulation Crowdfunding. See also 
discussion in Section II.D.5 below.
---------------------------------------------------------------------------

    The proposed rules would provide that, notwithstanding this 
exemption from broker registration, for purposes of Chapter X of Title 
31 of the Code of Federal Regulations, a funding portal would be deemed 
to be ``required to be registered'' as a broker with the Commission 
under the Exchange Act, thereby requiring funding portals to comply 
with Chapter X, including certain anti-money laundering (``AML'') 
provisions thereunder.\562\
---------------------------------------------------------------------------

    \562\ See 31 CFR 1010.100(h) and 1023.100(b) (defining broker or 
dealer for purposes of the applicability of AML requirements). See 
Currency and Foreign Transactions Reporting Act of 1970 (commonly 
referred to as the Bank Secrecy Act (``BSA'')) [12. U.S.C. 1829b, 12 
U.S.C. 1951-1959, 31 U.S.C. 5311-5330]. See also proposed Rule 
403(b) of Regulation Crowdfunding and discussion in Section II.D.4 
below. Securities Act Section 4A(a)(12) requires intermediaries to 
comply with requirements as the Commission may, by rule, prescribe 
for the protection of investors and in the public interest. As 
discussed in Sections II.C.1 and II.D.2 above, a funding portal is a 
broker that, in the absence of the exemption from the requirement to 
register as a broker or dealer provided for under the JOBS Act in 
Exchange Act Section 3(h)(1), would otherwise be required to 
register as a broker under Section 15(a) (15 U.S.C. 78o) of the 
Exchange Act, and by being so registered, would be subject to the 
full range of BSA obligations applicable to registered broker-
dealers. As discussed further in Section II.D.4.b below, we believe 
such obligations also should be imposed on funding portals.
---------------------------------------------------------------------------

Request for Comment
    212. Is the proposed exemption for funding portals from broker 
registration appropriate? Why or why not?
    213. Should the exemption be conditioned on the funding portal 
remaining in compliance with Subpart D of the proposed rules? Why or 
why not?
    214. Is it appropriate to propose to require funding portals to 
comply with the same requirements for purposes of Chapter X of Title 31 
of the Code of Federal Regulations as imposed on a person required to 
be registered as a broker or a dealer? Why or why not?
    215. Should the proposed exemption from broker registration be 
conditioned upon a funding portal's compliance with applicable Subpart 
C and D rules of proposed Regulation Crowdfunding? Why or why not? 
Should the failure to comply with certain requirements cause a funding 
portal to lose its exemption? If so, which requirements and why? Under 
what circumstances should the Commission consider revoking the 
exemption of a funding portal that fails to comply with these 
requirements?
3. Safe Harbor for Certain Activities
    Exchange Act Section 3(a)(80) provides that a funding portal may 
not offer investment advice or make recommendations; solicit purchases, 
sales or offers to buy the securities offered or displayed on its 
platform or portal; compensate employees, agents or other persons for 
such solicitation or based on the sale of securities displayed or 
referenced on its platform or portal; hold, manage, possess or 
otherwise handle investor funds or securities; or engage in such other 
activities as the Commission, by rule, determines appropriate.
    We received a number of comments concerning the scope and 
definition of permissible activities for a funding portal. A number of 
commenters sought guidance on services they might be permitted to 
provide consistent with the prohibition on offering investment advice 
or recommendations.\563\ We also received comments seeking 
clarification about the prohibitions on funding portals soliciting 
investors and handling funds and securities.\564\
---------------------------------------------------------------------------

    \563\ See, e.g., NCA Letter; NSBA Letter; CFIRA Letter 2.
    \564\ See, e.g., CFIRA Letter 2; NCA Letter; Wright Letter 1; 
RocketHub Letter 1; Grow VC Letter.
---------------------------------------------------------------------------

    One commenter asked us to clarify what activities would constitute 
prohibited investment advice and suggested that the Commission should 
establish ``bright lines'' that would make it clear how a funding 
portal can avoid being viewed as giving prohibited investment 
advice.\565\ This commenter and others provided numerous examples of 
potential funding portal activities, including:
---------------------------------------------------------------------------

    \565\ See CFIRA Letter 2.

 Advising issuers on the structure and contents of their 
offerings; \566\
---------------------------------------------------------------------------

    \566\ See id.
---------------------------------------------------------------------------

 providing access to the portal's platform to certain issuers 
and rejecting or removing others, based on criteria such as the 
``type'' or ``market characteristics'' of the offerings (e.g., film 
production securities, women- or minority-owned businesses or 
businesses in specific geographical areas); \567\
---------------------------------------------------------------------------

    \567\ See NCA Letter; NSBA Letter.
---------------------------------------------------------------------------

 removing an offering before the end of the offering period for 
lack of investor interest; \568\
---------------------------------------------------------------------------

    \568\ See id.
---------------------------------------------------------------------------

 removing an issuer for failing to provide documents responsive 
to the funding portal's due diligence or qualification standards, 
including standards other than those established by our rules,\569\ or 
the portal's belief

[[Page 66485]]

that an offering or the issuer may be fraudulent or abusive; \570\
---------------------------------------------------------------------------

    \569\ See id.
    \570\ See CFIRA Letter 3.
---------------------------------------------------------------------------

 highlighting, or otherwise making more prominent, the 
offering(s) of one or more issuers; \571\
---------------------------------------------------------------------------

    \571\ See RocketHub Letter 1; Wright Letter 1.
---------------------------------------------------------------------------

 organizing issuers listed on the funding portal's platform 
into groups based on the funding portal's view of the riskiness of the 
investment; \572\
---------------------------------------------------------------------------

    \572\ See id.
---------------------------------------------------------------------------

 providing information management tools (i.e., search functions 
and automatic notification mechanisms) on the funding portal's 
platform; \573\
---------------------------------------------------------------------------

    \573\ See CFIRA Letter 3.
---------------------------------------------------------------------------

 providing a ``valuation framework'' that could guide investors 
in determining a fair valuation for securities listed on the funding 
portal's platform, while also creating a ``negotiation space'' for an 
issuer and its potential investors; \574\ and
---------------------------------------------------------------------------

    \574\ A ``negotiation space'' would provide some ability for 
investors to set or influence the price of the securities, which 
would not necessarily depend on a specific valuation of the 
securities. See Pearfunds Letter.
---------------------------------------------------------------------------

 hosting on the funding portal's platform:
    [cir] third-party market and news updates; \575\
---------------------------------------------------------------------------

    \575\ See RocketHub Letter 1; Wright Letter 2.
---------------------------------------------------------------------------

    [cir] third-party opinions (including those of investors) on 
message boards and other information exchanges moderated by the funding 
portal; \576\ or
---------------------------------------------------------------------------

    \576\ See CFIRA Letter 3; Applied Dynamite Letter; Grow VC 
Letter.
---------------------------------------------------------------------------

    [cir] judgments about issuers made by a funding portal or its 
vendors or partners.\577\
---------------------------------------------------------------------------

    \577\ See Applied Dynamite Letter.
---------------------------------------------------------------------------

    With regard to the prohibition on solicitation, one commenter noted 
that the mere act of having a web platform available to the public on 
which issuers can list their offerings could be viewed as impermissible 
solicitation.\578\ Another commenter asked whether funding portals 
would be permitted to compensate employees and agents to solicit 
issuers by commission, referral fee or otherwise.\579\ Another 
commenter asked that we preserve the ability of funding portals to pay 
for search listings or advertisements in online social networks.\580\
---------------------------------------------------------------------------

    \578\ See Crowdfunding Offerings Ltd. Letter 2.
    \579\ See NCA Letter.
    \580\ See Cera Technology Letter.
---------------------------------------------------------------------------

    Commenters requested that we identify the kinds of third parties 
that could hold, manage, possess or otherwise handle investor funds and 
securities in connection with an offering made in reliance on Section 
4(a)(6).\581\ One commenter stated that a fiduciary would likely hold 
the funds for disposition as instructed by the funding portal and asked 
whether this instruction would constitute an impermissible handling of 
the funds.\582\ Another commenter stated that an intermediary should be 
authorized by the issuer and investors to operate as an escrow agent to 
facilitate transactions.\583\ One commenter asserted that funding 
portals need the ability to temporarily hold customer funds to properly 
clear and settle a securities transaction.\584\ The commenter further 
contended that, to ensure issuers are not overwhelmed with thousands of 
new shareholders, intermediaries, including funding portals, should be 
able to act as nominees of the investors who are the beneficial owners 
of the securities.
---------------------------------------------------------------------------

    \581\ See Crowdfunding Offerings Ltd. Letter 2; NSBA Letter.
    \582\ See Crowdfunding Offerings Ltd. Letter 4.
    \583\ See RocketHub Letter 1 (further stating that the 
intermediary should be permitted to hold investor funds in an escrow 
account that is segregated from the operating funds of the 
intermediary and that withdrawals from the account only be permitted 
for: ``payments to offerings that have successfully closed (having 
reached or exceeded their funding goals); payments to investors 
requesting refunds of uncommitted funds; or payment of established 
intermediary fees'').
    \584\ See Grow VC Letter.
---------------------------------------------------------------------------

    In light of these questions and comments, we are proposing to 
provide a non-exclusive, conditional safe harbor for funding portals 
that engage in certain limited activities.\585\ Failure of a funding 
portal to meet the conditions of this non-exclusive safe harbor would 
not create a presumption that the funding portal is in violation of the 
statutory prohibitions of Exchange Act Section 3(a)(80) or the rules in 
proposed Regulation Crowdfunding.\586\
---------------------------------------------------------------------------

    \585\ See proposed Rule 402 of Regulation Crowdfunding. The term 
``investment advice'' is not defined in the crowdfunding provisions 
of the JOBS Act or otherwise in the federal securities laws, and we 
do not include a definition of that term in our proposal. In the 
context of interpreting the term ``investment adviser,'' the 
determination of whether a particular communication rises to the 
level of investment advice depends on the facts and circumstances 
and is construed broadly. To the extent a funding portal limits its 
securities activities to those permitted by the proposed rules, 
including the safe harbor, we preliminarily believe that it would 
not come within the meaning of the term investment adviser under the 
Advisers Act. If it conducts other activities, such as advising an 
issuer concerning the investment of proceeds in securities, however, 
it would need to consider whether it comes within the meaning of 
that term under the Advisers Act. See Advisers Act Section 
202(a)(11) [15 U.S.C. 80b-2(a)(11)]. See also 2012 SEC Government-
Business Forum, note 29 (stating that there is a need for safe 
harbors that explicitly permit certain activities that may otherwise 
be seen as indicia of broker-dealer status or activities that are 
prohibited or otherwise subject to separate regulation).
    \586\ See proposed Rule 402(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In proposing the safe harbor, we are mindful that, while Section 
304 of the JOBS Act directs us to exempt a registered funding portal, 
conditionally or unconditionally, from broker-dealer registration and 
associated regulatory requirements, the statutory provisions also make 
clear that the activities in which a funding portal may engage are far 
more limited than those of a registered broker-dealer.\587\ At the same 
time, we recognize that the statutory prohibitions could be read so 
broadly as to limit the utility of funding portals. The proposed rule 
seeks to strike an appropriate balance by identifying certain limited 
activities in which a funding portal may engage, consistent with the 
statutory prohibitions.\588\ These activities relate to:
---------------------------------------------------------------------------

    \587\ See Exchange Act Section 3(a)(80). See also 158 Cong. Rec. 
S5474-03 (daily ed. July 26, 2012) (statement of Sen. Jeff Merkley) 
(``The Crowdfund Act is designed so that funding portals will be 
subject to fewer regulatory requirements than broker-dealers because 
they will do fewer things than broker-dealers. Among other limits, 
the law prohibits funding portals from engaging in solicitation, 
making recommendations, and providing investment advice. Relative 
passivity and neutrality, especially with respect to the investing 
public, are touchstones of the funding portal streamlined 
treatment.'').
    \588\ See proposed Rule 402 of Regulation Crowdfunding.
---------------------------------------------------------------------------

     Limiting offerings made on or through the funding portal's 
platform based on eligibility requirements;
     highlighting and displaying offerings on the platform;
     providing communication channels for potential investors 
and issuers;
     providing search functions on the platform;
     advising issuers on the structure or content of offerings;
     compensating others for referring persons to the funding 
portal and for other services; and
     advertising the funding portal's existence.
    In addition, the proposed rules would clarify that, consistent with 
other provisions of Regulation Crowdfunding,\589\ funding portals may 
deny access to issuers in certain circumstances, accept investment 
commitments and direct the transmission of funds, in connection with 
offerings conducted on their platforms.
---------------------------------------------------------------------------

    \589\ See, e.g., proposed Rules 303(d) and 303(e) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

[ssquf] Limiting Offerings
    We anticipate that some funding portals may wish to limit, to some 
extent, the scope of their businesses by, for example, specializing in 
offerings by issuers in certain industries or geographic locations. In 
some

[[Page 66486]]

circumstances, these limitations could be viewed as providing 
investment advice. To accommodate reasonable limitations, the proposed 
safe harbor would permit a funding portal to apply objective criteria 
to limit the offerings on its platform, without being deemed to be 
providing investment advice.\590\ Those criteria would be required to 
be reasonably designed to result in a broad selection of issuers 
offering securities through the funding portal's platform and be 
applied consistently to all potential issuers and offerings, so as not 
to recommend or implicitly endorse one issuer or offering over others. 
The criteria also would be required to be clearly displayed on the 
funding portal's platform.
---------------------------------------------------------------------------

    \590\ See proposed Rule 402(b)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The requirements that the objective criteria be reasonably designed 
to result in a broad selection of issuers, and be applied consistently, 
are intended to ensure that the funding portal does not provide 
impermissible investment advice by, for example, applying criteria that 
would so limit the number of issuers that the funding portal could be 
viewed as providing an implicit endorsement or recommendation of those 
issuers' offerings. An issuer that meets these criteria, and is not 
otherwise disqualified, would, subject to the funding portal's measures 
to reduce the risk of fraud under proposed Rule 301,\591\ be eligible 
to list its offering on the funding portal's platform.
---------------------------------------------------------------------------

    \591\ See discussion in Section II.C.3 above.
---------------------------------------------------------------------------

    One criterion could include the type of security being offered 
(such as common stock, preferred stock or debt securities). We believe 
that this criterion would be appropriate because potential investors 
may be interested in certain types of securities as a consideration 
separate from the identity of issuers. Other criteria also could 
include the geographic location of the issuer or the industry or 
business segment of the issuer. We believe that these criteria would be 
appropriate because a funding portal may wish to specialize and focus 
its efforts on facilitating offerings in particular areas or 
industries.\592\ The proposed rule would require funding portals to 
disclose to investors the criteria they use to limit the offerings 
available on their platforms. This should help investors better 
appreciate any niche focus of a funding portal and the scope of the 
offerings available on the funding portal's platform. In addition, we 
recognize that a funding portal may seek to limit the number of issuers 
or offerings on its platform at any given time, including for resource 
reasons. The application of the objective criteria could, in practice, 
result in the number of issuers or offerings displayed on the platform 
being very small, such as, for example, in the period soon after a 
funding portal begins operations. Nevertheless, we would not consider 
the funding portal to be providing investment advice if the objective 
criteria are designed to result in a broad selection of issuers.
---------------------------------------------------------------------------

    \592\ See, e.g., CrowdFund Connect Letter (stating that rural 
communities could build new local based co-operatives similar to the 
electric and telephone cooperatives for new technologies).
---------------------------------------------------------------------------

    To qualify for the safe harbor, a funding portal may not use 
criteria based on an assessment of the merits or the shortcomings of a 
particular issuer or offering. In particular, a funding portal may not 
deny access to an issuer based on the advisability of investing in the 
issuer or its offering.\593\ As noted above, one commenter stated that 
the prohibition on investment advice could potentially preclude a 
funding portal from denying access to a fraudulent offering or 
issuer.\594\ This would place investors at unnecessary risk and would 
be contrary to the funding portal's obligation under the proposed rules 
to deny access to its platform if it believes that the issuer or its 
offering presents potential for fraud or otherwise raises concerns 
regarding investor protection.\595\ Thus, as described above, a funding 
portal must deny access if it believes that the issuer or its offering 
has potential for fraud or otherwise raises concerns regarding investor 
protection.\596\
---------------------------------------------------------------------------

    \593\ Of course, a funding portal would be required to deny 
access to the issuer if the funding portal has a reasonable basis 
for believing that issuer is subject to a disqualification or if the 
funding portal believes that the issuer or the offering presents the 
potential for fraud or otherwise raises concerns regarding investor 
protection. See proposed Rule 301(c) of Regulation Crowdfunding.
    \594\ See CFIRA Letter 3.
    \595\ See proposed Rule 301 of Regulation Crowdfunding.
    \596\ Consistent with proposed Rule 301, proposed Rule 
402(b)(10) of Regulation Crowdfunding would clarify that a funding 
portal may deny access to an issuer if the funding portal believes 
that the issuer or its offering has potential for fraud or otherwise 
raises concerns regarding investor protection.
---------------------------------------------------------------------------

[ssquf] Highlighting Issuers and Offerings
    Under the proposed rules, a funding portal may highlight particular 
offerings of securities made in reliance on Section 4(a)(6) on its 
platform based on objective criteria that may include: the type of 
securities being offered (e.g., common stock, preferred stock or debt 
securities); the geographic location of the issuer; the industry or 
business segment of the issuer; the number or amount of investment 
commitments made; and the progress in meeting the target offering 
amount or, if applicable, the maximum offering amount, and minimum or 
maximum investment amount.\597\ A potential investor, for example, may 
have a strong interest in supporting a small issuer that is within the 
potential investor's geographic vicinity. Other potential investors may 
be interested in offerings that are about to close soon, that have 
particular maximum investment amounts or that have generated 
significant interest from users of the funding portal's platform. Some 
investors may only be interested in offerings in which a significant 
percentage of the target amount has been committed.\598\ We believe 
that the listed criteria are sufficiently objective, so as to reduce 
the risk of a funding portal applying them to advance a particular bias 
or subjective assessment of the issuers or offerings.
---------------------------------------------------------------------------

    \597\ See proposed Rule 402(b)(2) of Regulation Crowdfunding.
    \598\ See Howe, note 2.
---------------------------------------------------------------------------

    Consistent with the prohibition on investment advice and 
recommendations, the criteria must be reasonably designed to highlight 
a broad selection of issuers, so as not to recommend or implicitly 
endorse one issuer or offering over another, and must be applied 
consistently to all potential issuers and offerings. The selection 
criteria may not be based on an assessment of the merits of a 
particular issuer or offering and must be clearly displayed on the 
funding portal's platform, to permit investors to comprehend on what 
basis certain issuers are being highlighted, and, thereby, to help 
prevent them from misconstruing the highlighting as a recommendation or 
implicit endorsement of any issuer or offering. The funding portal may 
not highlight an issuer or offering based on the advisability of 
investing in the issuer or offering. To help prevent conflicts of 
interest and incentives for funding portals to favor certain issuers 
over others, the proposed rules would prohibit a funding portal from 
receiving any special or additional compensation for highlighting (or 
offering to highlight) one or more issuers or offerings on its 
platform.\599\
---------------------------------------------------------------------------

    \599\ See proposed Rule 402(b)(2)(iii) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    Some commenters sought clarification whether funding portals could 
distinguish offerings based on riskiness.\600\ We are not proposing a 
safe harbor for this type of distinction at this time, because we 
preliminarily believe that an assessment of risk necessarily

[[Page 66487]]

involves the exercise of judgment indicative of the giving of 
investment advice.
---------------------------------------------------------------------------

    \600\ See RocketHub Letter 1; Wright Letter 1.
---------------------------------------------------------------------------

[ssquf] Providing Search Functions
    The proposed rules would permit a funding portal to provide, on its 
platform, search functions or other tools that users could use to 
search, sort or categorize the offerings available on the funding 
portal's platform according to objective criteria.\601\ Search 
functions could help potential investors to more efficiently search for 
offerings that focus on a specific industry, funding goal or other 
criteria. Under the proposed rules, a funding portal also would be able 
to categorize offerings into general subject areas, so that a potential 
investor could readily find those offerings on the funding portal's 
platform. The proposed rules would also permit more granular tools 
that, for example, could provide a potential investor the ability to 
sort offerings based on a combination of different criteria, such as by 
the percentage of the target offering amount that has been met, 
geographic proximity to the investor and number of days remaining 
before an offering is to close.\602\ The objective criteria specified 
in the proposed rules are consistent with those in the proposed safe 
harbor for highlighting issuers and offerings.\603\ Consistent with the 
activities specifically prohibited by statute, funding portals would 
not be permitted to use criteria that search, sort or categorize 
offerings based on the advisability of investing in the issuer or its 
offering or an assessment of any characteristic of the issuer, its 
business plan, its management, or risks associated with an investment. 
One commenter questioned whether a funding portal could give potential 
investors the ability to create automated email notifications, based on 
criteria they have provided to identify particular offerings on the 
funding portal's platform.\604\ The proposed rules would permit funding 
portals to do so.
---------------------------------------------------------------------------

    \601\ See proposed Rule 402(b)(3) Regulation Crowdfunding. See 
also 158 Cong. Rec. 2231 (daily ed. Mar. 29, 2012) (statement of 
Sen. Scott Brown) (``Funding portals should be allowed to organize 
and sort information based on certain criteria. This will make it 
easier for individuals to find the types of companies in which they 
can potentially invest. This type of capability--commonly referred 
to as curation--should not constitute investment advice.'').
    \602\ See proposed Rule 402(b)(3) of Regulation Crowdfunding.
    \603\ See proposed Rule 402(b)(2)(ii) of Regulation 
Crowdfunding.
    \604\ See CFIRA Letter 3.
---------------------------------------------------------------------------

    We recognize that there are many potential ways that a tool or 
mechanism can be used to search, sort or categorize offerings. The 
proposed rules are intended to be sufficiently broad to cover any 
number of combinations of implementing tools or mechanisms for a 
search, while limiting the search parameters to objective criteria.
[ssquf] Providing Communication Channels
    The proposed rules would permit a funding portal to provide, on its 
platform, communication channels by which investors could communicate 
with one another and with representatives of the issuer about offerings 
of securities displayed on the funding portal's platform, in accordance 
with the conditions set out in proposed Rule 303(c).\605\ The safe 
harbor would specify that a funding portal (including its associated 
persons, such as its employees) may not participate in these 
communications, other than to establish guidelines about communication 
and to remove abusive or potentially fraudulent communications. For the 
reasons discussed above, a funding portal would be required to make 
communication channels available to the general public and to restrict 
the posting of comments on those channels to those who have 
accounts.\606\ In addition, the funding portal would need to require 
persons posting comments to disclose, in the channel, whether they 
receive or would receive any compensation for promoting an issuer.
---------------------------------------------------------------------------

    \605\ See proposed Rule 402(b)(4) of Regulation Crowdfunding.
    \606\ See discussion in Section II.C.5.c above and proposed Rule 
303(c)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Communication channels should facilitate the access to information 
among members of the public and provide potential investors with the 
crowd's insight as to the merits of an issuer or business plan.\607\ 
Restricting funding portal participation should help to ensure that 
funding portals do not provide impermissible recommendations or 
investment advice. Moreover, requiring potential investors to have 
accounts with the funding portal before posting a comment should 
provide a control that could aid in promoting accountability for 
comments made and help ensure that interested persons, such as those 
associated with the issuer or receiving compensation to promote the 
issuer, are properly identified.\608\
---------------------------------------------------------------------------

    \607\ See, e.g., Bradford, note 1. See also Howe, note 2.
    \608\ See 158 Cong. Rec. S2231 (daily ed. Mar. 29, 2012) 
(statement of Sen. Scott Brown) (``In addition to facilitating 
communication between issuers and investors, intermediaries should 
allow fellow investors to endorse or provide feedback about issuers 
and offerings, provided that these investors are not employees of 
the intermediary. Investors' credentials should be included with 
their comments to aid the collective wisdom of the crowd.'') See 
also discussion in Section II.C.5.c above.
---------------------------------------------------------------------------

    As suggested by commenters, the proposed rule would permit a 
funding portal to create a ``negotiation space'' in which those who 
have opened accounts with the funding portal and issuers could discuss 
and potentially negotiate certain aspects of the issuer's offering, 
including the price of the issuer's securities.\609\
---------------------------------------------------------------------------

    \609\ See Pearfunds Letter; CFIRA Letter 3.
---------------------------------------------------------------------------

[ssquf] Advising Issuers
    The proposed rules would permit a funding portal to advise an 
issuer about the structure or content of the issuer's offering, 
including preparing offering documentation.\610\ This advice is not the 
type of advice that we believe should be impermissible.\611\ We also 
believe that funding portals and brokers could provide certain services 
to issuers in order to facilitate the offer and sale of securities in 
reliance on Section 4(a)(6), and without this kind of advice to 
issuers, crowdfunding as a method to raise capital would not be viable. 
In particular, to the extent that the issuers that may choose to 
conduct offerings in reliance on Section 4(a)(6) would include startups 
and small businesses, we expect that these issuers would seek in many 
cases to obtain advice on the structure of the offering from 
intermediaries. Funding portals would be in a position to provide this 
type of assistance relatively efficiently, together with the other 
services under the proposed rules that they would be permitted to 
provide to issuers.
---------------------------------------------------------------------------

    \610\ See proposed Rule 402(b)(5) of Regulation Crowdfunding.
    \611\ Compare Registration of Municipal Advisors, Release No. 
34-63576 (Dec. 10, 2010) [76 FR 824 (Jan. 6, 2011)] (noting that 
Commission staff has taken the position that financial advisors that 
limit their advisory activities to advising municipal issuers as to 
the structuring of their financings, rather than providing advice 
for compensation regarding the investment of assets, may not need to 
register as investment advisers).
---------------------------------------------------------------------------

    The proposed safe harbor would permit funding portals to advise an 
issuer about the structure and content of the issuer's offering in a 
number of ways. A funding portal could, for example, provide pre-
drafted templates or forms for an issuer to use in its offering that 
would help it comply with its proposed disclosure obligations.\612\

[[Page 66488]]

Other examples of permissible assistance could include, as commenters 
have suggested, advice about the types of securities the issuer can 
offer, the terms of those securities and the procedures and regulations 
associated with crowdfunding.\613\
---------------------------------------------------------------------------

    \612\ See, e.g., 158 Cong. Rec. S2231 (daily ed. Mar. 29, 2012) 
(statement of Sen. Scott Brown) (``Similarly, funding portals should 
be allowed to engage in due diligence services. This would include 
providing templates and forms, which will enable issuers to comply 
with the underlying statute. In crafting this law, it was our intent 
to allow funding portals to provide such services.''); 158 Cong. 
Rec. S5474-03 (daily ed. July 26, 2012) (statement of Sen. Jeff 
Merkley) (``Subject to such limits as the SEC determines necessary 
for the protection of investors and the crowdfunding issuers, 
funding portals should be able to provide (or make available through 
service providers) services to assist entrepreneurs utilizing 
crowdfunding, including, for example, providing basic standardized 
templates, models, and checklists. Enabling them to help small 
businesses construct simple, standard deal structures will 
facilitate quality, low-cost offerings.'').
    \613\ See CFIRA Letter 2.
---------------------------------------------------------------------------

[ssquf] Paying for Referrals
    The proposed rules would clarify that, consistent with proposed 
Rule 305, a funding portal could compensate a third party for referring 
a person to the funding portal if the third party does not provide the 
funding portal with personally identifiable information of any 
potential investor. For example, a third party could provide hyperlinks 
to a funding portal in order to inform potential investors learn about 
securities offerings made in reliance on Section 4(a)(6). Any 
compensation, unless paid to third party that is a registered broker or 
dealer, could not be based, directly or indirectly, on the purchase or 
sale of a security offered in reliance on Section 4(a)(6) on or through 
the funding portal's platform.\614\ Otherwise, such transaction-based 
compensation could trigger broker-dealer registration requirements. We 
also believe that this prohibition on transaction-based compensation 
would help to remove the incentive for high-pressure sales tactics and 
other abusive practices.\615\
---------------------------------------------------------------------------

    \614\ See proposed Rule 402(b)(6) of Regulation Crowdfunding. 
See also discussion in Section II.C.7 above. Proposed Rule 305 of 
Regulation Crowdfunding would implement the prohibition in Section 
4A(a)(10).
    \615\ See note 515.
---------------------------------------------------------------------------

[ssquf] Compensation Arrangements With Registered Broker-Dealers
    The proposed rules would specify that a funding portal could enter 
into certain arrangements with a registered broker-dealer, through 
which they could compensate each other for services.\616\ In speaking 
with industry participants, we understand that because the statute 
narrowly defines the permissible activities in which funding portals 
may engage, funding portals may wish to contract or affiliate with 
registered broker-dealers, which are not subject to similar 
constraints.\617\ For example, a registered broker-dealer could, among 
other things, recommend securities offered on the funding portal's 
platform or provide services involving the handling of investor funds 
and securities. Conversely, funding portals may wish to offer certain 
services, including information technology services, to a broker-
dealer, for a fee. Each party to this type of arrangement would, 
because it is a regulated entity, need to comply with all applicable 
regulations, including the rules of the registered national securities 
association of which it is a member.
---------------------------------------------------------------------------

    \616\ See proposed Rules 402(b)(7) and 402(b)(8) of Regulation 
Crowdfunding.
    \617\ Exchange Act Section 3(a)(80) limits the permissible 
securities activities of a funding portal to those in connection 
with the offer and sale of securities in reliance on Securities Act 
Section 4(a)(6).
---------------------------------------------------------------------------

    Proposed Rule 402(b)(7) would permit a funding portal to pay or 
offer to pay compensation to a registered broker or dealer for services 
in connection with the funding portal's offer or sale of securities in 
reliance on Section 4(a)(6). Proposed Rule 402(b)(8) would permit a 
funding portal to provide services to and receive compensation from a 
registered broker-dealer in connection with the funding portal's offer 
or sale of securities in reliance on Section 4(a)(6).\618\ Compensation 
could include any monetary form of payment, such as fees, discounts, 
commissions, concessions, reimbursement of expenses and other 
allowances. The proposed safe harbor would not, however, permit a 
funding portal to receive transaction-based compensation for referrals 
of potential investors in other types of offerings being effected by a 
registered broker-dealer, such as a Rule 506 offering.\619\ The 
proposed rules would require the funding portal to provide any services 
pursuant to a written agreement with the registered broker-dealer, and 
they also would require the payments to be compliant with, and not 
prohibited by, the rules of the registered national securities 
association of which the funding portal is a member.\620\ The proposed 
rules would require that a funding portal's offers to pay, and payments 
made to, a registered broker-dealer, as well as a funding portal's 
receipt of compensation from a registered broker-dealer, under these 
arrangements, be compliant with Regulation Crowdfunding. In particular, 
these arrangements would have to be compliant with proposed Rule 305 
which prohibits, with certain exceptions, an intermediary from 
compensating any person for providing the intermediary with the 
personally identifiable information of any investor or potential 
investor.\621\ These proposed provisions, taken as a whole, are 
intended to facilitate intermediaries' cooperation with each other and 
promote the use of the Section 4(a)(6) exemption to raise capital, 
while maintaining a clear audit trail.
---------------------------------------------------------------------------

    \618\ See also FINRA, Payments to Unregistered Persons: FINRA 
Request Comment on Proposed Consolidated FINRA Rule Governing 
Payments to Unregistered Persons, Regulatory Notice 09-69 (Dec. 
2009), available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120480.pdf.
    \619\ Receipt of transaction-based compensation in connection 
with such referrals could cause a funding portal to be a broker 
required to register with us under Exchange Act Section 15(a)(1) (15 
U.S.C. 78o(a)(1)).
    \620\ See, e.g., FINRA Rule 4311 (``Carrying Agreements'').
    \621\ See proposed Rule 305 of Regulation Crowdfunding and 
discussion in Section II.C.7 above.
---------------------------------------------------------------------------

[ssquf] Advertising
    The proposed rules would permit a funding portal to advertise its 
existence and engage in certain other limited advertising 
activities.\622\ The proposed rule does not limit the manner in which a 
funding portal could advertise its existence. A funding portal may, for 
example, choose to advertise through social media, internet 
advertisements or traditional sources of advertising like print media.
---------------------------------------------------------------------------

    \622\ See proposed Rule 402(b)(9) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In addition, funding portals could identify issuers and offerings 
in the advertisements on the basis of criteria that are reasonably 
designed to identify a broad selection of issuers (so as not to 
recommend or implicitly endorse one issuer or offering over others) and 
are applied consistently to all potential issuers and offerings. The 
criteria, consistent with those described above with regard to 
highlighting issuers and offerings on the platform and the ability to 
provide investors with search functions, could include the type of 
securities being offered, the geographic location of the issuer, the 
industry or business segment of the issuer, the number or amount of 
investment commitments made, the progress in meeting the issuer's 
target offering amount and, if applicable, the maximum offering amount 
and the minimum or maximum investment amount.\623\ Of course, a funding 
portal is subject to the statutory prohibition on providing investment 
advice and recommendations, and soliciting, and so

[[Page 66489]]

the safe harbor would not permit a funding portal to advertise in such 
a way that expresses that any of the offerings offered on its platform 
are of a higher quality, are safer, or are more worthy investments 
compared to any others, whether offered on its platform or those of 
other intermediaries.
---------------------------------------------------------------------------

    \623\ As a funding portal could be subject to liability for 
fraud, it would need to consider whether its advertisements are not 
misleading or otherwise fraudulent, such as by implying that past 
performance of offerings on its platform is indicative of future 
results. See Exchange Act Rule 10b-5 [17 CFR 240.10b-5].
---------------------------------------------------------------------------

    The proposed rule would also specify that the funding portal could 
not receive special or additional compensation for identifying an 
issuer or offering in its advertisement, because this could create an 
incentive for the funding portal to promote one issuer over another. 
This prohibition should help to limit the dissemination of information 
that may be misleading or easily misconstrued.\624\
---------------------------------------------------------------------------

    \624\ In response to one commenter, we note that this would 
preserve the ability of funding portals to pay for search listings 
or advertisements in online social networks. See Cera Technology 
Letter.
---------------------------------------------------------------------------

[ssquf] Denying Access Based on Potential Fraud or Investor Protection 
Concerns
    In light of the comments received, the proposed rules would require 
a funding portal to deny access to its platform to, or cancel an 
offering of, an issuer that the funding portal believes may present the 
potential for fraud or otherwise raises concerns regarding investor 
protection, as is required under proposed Rule 301(c).\625\
---------------------------------------------------------------------------

    \625\ See proposed Rule 402(b)(10) of Regulation Crowdfunding. 
See also discussion in Section II.C.3 above.
---------------------------------------------------------------------------

[ssquf] Accepting Investor Commitments
    The proposed rules would permit a funding portal, on behalf of an 
issuer, to accept investment commitments from potential investors for 
securities offered in reliance on Section 4(a)(6) by that issuer on the 
funding portal's platform.\626\ Given the breadth of the statutory 
prohibition on holding, managing, possessing or otherwise handling 
investor funds or securities, we believe that it is important to 
clarify the activities, in this area, in which a funding portal may 
permissibly engage, including with regard to accepting investment 
commitments.\627\
---------------------------------------------------------------------------

    \626\ See proposed Rule 402(b)(11) of Regulation Crowdfunding.
    \627\ As described above, we are proposing other measures that 
would prescribe the requirements for funding portals with respect to 
the maintenance and transmission of funds, including the use of a 
qualified third party to hold and transmit investor funds. See 
discussion in Section II.C.5.d above.
---------------------------------------------------------------------------

    Although some commenters expressed the view that funding portals 
should be permitted to handle investor funds and securities in a 
limited capacity as the issuer's transfer agent or to be the holder of 
record,\628\ we do not believe that these activities would be 
consistent with the statutory directive in Exchange Act Section 
3(a)(80). In our view, a funding portal acting as custodian for 
securities through a book entry system likely would be engaged in 
handling or managing securities in violation of the statutory 
prohibition in Section 3(a)(80).\629\
---------------------------------------------------------------------------

    \628\ See Crowdfunding Offerings Ltd. Letter 4; RocketHub Letter 
1.
    \629\ Cf. Exchange Act Section 3(a)(23) [15 U.S.C. 78c(a)(23)] 
(defining ``clearing agency'' as an intermediary who ``acts as a 
custodian of securities in connection with a system for the central 
handling of securities'' where the securities may be administered 
``by bookkeeping entry without physical delivery of securities 
certificates'').
---------------------------------------------------------------------------

[ssquf] Directing Transmission of Funds
    The proposed rules would provide that a funding portal could 
fulfill its obligations with respect to the maintenance and 
transmission of funds and securities, as set forth in proposed Rule 
303, without violating the prohibition in Exchange Act Section 
3(a)(80)(D).\630\ Thus, subject to other applicable rules, a funding 
portal could direct investors where to transmit funds or remit payment 
in connection with the purchase of securities offered and sold in 
reliance on Section 4(a)(6).\631\ It also could direct a qualified 
third party to release the proceeds of an offering to the issuer upon 
completion of the offering or to return investor proceeds when an 
investment commitment or offering is cancelled.\632\ We believe that 
these discrete activities would facilitate crowdfunding transactions 
without exceeding the scope of permissible activities, and without 
unduly raising investor protection concerns.
---------------------------------------------------------------------------

    \630\ We believe the statutory requirements, and the rules we 
are proposing to implement such requirements, provide clear 
requirements for the protection of investor funds. In addition, the 
requirement for the funding portals to maintain a fidelity bond 
under proposed Rule 400(f) provides an additional protection with 
respect to investor funds. See discussion in Section II.D.1 above. 
See also proposed Rule 400(f) of Regulation Crowdfunding.
    \631\ See proposed Rule 402(b)(12) of Regulation Crowdfunding.
    \632\ See proposed Rule 402(b)(13) of Regulation Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    216. Does the proposed safe harbor appropriately define the actions 
in which a funding portal may engage? Are there other activities that 
should be addressed in the safe harbor? Are there activities included 
in the proposed safe harbor that should be modified or eliminated? If 
so, which activities and why?
    217. Are there any additional conditions that should apply to the 
activities covered under the proposed safe harbor? If so, which 
conditions, and why?
    218. Exchange Act Section 3(a)(80) provides that a funding portal 
may not offer investment advice, and the proposed rules would provide a 
conditional safe harbor for certain activities that funding portals may 
engage in without violating the statutory prohibition on providing 
investment advice. Is the safe harbor sufficient, or should we provide 
additional guidance regarding the status of funding portals under the 
Investment Advisers Act of 1940? Why or why not? Please discuss.
    219. Should the proposed safe harbor permit a funding portal to 
limit the offerings on its platform? If so, are the criteria set forth 
in the proposed rules appropriate? Why or why not? If not, what other 
criteria or conditions would be appropriate?
    220. Are there any additional criteria that a funding portal should 
be permitted to use when highlighting issuers and offerings on its 
platform? If so, which ones and why? Should a funding portal be 
permitted to highlight issuers and offerings based on criteria that 
specifically relate to the activities of users on its site, such as 
offerings that have been viewed by the largest number of visitors to 
the platform over a particular time period? Why or why not?
    221. As a condition of the proposed safe harbor, should we require 
funding portals to clearly display, on their platforms, the objective 
criteria they use in limiting or highlighting offerings? Why or why 
not?
    222. Under the proposed safe harbor, should we permit a funding 
portal to post news, such as market news and news about a particular 
issuer or industry, on its platform? Why or why not? If so, what 
restrictions, conditions or other safeguards should apply, in 
particular so that a funding portal would not be providing 
impermissible investment advice? For example, are there certain types 
of news or news feeds that should or should not be permitted, or should 
we restrict a funding portal from posting only positive news coverage? 
Should a funding portal be able to freely select the news stories it 
posts, or should there be some objective criteria? Please explain.
    223. Are the proposed limitations on a funding portal advertising 
its past offerings appropriate? Should we consider other advertising 
limitations? Should the proposed advertising rules be modified in any 
other way?
    224. Should we permit a funding portal to receive transaction-based 
compensation for referring potential investors to a registered broker-
dealer? Why or why not? If so, should we

[[Page 66490]]

impose disclosure requirements or other measures to mitigate potential 
conflicts? What should those requirements be and why? Should we permit 
a funding portal to receive transaction-based compensation from an 
affiliate? Why or why not?
    225. In addition to transaction-based compensation, are there other 
types of compensation that we should prohibit funding portals from 
paying to persons who are not registered broker-dealers? Should we 
permit, as proposed, funding portals to enter into compensation 
arrangements with registered broker-dealers or with any other regulated 
entities? Why or why not? If so, what types of regulated entities 
should be included? Please explain.
    226. Are there circumstances in which a funding portal could 
provide transfer agent services without handling investor funds or 
securities? If so, please describe.
    227. Should the proposed safe harbor permit a funding portal to 
engage in any other activities in connection with the required 
communication channels? Why or why not? If so, which activities and 
why?
    228. Should the proposed safe harbor include other types of 
activities that potentially could be construed as investment advice? If 
so, which ones and why? Would an exemption from the Investment Advisers 
Act of 1940 or other regulatory relief be appropriate in connection 
with such activities? Are there types of advice an issuer may seek from 
a funding portal, that would not be considered advice about the 
structure or content of the issuer's offering? Please explain.
    229. Should the agreed-upon terms of an arrangement with a funding 
portal be required to be documented in a written agreement with the 
issuer? Are there certain terms that should be included?
    230. Should the proposed safe harbor permit funding portals to 
provide a mechanism by which investors can rate an issuer or an 
offering? If so, what safeguards, if any, should be required? \633\ 
Should the Commission, as a condition of the safe harbor, limit the 
ability to rate to persons who have opened an account with the funding 
portal? \634\
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    \633\ An intermediary that is a registered broker could provide 
a mechanism for investors to rate an issuer or offering. But see 
Social Media Web sites and the Use of Personal Devices for Business 
Communications, FINRA Regulatory Notice 11-39 (Aug. 2011), available 
at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p124186.pdf (noting that a firm is responsible 
under NASD Rule 2210 for third-party site content if the firm has 
adopted or has become entangled with the site's content).
    \634\ Any person who promotes an issuer's offering for 
compensation, whether past or prospective, or who is a founder or an 
employee of an issuer that engages in promotional activities on 
behalf of the issuer on the intermediary's platform, must clearly 
disclose in all communications on the intermediary's platform, 
respectively, the receipt of compensation and that he or she is 
engaging in promotional activities on behalf of the issuer. See 
proposed Rule 302(c) of Regulation Crowdfunding.
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4. Compliance
a. Policies and Procedures
    The proposed rules would require a funding portal to implement 
written policies and procedures reasonably designed to achieve 
compliance with the federal securities laws and regulations thereunder, 
relating to its business as a funding portal.\635\ Under the proposed 
rules, a funding portal would have discretion to establish, implement, 
maintain and enforce those policies and procedures based on its 
relevant facts and circumstances. We believe that it is important to 
provide this flexibility in order to accommodate the various business 
models funding portals may have while at the same time accomplishing 
the Commission's investor protection goals. We also recognize that 
FINRA or any other registered national securities association may have 
separate requirements in this regard. Inherent in the notion of 
reasonably designed compliance policies and procedures is that a 
funding portal would promptly update its policies and procedures to 
reflect changes in applicable rules and regulations, as well as its 
business practices and the changing marketplace.
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    \635\ See proposed Rule 403(a) of Regulation Crowdfunding. As a 
condition to exempting funding portals from the requirement to 
register as a broker or a dealer under Exchange Act Section 15(a)(1) 
(15 U.S.C. 78o(a)(1)), Exchange Act Section 3(h)(1)(C) provides that 
registered funding portals must comply with such other requirements 
as the Commission determines appropriate.
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Request for Comment
    231. Should we specify requirements for funding portals' compliance 
policies and procedures? Why or why not? If so, what requirements and 
why?
    232. Should we require funding portals to update their policies and 
procedures to reflect changes in applicable rules and regulations 
within a specified time period after the change occurs? If so, what 
time period would be appropriate (e.g., 30 days, 60 days, six months)?
b. Anti-Money Laundering
    The proposed rules require that funding portals comply with certain 
AML provisions,\636\ as set forth in Chapter X of Title 31 of the Code 
of Federal Regulations.\637\ We preliminarily believe that funding 
portals could play a critical role in detecting, preventing, and 
reporting money laundering and other illicit financing, such as market 
manipulation and fraud. As discussed in more detail below, we believe 
it is important for funding portals to comply with BSA requirements, 
because they would be engaged in a similar business as a category of 
registered broker-dealers--introducing brokers--which have BSA 
obligations.\638\ Specifically, while a funding portal is prohibited by 
statute from handling, managing or possessing customer funds or 
securities, which means it cannot accept cash from customers or 
maintain custody of customer securities--and an introducing broker 
typically does not accept cash or maintain custody of customer 
securities--we believe that a funding portal, like an introducing 
broker, is in the best position to ``know its customers,'' and to 
identify and monitor for suspicious and potentially illicit activity at 
the individual customer level, as compared to the qualified third 
party, which may not see such activity given its less direct contact 
with individual customers.\639\ We also believe it is important for 
funding portals to comply with BSA requirements because they would be 
in engaged in the same business of effecting securities transactions 
for the accounts of others as registered broker-dealers, which have BSA 
obligations. To require otherwise could inadvertently steer potential 
money launders to funding portals.
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    \636\ See proposed Rule 403(b) of Regulation Crowdfunding. See 
also proposed Rule 401(b) and discussion in Section II.D.2 above, 
which discusses how funding portals fall within the scope of Chapter 
X of Title 31 of the Code of Federal Regulations.
    \637\ See note 562.
    \638\ See 31 C.F.R 1023.100 et seq.
    \639\ See, e.g., NASD (n/k/a FINRA), NASD Provides Guidance To 
Member Firms Concerning Anti-Money Laundering Compliance Programs 
Required by Federal Law, Special Notice to Members 02-21 (Apr. 
2002), available at https://www.finra.org/Industry/Regulation/Notices/2002/p003703 (stating that ``introducing brokers generally 
are in the best position to `know the customer,' and thus to 
identify potential money laundering concerns at the account opening 
stage, including verification of the identity of the customer and 
deciding whether to open an account for a customer.'').
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    Moreover, we expect that funding portals would often facilitate 
offerings of microcap or low-priced securities, which may be more 
susceptible to fraud and market manipulation.\640\ We believe

[[Page 66491]]

that imposing the monitoring and reporting requirements of the BSA on 
funding portals would establish a valuable oversight, prevention and 
detection mechanism. The Financial Action Task Force (``FATF''), an 
inter-governmental body whose objective is to set standards and promote 
effective implementation of legal, regulatory and operational measures 
for combating money laundering, terrorist financing and other related 
threats to the integrity of the international financial system, has 
also identified low-priced and privately-placed securities as potential 
vehicles for laundering money.\641\ As explained by FATF, these 
securities pose a money laundering risk because they are often used to 
generate illicit assets through market manipulation, insider trading 
and fraud.\642\ In addition, unlawfully acquired assets can be used to 
purchase these securities in order to resell them and create the 
appearance of legitimately sourced funds.\643\ We believe that 
securities offered and sold in reliance on Section 4(a)(6) could be 
susceptible to money laundering because they are low priced, are placed 
in an offering that is exempt from registration and not subject to the 
filing review process of a registered offering. In addition, we expect 
that many of the issuers relying on the exemption in Section 4(a)(6) 
may be shell companies, which have been associated with a high risk of 
money laundering.\644\ We believe that Congress was aware of these 
risks, which is why, in part, it chose to require that securities 
offered and sold in reliance on Section 4(a)(6) be sold through a 
regulated intermediary.\645\
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    \640\ A number of the Commission's enforcement actions in the 
BSA area have involved broker-dealers failing to report suspicious 
activity involving microcap securities fraud. See, e.g., In the 
Matter of Gilford Securities, Incorporated, Ralph Worthington, IV, 
David S. Kaplan, and Richard W. Granahan, Release No. 34-65450 
(Sept. 30, 2011); In the Matter of Elizabeth Pagliarini, Release No. 
34-63964 (Feb. 24, 2011).
    \641\ See Financial Action Task Force (``FATF''), Money 
Laundering and Terrorist Financing in the Securities Sector 20-21 
(Oct. 2009) (``FATF Typology'') (discussing the money laundering 
risks associated with low priced securities, private issuers and 
shell companies).
    \642\ Id. As explained in the FATF Typology, illicit actors 
``can either use existing shares that are already publicly traded or 
start a shell company for the express purpose of engaging in those 
illicit activities. In addition, criminal organizations also have 
been known to use illicit assets generated outside the securities 
industry to engage in market manipulation and fraud.'' Id.
    \643\ Id. ``Moreover, criminal organizations can also initially 
invest in a private company that they can then use as a front 
company for commingling illicit and legitimate assets. They can then 
take this company public through an offering in the public 
securities markets, thus creating what appear to be legitimate 
offering revenues. Alternatively, criminal organizations can acquire 
a publicly traded company and use it to launder illicit assets.'' 
Id. The FATF Typology further highlighted the risk of shell 
companies that, for example, ``can be established to accept payments 
from criminal organizations for non-existent services. These 
payments, which appear legitimate, can be deposited into depository 
or brokerage accounts and either wire transferred out of a 
jurisdiction or used to purchase securities products that are easily 
transferable or redeemable.'' Id. at 39.
    \644\ See, e.g., Joint Release, Guidance on Obtaining and 
Retaining Beneficial Ownership Information, FIN-2010-G001 (Mar. 5, 
2010) (noting that criminals, money launderers, tax evaders and 
terrorists may exploit the privacy and confidentiality surrounding 
some business entities, including shell companies and other vehicles 
designed to conceal the nature and purpose of illicit transactions 
and the identities of the persons associated with them); Financial 
Crimes Enforcement Network, The Role of Domestic Shell Companies in 
Financial Crime and Money Laundering: Limited Liability Companies 
(Nov. 2006), available at http://www.fincen.gov/news_room/rp/files/LLCAssessment_FINAL.pdf.
    \645\ 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012) (statement 
of Sen. Carl Levin) (``Senior citizens, state securities regulators, 
and others worry that this will give rise to money laundering and 
fraud risks.'')
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    The BSA \646\ and its implementing regulations establish the basic 
framework for AML obligations imposed on financial institutions.\647\ 
The BSA is intended to facilitate the prevention, detection and 
prosecution of money laundering, terrorist financing and other 
financial crimes. Below, we clarify which aspects of these regulations 
we anticipate would be relevant to funding portals, given the limited 
scope of their activities.\648\
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    \646\ See BSA, note 562.
    \647\ See 31 CFR Chapter X.
    \648\ We also propose to impose on funding portals obligations 
that are analogous to those imposed on broker-dealers pursuant to 
Exchange Act Rule 17a-8 (17 CFR 240.17a-8), which requires broker-
dealers to comply with the reporting, recordkeeping and record 
retention requirements of the BSA's implementing regulations, as 
found in Chapter X of Title 31 of the CFR. These proposed 
obligations are discussed in Section II.D.5 below, which also 
addresses other recordkeeping requirements we are proposing for 
funding portals. See proposed Rule 404(f) of Regulation 
Crowdfunding.
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    Among other things, the BSA and its implementing regulations 
require a ``broker or dealer in securities'' (sometimes referred to in 
the regulations as a ``broker-dealer'') to: (1) Establish and maintain 
an effective AML program (``AML Program Requirement''); \649\ (2) 
establish and maintain a Customer Identification Program (``CIP 
Requirement''); \650\ (3) monitor for and file reports of suspicious 
activity (``the SAR Requirement''); \651\ and (4) comply with requests 
for information from the Financial Crimes Enforcement Network 
(``FinCEN'') (the ``Section 314(a) Requirements'').\652\ For purposes 
of the BSA obligations, a ``broker or dealer in securities'' is defined 
as a ``broker or dealer in securities, registered or required to be 
registered with the Securities and Exchange Commission under the 
Securities Exchange Act of 1934, except persons who register pursuant 
to [S]ection 15(b)(11) of the Securities Exchange Act of 1934.'' \653\ 
As discussed above in Section II.D.2.a, for purposes of Chapter X of 
Title 31 of the Code of Federal Regulations, a funding portal is 
``required to be registered'' as a broker or dealer with the Commission 
under the Exchange Act.
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    \649\ See 31 U.S.C. 5318(h). See also 31 CFR 1023.210; FINRA 
Rule 3310.
    \650\ 31 CFR 1023.220.
    \651\ 31 CFR 1023.320. See also FINRA Rule 3310.
    \652\ 31 CFR 1010.520.
    \653\ 31 CFR 1010.100(h). As noted above, certain FinCEN 
regulations apply to a ``broker-dealer,'' which is defined as a 
``person registered or required to be registered as a broker or 
dealer with the Commission under the Securities Exchange Act of 1934 
(15 U.S.C. 77a et seq.), except persons who register pursuant to 15 
U.S.C. 78o(b)(11).'' 31 CFR 1023.100(b). Such broker-dealers also 
would meet the definition of ``broker or dealers in securities'' 
above.
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    Finally, we note that while other parties involved in transactions 
conducted pursuant to Section 4(a)(6) through a funding portal (such as 
a bank acting as a qualified third party to hold investor funds) have 
their own BSA obligations, again, as noted above, we believe that the 
funding portal, like an introducing broker, is in the best position to 
``know its customers,'' and to identify and monitor for suspicious and 
potentially illicit activity at the individual customer level.
    While a funding portal would be required to comply with all of the 
provisions in the BSA and its implementing regulations that are 
applicable to broker-dealers, the Commission anticipates that, as a 
practical matter, a funding portal's BSA obligations would typically be 
limited, based on the relatively limited securities activities in which 
funding portals would be permitted to engage. For a typical transaction 
involving an individual U.S. investor, funding portal activities, for 
example, would not involve the maintenance of ``correspondent 
accounts'' with foreign financial institutions or the offer of 
``private banking accounts'' that would trigger the corresponding due 
diligence obligations under the BSA.\654\ While it is possible that a 
funding portal's activities could trigger other BSA obligations, we 
expect that the nature of a funding portal's business would typically 
implicate the AML Program Requirement, the CIP Requirement, the SAR 
Requirement and the information sharing provisions of the Section 
314(a) Requirements. We, therefore, highlight these obligations below.
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    \654\ See 31 CFR 1010.610 and 1010.620.
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    Brokers and funding portals, which as noted above meet the 
definition of

[[Page 66492]]

``broker,'' \655\ can satisfy the AML Program Requirement by 
implementing and maintaining an AML program that complies with SRO 
rules.\656\ Generally, under existing rules applicable to brokers, an 
AML program must be in writing and include, at a minimum: (1) Policies, 
procedures and internal controls reasonably designed to achieve 
compliance with the BSA and its implementing rules; (2) policies and 
procedures that can be reasonably expected to detect and cause the 
reporting of transactions under 31 U.S.C. 5318(g) and the implementing 
regulations thereunder; (3) the designation of an AML compliance 
officer, including notification to the SROs; (4) ongoing AML employee 
training; and (5) an independent test of the firm's AML program, 
annually for most firms.\657\
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    \655\ See discussion in this section above and in Section 
II.D.2.a above.
    \656\ 31 CFR 1023.210 (providing that a broker-dealer is deemed 
to have satisfied the requirement to establish an AML program if it 
(1) implements and maintains an anti-money laundering program that 
complies with the rules, regulations or requirements of its SRO 
governing such programs; and (2) the rules, regulations or 
requirements of the SRO have been approved, if required, by the 
SEC).
    \657\ See, e.g., FINRA Rule 3310. FINRA's existing AML program 
rule applies to member broker-dealers. FINRA or any other national 
registered securities association may adopt an AML Program 
Requirement specific to funding portals. Consistent with the BSA, 
any such rule must require that the AML program include, at a 
minimum: the development of internal policies, procedures and 
controls; designation of a compliance officer, an ongoing employee 
training program and an independent audit function to test the 
program. See 31 U.S.C. 5318(h).
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    FinCEN's BSA regulations also require brokers, and thus would 
require funding portals, to establish a written CIP that, at a minimum, 
includes procedures for: (1) Obtaining customer identifying information 
from each customer prior to account opening; (2) verifying the identity 
of each customer,\658\ to the extent reasonable and practicable, within 
a reasonable time before or after account opening; (3) making and 
maintaining a record of obtained information relating to identity 
verification; (4) determining, within a reasonable time after account 
opening or earlier, whether a customer appears on any list of known or 
suspected terrorist organizations designated by Treasury; \659\ and (5) 
providing each customer with adequate notice, prior to opening an 
account, that information is being requested to verify the customer's 
identity.\660\
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    \658\ For purposes of the CIP requirements, a customer is 
generally defined as ``a person that opens a new account.'' 31 CFR 
1023.100(d).
    \659\ To date, there are no designated government lists to 
verify specifically for CIP purposes.
    \660\ 31 CFR 1023.220.
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    The CIP rule provides that, under certain defined circumstances, 
brokers, which would include funding portals, may rely on the 
performance of another financial institution to fulfill some or all of 
the requirements of the broker's CIP.\661\ In order for brokers (which 
would include funding portals) to rely on the other financial 
institution, for example, the reliance must be reasonable.\662\ The 
other financial institution also must be subject to an AML compliance 
program rule and be regulated by a federal functional regulator.\663\ 
Additionally, the broker and the other financial institution must enter 
into a contract, and the other financial institution must certify 
annually to the broker that it has implemented an AML program and that 
it will perform the specified requirements of the broker's CIP.\664\
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    \661\ 31 CFR 1023.220(a)(6).
    \662\ 31 CFR 1023.220(a)(6)(i).
    \663\ 31 CFR 1023.220(a)(6)(ii).
    \664\ 31 CFR 1023.220(a)(6)(iii).
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    Under the SAR Requirement, brokers and funding portals, which as 
noted above meet the definition of ``broker,'' \665\ must file a 
suspicious activity report if: (1) A transaction is conducted or 
attempted to be conducted by, at, or through a broker; (2) the 
transaction involves or aggregates funds or other assets of at least 
$5,000; and (3) the broker knows, suspects or has reason to suspect 
that the transaction: (i) Involves funds or is intended to disguise 
funds derived from illegal activity, (ii) is designed to evade 
requirements of the BSA, (iii) has no business or apparent lawful 
purpose, and the broker knows of no reasonable explanation for the 
transaction after examining the available facts, or (iv) involves the 
use of the broker-dealer to facilitate criminal activity.\666\ The 
suspicious activity must be reported on a form prescribed by FinCEN, 
which includes instructions.\667\ Brokers, which would include funding 
portals, must maintain a copy of any suspicious activity report filed, 
as well as supporting documentation for a period of five years from the 
date of filing the report.\668\ The report (and any information that 
would reveal its existence) must be kept confidential.\669\
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    \665\ See discussion in this section above and in Section 
II.D.2.a above.
    \666\ 31 CFR 1023.320(a).
    \667\ 31 CFR 1023.320(b).
    \668\ 31 CFR 1023.320(d).
    \669\ 31 CFR 1023.320(e).
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    Under the Section 314(a) Requirements, brokers, which would include 
funding portals, also must respond to mandatory requests for 
information made by FinCEN on behalf of federal law enforcement 
agencies.\670\ Law enforcement agencies with criminal investigative 
authority are permitted to request that FinCEN solicit, on the agency's 
behalf, certain information from a financial institution, including 
brokers; FinCEN also may make similar requests on its own behalf or on 
behalf of certain components of Treasury.\671\ Upon receiving such a 
request, a broker (which would include a funding portal) is required to 
search its records to determine whether it has accounts for, or has 
engaged in transactions with, any specified individual, entity or 
organization.\672\ If the broker identifies an account or transaction 
identified with any individual, entity or organization named in the 
request, it must report certain relevant information to FinCEN.\673\ 
Brokers also must designate a contact person (typically the firm's AML 
compliance officer) to receive the requests and must maintain the 
confidentiality of any request and any responsive reports to 
FinCEN.\674\
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    \670\ 31 CFR 1010.520.
    \671\ 31 CFR 1010.520(b).
    \672\ 31 CFR 1010.520(b)(3).
    \673\ 31 CFR 1010.520(b)(3)(ii).
    \674\ 31 CFR 1010.520(b)(3)(iii) and (iv).
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Request for Comment
    233. We identified the AML Program, CIP, SAR and 314(a) 
Requirements as the most significant requirements that would most 
typically apply to funding portals, in light of the nature of their 
business. Under the proposed rules, however, funding portals would be 
subject to all BSA requirements applicable to registered brokers. Are 
there any other requirements under the BSA and its implementing 
regulations that should be clarified, with regard to application in the 
crowdfunding context, or excluded from application to funding portals? 
If so, which ones?
    234. Is express compliance with the BSA by funding portals, as 
proposed, necessary to protect against the risk of money laundering, 
given that other regulated entities involved in transactions conducted 
pursuant to Section 4(a)(6), such as the qualified third party we 
propose to require be involved in the transmission of proceeds, are 
subject to the BSA? Please explain.
    235. Is there another approach, other than the one we have 
proposed, to help protect against the risk of money laundering, that 
does not rely on BSA compliance? If so, please explain.
c. Privacy
    Section 4A(a)(9) requires intermediaries to take such steps to

[[Page 66493]]

protect the privacy of information collected from investors as the 
Commission shall, by rule, determine appropriate. One commenter 
suggested that the responsibility for storing confidential information 
should rest with the intermediary and that data should not be shared 
with, or stored by, any other organization.\675\ The commenter 
recommended requiring intermediaries to store information in a secure 
fashion on a dedicated, secure server. The commenter also urged the 
Commission to identify, by rule or otherwise, an appropriate industry 
standard for protection of this data, perhaps looking to standards 
adopted in the legal and banking industries as examples. Another 
commenter suggested that a procedure should be established to allow the 
public to control the delivery and the amount of emails soliciting 
funds for crowdfunding projects.\676\
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    \675\ See RocketHub Letter 1.
    \676\ See Bach Letter.
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    The proposed rules would implement the requirements of Section 
4A(a)(9) by subjecting funding portals, as brokers, to the same privacy 
rules applicable to brokers.\677\ Proposed Rule 403(c), therefore, 
would require funding portals to comply with Regulation S-P (Privacy of 
Consumer Financial Information and Safeguarding Personal 
Information),\678\ Regulation S-AM (Limitations on Affiliate Marketing) 
\679\ and Regulation S-ID (Identity Theft Red Flags) \680\ 
(collectively, the ``Privacy Rules'').\681\
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    \677\ See proposed Rule 403(c) of Regulation Crowdfunding.
    \678\ See Privacy of Consumer Financial Information (Regulation 
S-P), Release No. 34-42974 (June 22, 2000) [65 FR 40334 (June 29, 
2000)].
    \679\ See Regulation S-AM: Limitations on Affiliate Marketing, 
Release No. 34-60423 (Aug. 4, 2011) [74 FR 40398 (Aug. 11, 2009)].
    \680\ See Identity Theft Red Flags Rules, Release No. 34-69359 
(Apr. 10, 2013) [78 FR 23637 (Apr. 19, 2013)] (``Identity Theft Red 
Flags Rules'') (adopted jointly with the Commodity Futures Trading 
Commission).
    \681\ See 17 CFR part 248.
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    Regulation S-P governs the treatment of nonpublic personal 
information by brokers, among others.\682\ It generally requires a 
broker to provide notice to investors about its privacy policies and 
practices; describes the conditions under which a broker may disclose 
nonpublic personal information about investors to nonaffiliated third 
parties; and provides a method for investors to prevent a broker from 
disclosing that information to most nonaffiliated third parties by 
``opting out'' of that disclosure, subject to certain exceptions. 
Regulation S-AM allows a consumer, in certain limited situations, to 
block affiliates of covered persons (i.e., brokers, dealers, investment 
companies and both investment advisers and transfer agents registered 
with the Commission) from soliciting the consumer based on eligibility 
information (i.e., certain financial information, such as information 
regarding the consumer's transactions or experiences with the covered 
person) received from the covered person.\683\ Regulation S-ID 
generally requires brokers to develop and implement a written identity 
theft prevention program that is designed to detect, prevent and 
mitigate identity theft in connection with certain existing accounts or 
the opening of new accounts.\684\
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    \682\ See 17 CFR part 248 subpart A.
    \683\ 17 CFR part 248 subpart B.
    \684\ See Identity Theft Red Flags Rules, note 680.
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    While we recognize that crowdfunding activities, like any Internet-
based communications, could raise novel issues not already addressed in 
existing regulations and guidance, we believe that it is unnecessary to 
repeat identical, existing requirements, in a separate rule proposal 
only for funding portals, or to propose rules that would apply not only 
to crowdfunding, but to a broader set of technology-based activity. We 
believe that the requirements of the Privacy Rules would impose 
relatively minimal costs on funding portals,\685\ but provide key 
investor protections, and that persons who deal with funding portals, 
as opposed to brokers, should not have to lose the benefit of those 
protections.
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    \685\ See discussion in Section IV.C.2.l below.
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    Although one commenter suggested the development of a procedure to 
allow the public to control the delivery and the amount of emails that 
solicit funds for crowdfunding projects,\686\ we note that the 
definition of funding portal in Exchange Act Section 3(a)(80) and the 
proposed rules \687\ prohibit a funding portal from soliciting 
investors for specific crowdfunding projects. Moreover, Section 
4A(b)(2) and the proposed rules \688\ prohibit issuers from advertising 
the terms of an offering, except for directing potential investors to 
the intermediary.\689\ The proposed rules \690\ also incorporate 
prohibitions on the transmission of personally identifiable information 
in connection with intermediaries' advertisements, referrals and 
payments to third parties.\691\ We believe that these provisions, in 
combination with the Privacy Rules, address the commenter's concern. 
Although one commenter urged us not to permit intermediaries to store 
information with third parties,\692\ we note that our recordkeeping 
rules applicable to brokers permit the use of third-party service 
providers for storing records.\693\ We are proposing a similar 
requirement for funding portals, as discussed in Section II.D.5 below. 
A different requirement for funding portals would not be consistent 
with the requirements for brokers and may not be economically feasible 
for some intermediaries.
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    \686\ See Bach Letter.
    \687\ See proposed Rule 300(c) of Regulation Crowdfunding.
    \688\ See proposed Rule 204 of Regulation Crowdfunding.
    \689\ See discussion in Section II.B.4 above.
    \690\ See proposed Rules 305 and 402(b)(6) of Regulation 
Crowdfunding.
    \691\ See discussion in Sections II.C.7 and II.D.3 above.
    \692\ See RocketHub Letter 1.
    \693\ See 17 CFR 240.17a-4(i).
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Request for Comment
    236. Is it appropriate to implement the requirements of Section 
4A(a)(9) by applying the requirements of the Privacy Rules to funding 
portals? Why or why not? Is the nature of a funding portal's activities 
such that a different requirement to protect privacy would be more 
appropriate? Please explain.
    237. Are there specific considerations with respect to privacy and 
crowdfunding that are not already adequately addressed in the Privacy 
Rules? If so, what are they and how should we address them?
    238. Should we provide additional guidance concerning the 
application of the Privacy Rules to funding portals? If so, which parts 
and why?
    239. Under the proposed rules, funding portals would be required to 
collect information about their customers in order to comply with anti-
money laundering provisions, as brokers are required to do, as 
discussed above in relation to proposed Rule 402(b). At the same time, 
intermediaries would be required to take steps to protect the privacy 
of information collected from customers, as set forth in Section 
4A(a)(9). Do our proposed rules achieve the appropriate balance between 
these two objectives? What other approaches would achieve an 
appropriate balance? Please explain.
d. Inspections and Examinations
    Congress specified that funding portals must remain subject to our 
examination authority.\694\ Under the

[[Page 66494]]

proposed rules, a funding portal would be required to permit the 
examination and inspection of all of its business and business 
operations that relate to its activities as a funding portal, such as 
its premises, systems, platforms and records, by our representatives 
and by representatives of the registered national securities 
association of which it is a member.
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    \694\ As a condition to exempting funding portals from the 
requirement to register as broker-dealers under Exchange Act Section 
15(a)(1) (15 U.S.C. 78c(a)(1)), Exchange Act Section 3(h)(1)(A) 
requires that registered funding portals remain subject to, among 
other things, our examination authority. See proposed Rule 403(d) of 
Regulation Crowdfunding.
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Request for Comment
    240. Are there any additional provisions that should be 
incorporated in the proposed rules regarding inspection and examination 
of funding portals? Please explain.
5. Records To Be Created and Maintained by Funding Portals
    The proposed rules would require a funding portal to create and 
maintain certain records.\695\ We believe that it is important for 
funding portals to be subject to a recordkeeping requirement in order 
to create a meaningful audit trail of the crowdfunding transactions and 
communications. Without these records, the Commission and any 
registered national securities association would have difficulty 
examining a funding portal for compliance with the requirements of 
Regulation Crowdfunding, the BSA \696\ and the federal securities laws.
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    \695\ See proposed Rule 404 of Regulation Crowdfunding. Exchange 
Act Section 3(h)(1)(C) permits us to impose, as part of our 
authority to exempt funding portals from broker registration, ``such 
other requirements under [the Exchange Act] as the Commission 
determines appropriate.''
    \696\ In the release adopting Exchange Act Rule 17a-8 (17 CFR 
240.17a-8), which requires broker-dealers to comply with the 
reporting, recordkeeping and record retention rules adopted under 
the BSA, the Commission noted that the ``most effective means of 
enforcing compliance with the reporting and recordkeeping 
requirements is through on-site examinations of broker-dealer firms 
conducted by the Commission and the self-regulatory organizations. . 
. .'' See Recordkeeping by Brokers and Dealers, Release No. 34-18321 
(Dec. 10, 1981) [46 FR 61454 (Dec. 17, 1981)].
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    The proposed rules would require a funding portal to make and 
preserve certain records for five years, with the records retained in a 
readily accessible place for at least the first two years.\697\ The 
records would include those regarding investors who purchase or attempt 
to purchase securities through the funding portal, such as information 
relating to educational materials provided to investors, account 
opening and transactions (including notices of investment commitments 
and reconfirmations), as required under Subpart C. They also would 
include records relating to issuers that offer and sell, or attempt to 
offer and sell, securities through the funding portal and to persons 
having control with respect to those issuers. This proposed requirement 
would better enable regulators to gather information about the 
activities in which the funding portal has been engaged, as well as 
about the issuers and investors that use the funding portal for their 
crowdfunding transactions.
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    \697\ See proposed Rules 404(a)(1) through (9) of Regulation 
Crowdfunding.
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    The proposed rules also would require a funding portal to maintain 
records of all communications that occur on or through its 
platform.\698\ Some commenters expressed concerns about the ability of 
funding portals to track and store communications that take place 
outside of their platforms.\699\ We believe that funding portals should 
be responsible to keep records of only the communications that occur on 
or through their platforms, including in the communication channels 
they are required to provide. We do not believe they should be 
responsible for keeping records of communications that take place 
exclusively outside of their platforms, such as on third-party social 
media sites or elsewhere on the Internet. The proposed rules also would 
require a funding portal to keep all records related to persons that 
use communication services provided by a funding portal to promote an 
issuer's securities or to communicate with potential investors.\700\ 
These proposed requirements would help regulators to examine the 
funding portal for any potential connection with promoters, including 
associated persons that act as promoters, whose promotion or 
communication activities could cause the funding portal to lose its 
exemption from broker-dealer registration.
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    \698\ See id.
    \699\ See CFIRA Letter 13.
    \700\ See proposed Rule 404(a)(3) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would require a funding portal to maintain 
records demonstrating its compliance with requirements of Subparts C 
(intermediary obligations) and D (funding portal requirements).\701\ 
This proposed requirement would require a funding portal to keep all 
the records it has created in the course of its business in order to 
comply with Regulation Crowdfunding. This requirement alone would not, 
however, require the creation of any records or proscribe the format or 
manner of any records. This proposed requirement would not only assist 
in regulators' compliance examinations, but also should assist funding 
portals in complying with the rules pertaining to their crowdfunding 
activities.
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    \701\ See proposed Rule 404(a)(5) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would require a funding portal to maintain all 
notices provided by the funding portal to issuers and investors 
generally through the funding portal's platform or otherwise.\702\ This 
proposed requirement would assist regulatory examination of the funding 
portal for any communications to issuers or investors that could 
indicate violations of particular provisions of proposed Regulation 
Crowdfunding.
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    \702\ These would include, but not be limited to: (1) Notices 
addressing hours of funding portal operations (if any); (2) funding 
portal malfunctions; (3) changes to funding portal procedures; (4) 
maintenance of hardware and software; (5) instructions pertaining to 
access to the funding portal; and (6) denials of, or limitations on, 
access to the funding portal. See proposed Rule 404(a)(6) of 
Regulation Crowdfunding.
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    The proposed rules would require a funding portal to maintain 
records of all written agreements (or copies thereof) entered into by a 
funding portal, relating to its business as such.\703\ This proposed 
requirement is intended to capture details of any funding portal 
arrangements and the funding portal's compliance with applicable 
requirements.
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    \703\ See proposed Rule 404(a)(7) of Regulation Crowdfunding.
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    The proposed rules would require a funding portal to create and 
maintain daily, monthly and quarterly summaries of transactions 
effected through it.\704\ The purpose of this proposed requirement is 
to help ensure that an historical and ongoing record exists of the 
transactions that have been conducted through the funding portal, 
especially given the high volume of transactions we expect to occur on 
funding portals' platforms.
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    \704\ These would include: (1) Issuers for which the target 
offering amount has been reached and funds distributed; and (2) 
transaction volume, expressed in number of transactions, number of 
securities involved in a transaction and total amounts raised by and 
distributed to issuers, as well as total dollar amounts raised 
across all issuers, expressed in U.S. dollars. See proposed Rule 
404(a)(8) of Regulation Crowdfunding.
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    The proposed rules would require a funding portal to make and keep 
a log of each offering, reflecting the progress of each issuer in 
meeting the target offering amount.\705\ This proposed requirement is 
intended to support, or otherwise be compared against, information 
included on an issuer's filing of Form C-U.\706\
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    \705\ See proposed Rule 404(a)(9) of Regulation Crowdfunding.
    \706\ See discussion in Section II.B.1 above. See also Section 
II.C.5 above for a discussion of proposed Rule 303(a) of Regulation 
Crowdfunding.
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    The proposed rules also would require that a funding portal make 
and

[[Page 66495]]

preserve its organizational documents, during its operation as a 
funding portal and of any successor funding portal.\707\ This proposed 
requirement is intended to ensure that these key documents are 
maintained for identification and verification purposes.
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    \707\ These would include, but not be limited to: (1) 
Partnership agreements; (2) articles of incorporation or charter; 
(3) minute books; and (4) stock certificate books (or other similar 
type documents). See proposed Rule 404(b) of Regulation 
Crowdfunding.
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    These recordkeeping requirements are similar to, but in many ways 
less extensive than, those for registered broker-dealers under Exchange 
Act Rule 17a-4(a).\708\ Because funding portals would be engaged in a 
more limited range of activities than brokers and a relatively high 
proportion of funding portals would be new market entrants that may not 
have formal recordkeeping practices in place, the proposed requirements 
are relatively streamlined, compared to those for brokers. The proposed 
funding portal recordkeeping requirements would require only those 
documents that relate to the funding portal's business and would 
require the portal to retain them for five years, but in an easily 
accessible place for the first two years, for purposes of facilitating 
and ensuring timeliness of inspections. A funding portal would be 
required to produce, reproduce and maintain the required records in the 
original, non-alterable format in which they were created or as 
permitted under Exchange Act Rule 17a-4(f).\709\ This flexibility 
should be appropriate for funding portals, because we believe that many 
of their documents would already be in electronic form. Thus, funding 
portals should not incur a significant additional burden for 
maintenance of those records. This flexibility also is consistent with 
the broker recordkeeping requirements under Exchange Act Rule 17a-4(f).
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    \708\ Exchange Act Rule 17a-4 provides more extensive details of 
the types of records required, and it also specifies different time 
periods for retention, namely three to six years, depending on the 
type of record. 17 CFR 240.17a-4(a).
    \709\ See proposed Rule 404(c) of Regulation Crowdfunding. 
Permitted formats would include the use of electronic storage media 
that otherwise permits the funding portal to comply with its 
obligations under the proposed rules. 17 CFR 240.17a-4(f).
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    We recognize that a funding portal may find it cost-effective or 
otherwise appropriate to use the recordkeeping services of a third 
party. The proposed rules would allow third parties to prepare or 
maintain the required records on behalf of the funding portal, provided 
that there is a written agreement in place between the funding portal 
and the third party in which the third party states that the required 
records are the property of the funding portal and would be surrendered 
promptly on request by the Commission or the national securities 
association of which the funding portal is a member.\710\ The funding 
portal also would be required to file, with the registered national 
securities association of which it is a member, this written 
undertaking, signed by a duly authorized representative of the third 
party. We believe that this provision would help to ensure that records 
maintained or preserved by a third party would be readily available for 
examination.
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    \710\ See proposed Rule 404(d) of Regulation Crowdfunding. An 
agreement between a funding portal and a third party would not 
relieve the funding portal from its responsibility to prepare and 
maintain records, as required under proposed Rule 404 of Regulation 
Crowdfunding. The written undertaking would be required to include 
the following provision: ``With respect to any books and records 
maintained or preserved on behalf of [name of funding portal], the 
undersigned hereby acknowledges that the books and records are the 
property of [name of funding portal], and hereby undertakes to 
permit examination of such books and records at any time, or from 
time to time, during business hours by representatives of the 
Securities and Exchange Commission, the national securities 
association of which the funding portal is a member, and to promptly 
furnish to the Commission and national securities association of 
which the funding portal is a member, a true, correct, complete and 
current hard copy of any, all, or any part of, such books and 
records.'' See proposed Rule 404(d) of Regulation Crowdfunding. This 
provision is consistent with the recordkeeping provisions applicable 
to brokers under Exchange Act Rules 17a-4(f) (17 CFR 17a-4(f)) and 
17a-4(j) (17 CFR 240.17a-4(j)), but it is somewhat simplified to be 
more appropriate for funding portals.
---------------------------------------------------------------------------

    Under the proposed rules, all records of a funding portal would be 
subject at any time, or from time to time, to such reasonable periodic, 
special or other examination by our representatives and representatives 
of the registered national securities association of which the funding 
portal is a member.\711\ We believe that this requirement would 
facilitate our oversight of funding portals and crowdfunding 
activities, as Congress intended.\712\
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    \711\ See proposed Rule 404(e) of Regulation Crowdfunding.
    \712\ See Exchange Act Section 3(h)(1)(A). See also 158 Cong. 
Rec. S5474-03 (daily ed. July 26, 2012) (statement of Sen. Jeff 
Merkley) (``I would encourage the SEC and the relevant national 
securities association to engage in regular reviews and reports 
regarding developments in the crowdfunding marketplace. . . . Should 
problems arise, these authorities should act quickly, including use 
of their full rulemaking and enforcement authorities. . . . For 
[crowdfunding] to succeed long-term, it will require careful 
oversight, especially during the early stages.'').
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    Finally, the proposed rules would require that a funding portal 
comply with the reporting, recordkeeping and record retention 
requirements of Chapter X of Title 31 of the Code of Federal 
Regulations, a requirement analogous to that imposed on broker-dealers 
under Exchange Act Rule 17a-8.\713\ This requirement is intended to 
ensure that funding portals create and maintain an accurate record of 
their compliance with BSA obligations, including the requirement to 
maintain records of suspicious activity reports.\714\ As noted above, 
we believe that it is important for funding portals to be subject to a 
recordkeeping requirement, along the same lines of the requirement 
applicable to brokers, to create a meaningful audit trail of the 
crowdfunding transactions and communications that occur on and through 
their platforms. Without these records, we, FINRA or any other 
registered national securities association, would have difficulty 
examining a funding portal for compliance with the requirements of 
Regulation Crowdfunding, the BSA \715\ and the federal securities laws. 
Although under the proposed rules funding portals would be required to 
create and maintain certain records, we believe this particular rule is 
necessary to achieve consistent application of, and ability to examine 
and enforce, BSA requirements across all intermediaries, whether 
brokers or funding portals.
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    \713\ 17 CFR 240.17a-8.
    \714\ We note that a funding portal's proposed obligation, under 
the BSA, to report suspicious activity includes an obligation to 
maintain the confidentiality of suspicious activity reports and any 
information that would reveal the existence of a suspicious activity 
report. See generally 31 CFR 1023.320.
    \715\ See note 696.
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Request for Comment
    241. We have proposed a variety of documents and data to be 
retained by a funding portal. Are these documents and data appropriate? 
Should other types of documents and data be required to be retained, 
and if so, which documents and data and why? Are any of the documents 
and data we propose to require be retained unnecessary, unclear or not 
sufficiently detailed? If so, which ones? Please explain. Should any of 
the proposed books and records requirements be modified? If so, please 
explain why.
    242. What burdens or costs would the retention of such information 
entail? Is it appropriate to base the books and records requirements of 
funding portals on the books and records requirements for broker-
dealers generally? Have we appropriately tailored the broker-dealer 
requirements for funding portals? If not, how should they be further 
modified? Would these tailored requirements create any competitive 
advantages for funding portals as compared to broker-

[[Page 66496]]

dealers engaged solely in the same limited activities in which a 
funding portal may engage? Are there books and records requirements 
currently applicable to broker-dealers, but not included in the 
proposed rules, that should be included? Please provide examples of any 
such requirements or any suggested alternatives.

E. Miscellaneous Provisions

1. Insignificant Deviations From Regulation Crowdfunding
    We are proposing to provide issuers a safe harbor for certain 
insignificant deviations from a term, condition or requirement of 
Regulation Crowdfunding.\716\ To qualify for the safe harbor, the 
issuer relying on the exemption would have to show that: (1) The 
failure to comply with a term, condition or requirement was 
insignificant with respect to the offering as a whole; (2) the issuer 
made a good faith and reasonable attempt to comply with all applicable 
terms, conditions and requirements of Regulation Crowdfunding; and (3) 
the issuer did not know of the failure to comply, where the failure to 
comply with a term, condition or requirement was the result of the 
failure of the intermediary to comply with the requirements of Section 
4A(a) and the related rules, or such failure by the intermediary 
occurred solely in offerings other than the issuer's offering.
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    \716\ See proposed Rule 502 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The first two prongs of the safe harbor provision are modeled after 
a similar provision in Rule 508 of Regulation D,\717\ and we believe a 
similar safe harbor is appropriate for offerings made in reliance on 
Section 4(a)(6). The offering exemption in Section 4(a)(6) was designed 
to help alleviate the funding gap and the accompanying regulatory 
concerns faced by startups and small businesses, many of which may not 
be familiar with the federal securities laws. We believe that issuers 
should not lose the Section 4(a)(6) exemption because of a failure to 
comply that is not significant with respect to the offering as a whole, 
so long as the issuer, in good faith, attempted to comply with the 
rules. We also propose to include the third prong of the safe harbor 
because, under the statute, an issuer could lose the exemption because 
of the failure of the intermediary to comply with the requirements of 
Section 4A(a). We believe that an issuer should not lose the offering 
exemption due to such failure by the intermediary, which likely would 
be out of the issuer's control, if the issuer did not know of such 
failure or such failure related to offerings other than the issuer's 
offering. Absent this safe harbor, we believe issuers may be hesitant 
to participate in offerings in reliance on Section 4(a)(6) due to 
uncertainty regarding their ability to rely on the exemption, which 
could undermine the facilitation of capital raising for startups and 
small businesses.
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    \717\ 17 CFR 230.508.
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    We believe that the potential harm to investors that might result 
from the applicability of this safe harbor would be minimal because the 
deviations must be insignificant to the offering as a whole for the 
safe harbor to apply. In addition, the proposed rules would provide 
that notwithstanding this safe harbor, any failure to comply with 
Regulation Crowdfunding would nonetheless be actionable by the 
Commission.\718\ We believe that this safe harbor would address 
concerns raised by one commenter and a member of Congress.\719\ We also 
believe it appropriately would protect an issuer who made a diligent 
attempt to comply with the proposed rules from losing the exemption as 
a result of insignificant deviations from Regulation Crowdfunding.
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    \718\ See proposed Rule 502(b) of Regulation Crowdfunding.
    \719\ See 2012 SEC Government-Business Forum, note 29 
(recommending that we provide a safe harbor for ``innocent 
violations of procedural or disclosure requirements'' in 
transactions relying on Section 4(a)(6)). See also 158 Cong. Rec. 
S2230 (daily ed. Mar. 29, 2012) (statement of Sen. Scott Brown) 
(``[I]ssuers should not be held liable for misstatements or 
omissions that were made by mistake'').
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Request for Comment
    243. Is a safe harbor for certain insignificant deviations from a 
term, condition or requirement of Regulation Crowdfunding appropriate? 
If so, is the proposed safe harbor sufficiently broad or too broad? Are 
there additional conditions that should apply for an issuer to rely on 
the safe harbor? If so, what conditions and why?
    244. Should we define the term ``insignificant'' or use a different 
term? Please explain. Should we use a standard requiring something 
other than ``good faith and reasonable attempt'' to comply with the 
requirements? If so, what standard and why? Is it appropriate for the 
safe harbor to cover the failure of the intermediary to comply with the 
requirements of Section 4A(a) if the issuer did not know of such 
failure or such failure occurred solely in offerings other than the 
issuer's offering? Why or why not?
    245. Are there certain deviations that should never be considered 
insignificant for purposes of this safe harbor? Why or why not? Should 
we provide examples of deviations that we would consider significant? 
If so, what should those be (e.g., failure to file the Form C: Offering 
Statement on EDGAR)?
2. Restrictions on Resales
    Section 4A(e) provides that securities issued in reliance on 
Section 4(a)(6) may not be transferred by the purchaser for one year 
after the date of purchase, except when transferred: (1) To the issuer 
of the securities; (2) to an accredited investor; (3) as part of an 
offering registered with the Commission; or (4) to a family member of 
the purchaser or the equivalent, or in connection with certain events, 
including death or divorce of the purchaser, or other similar 
circumstances, in the discretion of the Commission. Section 4A(e) 
further provides that the Commission may establish additional 
limitations on securities issued in reliance on Section 4(a)(6).
    The proposed rules track the provisions of Section 4A(e).\720\ We 
also are proposing to include instructions in the rules to define 
``accredited investor'' and a ``member of the family of the purchaser 
or the equivalent.'' Under the proposed rules, the term ``accredited 
investor'' would have the same definition as in Rule 501(a) of 
Regulation D.\721\
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    \720\ See proposed Rule 501 of Regulation Crowdfunding.
    \721\ 17 CFR 230.501(a). See also note 38.
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    The statute does not define ``member of the family of the purchaser 
or the equivalent.'' We propose to define the phrase to mean a ``child, 
stepchild, grandchild, parent, stepparent, grandparent, spouse or 
spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, 
daughter-in-law, brother-in-law, or sister-in-law of the purchaser, and 
shall include adoptive relationships.'' This definition tracks the 
definition of ``immediate family'' in Exchange Act Rule 16a-1(e),\722\ 
but with the addition of ``spousal equivalent.'' We propose to include 
the term spousal equivalent to address the concept in Section 
4A(e)(1)(D) of the ``equivalent'' of a member of the family of the 
purchaser. The proposed rules would define spousal equivalent to mean a 
cohabitant occupying a relationship generally equivalent to that of a 
spouse.\723\ This is the same definition as in Rule

[[Page 66497]]

202(a)(11)(G)-1(d)(9) under the Investment Advisers Act of 1940.\724\ 
We believe issuers and investors would benefit from definitions that 
are consistent with those already used in our rules, rather than 
creating a new definition, because issuers may be familiar with those 
terms and should benefit from existing Commission and staff guidance. 
The proposed rules also would provide that securities offered and sold 
in reliance on Section 4(a)(6) may be transferred during the initial 
one-year period to a trust controlled by the initial purchaser or to a 
trust created for the benefit of a member of the family of the 
purchaser or the equivalent. We believe allowing transfers in such 
cases would be consistent with the intent of the provision because the 
person that controls or benefits from the trust would otherwise be 
covered by the rules.
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    \722\ 17 CFR 240.16a-1(e).
    \723\ See proposed Instruction to paragraph (c) of proposed Rule 
501 of Regulation Crowdfunding.
    \724\ 17 CFR 275.202(a)(11)(G)-1(d)(9). See also Family Offices, 
Release No. IA-3220 (Jun. 22, 2011) [76 FR 37983 (June 29, 2011)] 
(adopting release); Family Offices, Release No. IA-3098 (Oct. 12, 
2010) [75 FR 63753 (Oct. 18, 2010)] (proposing release).
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Request for Comment
    246. Are the proposed limitations on resale appropriate? Why or why 
not? If not, what approach would be more appropriate and why? Should 
there be additional limitations on resale, especially after the first 
year? Why or why not? If so, what should they be and why? If an issuer 
no longer was in compliance with the ongoing reporting requirements 
\725\ or was no longer in business, should we place restrictions on the 
resale of the issuer's securities or otherwise limit the ability of 
those shares to trade? If so, please describe the appropriate 
restrictions and explain how we could implement such restrictions.
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    \725\ See Section II.B.2 above for a discussion of the ongoing 
reporting requirements.
---------------------------------------------------------------------------

    247. To transfer securities to an accredited investor during the 
one-year period beginning when the securities are sold in reliance on 
Section 4(a)(6), the seller would need to have a reasonable belief that 
the purchaser is an accredited investor.\726\ Is this approach 
appropriate? Why or why not?
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    \726\ See proposed Rule 501(b) of Regulation Crowdfunding.
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    248. Is the proposed use of the definition of ``accredited 
investor'' in Rule 501(a) of Regulation D appropriate? Why or why not? 
Should a different definition be used for purposes of Regulation 
Crowdfunding? Please explain.
    249. Is the proposed definition of ``member of the family of the 
purchaser or the equivalent'' appropriate? Is it appropriate to track 
the definition of ``immediate family'' under Exchange Act Section 16 
(with the addition of ``spousal equivalent''), or would another 
definition be more appropriate? Should any persons be included or not 
included in the definition? Why or why not? Should we use a consistent 
definition throughout Regulation Crowdfunding even if it differs from 
similar rules in other Commission regulations? Why or why not?
3. Information Available to States
    Under Section 4A(d), the Commission shall make available, or shall 
cause to be made available by the relevant intermediary, the 
information required under Section 4A(b) and such other information as 
the Commission, by rule, determines appropriate 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.
    One commenter suggested that all information filed with the 
Commission should be made available to state regulators.\727\ Another 
commenter questioned whether open Internet access to the crowdfunding 
platforms would be sufficient, questioning a platform's ability to 
maintain or archive records from Web sites that are routinely 
updated.\728\ Another commenter suggested that the requirement in 
Section 4A(d) should create an affirmative obligation for an 
intermediary only if a state regulator requests information in excess 
of what is provided to the Commission.\729\
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    \727\ See Commonwealth of Massachusetts Letter.
    \728\ See NASAA Letter.
    \729\ See RocketHub Letter 1.
---------------------------------------------------------------------------

    We are proposing to require issuers to file on EDGAR the 
information required by Section 4A(b) and the related rules. 
Information filed on EDGAR is publicly available and would, therefore, 
be available to each state, territory and the District of Columbia. We 
believe this approach would satisfy the requirement to make the 
information available. Accordingly, we do not believe that it is 
necessary to propose to impose any additional obligations on 
intermediaries with respect to this requirement.
Request for Comment
    250. Would the availability of information on EDGAR satisfy the 
requirement to make the information available to each state, territory 
and the District of Columbia? Are there other means of making the 
information available? Should we impose any additional obligations on 
intermediaries with respect to this requirement? If so, what are they? 
For example, should we require issuers or intermediaries to provide 
this information directly to state regulators? Please explain.
4. Exemption from Section 12(g)
    Section 303 of the JOBS Act amended Exchange Act Section 12(g) to 
provide that ``the Commission shall, by rule, exempt, conditionally or 
unconditionally, securities acquired pursuant to an offering made under 
[S]ection 4[(a)](6) of the Securities Act of 1933 from the provisions 
of this subsection.''
    As amended by the JOBS Act, Section 12(g) requires, among other 
things, that an issuer with total assets exceeding $10,000,000 and a 
class of securities held of record by either 2,000 persons, or 500 
persons who are not accredited investors, register such class of 
securities with the Commission.\730\ Crowdfunding contemplates the 
issuance of securities to a large number of holders, which could 
increase the likelihood that Section 4(a)(6) issuers would exceed the 
thresholds for reporting in Section 12(g). Section 303 could be read to 
mean that securities acquired in a crowdfunding transaction would be 
excluded from the record holder count permanently, regardless of 
whether the securities continue to be held by a person who purchased in 
the crowdfunding transaction. An alternative reading could provide that 
securities acquired in a crowdfunding transaction would be excluded 
from the record holder count only while held by the original purchaser 
in the Section 4(a)(6) transaction, as a subsequent purchaser of the 
securities would not be considered to have ``acquired [the securities] 
pursuant to an offering made under [S]ection 4[(a)](6).''
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    \730\ See Section 501 of the JOBS Act. In the case of an issuer 
that is a bank or a bank holding company, Exchange Act Section 
12(g)(1)(B) (15 U.S.C. 78l(g)(1)(B)) requires, among other things, 
that the issuer, if it has total assets exceeding $10,000,000 and a 
class of securities held of record by 2,000 persons, register such 
class of securities with the Commission. See Section 601 of the JOBS 
Act.
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    Commenters expressed concern that once the securities issued 
pursuant to Section 4(a)(6) are transferred, the exemption from Section 
12(g) registration could cease to apply and any new holders of those 
securities would be included in the calculation of holders of record 
for purposes of Section 12(g), which could potentially require an 
issuer to register its securities with the Commission.\731\ Another

[[Page 66498]]

commenter noted that the prospect that resales could trigger 
registration requirements under the Exchange Act might provide an 
incentive for issuers to attempt in some way to restrict resale and 
transfer of the securities issued in the offering made in reliance on 
Section 4(a)(6), even after the lapse of the one year transfer 
limitation, which would be to the detriment of small crowdfunding 
investors seeking liquidity.\732\ One commenter suggested that the 
exemption from Section 12(g) registration should attach to different 
securities issued in a subsequent restructuring, recapitalization or 
similar transaction that is exempt from, or otherwise not subject to, 
the registration requirements of Section 5, so long as the parties to 
the transaction are affiliates of the original issuer.\733\ The same 
commenter suggested that the availability of the exemption be 
conditioned on the issuer complying with the ongoing reporting 
requirements and not having total assets at the last day of the fiscal 
year in excess of $25 million.\734\
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    \731\ See Liles Letter 1; NCA Letter (stating that the time and 
expense associated with registration of a class of securities could 
affect an issuer's working capital and business operations); CFIRA 
Letter 2 (stating that the need for additional capital to meet 
registration requirements would result in an issuer either having to 
borrow money, thus leveraging its business, or raising additional 
capital through a subsequent equity offering that would dilute 
existing stockholders); ABA Letter 2 (stating that a Section 12(g) 
exemption limited to the initial purchaser of securities would 
undermine the utility of such an exemption and that an initial 
purchaser should not be able to force an issuer to register under 
Section 12(g) simply by reselling his or her securities).
    \732\ See Liles Letter 1.
    \733\ See ABA Letter 2.
    \734\ Id.
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    Proposed Rule 12g-6 provides that securities issued pursuant to an 
offering made under Section 4(a)(6) would be permanently exempted from 
the record holder count under Section 12(g). An issuer seeking to 
exclude a person from the record holder count would have the 
responsibility for demonstrating that the securities held by the person 
were initially issued in an offering made under Section 4(a)(6). We 
believe that allowing issuers to sell securities pursuant to Section 
4(a)(6) without becoming Exchange Act reporting issuers is consistent 
with the intent of Title III.\735\ In this regard, we note that Title 
III provides for an alternative reporting system under which issuers 
would be required to file annual reports with the Commission.\736\ We 
believe this is consistent with the proposal to permanently exempt 
securities issued in reliance on Section 4(a)(6) from the record holder 
count under Section 12(g). Section 303 of the JOBS Act does not extend 
the exemption from Section 12(g) to different securities issued in a 
subsequent restructuring, recapitalization or similar transaction, so 
we are not proposing to exempt such securities at this time, as one 
commenter suggested.\737\ We also are not proposing to condition the 
exemption on the issuer's compliance with the ongoing reporting 
requirements or on the issuer not having total assets in excess of a 
certain amount, as the same commenter suggested.\738\ We believe that 
the size of the issuer should not affect the availability of the 
exemption because conditioning the exemption on the issuer not 
exceeding a certain amount of total assets would impose an additional 
burden on successful issuers that unsuccessful issuers would not face, 
which in turn would discourage growth. We also believe that failure to 
comply with the ongoing reporting requirements could be better 
addressed as proposed by making the issuer ineligible to use the 
exemption under Section 4(a)(6),\739\ rather than by requiring such 
issuer to register a class of securities under Section 12(g).\740\
---------------------------------------------------------------------------

    \735\ See 158 Cong. Rec. S1829 (daily ed. Mar. 20, 2012) 
(statement of Sen. Jeff Merkley) (``It also provides a very 
important provision so the small investors do not count against the 
shareholder number that drives companies to have to become a fully 
public company. That is critical and interrelates with other parts 
of the [crowdfunding] bill before us.'').
    \736\ See Section II.B.2 above for a discussion of the 
requirement to file annual reports.
    \737\ See ABA Letter 2.
    \738\ See id.
    \739\ See proposed Rule 100(b)(6) of Regulation Crowdfunding.
    \740\ We note, however, that making the issuer ineligible to use 
the exemption under Section 4(a)(6) if the issuer failed to comply 
with the ongoing reporting requirements could have a limited impact 
since it only would impact an issuer that intended to rely on the 
Section 4(a)(6) exemption for future offers and sales. But see 
Bradford note 1 (``The need to go back to investors for future 
funding should constrain self-dealing, opportunistic behavior by the 
entrepreneur.'').
---------------------------------------------------------------------------

Request for Comment
    251. Should the Commission permanently exempt securities issued 
pursuant to an offering under Section 4(a)(6) from the record holder 
count under Section 12(g), as proposed? Why or why not? Should the 
Commission exempt securities issued under Section 4(a)(6) only when 
held of record by the original purchaser in the Section 4(a)(6) 
transaction, an affiliate of the original purchaser, a member of the 
original purchaser's family or a trust for the benefit of the original 
purchaser or the original purchaser's family? Why or why not? Are there 
other ways to implement Section 303 that may be more appropriate? 
Please explain.
    252. One commenter suggested \741\ that the Section 4(a)(6) 
exemption should survive and attach to different securities issued in a 
subsequent restructuring, recapitalization or similar transaction that 
is exempt from, or otherwise not subject to, the registration 
requirements of Section 5, if the parties to the transaction are 
affiliates of the original issuer. While we are not proposing to 
implement this suggestion at this time, we invite commenters to discuss 
the advantages and disadvantages of this approach.
---------------------------------------------------------------------------

    \741\ See ABA Letter 2.
---------------------------------------------------------------------------

    253. The same commenter suggested \742\ that the availability of 
the exemption under Section 12(g)(6) should be conditioned on the 
issuer not having total assets, at the last day of the fiscal year with 
respect to which the Section 12(g) compliance determination is made (or 
a reasonable time before or after such date), in excess of $25 million. 
Should we condition the availability of the exemption under Section 
12(g)(6) on the issuer not having total assets in excess of $25 
million? If not $25 million, should the availability of the exemption 
be conditioned on total assets not exceeding some other amount (e.g., 
$10 million, $50 million, etc.)? Should this determination be made as 
of the last day of the fiscal year or a different date? Please explain.
---------------------------------------------------------------------------

    \742\ See id.
---------------------------------------------------------------------------

    254. Should issuers that fail to comply with the ongoing reporting 
requirements\743\ of Regulation Crowdfunding be disqualified from 
relying on the exemption under Section 12(g)(6), as suggested by one 
commenter? \744\ Why or why not?
---------------------------------------------------------------------------

    \743\ See proposed Rules 202 and 203(b) of Regulation 
Crowdfunding and Section II.B.2 above for a discussion of the 
ongoing reporting requirements.
    \744\ See ABA Letter 2.
---------------------------------------------------------------------------

    255. How would issuers be able to distinguish securities issued in 
a transaction exempt under Section 4(a)(6) from securities issued in 
other offerings? What would be the costs associated with making such a 
determination?
5. Scope of Statutory Liability
    As noted above, Securities Act Section 4A(c) sets forth a liability 
provision for crowdfunding transactions under Section 4(a)(6).\745\ 
Section 4A(c) provides that an issuer will be liable to a purchaser of 
its securities in a

[[Page 66499]]

transaction exempted by Section 4(a)(6) if the issuer, in the offer or 
sale of the securities, 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 light of the circumstances under which 
they were made, not misleading, provided that the purchaser did not 
know of the untruth or omission, and the issuer 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 the untruth or omission. 
Section 4A(c)(3) defines, for purposes of the liability provisions of 
Section 4A, an issuer as including ``any person who offers or sells the 
security in such offering.'' On the basis of this definition, it 
appears likely that intermediaries, including funding portals, would be 
considered issuers for purposes of this liability provision. We believe 
that steps intermediaries could take in exercising reasonable care in 
light of this liability provision would include establishing policies 
and procedures \746\ that are reasonably designed to achieve compliance 
with the requirements of Regulation Crowdfunding, and that include the 
intermediary conducting a review of the issuer's offering documents, 
before posting them to the platform, to evaluate whether they contain 
materially false or misleading information.
---------------------------------------------------------------------------

    \745\ The anti-fraud and civil liability provisions of the 
Securities Act, such as Sections 12(a)(2) and 17, apply to exempted 
transactions, including those transactions that will be conducted in 
reliance on Section 4(a)(6).
    \746\ With respect to intermediaries that are funding portals, 
see proposed Rule 403(a) of Regulation Crowdfunding and the 
discussion in Section II.D.4 above.
---------------------------------------------------------------------------

    Under this liability provision, an investor who purchases 
securities in a crowdfunding transaction may bring an action against 
the issuer to recover the consideration paid for the security, with 
interest, or damages if the person no longer holds the security. The 
statute further provides that actions brought under Section 4A(c) will 
be subject to the provisions of Securities Act Sections 12(b) and 13, 
as though the liability were created under Securities Act Section 
12(a)(2).
6. Disqualification
    Section 302(d) of the JOBS Act requires the Commission to establish 
disqualification provisions under which an issuer would not be eligible 
to offer securities pursuant to Section 4(a)(6) and an intermediary 
would not be eligible to effect or participate in transactions pursuant 
to Section 4(a)(6). Section 302(d)(2) specifies that the 
disqualification provisions must be ``substantially similar'' to the 
disqualification provisions contained in Rule 262 of Regulation A,\747\ 
and they also must cover certain actions by state regulators enumerated 
in Section 302(d)(2). The disqualifying events listed in Rule 262 apply 
to the issuer and certain other persons associated with the issuer or 
the offering, including the issuer's predecessors and affiliated 
issuers; directors, officers and general partners of the issuer; 
beneficial owners of 10 percent or more of any class of the issuer's 
equity securities; promoters connected with the issuer; and 
underwriters and their directors, officers and partners. Rule 262 
disqualifying events include:
---------------------------------------------------------------------------

    \747\ 17 CFR 230.262.
---------------------------------------------------------------------------

     Felony and misdemeanor convictions in connection with the 
purchase or sale of a security or involving the making of a false 
filing with the Commission (the same criminal conviction standard as in 
Section 302(d) of the JOBS Act) within the last five years in the case 
of issuers and 10 years in the case of other covered persons;
     injunctions and court orders within the last five years 
against engaging in or continuing conduct or practices in connection 
with the purchase or sale of securities, or involving the making of any 
false filing with the Commission;
     United States Postal Service false representation orders 
within the last five years;
     filing, or being named as an underwriter in, a 
registration statement or Regulation A offering statement that is the 
subject of a proceeding to determine whether a stop order should be 
issued, or as to which a stop order was issued within the last five 
years; and
     for covered persons other than the issuer:
    [cir] being subject to a Commission order:
    [ssquf] revoking or suspending their registration as a broker, 
dealer, municipal securities dealer or investment adviser;
    [ssquf] placing limitations on their activities as such;
    [ssquf] barring them from association with any entity; or
    [ssquf] barring them from participating in an offering of penny 
stock; or
    [cir] being suspended or expelled from membership in, or suspended 
or barred from association with a member of, a registered national 
securities exchange or national securities association for conduct 
inconsistent with just and equitable principles of trade.
    The disqualifying events specifically required by Section 302(d)(2) 
are:
     final orders issued by state securities, banking, savings 
association, credit union and insurance regulators, federal banking 
regulators and the National Credit Union Administration that either:
    [cir] bar a person from association with an entity regulated by the 
regulator issuing the order; engaging in the business of securities, 
insurance or banking; or engaging in savings association or credit 
union activities; or
    [cir] are based on a violation of any law or regulation that 
prohibits fraudulent, manipulative or deceptive conduct within a 10-
year period ending on the date of the filing of the offer or sale; and
     felony and misdemeanor convictions in connection with the 
purchase or sale of a security or involving the making of a false 
filing with the Commission.
    One commenter urged us to apply the same standards adopted by the 
Commission for Rule 506 of Regulation D \748\ to this exemption.\749\ 
Another commenter stated that searching for most disqualifying events 
could be achieved with automated or semi-automated inquiries to 
databases or data services, but other disqualifying events would be 
difficult to identify with those types of inquiries and should be the 
responsibility of the issuer to address with representations and 
warranties.\750\ One commenter stated that if a bankruptcy proceeding 
would be a disqualifying event, it should be limited to a bankruptcy 
proceeding of the issuer or the intermediary and not include a personal 
bankruptcy proceeding.\751\ Another commenter recommended that the 
disqualification rules: (1) Not be so broad as to affect ``persons who 
may not be true bad actors--such as persons who consent to the entry of 
judgments which do not also include meaningful monetary or other 
penalties;'' (2) not apply retroactively to cover disqualifying events 
prior to the adoption of the final rules; and (3) apply to other types 
of exempt offerings

[[Page 66500]]

(including offerings made in reliance on Regulation A).\752\
---------------------------------------------------------------------------

    \748\ See Securities Act Rule 506(d) [17 CFR 230.506(d)]. See 
also Disqualification Adopting Release, note 101.
    \749\ See NASAA Letter (stating that an offering made pursuant 
to Section 4(a)(6) also should be subject to disqualification based 
on the prior bad acts of the funding portal and its management).
    \750\ See Applied Dynamite Letter (stating that certain 
disqualifying events have open-ended definitions that would make it 
difficult to satisfy with confidence: ``any court of competent 
jurisdiction'' having entered an order because there is no limit to 
the number of courts which may have, at some time, been competent to 
enter an order regarding an issuer; being ``subject to'' certain 
unpublished orders or injunctions such as a United States Postal 
Service false representation order; and the extension of 
disqualification events to predecessors and affiliated issuers 
because of the innumerable ways in which two companies might be 
deemed to be affiliated).
    \751\ See Landon Letter 1.
    \752\ See SEC Government-Business Forum, note 29.
---------------------------------------------------------------------------

a. Issuers and Certain Other Associated Persons
    The disqualification provisions included in Section 302(d) of the 
JOBS Act are modeled on the disqualification provisions included in 
Section 926 of the Dodd-Frank Act, which required the Commission to 
adopt rules, ``substantially similar'' to Rule 262, that disqualify 
securities offerings involving certain ``felons and other `bad actors' 
'' from reliance on Rule 506 of Regulation D.\753\ On July 10, 2013, we 
adopted rules to implement Section 926 of the Dodd-Frank Act to 
disqualify certain securities offerings from reliance on Rule 506 of 
Regulation D.\754\ The proposed disqualification rules,\755\ as they 
relate to issuers and certain other associated persons, are modeled on 
the Rule 506 disqualification rules, which, in turn, are substantially 
similar to the disqualification provisions in Rule 262.
---------------------------------------------------------------------------

    \753\ See Dodd-Frank Act, note 38.
    \754\ See Disqualification Adopting Release, note 101.
    \755\ See proposed Rules 503(a)-(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

i. Covered Persons
    The proposed rules would apply the disqualification provisions to:
     the issuer and any predecessor of the issuer or affiliated 
issuer;
     any director, officer, general partner or managing member 
of the issuer;
     any 20 percent Beneficial Owner;
     any promoter connected with the issuer in any capacity at 
the time of the sale;
     any person that has been or will be paid (directly or 
indirectly) remuneration for solicitation of purchasers in connection 
with sales of securities in the offering (which we refer to as a 
``compensated solicitor''); and
     any director, officer, general partner or managing member 
of any such compensated solicitor.
    These covered persons are substantially similar to those currently 
covered by the disqualification rules for Rules 262 and 506. The 
proposed rules would cover any ``officer'' \756\ of the issuer, 
mirroring the coverage in Rule 262, rather than any ``executive officer 
[and] other officer participating in the offering'' \757\ as it is 
currently covered in Rule 506. In adopting the Rule 506 
disqualification rules, we noted that an ``officer'' test would be 
unduly burdensome and overly restrictive due to the larger and more 
complex organizations that are involved in many Rule 506 transactions 
as compared to the smaller entities that use Regulation A. We also 
noted that limiting the coverage of the Rule 506 disqualification rules 
to executive officers and officers who participate in the offering 
would lessen the potential compliance burden by limiting the number of 
covered persons. In contrast, we believe that the startups and small 
businesses that may seek to raise capital in reliance on Section 
4(a)(6) generally will be smaller than the entities involved in Rule 
506 transactions and, likely, smaller than the issuers of securities 
relying on Regulation A.\758\ We also believe that the ``officers'' of 
many issuers relying on Section 4(a)(6) may be only a few individuals, 
with or without formal titles. As a result, we do not believe that an 
``officer'' test would be more burdensome than the test used for 
Regulation A purposes, so we do not see a need to deviate from Rule 262 
in this context.
---------------------------------------------------------------------------

    \756\ Under Securities Act Rule 405, the term ``officer'' is 
defined as ``a president, vice president, secretary, treasurer or 
principal financial officer, comptroller or principal accounting 
officer, and any person routinely performing corresponding functions 
with respect to any organization.'' 17 CFR 230.405.
    \757\ Under Securities Act Rule 405, the term ``executive 
officer'' is defined as a ``president [of the registrant], any vice 
president of the registrant in charge of a principal business unit, 
division or function (such as sales, administration or finance), any 
other officer who performs a policy making function or any other 
person who performs similar policy making functions for the 
registrant.'' 17 CFR 230.405.
    \758\ There is no cap on the amount of proceeds that may be 
raised in an offering relying on Rule 506, and Regulation A limits 
offerings to $5 million.
---------------------------------------------------------------------------

    The proposed rules also would cover persons who are 20 Percent 
Beneficial Owners. This threshold differs from the 10 percent threshold 
specified in Rule 262, but it is the same as the threshold in the Rule 
506 disqualification rules. We believe that a 10 percent ownership 
threshold could impose an undue burden on participants in the Section 
4(a)(6) marketplace. In this regard, the potential administrative 
complexity of monitoring the fluctuating ownership levels and the 
issuer's inability to control the actions of a shareholder who does not 
disclose disqualification would be greater under a 10 percent threshold 
scheme than under a 20 percent threshold scheme. This is the same 
concern that led us to change the 10 percent threshold in the Rule 506 
disqualification rules. A 20 percent threshold would provide greater 
certainty and ease of compliance than a 10 percent threshold, and it 
also would be consistent with both the threshold specified in the Rule 
506 disqualification rules and the disclosure requirements of Sections 
4A(b)(1)(B) and 4A(b)(1)(H)(iii), which require certain disclosures 
about shareholders based on a 20 percent threshold.\759\
---------------------------------------------------------------------------

    \759\ See discussion in Section II.B.1.a.i(a) above.
---------------------------------------------------------------------------

    The proposed rules would include the category of compensated 
solicitor and any director, officer, general partner or managing member 
of any such compensated solicitor, currently in the Rule 506 
disqualification rules.\760\ Regulation A offerings may involve 
traditional underwritten offerings, but offers and sales made in 
reliance on Section 4(a)(6), similar to transactions under Rule 506, 
would not involve underwriters. Thus, the proposed disqualification 
rules would not apply to underwriters, but would substitute 
underwriters with the concept of compensated solicitor. The statute and 
the proposed rules would permit issuers offering and selling securities 
in reliance on Section 4(a)(6) to compensate persons to promote the 
issuer's offering through communication channels provided by the 
intermediary, subject to certain conditions.\761\ We believe those 
individuals receiving compensation to promote the issuer's offering 
should be covered by the disqualification provisions because they would 
be subject to conflicts of interest in transactions pursuant to Section 
4(a)(6), which would be substantially similar to those of underwriters 
in Regulation A transactions.\762\
---------------------------------------------------------------------------

    \760\ See proposed Rule 503(a) of Regulation Crowdfunding.
    \761\ See Section 4A(b)(3) and proposed Rule 205 of Regulation 
Crowdfunding. See also Section II.B.5 above.
    \762\ We note that the receipt of transaction-based compensation 
in connection with the offer and sale of a security could cause a 
person to be a broker required to register with us under Exchange 
Act Section 15(a)(1) (15 U.S.C. 78c(a)(1)).
---------------------------------------------------------------------------

    Moreover, the proposed rules would provide that events relating to 
certain affiliated issuers are not disqualifying if they pre-date the 
affiliate relationship.\763\ Rule 262(a)(5) currently provides that 
orders, judgments and decrees entered against affiliated issuers before 
the affiliation arose do not disqualify an issuer from reliance on 
Regulation A if the affiliated issuer is not: (1) In control of the 
issuer; or (2) under the common control of a third party that 
controlled the affiliated issuer at the time such order, judgment or 
decree was entered. The proposed rules would include a substantially 
similar provision but would clarify that it applies to all potentially 
disqualifying events that pre-date affiliation. We believe this is 
appropriate because the

[[Page 66501]]

current placement of this language within paragraph (5) of Rule 262(a) 
may incorrectly suggest that it applies only to Postal Service false 
representation orders. This is the same approach we took in the Rule 
506 disqualification rules. As in Rule 506(d), the proposed rules would 
not treat entities differently if they have undergone a change of 
control or other remedial measures.\764\ This should avoid undue 
complexity in applying the proposed rules, while also avoiding 
potential abuse by bad actors that may falsely claim to have undergone 
a change of control.\765\
---------------------------------------------------------------------------

    \763\ See proposed Rule 503(c) of Regulation Crowdfunding.
    \764\ See Disqualification Adopting Release, note 101 (declining 
to provide different treatment for entities that have undergone a 
change of control or other remedial measures, such as a change of 
policy whereby an issuer would have implemented policies and 
procedures, designed to prevent the occurrence of the kinds of 
activities that gave rise to disqualification, and such policies and 
procedures would have been approved by a regulator or a court).
    \765\ Entities that have undergone a change of control or a 
change of policy could, however, seek a waiver of the 
disqualification upon a proper showing that there has been a change 
of control and the persons responsible for the activities resulting 
in a disqualification are no longer employed by the entity or 
exercise influence over such entity. See Section II.E.6.a.iv below 
for a discussion of waivers.
---------------------------------------------------------------------------

Request for Comment
    256. Should we eliminate or modify any of the proposed categories 
of covered persons? If so, which ones and why? Would doing so still 
result in a rule substantially similar to Rule 262? Should we 
disqualify additional categories of covered persons? If so, which ones 
and why?
    257. The proposed rules would apply to officers of the issuer, 
mirroring Rule 262, rather than executive officers and other officers 
participating in the offering, as in Securities Act Rule 506(d). Is 
this approach appropriate? Why or why not?
    258. Should persons compensated to promote the issuer's offering 
through communication channels provided by the intermediary be covered 
persons, as is the case for the Rule 506 disqualification rules? Why or 
why not? Would doing so result in a rule substantially similar to Rule 
262?
    259. The proposed disqualification rules would cover persons who 
are 20 Percent Beneficial Owners. Is the 20 percent beneficial 
ownership threshold appropriate? Why or why not? Should the proposed 
disqualification rules cover persons based on a 10 percent ownership 
threshold, as in Rule 262? Why or why not?
    260. Should orders, judgments and decrees entered against 
affiliated issuers not be disqualifying if they pre-date the affiliate 
relationship, as proposed? Should we, as proposed, expand this 
treatment to entities that have undergone a change of control or a 
change of policy? Why or why not?
ii. Disqualifying Events
(a) Criminal Convictions
    Section 302(d)(2)(B)(ii) provides for disqualification if any 
covered person ``has been convicted of any felony or misdemeanor in 
connection with the purchase or sale of any security or involving the 
making of any false filing with the Commission.'' This essentially 
mirrors Rule 262(a)(3), which covers criminal convictions of issuers, 
and Rule 262(b)(1), which covers criminal convictions of other covered 
persons. There are, however, two differences between the felony and 
misdemeanor conviction provisions of Section 302(d)(2)(B)(ii) and Rule 
262. First, Section 302(d)(2)(B)(ii) does not include a specific time 
limit (or ``look-back period'') on convictions that trigger 
disqualification, while Rule 262 provides a five-year look-back period 
for criminal convictions of issuers and a 10-year look-back period for 
criminal convictions of other covered persons. In light of the time 
limits on criminal convictions under Rule 262, we are proposing the 
same five-year and 10-year look-back periods so the proposed rules 
would be substantially similar to the existing rules. Second, unlike 
Rule 262(b)(1), Section 302(d) does not include a reference to criminal 
convictions ``arising out of the conduct of the business of an 
underwriter, broker, dealer, municipal securities dealer or investment 
adviser.'' We are not aware of any legislative history that explains 
why this type of conviction was not mentioned in Section 302(d). 
However, because such convictions are covered in Rule 262, we believe 
that rules substantially similar to the existing rules should cover 
them.
    The proposed rules are based on Rule 262 and differ from the Rule 
506 disqualification rules in that the look-back period would be 
measured from the date of the requisite filing with the Commission, 
rather than the date of the relevant sale.\766\ We noted in the 
proposing release for the Rule 506 disqualification rules \767\ that 
measuring from the date of the requisite filing, as in Rule 262, would 
not be appropriate in the context of Rule 506 because no filing is 
required to be made with the Commission before an offer or sale is made 
in reliance on Regulation D.\768\ Because the proposed rules would 
require issuers offering securities in reliance on Section 4(a)(6) to 
file with the Commission the information required by Section 
4A(b),\769\ the proposed rules would measure the look-back period based 
on the filing date, similar to Rule 262, rather than the date of sale.
---------------------------------------------------------------------------

    \766\ See proposed Rule 503(a)(1) of Regulation Crowdfunding.
    \767\ See Disqualification of Felons and Other ``Bad Actors'' 
from Rule 506 Offerings, Release No. 33-9211 (proposed May 25, 2011) 
at 18 [76 FR 31518, 31523 (June 1, 2011)].
    \768\ See also Disqualification Adopting Release, note 101.
    \769\ See Sections II.B.1 and II.B.3 above for a discussion of 
the disclosure and filing requirements.
---------------------------------------------------------------------------

(b) Court Injunctions and Restraining Orders
    Under Rule 262(a)(4), an issuer is disqualified from reliance on 
Regulation A if it, or any predecessor or affiliated issuer, is subject 
to a court injunction or restraining order against ``engaging in or 
continuing any conduct or practice in connection with the purchase or 
sale of any security or involving the making of any false filing with 
the Commission.'' Similarly, under Rule 262(b)(2), an issuer is 
disqualified from reliance on Regulation A if any other covered person 
is subject to such a court injunction or restraining order or to one 
``arising out of the conduct of the business of an underwriter, broker, 
dealer, municipal securities dealer or investment adviser.'' 
Disqualification is triggered by temporary or preliminary injunctions 
and restraining orders that are currently in effect, as well as by 
permanent injunctions and restraining orders entered within the last 
five years.\770\
---------------------------------------------------------------------------

    \770\ The look-back period means that disqualification no longer 
arises from a permanent injunction or restraining order after the 
requisite amount of time has passed, even though the injunction or 
order may still be in effect. In addition, because disqualification 
is triggered only when a person ``is subject to'' a relevant 
injunction or order, injunctions and orders that have expired or are 
otherwise no longer in effect are not disqualifying, even if they 
were issued within the relevant look-back period.
---------------------------------------------------------------------------

    The proposed rules are substantially similar to these two 
provisions, but in a simplified, combined format.\771\ The proposed 
rules would include the same coverage and look-back periods that apply 
under the disqualification provisions for Rules 262 and 506, except 
that the look-back period would be measured from the date of the 
requisite filing with the Commission, consistent with the approach in 
Rule 262. The proposed rules also would not impose due process 
requirements (such as notice and an opportunity to appear) or require 
that all appeals be exhausted or

[[Page 66502]]

the time for appeal be expired, as a condition to disqualification. 
This is the same approach as under the disqualification provisions for 
Rules 262 and 506. We believe that the risk that disqualification may 
arise from ex parte proceedings could be better addressed through the 
waiver process,\772\ rather than through additional requirements for 
factual inquiry that would affect all offerings. As for appealable 
orders, we believe that suspending disqualification during the pendency 
of a potentially lengthy appeals process could significantly undermine 
the intended protections in the rules, and therefore, the proposed 
rules would disqualify covered persons during the pendency of the 
appeals.
---------------------------------------------------------------------------

    \771\ See proposed Rule 503(a)(2) of Regulation Crowdfunding.
    \772\ See Section II.E.6.a.iv below for a discussion of the 
waiver process.
---------------------------------------------------------------------------

    With regard to who would be viewed as subject to an order, we 
believe the proposed rules should be applied consistently with the way 
the staff has applied Rule 262. For disqualification purposes, the 
staff has interpreted Rule 262 to limit those considered ``subject to'' 
an order to only the persons specifically named in the order. Others 
who are not specifically named but who come within the scope of an 
order (such as, for example, agents, attorneys and persons acting in 
concert with the named person) would not be treated as ``subject to'' 
the order for purposes of disqualification.
(c) Final Orders of Certain Regulators
    Section 302(d)(2)(B) provides that the disqualification rules for 
transactions made in reliance on Section 4(a)(6) must disqualify any 
covered person that:
    (i) is subject to a final order of a State securities commission 
(or an agency or officer of a State performing like functions), a State 
authority that supervises or examines banks, savings associations, or 
credit unions, a State insurance commission (or an agency or officer of 
a State performing like functions), an appropriate Federal banking 
agency, or the National Credit Union Administration, that--
    (I) bars the person from--
    (aa) association with an entity regulated by such commission, 
authority, agency, or officer;
    (bb) engaging in the business of securities, insurance, or banking; 
or
    (cc) engaging in savings association or credit union activities; or
    (II) constitutes a final order based on a violation of any law or 
regulation that prohibits fraudulent, manipulative, or deceptive 
conduct within the 10-year period ending on the date of filing of the 
offer or sale.
    Section 302(d)(2)(B) is substantively identical to Exchange Act 
Section 15(b)(4)(H) and Section 203(e)(9) of the Investment Advisers 
Act of 1940 (``Advisers Act''). Section 302(d)(2)(B) contains a 10-year 
look-back period for final orders based on violations of laws and 
regulations that prohibit fraudulent, manipulative and deceptive 
conduct, while the Exchange Act and Advisers Act provisions have no 
time limit for such orders.
    The proposed rules would reflect the text of Section 302(d)(2)(B) 
with two clarifications.\773\ First, the proposed rules would specify 
that an order must bar the covered person ``at the time of the filing 
of the information required by Section 4A(b) of the Securities Act of 
1933,'' to clarify that a bar would be disqualifying only for as long 
as it has continuing effect. Second, the proposed rules would require 
that orders must have been ``entered'' within the look-back period, to 
clarify that the date of the order, and not the date of the underlying 
conduct, was relevant for that determination. We believe these 
clarifications would eliminate potential ambiguities and allow for more 
appropriate application of the rules. These clarifications also are 
consistent with the approach in the Rule 506 disqualification rules, 
except that under Securities Act Rule 506(d), the order must bar the 
covered person at the time of the relevant sale, rather than at the 
time of the filing, because no filing is required to be made with the 
Commission prior to the time of a sale made pursuant to Rule 506.
---------------------------------------------------------------------------

    \773\ See proposed Rule 503(a)(3) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules also would include the U.S. Commodity Futures 
Trading Commission (``CFTC'') in the list of regulators whose 
regulatory bars and other final orders will trigger disqualification. 
This is consistent with the approach in the Rule 506 disqualification 
rules. As we noted in the adopting release for Securities Act Rule 
506(d),\774\ the conduct that would typically give rise to CFTC 
sanctions is similar to the type of conduct that would result in 
disqualification if it were the subject of sanctions by another 
financial regulator. For that reason, CFTC orders trigger consequences 
under other Commission statutes \775\ (for example, both registered 
broker-dealers and investment advisers may be subject to Commission 
disciplinary action based on violations of the Commodity Exchange Act 
\776\). We believe that including CFTC orders would make the 
disqualification rules for transactions made in reliance on Section 
4(a)(6) more internally consistent, treating relevant sanctions 
similarly for disqualification purposes, which should enhance the 
effectiveness of the disqualification rules to screen out felons and 
bad actors.
---------------------------------------------------------------------------

    \774\ Disqualification Adopting Release, note 101.
    \775\ See, e.g., Exchange Act Section 15(b)(4)(D) [15 U.S.C. 
78o(b)(4)(D)] and Advisers Act Section 203(e)(5) [15 U.S.C. 80b-
3(e)(5)].
    \776\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------

    In our view, bars are orders issued by one of the specified 
regulators that have the effect of barring a person from: (1) 
Associating with certain regulated entities; (2) engaging in the 
business of securities, insurance or banking; or (3) engaging in 
savings association or credit union activities. We believe that any 
such order that has one of those effects would be a bar, regardless of 
whether it uses the term ``bar.'' \777\ Under the proposed rules, a 
disqualifying order is one that bars the person ``at the time of the 
filing of the information required by Section 4A(b) of the Securities 
Act of 1933'' from one or more of the specified activities. Thus, for 
example, a person who was barred permanently, with the right to apply 
to reassociate after three years, would be disqualified until such time 
as he or she successfully applied to reassociate, assuming that the bar 
had no continuing effect after reassociation. Bars would be 
disqualifying for as long as they are in effect but no longer, matching 
the period of disqualification to the duration of the regulatory 
sanction. The treatment of regulatory bars and orders \778\ is 
different in one relevant respect from court injunctions and 
restraining orders.\779\ Court injunctions and restraining orders would 
be subject to a five-year look-back period, which would function as a 
cut-off (i.e., injunctions and restraining orders issued more than five 
years before the filing required by Section 4A(b) would no longer be 
disqualifying, even if they are still in effect or permanent). This is 
the same approach as under the Rules 262 and 506 disqualification 
rules, and we do not believe that the shift from Regulation A and Rule 
506 offerings to offerings pursuant to Section 4(a)(6) justifies 
extending the time period for disqualifications associated with court 
injunctions and restraining orders.
---------------------------------------------------------------------------

    \777\ Orders that do not have any of those effects are not bars, 
although they may be disqualifying ``final orders.''
    \778\ See proposed Rule 503(a)(3) of Regulation Crowdfunding.
    \779\ See proposed Rule 503(a)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would define a ``final order'' as ``a written 
directive or declaratory statement issued by a

[[Page 66503]]

federal or state agency, described in proposed Rule 503(a)(3) of 
Regulation Crowdfunding, under applicable statutory authority that 
provides for notice and an opportunity for hearing, which constitutes a 
final disposition or action by that federal or state agency.'' \780\ 
This definition is based on the definition that FINRA uses in forms 
related to Exchange Act Section 15(b)(4)(H), which is identical to 
provisions of Section 302(d). Section 302(d) provides that 
disqualification must result from final orders of the relevant 
regulators that are ``based on a violation of any law or regulation 
that prohibits fraudulent, manipulative, or deceptive conduct.'' The 
proposed rules would not, similar to the Rule 506 disqualification 
rules, limit ``fraudulent, manipulative or deceptive conduct'' to 
matters involving scienter. Scienter is not a requirement under 
Exchange Act Section 15(b)(4)(H) or Advisers Act Section 203(e)(9). 
Commission orders are issued under these sections based only on the 
existence of a relevant state or federal regulatory order. The 
Commission has stated that, while the degree of scienter involved is a 
factor in determining what sanction is appropriate,\781\ the Commission 
can order sanctions even where scienter is not an element of the 
underlying state antifraud law violation.\782\ We do not believe it 
would be appropriate to limit the provision to matters involving 
scienter absent a clear statutory directive to do so, particularly when 
the relevant language has been construed in other contexts not to be so 
limited. Moreover, imposing such a limitation may result in excluding 
regulatory orders that are explicitly mandated to be covered by the new 
rules.
---------------------------------------------------------------------------

    \780\ The federal or state agencies described in proposed Rule 
503(a)(3) of Regulation Crowdfunding are the ones identified in 
Section 302(d)(2)(B)(i), with the addition of the CFTC.
    \781\ Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), 
aff'd on other grounds, 450 U.S. 91 (1981).
    \782\ See In the Matter of Mitchell M. Maynard and Dorice A. 
Maynard, Release No. IA-2875 (May 15, 2009).
---------------------------------------------------------------------------

(d) Commission Disciplinary Orders
    Rule 262(b)(3) of Regulation A disqualifies an issuer if any 
covered person is subject to a Commission order ``entered pursuant to 
[S]ection 15(b), 15B(a), or 15B(c) of the Exchange Act, or [S]ection 
203(e) or (f) of the Investment Advisers Act.'' Under these provisions 
(other than Section 15B(a), discussed below), the Commission has 
authority to order a variety of sanctions against registered brokers, 
dealers, municipal securities dealers and investment advisers and their 
associated persons, including suspension or revocation of registration, 
censure, limiting their activities, imposing civil money penalties and 
barring individuals from being associated with specified entities and 
from participating in the offering of any penny stock.
    The proposed rules are based on Rule 262(b)(3) but would not 
include the reference to Section 15B(a) (the basic registration 
requirements for municipal securities dealers).\783\ Section 15B(a) is 
not generally a source of sanctioning authority, and we do not believe 
it is appropriate to refer to it in the context of the proposed 
disqualification rules. This is consistent with the approach in the 
Rule 506 disqualification rules. Under the proposed rules, the 
disqualification would continue only for as long as some act is 
prohibited or required to be performed pursuant to the order (with the 
consequence that censures and orders to pay civil money penalties, 
assuming the penalties are paid in accordance with the order, would not 
be disqualifying, and a disqualification based on a suspension or 
limitation of activities would expire when the suspension or limitation 
expires).
---------------------------------------------------------------------------

    \783\ See proposed Rule 503(a)(4) of Regulation Crowdfunding.
---------------------------------------------------------------------------

(e) Certain Commission Cease-and-Desist Orders
    Section 302(d) mandates that disqualification result from final 
orders issued within a 10-year period by the state and federal 
regulators identified in Section 302(d)(2)(B)(i). These regulators 
include state authorities that supervise banks, savings associations or 
credit unions; state insurance regulators; appropriate federal banking 
agencies; and the National Credit Union Administration. The Commission 
is not included in the list of regulators, and orders issued in stand-
alone Commission cease-and-desist proceedings \784\ are not 
disqualifying under Rule 262.\785\ The reason for this omission appears 
to be largely historical: the Commission did not have authority to 
bring cease-and-desist proceedings when Rule 262 was originally 
adopted, and the rule has not been amended to take that authority into 
account. We believe that adding certain Commission cease-and-desist 
orders to the disqualification provisions would further enhance the 
investor protection intent of the disqualification provisions. This 
approach also would be consistent with the disqualification provisions 
for Rule 506. We believe an injunctive or restraining order issued by a 
federal court and a Commission cease-and-desist order arising out of 
the same legal violation demonstrate equally disqualifying conduct and 
should have the same consequences under our proposed disqualification 
rules. We believe that the determination of disqualification should not 
depend on whether a particular enforcement action is brought in court 
or through a Commission cease-and-desist proceeding. Commission cease-
and-desist orders would be an additional disqualification trigger not 
provided for in Section 302(d). In our view, Section 302(d) does not 
limit the existing authority we previously used to create other bad 
actor provisions, and based on the foregoing reasons, we believe it 
would be appropriate to add Commission cease-and-desist orders to the 
disqualification triggers.
---------------------------------------------------------------------------

    \784\ In cease-and-desist proceedings, the Commission can issue 
orders against ``any person,'' including entities and individuals 
outside the securities industry, imposing sanctions such as 
penalties, accounting and disgorgement or officer and director bars. 
In contrast, administrative proceedings generally are limited to 
regulated entities and their associated persons.
    \785\ The disqualification provisions under Rule 262 also do not 
cover other types of Commission actions. For example, the Commission 
has authority under Section 9(b) of the Investment Company Act to 
bring proceedings against ``any person'' and may impose investment 
company bars, civil penalties and disgorgement under Sections 9(d) 
and (e) of the Investment Company Act. 15 U.S.C. 80a-9(b), (d) and 
(e). The Commission also has authority under Rule 102(e) of its 
Rules of Practice to censure persons (such as accountants and 
attorneys) who appear or practice before it, or to deny them the 
privilege of appearing before the Commission temporarily or 
permanently. 17 CFR 201.102(e). Orders under these sections are not 
disqualifying under Rule 262.
---------------------------------------------------------------------------

    The proposed rules, consistent with the approach for the Rule 506 
disqualification rules, would not include administrative cease-and-
desist orders that do not require any showing or finding of scienter, 
with one exception.\786\ The proposed disqualification trigger only 
would cover Commission orders to cease and desist from violations and 
future violations of the scienter-based anti-fraud provisions of the 
federal securities laws (including, without limitation, Securities Act 
Section 17(a)(1),\787\ Exchange Act Section 10(b) \788\ and Rule 10b-5 
thereunder,\789\ Exchange Act Section 15(c)(1) \790\ and Advisers Act 
Section 206(1) \791\). The only additional disqualification trigger not 
requiring scienter would be Section 5

[[Page 66504]]

violations.\792\ Section 5 imposes a strict liability standard, which 
does not require a finding of scienter.\793\ As a matter of policy, we 
do not believe that the exemption from registration under Section 
4(a)(6) should be made available to persons whose prior conduct has 
resulted in an order to cease and desist from violations of the 
registration requirements of Section 5.
---------------------------------------------------------------------------

    \786\ See proposed Rule 503(a)(5) of Regulation Crowdfunding.
    \787\ 15 U.S.C. 77q(a)(1).
    \788\ 15 U.S.C. 78j(b).
    \789\ 17 CFR 240.10b-5.
    \790\ 15 U.S.C. 78o(c)(1).
    \791\ 15 U.S.C. 80b-6(1).
    \792\ 15 U.S.C. 77e.
    \793\ See SEC v. Ross, 504 F.3d 1130, 1137 (9th Cir. 2007); 
Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir. 1980); SEC v. N. 
Am. Research and Dev. Corp., 424 F.2d 63, 81-82 (2d Cir. 1970); SEC 
v. Pearson, 426 F.2d 1339, 1343 (10th Cir. 1970).
---------------------------------------------------------------------------

    A disqualification based on a Commission cease-and-desist order 
would be subject to the same five-year look-back period that applies to 
court restraining orders and injunctions, rather than the 10-year look-
back that is mandated to apply to other final regulatory orders under 
Section 302(d), which would provide consistent Commission treatment of 
cease-and-desist orders with court orders that we seek. This approach 
is also consistent with the Rule 506 disqualification rules.
(f) Suspension or Expulsion From SRO Membership or Association With an 
SRO Member
    Rule 262(b)(4) disqualifies an offering if any covered person is 
suspended or expelled from membership in, or suspended or barred from 
association with a member of, a self-regulatory organization or ``SRO'' 
(e.g., a registered national securities exchange or national securities 
association) for any act or omission to act constituting conduct 
inconsistent with just and equitable principles of trade.\794\
---------------------------------------------------------------------------

    \794\ See 17 CFR 230.262(b)(4).
---------------------------------------------------------------------------

    The proposed rules would include a reference to a registered 
affiliated securities association \795\ and would apply the standard to 
all covered persons,\796\ but they would not otherwise change the 
substance of Rule 262(b)(4).\797\ Including these changes is the same 
approach as in the Rule 506 disqualification rules.
---------------------------------------------------------------------------

    \795\ An association of brokers and dealers may be registered as 
an affiliated securities association under Exchange Act Section 15A. 
15 U.S.C. 78o-3.
    \796\ Rule 262(b)(4) does not apply to issuers, their 
predecessors or affiliated issuers. 17 CFR 230.262(b)(4).
    \797\ See proposed Rule 503(a)(6) of Regulation Crowdfunding.
---------------------------------------------------------------------------

(g) Stop Orders and Orders Suspending the Regulation A Exemption
    Paragraphs (a)(1) and (2) of Rule 262 disqualify an offering if the 
issuer, or any predecessor or affiliated issuer, has filed a 
registration statement or Regulation A offering statement that was the 
subject of a Commission refusal order, stop order or order suspending 
the Regulation A exemption within the last five years, or is the 
subject of a pending proceeding to determine whether such an order 
should be issued.\798\ Similarly, paragraphs (c)(1) and (2) of Rule 262 
disqualify an offering if any underwriter of the securities proposed to 
be issued was, or was named as, an underwriter of securities under a 
registration statement or Regulation A offering statement that was the 
subject of a Commission refusal order, stop order or order suspending 
the Regulation A exemption within the last five years, or is the 
subject of a pending proceeding to determine whether such an order 
should be issued.\799\
---------------------------------------------------------------------------

    \798\ 17 CFR 230.262(a)(1) and (2).
    \799\ 17 CFR 230.262(c)(1) and (2).
---------------------------------------------------------------------------

    The proposed rules would incorporate the substance of paragraphs 
(a)(1), (a)(2), (c)(1) and (c)(2) of Rule 262 in a single paragraph 
that applies to all covered persons,\800\ resulting in rules that are 
substantially similar to Rule 262. This is the same as the approach in 
the Rule 506 disqualification rules.
---------------------------------------------------------------------------

    \800\ See proposed Rule 503(a)(7) of Regulation Crowdfunding.
---------------------------------------------------------------------------

(h) United States Postal Service False Representation Orders
    Paragraphs (a)(5) and (b)(5) of Rule 262 disqualify an offering if 
the issuer or another covered person is subject to a United States 
Postal Service false representation order, entered within the preceding 
five years, or to a temporary restraining order or preliminary 
injunction with respect to conduct alleged to have violated the false 
representation statute that applies to U.S. mail.\801\
---------------------------------------------------------------------------

    \801\ Paragraph (a)(5) of Rule 262 relates to issuers and their 
predecessors and affiliated issuers, and paragraph (b)(5) of Rule 
262 relates to other covered persons. Disqualification results if 
any covered person ``is subject to a United States Postal Service 
false representation order entered under 39 U.S.C. 3005, within 5 
years prior to the filing of the offering statement, or is subject 
to a temporary restraining order or preliminary injunction entered 
under 39 U.S.C. 3007 with respect to conduct alleged to have 
violated 39 U.S.C. 3005.'' [17 CFR 230.262(a)(5) and (b)(5)].
---------------------------------------------------------------------------

    The proposed rules would incorporate the substance of paragraphs 
(a)(5) and (b)(5) of Rule 262 in a single paragraph,\802\ resulting in 
rules that are substantially similar to Rule 262. This is the same as 
the approach in the Rule 506 disqualification rules.
---------------------------------------------------------------------------

    \802\ See proposed Rule 503(a)(8) of Regulation Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    261. Should we eliminate or modify any of the proposed 
disqualification events? If so, which ones and why? Should additional 
events be disqualifying events? If so, what should constitute a 
disqualifying event and why?
    262. The proposed disqualification for certain criminal convictions 
contemplates a look-back period of five years for criminal convictions 
of issuers (including predecessors and affiliated issuers) and 10 years 
for other covered persons. Should we modify the proposed five- and 10-
year look-back periods? If so, what should the look-back periods be? 
Should the look-back periods be measured from the date of the requisite 
filing with the Commission, as proposed, or the date of the relevant 
sale? Why?
    263. Should we expand or narrow the scope of the coverage of 
criminal convictions? Why or why not?
    264. Is the proposed coverage and look-back period for 
disqualification events relating to court injunctions and restraining 
orders appropriate? Why or why not? Should we impose any due process 
requirements as a condition to disqualification? If so, what should 
those requirements be and why? Should we expand or narrow our proposed 
approach of who would be viewed as subject to an order? Why or why not?
    265. Are the proposed disqualification provisions relating to final 
orders of certain regulators appropriate? Why or why not? The proposed 
rules would add the CFTC to the list of regulators whose regulatory 
bars and other final orders will trigger disqualification. Is this 
addition appropriate? Why or why not? Should we define or provide 
additional guidance about what constitutes a ``bar''? Why or why not? 
Is our proposed definition of ``final order'' appropriate? If not, why 
not and what should it be? Should we limit ``fraudulent, manipulative 
or deceptive conduct'' to matters involving scienter? Why or why not?
    266. Are the proposed disqualification provisions relating to 
Commission disciplinary orders appropriate? Why or why not? Should the 
disqualification continue only for as long as some act is prohibited or 
required to be performed pursuant to the order, as proposed, or should 
we impose a look-back period for Commission disciplinary orders? If we 
should impose a look-back period, how long should that look-back period 
be (e.g. five years, 10 years)?
    267. The proposed disqualification provisions would make certain 
Commission cease-and-desist orders a

[[Page 66505]]

disqualifying event. Is this approach appropriate? Why or why not? 
Should we create a new disqualification trigger for orders of any other 
regulator not identified in Section 302(d)? If so, which regulator and 
why?
    268. Are the proposed disqualification provisions relating to 
suspension or expulsion from SRO membership or association with an SRO 
member appropriate? Why or why not?
    269. Are the proposed disqualification provisions relating to stop 
orders and orders suspending the Regulation A exemption appropriate? 
Why or why not?
    270. Are the proposed disqualification provisions relating to 
United States Postal Service false representation orders appropriate? 
Why or why not?
iii. Reasonable Care Exception
    The proposed rules would include an exception from disqualification 
for offerings in which the issuer establishes that it did not know and, 
in the exercise of reasonable care, could not have known that a 
disqualification existed because of the presence or participation of 
another covered person.\803\ This is the same as the approach in the 
Rule 506 disqualification rules. The proposed reasonable care exception 
should help address the potential difficulty for issuers in 
establishing whether any covered persons are the subject of 
disqualifying events,\804\ particularly given that there is no central 
repository that aggregates information from all the federal and state 
courts and regulatory authorities that would be relevant in determining 
whether covered persons have a disqualifying event in their past. We 
are proposing a reasonable care exception out of concern that the 
benefits of the new exemption under Section 4(a)(6)--which, among other 
things, is intended to alleviate the funding gap and accompanying 
regulatory concerns faced by startups and small businesses in 
connection with raising capital in relatively low dollar amounts--may 
otherwise be substantially reduced. Issuers may be reluctant to offer 
or sell securities in reliance on an exemptive rule if the exemption 
could later be found, despite the issuer's exercise of reasonable care, 
not to have been available. On the other hand, issuers must have a 
responsibility to screen bad actors out of their offerings made in 
reliance on Section 4(a)(6). We believe that providing a reasonable 
care exception would help to preserve the intended benefits of the 
Section 4(a)(6) exemption and avoid creating an undue burden on 
capital-raising activities, while giving effect to the disqualification 
provisions. Although Rule 262 does not contain a reasonable care 
exception, we believe that even with its inclusion, the proposed rules 
would be substantially similar to Rule 262.
---------------------------------------------------------------------------

    \803\ See proposed Rule 503(b)(4) of Regulation Crowdfunding.
    \804\ See also Applied Dynamite Letter (discussing difficulties 
associated with satisfying certain disqualification criteria with 
confidence).
---------------------------------------------------------------------------

    We are proposing that in order for an issuer to establish that it 
had exercised reasonable care, it would need to make a factual inquiry 
into whether any disqualifications existed. The nature and scope of the 
factual inquiry would vary based on the circumstances of the issuer and 
the other offering participants. For example, we believe that issuers 
should have an in-depth knowledge of their own officers and directors, 
which could be gained through the recruiting process and in the course 
of performing their duties. When relevant inquiry has already been 
made, further steps may not be required in connection with a particular 
offering. In the absence of other factors, factual inquiry by means of 
questionnaires or certifications, perhaps accompanied by contractual 
representations, covenants and undertakings, may be sufficient. If the 
circumstances give an issuer reason to question the veracity or 
accuracy of the responses to its inquiries, we believe reasonable care 
would require the issuer to take further steps or undertake additional 
inquiry to provide a reasonable level of assurance that no 
disqualifications apply.
    The timeframe for inquiry also should be reasonable in relation to 
the circumstances of the offering and the participants. The objective 
would be for the issuer to gather information that is complete and 
accurate as of the time of the relevant transactions without imposing 
an unreasonable burden on the issuer or the other offering 
participants. With that in mind, we would expect issuers to determine 
the appropriate cut-off dates to apply when they make a factual 
inquiry, based upon the particular facts and circumstances of the 
offering and the participants involved, to determine whether any 
covered persons are subject to disqualification before seeking to rely 
on the exemption.
Request for Comment
    271. Is it appropriate to have a reasonable care exception from 
disqualification? Why or why not?
    272. In order for an issuer to establish that it had exercised 
reasonable care, the proposed rules would require the issuer to make a 
factual inquiry into whether any disqualifications existed. Is this 
approach appropriate? Why or why not? Should we include in the proposed 
rules additional guidance on what types of factual inquiries should be 
undertaken under the reasonable care standard? If so, what should that 
guidance include? Should we create a cut-off date to apply when issuers 
make a factual inquiry? If so, what should that cut-off date be?
iv. Waivers
    The proposed rules would include a waiver provision based on Rule 
262 under which the Commission could grant a waiver of disqualification 
if it determined that the issuer had shown good cause ``that it is not 
necessary under the circumstances that the [registration] exemption . . 
. be denied.'' Depending on the specific facts, we believe a number of 
circumstances (such as a change of control, change of supervisory 
personnel, absence of notice and opportunity for hearing and relief 
from a permanent bar for a person who does not intend to apply to 
reassociate with a regulated entity) could be relevant to the 
evaluation of a waiver request. The Commission has delegated authority 
to the Director of the Division of Corporation Finance to grant 
disqualification waivers under Regulation A.\805\ Given the expectation 
of a short timeframe for crowdfunding offerings conducted pursuant to 
Section 4(a)(6), we are sensitive to the timeliness of the waiver 
application process and the risk that a lengthy review process may 
disadvantage issuers seeking speedy access to capital. We believe the 
staff has managed the process of granting waivers from Regulation A and 
Rule 505 disqualification appropriately in the past. Accordingly, we 
are proposing to clarify the existing delegation of authority to the 
Director of the Division of Corporation Finance by amending it to cover 
disqualification waivers under Section 4(a)(6).\806\ This also is the 
same approach we took in the context of waivers for the Rule 506 
disqualification rules.
---------------------------------------------------------------------------

    \805\ See Rule 30-1(b) of our Rules of Organization and Program 
Management [17 CFR 200.30-1(b)].
    \806\ See proposed paragraph (d) to Rule 30-1 of our Rules of 
Organization and Program Management.
---------------------------------------------------------------------------

    The proposed rules would provide that disqualification would not 
arise if, before the filing of the information required by Section 
4A(b), the court or regulatory authority that entered the relevant 
order, judgment or decree advises in writing, whether contained in the 
relevant judgment, order or decree or separately to the Commission or 
its staff, that disqualification under Section

[[Page 66506]]

4(a)(6) should not arise as a consequence of such order, judgment or 
decree. Because disqualification would not arise in those 
circumstances, no waiver would be needed. This automatic exception from 
disqualification is similar to that in NASAA's approved Model 
Accredited Investor Exemption (``MAIE''), adopted in 1997, and Uniform 
Limited Offering Exemption (``ULOE''), adopted in 1983 and again in 
1989. Under both the MAIE and ULOE, disqualification is waived if, 
among other things, the regulator issuing the relevant order determines 
that disqualification is not necessary under the circumstances.\807\ We 
believe that including this automatic exception from disqualification 
is appropriate because it allows the relevant authorities to determine 
the impact of their roles, and it conserves Commission resources (which 
might otherwise be devoted to consideration of waiver applications) in 
cases where the relevant authority determines that disqualification 
from offerings made in reliance on Section 4(a)(6) is not warranted. 
This is the same as the approach in the Rule 506 disqualification 
rules.
---------------------------------------------------------------------------

    \807\ See MAIE paragraph (D)(2)(b), available at http://www.nasaa.org/wp-content/uploads/2011/07/24-Model_Accredited_Investor_Exemption.pdf; Peter M. Fass and Derek A. Wittner, Blue 
Sky Practice for Public and Private Direct Participation Offerings, 
Appendix 9A, paragraph B.6 (Thompson Reuters/West 2008).
---------------------------------------------------------------------------

Request for Comment
    273. The proposed rules contemplate that the Commission could grant 
a waiver of disqualification under certain circumstances. Is this 
approach appropriate? Why or why not? What should constitute ``good 
cause'' for purposes of seeking a waiver? Are there specific 
circumstances under which a waiver is appropriate (e.g. change of 
control, change of supervisory personnel, absence of notice and 
opportunity for a hearing)? If so, what are they?
    274. Should we delegate authority to the Director of the Division 
of Corporation Finance to grant disqualification waivers under Section 
4(a)(6), as proposed? Why or why not?
    275. Is it appropriate to include an automatic exception from 
disqualification where the relevant authority concludes that 
disqualification under Section 4(a)(6) should not arise as a 
consequence of such order, judgment or decree, as proposed? If not, why 
not? Should we expand or limit this automatic exception? Please 
explain.
v. Transition Issues
    The proposed rules would specify that disqualification under 
Section 4(a)(6) would not arise as a result of events occurring before 
the effective date of Regulation Crowdfunding, when adopted.\808\ This 
is consistent with the approach we took with respect to the Rule 506 
disqualification rules. We believe this approach would address concerns 
about the potential unfairness of a retroactive application of the 
disqualification provisions, such as to persons who settled actions 
prior to the enactment of the JOBS Act and the adoption of rules to 
implement the JOBS Act.
---------------------------------------------------------------------------

    \808\ See proposed Rule 503(b)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In lieu of imposing disqualification for pre-existing events, the 
proposed rules would require disclosure in the offering materials of 
matters that would have triggered disqualification had they occurred 
after the effective date of proposed Regulation Crowdfunding.\809\ We 
believe this disclosure would put investors on notice of events that 
would, but for the timing of such events, disqualify offerings under 
Section 4(a)(6) that they are evaluating as potential investments. We 
also believe that this disclosure is particularly important because, as 
a result of the implementation of Section 302(d), investors may have 
the impression that all bad actors would now be disqualified from 
participating in offerings under Section 4(a)(6). We expect that 
issuers would give reasonable prominence to the disclosure to ensure 
that information about pre-existing bad actor events would be 
appropriately presented in the total mix of information available to 
investors. If disclosure of a pre-existing, otherwise disqualifying 
event is required and not adequately provided to an investor, we do not 
believe relief would be available under the proposed rules,\810\ which 
provide that insignificant deviations from Regulation Crowdfunding 
requirements would not necessarily result in loss of the exemption.
---------------------------------------------------------------------------

    \809\ See proposed Rule 201(u) of Regulation Crowdfunding.
    \810\ See proposed Rule 502 of Regulation Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    276. Should we impose disqualification for all pre-existing events, 
regardless of whether they occurred before the effectiveness of the 
final rules, or only for events after effectiveness? Why or why not? 
Should we treat different types of pre-existing events differently? Why 
or why not? If so, in either case, how should we address concerns about 
the fairness of retroactive application of the disqualification 
provisions to actions that took place prior to the enactment of the 
JOBS Act and the adoption of rules implementing the JOBS Act?
    277. The proposed rules would specify that disqualification under 
Section 4(a)(6) would not arise as a result of events occurring before 
the effective date of proposed Regulation Crowdfunding. Should we limit 
disqualification to events occurring after the enactment of the JOBS 
Act instead? Why or why not?
    278. Is it appropriate to require disclosure of matters that would 
have triggered disqualification had they occurred after the effective 
date of proposed Regulation Crowdfunding? Is there a better method of 
putting investors on notice of bad actor involvement? If so, what 
method? If disclosure of a pre-existing triggering event is required 
and not adequately provided to an investor, should relief for 
insignificant deviations from Regulation Crowdfunding requirements be 
available? Why or why not?
b. Intermediaries and Certain Other Associated Persons
    As noted above, Section 302(d)(1)(B) requires the Commission to 
establish disqualification provisions under which an intermediary would 
not be eligible to effect or participate in transactions conducted 
pursuant to Securities Act Section 4(a)(6). Section 302(d)(2) requires 
that the disqualification provisions we propose be substantially 
similar to the provisions of Securities Act Rule 262, which applies to 
issuers. Exchange Act Section 3(a)(39) \811\ currently defines the 
circumstances in which a broker would be subject to a ``statutory 
disqualification'' with respect to membership or participation in a 
self-regulatory organization such as FINRA or any other registered 
national securities association. We believe that the definition of 
``statutory disqualification'' under Section 3(a)(39) is substantially 
similar to, while somewhat broader than, the provisions of Rule 
262.\812\
---------------------------------------------------------------------------

    \811\ 15 U.S.C. 78c(39).
    \812\ There are certain differences between Exchange Act Section 
3(a)(39) and Rule 262. For example, while Rule 262 refers to orders 
that had been entered into within five years prior to a filing, 
there is no similar time restriction in Section 3(a)(39). Unlike 
Rule 262, Section 3(a)(39) extends disqualification to persons who, 
by their conduct while associated with brokers or dealers (among 
other types of regulated entities), have been found to be a cause of 
any effective, relevant suspension, expulsion or order. Section 
3(a)(39) also subjects persons to disqualification if they had been 
convicted of, in addition to certain specified offenses related to 
securities and funds, any felony within ten years of filing to apply 
for membership or participation in, or to become associated with a 
member of, an SRO; the comparable provisions of Rule 262 are, in 
contrast, limited to felonies or misdemeanors relating to the 
purchase or sale of securities. Section 3(a)(39) covers suspensions, 
expulsions and orders by both U.S. and non-U.S. regulators and SROs 
(or their equivalents), whereas Rule 262 covers suspensions, 
expulsions and orders by only U.S.-registered SROs, as well as 
orders, judgments and decrees of any court of competent 
jurisdiction. Finally, Rule 262 disqualifies a person, while Section 
3(a)(39) does not, for being subject to a U.S. Postal Service false 
representation order, or subject to a temporary restraining order or 
preliminary injunction, entered under 39 U.S.C. 3005 or 39 U.S.C. 
3007, respectively, within 5 years prior to a filing. Despite these 
differences, we believe that Section 3(a)(39) and Rule 262 are 
substantially similar in particular with regard to the persons and 
events they cover, their scope and their purpose.

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[[Page 66507]]

    The proposed rules would prohibit any person subject to a statutory 
disqualification as defined in Exchange Act Section 3(a)(39) from 
acting as, or being an associated person of, an intermediary unless 
permitted to do so by Commission rule or order.\813\ The term ``subject 
to a statutory disqualification'' has an established meaning under 
Exchange Act Section 3(a)(39) and defines circumstances that would 
subject a person to a statutory disqualification with respect to 
membership or participation in, or association with a member of, a 
self-regulatory organization.\814\ Because funding portals, like 
broker-dealers, would be members of FINRA or any other registered 
national securities association, we anticipate that they would take 
appropriate steps to check the background of any person seeking to 
become associated with them, including whether such person is subject 
to a statutory disqualification. In addition, we propose to clarify 
that associated persons of intermediaries engaging in transactions in 
reliance on Section 4(a)(6) must comply with Exchange Act Rule 17f-2, 
relating to the fingerprinting of securities industry personnel. 
Exchange Act Rule 17f-2 would apply to all brokers, including 
registered funding portals. The proposed instructions to Rule 503(d) 
would clarify that Rule 17f-2 requires that, unless subject to an 
exemption, every broker shall require that each of its partners, 
directors, officers and employees be fingerprinted and shall submit, or 
cause to be submitted, the fingerprints of such persons to the Attorney 
General of the United States or its designee for identification and 
appropriate processing. We believe that consistent standards for all 
intermediaries would assist FINRA or any other registered national 
securities association in monitoring compliance and enforcing its rules 
across its members.
---------------------------------------------------------------------------

    \813\ See proposed Rule 503(d) of Regulation Crowdfunding.
    \814\ Events that could result in a statutory disqualification 
for an associated person under Section 3(a)(39) include, but are not 
limited to: certain misdemeanor and all felony criminal convictions; 
temporary and permanent injunctions issued by a court of competent 
jurisdiction involving a broad range of unlawful investment 
activities; expulsions (and current suspensions) from membership or 
participation in an SRO; bars (and current suspensions) ordered by 
the Commission or an SRO; denials or revocations of registration by 
the CFTC; and findings by the Commission, CFTC or an SRO that a 
person: (1) ``willfully'' violated the federal securities or 
commodities laws, or the Municipal Securities Rulemaking Board 
(MSRB) rules; (2) ``willfully'' aided, abetted, counseled, 
commanded, induced or procured such violations; or (3) failed to 
supervise another who commits violations of such laws or rules. 15 
U.S.C. 78c(a)(39).
---------------------------------------------------------------------------

    We are proposing to apply to intermediaries the standard of Section 
3(a)(39) rather than Rule 262 or the disqualification rules we are 
proposing for issuers, in part because the Section 3(a)(39) standard is 
already an established one among financial intermediaries and their 
regulators. We believe that the practices that have evolved around the 
Section 3(a)(39) standards have evolved in a manner appropriate to 
intermediaries, and that to impose a new or different standard only for 
those intermediaries that engage in transactions in reliance on Section 
4(a)(6), could create confusion and unnecessary burdens on market 
participants. Unnecessary burdens would arise in particular for brokers 
that act as intermediaries in transactions in reliance on Section 
4(a)(6), as they and their associated persons would become subject to 
two distinct standards for disqualification. Consistent standards for 
all brokers and funding portals would also assist FINRA or any other 
registered national securities association in monitoring compliance and 
enforcing its rules across its members.
Request for Comment
    279. Is the standard for ``subject to a statutory 
disqualification'' as defined in Exchange Act Section 3(a)(39) 
appropriate for purposes of establishing disqualification provisions 
for intermediaries in crowdfunding transactions made in reliance on 
Section 4(a)(6)? Why or why not? If another standard would be 
appropriate, why should that standard be used instead of Section 
3(a)(39)? If we were to use another standard for funding portals, 
should we also use that standard for brokers' crowdfunding activities? 
Or, should brokers adhere to the Section 3(a)(39) standard for all 
their activities, including crowdfunding?
    280. Should we instead propose rules that mirror the 
disqualification rules we are proposing for issuers? If we were to take 
this approach, would any particular disqualification provision need to 
be tailored for intermediaries engaging in crowdfunding transactions? 
Are there unintended consequences of having different disqualification 
standards for issuers and for intermediaries? Please explain.
    281. Should any of the differences between Rule 262 and Section 
3(a)(39) be addressed? Why or why not? If so, how should we address 
them?
    282. Should we permit intermediaries to determine how best to 
screen associated persons to ensure they are not subject to a statutory 
disqualification? Why or why not? If so, should we propose particular 
standards, or a level of care, applicable to this screening?
    283. Should we prescribe specific steps that an intermediary must 
take to ascertain whether an associated person should be prohibited 
from participating in or effecting crowdfunding transactions in 
reliance on Section 4(a)(6)? If so, what should those steps be?
    284. Should we permit intermediaries to reasonably rely on the 
representations of associated persons regarding statutory 
disqualification if the intermediary otherwise has conducted a 
background check on the associated person?

F. General Request for Comment

    We request and encourage any interested person to submit comments 
regarding the proposed rules and form amendments, specific issues 
discussed in this release and other matters that may have an effect on 
the proposed rules. We particularly welcome comments from issuers, 
investors, state regulators and other market participants. With regard 
to any comments, we note that such comments are of particular 
assistance to us if accompanied by supporting data and analysis of the 
issues addressed in those comments. We urge commenters to be as 
specific as possible.

III. Economic Analysis

    Title III sets forth a comprehensive regulatory structure for 
startups and small businesses to raise capital through securities 
offerings using the Internet through crowdfunding. In particular, Title 
III provides an exemption from registration for certain offerings of 
securities by adding Securities Act Section 4(a)(6). In addition, Title 
III:
     Adds Securities Act Section 4A, which requires, among 
other things, that issuers and intermediaries that facilitate

[[Page 66508]]

transactions between issuers and investors provide certain information 
to investors and potential investors, take certain actions and provide 
notices and other information to the Commission;
     Adds Exchange Act Section 3(h), which requires the 
Commission to adopt rules to exempt, either conditionally or 
unconditionally, funding portals from having to register as brokers or 
dealers pursuant to Exchange Act Section 15(a)(1);
     Includes disqualification provisions under which an issuer 
would not be able to avail itself of the exemption for crowdfunding if 
the issuer or other related parties, including an intermediary, were 
subject to a disqualifying event; and
     Adds Exchange Act Section 12(g)(6), which requires the 
Commission to adopt rules to exempt from Section 12(g), either 
conditionally or unconditionally, securities acquired pursuant to an 
offering made in reliance on Section 4(a)(6).
    As discussed in detail above, we are proposing Regulation 
Crowdfunding to implement the requirements of Title III. The proposed 
rules would implement the new exemption for the offer and sale of 
securities pursuant to the requirements of Section 4(a)(6) and provide 
a framework for the regulation of issuers and intermediaries, which 
includes brokers and funding portals engaging in such transactions. The 
proposed rules also would exempt securities offered and sold in 
reliance on Section 4(a)(6) from the registration requirements of 
Exchange Act Section 12(g).
    We are mindful of the costs imposed by, and the benefits to be 
obtained from, our rules. Securities Act Section 2(a) and Exchange Act 
Section 3(f) require us, when engaging in rulemaking that requires us 
to consider or determine whether an action is necessary or appropriate 
in the public interest, to consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition and 
capital formation. Exchange Act Section 23(a)(2) requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition and to not adopt any rule that would 
impose a burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The discussion below 
addresses the economic effects of the proposed rules, including the 
likely costs and benefits of proposed Regulation Crowdfunding, as well 
as the likely effect of the proposed rules on efficiency, competition 
and capital formation. Given the specific language of the statute and 
our understanding of Congress's objectives, we believe that it is 
appropriate for the proposed rules to follow the statutory provisions 
closely. We nonetheless also rely on our discretionary authority to 
propose certain additional provisions. While the costs and benefits of 
the proposed rules in large part stem from the statutory mandate of 
Title III, certain costs and benefits are affected by the discretion we 
propose to exercise in connection with implementing this mandate. For 
purposes of this economic analysis, we address the costs and benefits 
resulting from the mandatory statutory provisions and our exercise of 
discretion together, because the two types of benefits and costs are 
not separable.
    We request comment on all aspects of our economic analysis, 
including the potential costs and benefits of the proposed rules.

A. Economic Baseline

    The baseline for our economic analysis of proposed Regulation 
Crowdfunding, including the baseline for our consideration of the 
effects of the proposed rules on efficiency, competition and capital 
formation, is the situation in existence today, in which startups and 
small businesses seeking to raise capital through securities offerings 
must register the offer and sale of securities under the Securities Act 
unless they can rely on an existing exemption from registration under 
the federal securities laws. Moreover, under existing requirements, 
intermediaries intending to facilitate such transactions generally are 
required to register with the Commission as broker-dealers under 
Exchange Act Section 15(a). Finally, under existing exemptions from the 
registration requirements of the Securities Act, small investors may be 
limited in their ability to participate in offerings of securities of 
nonpublic companies.\815\
---------------------------------------------------------------------------

    \815\ For example, only up to 35 non-accredited investors are 
allowed to participate in the most frequently used Regulation D 
exemption, Securities Act Rule 506(b) (17 CFR 230.506(b)), and these 
investors must meet certain sophistication requirements.
---------------------------------------------------------------------------

1. Existing Funding Sources Available to Startups and Small Businesses
    The potential economic impact of the proposed rules, including 
their effect on efficiency, competition and capital formation, will 
depend on how the crowdfunding method of raising capital compares to 
existing methods that startups and small businesses currently use for 
raising capital. Startups and small businesses can potentially tap a 
variety of financing sources in the capital markets: Debt, equity or 
hybrid security offerings; registered or unregistered offerings; and 
bank loans. The figure below plots the capital raising by various 
sources for the period 2009-2012.\816\ As evident from the data, 
significant fundraising in the capital markets takes place via public 
debt, Regulation D offerings (which include equity, debt and hybrid 
security offerings) and Rule 144A offerings (which include 
predominantly debt securities).
---------------------------------------------------------------------------

    \816\ These statistics are based on a review of Form D 
electronic filings with the Commission--specifically, the ``total 
amount sold'' as reported in the filings--and data regarding other 
types of offerings (e.g., public debt offerings and Rule 144A 
offerings) from Securities Data Corporation's New Issues database 
(Thomson Financial). See Vladimir Ivanov and Scott Bauguess, Capital 
Raising in the U.S.: An Analysis of Unregistered Offerings Using the 
Regulation D Exemption, 2009-2012 (July 2013) (``Ivanov/Bauguess 
Study''), available at http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf. Data on new bank 
loans per year is not available.

---------------------------------------------------------------------------

[[Page 66509]]

[GRAPHIC] [TIFF OMITTED] TP05NO13.002

    Startups and small businesses seeking to raise capital can register 
the offer and sale of securities under the Securities Act. Registered 
offerings, however, are generally too costly to be viable alternatives 
for startups and small businesses. In particular, issuers conducting 
registered offerings must usually pay underwriter commissions, which 
are, on average, 7% for initial public offerings, 5.4% for follow-on 
equity offerings and between 0.9% and 1.5% for issuers raising capital 
through public bond issuances.\817\ Issuers conducting registered 
offerings also must pay Commission registration fees and FINRA or any 
other registered national securities association filing fees, legal and 
accounting fees and expenses, transfer agent and registrar fees, costs 
associated with periodic reporting requirements and other regulatory 
requirements and various other fees. Two surveys concluded that the 
average cost of achieving initial regulatory compliance for an initial 
public offering is $2.5 million, followed by an ongoing compliance 
cost, once public, of $1.5 million per year.\818\ Hence, for an issuer 
seeking to raise less than $1 million, a registered offering is not 
economically feasible if it would cost an estimated $2.5 million, on 
average, to achieve initial regulatory compliance for an initial public 
offering.\819\
---------------------------------------------------------------------------

    \817\ See, e.g., Hsuan-Chi Chen and Jay R. Ritter, The Seven 
Percent Solution, 55 J. Fin. 1105-1131 (2000); Shane A. Corwin, The 
Determinants of Underpricing for Seasoned Equity Offers, 58 J. Fin. 
2249-2279 (2003); Lily Hua Fang, Investment Bank Reputation and the 
Price and Quality of Underwriting Services, 60 J. Fin. 2729-2761 
(2005); Stephen J. Brown, Bruce D. Grundy, Craig M. Lewis and 
Patrick Verwijmeren, Convertibles and Hedge Funds as Distributors of 
Equity Exposure, 25 Rev. Fin. Stud. 3077-3112 (2012).
    \818\ See IPO Task Force, Rebuilding the IPO On-Ramp, at 9 (Oct. 
20, 2011), available at http://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (``IPO Task Force'').
    \819\ See id.
---------------------------------------------------------------------------

    The alternative to raising capital via registered offerings is for 
startups and small businesses to offer and sell securities by relying 
on an existing exemption from registration under the federal securities 
laws. For example, they could rely on current exemptions from 
registration under the Securities Act, such as Section 3(a)(11), 
Section 4(a)(2),\820\ Regulation D \821\ and Regulation A.\822\ While 
we do not have complete data on offerings relying on an exemption under 
Section 3(a)(11) or Section 4(a)(2), certain data available from 
Regulation D and Regulation A filings allow us to gauge how frequently 
issuers use these exemptions when raising capital. Based on Regulation 
D filings by non-fund issuers \823\ from 2009 to 2012, there are a 
substantial number of issuers who choose to raise capital by relying on 
Rule 506 even though their offering size would qualify for an exemption 
under Rule 504 or Rule 505.\824\ With the recent amendment to Rule 506 
of Regulation D that permits an issuer to engage in general 
solicitation or general advertising in offering and selling securities 
pursuant to Rule 506, subject to certain conditions,\825\ we expect to 
see an even higher percentage of issuers relying on that rule. As shown 
in the table below reporting the number of Regulation D and Regulation 
A offerings by non-fund issuers, from 2009 to 2012, relatively few 
issuers rely on Regulation A.
---------------------------------------------------------------------------

    \820\ Securities Act Section 4(a)(2) provides that the 
provisions of the Securities Act shall not apply to ``transactions 
by an issuer not involving a public offering.''
    \821\ Regulation D provides a nonexclusive safe harbor from 
registration for certain types of securities offerings.
    \822\ Regulation A provides a conditional exemption from 
registration for certain small issuances.
    \823\ These are issuers that are not pooled investment vehicles.
    \824\ This tendency could, in part, be attributed to two 
features of Rule 506: Blue Sky law preemption and an unlimited 
offering amount. See also U.S. Government Accountability Office, 
Factors That May Affect Trends in Regulation A Offerings, GAO-12-839 
(Jul. 3, 2012), available at http://www.gao.gov/products/GAO-12-839 
(``GAO Report'').
    \825\ See General Solicitation Adopting Release, note 12.

----------------------------------------------------------------------------------------------------------------
                                                                                 Offering size
                                                             ---------------------------------------------------
                                                                  < $1         $1-5        $5-50         >$50
                                                                Million      million      million      million
----------------------------------------------------------------------------------------------------------------
Rule 504....................................................        1,997
Rule 505....................................................          705          229
Rule 506....................................................       19,424       11,957        8,103        1,268

[[Page 66510]]

 
Regulation A................................................            2           14
----------------------------------------------------------------------------------------------------------------
Note: Data comes from Form D and Form 1-A filings from 2009 to 2012. We consider only new offerings and exclude
  offerings with amount sold reported as $0 on Form D. We also use the maximum amount indicated in Form 1-A to
  determine offering size for Regulation A offerings.

    Each of these exemptions, however, includes restrictions that may 
limit its suitability for startups and small businesses. The table 
below lists the main requirements of these exemptions. For example, the 
exemption under Securities Act Section 3(a)(11) is limited to 
intrastate offerings,\826\ and an issuer seeking to offer and sell 
securities pursuant to Regulation A may be required to register in all 
50 states if it intends to offer and sell the securities in all 50 
states using the Internet. An issuer relying on Regulation A also would 
need to file with the Commission an offering document, which, coupled 
with the potential review of such document by the staff, has been cited 
as a reason why Regulation A is not widely used.\827\ Issuers of 
securities pursuant to Securities Act Section 4(a)(2) and Rules 504, 
505 and 506(b) under Regulation D generally may not engage in general 
solicitation and general advertising to reach potential investors, 
which also could place a significant limitation on offerings by 
startups and small businesses. Although an issuer may avoid the 
restriction on general solicitation and general advertising by using 
the services of a financial intermediary, those services may be 
costly.\828\ While Rule 506 under Regulation D preempts the 
applicability of state laws regarding the offer and sale of securities 
and new Rule 506(c) permits general solicitation and general 
advertising, an issuer seeking to rely on Rule 506(c) would be limited 
to selling securities only to accredited investors.\829\
---------------------------------------------------------------------------

    \826\ Under Securities Act Section 3(a)(11), except as expressly 
provided, the provisions of the Securities Act (including the 
registration requirement under Securities Act Section 5) do not 
apply to a security that is ``part of an issue offered and sold only 
to persons resident within a single State or Territory, where the 
issuer of such security is a person resident and doing business 
within, or, if a corporation, incorporated by and doing business 
within, such State or Territory.''
    \827\ See Rutheford B. Campbell, Jr., Regulation A: Small 
Businesses' Search for ``A Moderate Capital'', 31 Del. J. Corp. L. 
77, 106 (2006). See also GAO Report, note 824.
    \828\ An internal study by our Division of Economic and Risk 
Analysis covering 2009 to 2012 found that the average sales 
commission for Regulation D offerings for up to $1 million was 6.5%, 
almost three times larger than that for offerings of more than $50 
million (1.9%). See Ivanov/Bauguess Study, note 816.
    \829\ See General Solicitation Adopting Release, note 12.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Issuer and
        Type of offering             Dollar limit     Manner of offering       investor       Filing requirement    Restriction on    Blue sky exemption
                                                                             requirements                               resale
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 3(a)(11)................  None..............  No limitation       All issuers and     None..............  Rests within the    Need to comply
                                                       other than to       investors must be                       state (generally    with state blue
                                                       maintain            resident in                             a one-year period   sky law by
                                                       intrastate          state. No                               for resales         registration or
                                                       character of        limitation on                           within state).      state exemption.
                                                       offering.           number.
Section 4(a)(2).................  None..............  No general          All issuers and     None..............  Restricted          Need to comply
                                                       solicitation or     investors must                          securities.         with state blue
                                                       advertising.        meet                                                        sky law.
                                                                           sophistication
                                                                           and access to
                                                                           information test
                                                                           so as not to need
                                                                           protection of
                                                                           registration.
Regulation A....................  $5,000,000 within   ``Testing the       No requirements...  File test the       None; freely        Need to comply
                                   prior 12 months,    waters''                                waters documents,   resalable.          with state blue
                                   but no more than    permitted before                        Form 1-A, any                           sky law.
                                   $1,500,000 by       filing Form 1-A.                        sales material
                                   selling security    Sales permitted                         and Form 2-A
                                   holders.            after Form 1-A                          report of sales
                                                       qualified.                              and use of
                                                                                               proceeds with the
                                                                                               Commission.

[[Page 66511]]

 
Rule 504........................  $1,000,000 within   No general          No requirements...  File Form D with    Restricted unless   Need to comply
Regulation D....................   prior 12 months.    solicitation or                         the Commission      registered in a     with state blue
                                                       advertising                             not later than 15   state requiring     sky law by
                                                       unless registered                       days after first    use of a            registration or
                                                       in a state                              sale. Filing not    substantive         state exemption.
                                                       requiring use of                        a condition of      disclosure
                                                       a substantive                           the exemption.      document or sold
                                                       disclosure                                                  under state
                                                       document or sold                                            exemption for
                                                       under state                                                 sale to
                                                       exemption for                                               accredited
                                                       sales to                                                    investors with
                                                       accredited                                                  general
                                                       investors with                                              solicitation.
                                                       general
                                                       solicitation.
Rule 505........................  $5,000,000 within   No general          Unlimited           File Form D with    Restricted          Need to comply
Regulation D....................   prior 12 months.    solicitation or     accredited          the Commission      securities.         with state blue
                                                       advertising.        investors and 35    not later than 15                       sky law.
                                                                           non-accredited      days after first
                                                                           investors.          sale. Filing not
                                                                                               a condition of
                                                                                               the exemption.
Rule 506........................  None..............  No general          Under Rule 506(b),  File Form D with    Restricted          Exempt as
Regulation D....................                       solicitation or     unlimited           SEC not later       securities.         ``covered
                                                       advertising under   accredited          than 15 days                            security''
                                                       Rule 506(b).        investors and 35    after first sale.                       pursuant to
                                                      General              non-accredited      Filing not a                            Securities Act
                                                       solicitation and    investors. Under    condition of the                        Section 18 [15
                                                       general             Rule 506(c), all    exemption.                              U.S.C. 77r].
                                                       advertising         purchasers must
                                                       permitted under     be accredited
                                                       Rule 506(c),        investors.
                                                       provided all
                                                       purchasers are
                                                       accredited
                                                       investors.
--------------------------------------------------------------------------------------------------------------------------------------------------------

2. Current Sources of Funding for Startups and Small Businesses That 
Could Be Substitutes or Complements to Crowdfunding
    At present, startups and small businesses can raise capital through 
several sources that could be close substitutes or complements to 
crowdfunding transactions that rely on Section 4(a)(6). These sources 
are either based on unregistered securities offerings or involve 
lending by financial institutions.
a. Family and Friends
    Family and friends are sources through which startups and small 
businesses can raise capital. This source of capital is usually 
available early in the lifecycle of a small business, before the 
business approaches arm's-length formal financial channels.\830\ Among 
other things, family and friends may donate funds, loan funds or 
acquire an equity stake in the business. A recent study of the 
financing choices of startups finds that most of the capital supplied 
by friends and family is in the form of loans.\831\ In contrast to a 
commercial lender that, for example, would need to assess factors such 
as the willingness and ability of a borrower to repay the loan and the 
viability of its business, family and friends may be willing to assist 
based primarily or solely upon personal relationships. Family and 
friends, however, may be able to provide only a limited amount of 
capital compared to other sources. In addition, financial arrangements 
with family and friends may not be an optimal source of funding if any 
of the parties is untrained in the structuring of loan agreements, 
equity investments or in related areas of accounting. Unfortunately, 
there is no available data on these financing sources that could allow 
us to quantify their magnitude and compare them to other current 
sources of capital.
---------------------------------------------------------------------------

    \830\ See Paul Gompers and Josh Lerner, The Venture Capital 
Cycle (MIT Press 2006) (``Gompers''); Alicia M. Robb and David T. 
Robinson, The Capital Structure Decisions of New Firms, Rev. Fin. 
Stud. (forthcoming), available at http://rfs.oxfordjournals.org/content/early/2012/07/07/rfs.hhs072.full.pdf+html (``Robb'').
    \831\ See Robb, note 830.
---------------------------------------------------------------------------

b. Commercial Loans, Peer-to-Peer Loans and Microfinance
    Startups and small businesses also may seek loans from financial 
institutions.\832\ A recent study of the financing choices of startups 
suggests that they resort to bank financing early in their 
lifecycle.\833\ The study finds that businesses rely heavily on 
external debt sources such as bank financing in the first year after 
being formed, which comes mostly in the form of personal and commercial 
bank loans, business

[[Page 66512]]

credit cards and credit lines. Another recent report, however, suggests 
that bank lending to small businesses fell by $100 billion from 2008 to 
2011 and that by 2012, less than one-third of small businesses reported 
having a business bank loan.\834\ Our analysis of lending data from 
FDIC-insured depository institutions from June 30, 2006 until June 30, 
2013 also shows that both small business loans (those for up to a $1 
million) and large business loans (those greater than $1 million) 
experienced a decline from the peak in 2008.\835\ Small business loans, 
however, declined continuously over the period by approximately 18% 
from 2008 until 2013. Large business loans, on the other hand, range 
from a high of $2,440 billion in 2008 to a low of $1,924 billion in 
2010. The figure shows that this segment of the loan market has shown 
steady increases since 2010.
---------------------------------------------------------------------------

    \832\ Using data from the 1993 Survey of Small Business Finance, 
one seminal study indicates that financial institutions account for 
approximately 27% of small firms' borrowings. See Allen N. Berger 
and Gregory F. Udell, The Economics of Small Business Finance: The 
Roles of Private Equity and Debt Markets in the Financial Growth 
Cycle, 22 J. Banking & Fin. 613 (1998). See also 1987, 1993, 1998 
and 2003 Surveys of Small Business Finances, available at http://www.federalreserve.gov/pubs/oss/oss3/nssbftoc.htm. The Survey of 
Small Business Finances was discontinued after 2003. Using data from 
the Kauffman Foundation Firm Surveys, one study finds that 44% of 
startups use loans from financial institutions. See Rebel A. Cole 
and Tatyana Sokolyk, How Do Start-Up Firms Finance Their Assets? 
Evidence from the Kauffman Firm Surveys (2012), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2028176.
    \833\ See Robb, note 830.
    \834\ See The Kauffman Foundation, 2013 State of 
Entrepreneurship Address (Feb. 5, 2013), available at http://www.kauffman.org/uploadedFiles/DownLoadableResources/SOE%20Report_2013pdf.pdf. The report cautions against prematurely concluding that 
banks are not lending enough to small businesses as the sample 
period of the study includes the most recent recession.
    \835\ We define business loans to include commercial and 
industrial loans and commercial real estate loans. See Federal 
Deposit Insurance Corporation, Statistics on Banking, available at 
http://www2.fdic.gov/SDI/SOB/.
[GRAPHIC] [TIFF OMITTED] TP05NO13.003

    Additionally, although covering the pre-recessionary period, a 
Federal Reserve Board staff study analyzing data from the 2003 Survey 
of Small Business Finance suggests that 60 percent of small businesses 
have outstanding credit in the form of a credit line, a loan or a 
capital lease.\836\ These loans were borrowed from two types of 
financial institutions--depositary and non-depositary institutions 
(e.g., finance companies, factors or leasing companies).\837\ Lines of 
credit were the most widely used type of credit.\838\ Other types of 
loans included mortgage loans, equipment loans and motor vehicle 
loans.\839\
---------------------------------------------------------------------------

    \836\ See Federal Reserve Board, Financial Services Used by 
Small Businesses: Evidence from the 2003 Survey of Small Business 
Finances (October 2006), available at http://www.federalreserve.gov/pubs/bulletin/2006/smallbusiness/smallbusiness.pdf (``2003 
Survey'').
    \837\ See Rebel Cole, What Do We Know About the Capital 
Structure of Privately Held Firms? Evidence from the Surveys of 
Small Business Finance (Working Paper) (Feb. 2013), available at 
http://onlinelibrary.wiley.com/doi/10.1111/fima.12015/pdf.
    \838\ See 2003 Survey, note 836 (estimating that 34% of small 
businesses use lines of credit).
    \839\ Id.
---------------------------------------------------------------------------

    Various loan guarantee programs of the Small Business 
Administration (``SBA'') make credit more accessible to small 
businesses by either lowering the interest rate of the loan or enabling 
a market-based loan that a lender would not otherwise be willing to 
provide, absent a guarantee.\840\ Although the SBA does not itself act 
as a lender, the agency guarantees a portion of loans made and 
administered by commercial lending institutions. SBA loan programs 
include 7(a) loans,\841\ CDC/504 loans \842\ and Microloans.\843\ For 
example, in fiscal year 2011, the SBA approved approximately $30.5 
billion in 7(a) and CDC/504 loans, which were distributed to 
approximately 54,500 small businesses.\844\ The SBA, however, currently 
accounts for a small part of the overall small business lending in the 
United States, administering less than 2 percent of all small business 
loans.\845\
---------------------------------------------------------------------------

    \840\ Numerous states also offer a variety of small business 
financing programs, such as Capital Access Programs, collateral 
support programs and loan guarantee programs. These programs are 
eligible for support under the State Small Business Credit 
Initiative, available at http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci.aspx.
    \841\ 15 U.S.C. 631 et seq. The 7(a) loans provide small 
businesses with financing guarantees for a variety of general 
business purposes through participating lending institutions.
    \842\ 15 U.S.C. 695 et seq. The CDC/504 loans are made available 
through ``certified development companies'' or ``CDCs'', typically 
structured with the SBA providing 40% of the total project costs, a 
participating lender covering up to 50% of the total project costs 
and the borrower contributing 10% of the project costs.
    \843\ 15 U.S.C. 631 et seq. The Microloan program provides 
small, short-term loans to small businesses and certain types of 
not-for-profit childcare centers. The maximum loan amount is 
$50,000, but the average microloan is about $13,000. See Microloan 
Program, U.S. Small Business Administration, available at http://www.sba.gov/content/microloan-program.
    \844\ See U.S. Small Business Administration, FY 2013 
Congressional Budget Justification And FY 2011 Annual Performance 
Report (``2011 Annual Performance Report''), available at http://www.sba.gov/sites/default/files/files/1-508%20Compliant%20FY%202013%20CBJ%20FY%202011%20APR%281%29.pdf.
    \845\ One article notes that as of September 2012, the SBA 
managed 318,396 ($79 billion) loans, while there were 17,249,884 
($646 billion) small-business loans on the books of banks insured by 
the FDIC. By this measure, the SBA managed 1.85% (12.23% in dollar 
volume) of all small-business loans. See Ami Kassar, Putting the 
S.B.A. Into Perspective, N.Y. Times, Sept. 14, 2012, available at 
http://boss.blogs.nytimes.com/2012/09/14/putting-the-s-b-a-into-perspective/. The SBA recently proposed rule amendments to increase 
eligibility for loans under the SBA's business loan programs. See 
SBA 504 and 7(a) Regulatory Enhancements, 13 CFR 120 (proposed Feb. 
25, 2013).
---------------------------------------------------------------------------

    Many startups and small businesses may find loan requirements 
imposed by financial institutions difficult to meet and may not be able 
to rely on these institutions to secure funding. For example, financial 
institutions generally require a borrower to provide collateral

[[Page 66513]]

and/or a guarantee,\846\ which startups, small businesses and their 
owners may not be able to provide. Collateral may be required even for 
loans guaranteed by the SBA.
---------------------------------------------------------------------------

    \846\ Approximately 92% of all small business debt to financial 
institutions is secured, and about 52% of that debt is guaranteed, 
primarily by the owners of the firm. See Berger, note 832.
---------------------------------------------------------------------------

    Another source of debt financing for startups and small businesses 
is peer-to-peer lending, which, according to one study, began 
developing in 2005.\847\ Peer-to-peer lending Web sites facilitate debt 
transactions by directly connecting borrowers and lenders over the 
Internet. While data on the size of the overall industry is sparse, 
peer-to-peer lending was estimated to have reached approximately $647 
million in 2009 and was expected to grow to $5.8 billion by 2010.\848\ 
Although this source of funding is small relative to the role of 
financial institutions, peer-to-peer lending sites may offer small 
businesses more flexibility with regard to pricing, terms of credit, 
repayment schedules and other conditions. Moreover, peer-to-peer 
lending sites may not require borrowers to post collateral or a 
guarantee, and some market participants offer a secondary market for 
loans originated on their own sites.\849\ At least one of the existing 
peer-to-peer platforms sells third-party issued securities to multiple 
individual investors, thus improving the liquidity of these 
securities.\850\ Like any traditional lending arrangement, however, 
borrowers on peer-to-peer lending sites are required to make fixed 
regular payments to their lenders, which might make it a less 
attractive option for small businesses with negative cash flows and 
short operating histories, both of which may make it more difficult for 
such businesses to demonstrate their ability to repay loans.
---------------------------------------------------------------------------

    \847\ See Ian Galloway, Peer-to-Peer Lending and Community 
Development Finance, Federal Reserve Bank of San Francisco (Working 
Paper) (2009), available at http://www.frbsf.org/publications/community/wpapers/2009/wp2009-06.pdf.
    \848\ Id.
    \849\ Id.
    \850\ Id. We note that under current law, this activity would 
require broker-dealer registration.
---------------------------------------------------------------------------

    Microfinance also is another source of debt financing for startups 
and small businesses. Microfinance consists of small, working capital 
loans provided by microfinance institutions (``MFIs'') that are 
invested in microenterprises or income-generating activities.\851\ The 
typical users of microfinance services and, in particular, of 
microcredits are family-owned enterprises or self-employed, low-income 
entrepreneurs, such as street vendors, farmers, service providers, 
artisans and small producers, who live close to the poverty line in 
both urban and rural areas.\852\
---------------------------------------------------------------------------

    \851\ See Craig Churchill and Cheryl Frankiewicz, Making 
Microfinance Work: Managing for Improved Performance, Geneva 
International Labor Organization (2006).
    \852\ See Joanna Ledgerwood, Microfinance Handbook: An 
Institutional and Financial Perspective, Washington DC, World Bank 
Publications (1999).
---------------------------------------------------------------------------

    The microfinance market has evolved and grown considerably in the 
past decades. While data on the size of the overall industry is sparse, 
in 2008, it was estimated that there were between 7,000 and 10,000 MFIs 
globally that supplied an estimated $15 to $25 billion in loans.\853\ 
In the U.S., there were about 362 MFIs who disbursed 9,100 loans for a 
total value of $100 million.\854\ On average, U.S. microloans are 
relatively larger with lower interest rates than those of microloans in 
developing countries. One distinctive characteristic of the U.S. model 
of microfinance is that MFIs provide borrowers not only with funds, but 
also with educational services to build entrepreneurial and leadership 
skills.\855\
---------------------------------------------------------------------------

    \853\ See Sam Daley-Harris, State of Microcredit Summit Campaign 
Report 2009, Washington DC, Microcredit Summit Campaign (2009).
    \854\ See FIELD at the Aspen Institute, Key Data on the Scale of 
Microlending in the U.S. (February 2011).
    \855\ Id. at 4 and 13.
---------------------------------------------------------------------------

c. Venture Capitalists and Angel Investors
    Startups and small businesses also may seek funding from venture 
capitalists (``VCs'') and angel investors. Entrepreneurs seek VC and 
angel financing usually after they have exhausted other sources of 
capital that generally do not require the entrepreneurs to relinquish 
control rights (for example, personal funds and funds from family and 
friends, if available).
    As the chart below shows, according to data from the National 
Venture Capital Association, in 2012, VCs invested approximately $27 
billion in approximately 3,800 deals that included seed, early-stage, 
expansion, and late-stage companies.\856\
---------------------------------------------------------------------------

    \856\ See National Venture Capital Association, Recent Stats & 
Studies, available at http://www.nvca.org/index.php?option=com_content&view=article&id=344&Itemid=103.
[GRAPHIC] [TIFF OMITTED] TP05NO13.004


[[Page 66514]]


    Some startups, however, may struggle to attract funding from VCs 
because VCs tend to invest in startups with certain characteristics. A 
defining feature of VCs is that they tend to focus exclusively on 
startup companies with high-growth potential and a high likelihood of 
going public after a few years of financing. VCs also tend to invest in 
companies that have already used some other sources of financing, tend 
to be concentrated in certain geographic regions (e.g., California and 
Massachusetts) and often require their investments to have an 
attractive business plan, meet certain growth benchmarks or fill a 
specific portfolio or industry niche.\857\ In addition, when investing 
in companies, VCs tend to acquire significant control rights (e.g., 
board seats, rights of first refusal, etc.), which they gradually 
relinquish as the company approaches an initial public offering.\858\
---------------------------------------------------------------------------

    \857\ See Gompers, note 830.
    \858\ See Steven N. Kaplan and Per Stromberg, Financial 
Contracting Meets the Real World: An Empirical Analysis of Venture 
Capital Contracts, 70 Rev. Econ. Stud. 281-316 (2003).
---------------------------------------------------------------------------

    According to a trade association, the Angel Capital Association, in 
2006, the 5,632 accredited angel investors in its member groups made 
947 investments in 512 companies, providing startups with a total of 
$228.8 million.\859\ A study suggests that angel investors tend to 
invest in younger companies than VCs.\860\ We do not have more detailed 
data on the amount of angel investments in more recent years.
---------------------------------------------------------------------------

    \859\ See Scott Shane, The Importance of Angel Investing in 
Financing the Growth of Entrepreneurial Ventures, 2 Q. J. of Fin. 
(2012).
    \860\ See Gompers, note 830.
---------------------------------------------------------------------------

d. Current Crowdfunding Practices
    Currently in the United States, crowdfunding activity generally is 
lending-based, ``reward-based'' or ``donation-based,'' as defined by a 
recent crowdfunding industry report.\861\ The report defines reward-
based crowdfunding as a model where funders receive a ``reward,'' such 
as a token or a manufactured product sample, and it defines donation-
based crowdfunding as a model where funders donate to causes that they 
want to support, with no expected compensation or return on their 
investment. Many of the current domestic crowdfunding offerings relate 
to individual projects and may not have a defined or sustained business 
model commensurate with typical issuers of securities. The industry 
report finds that more than half of all projects on one of the largest 
domestic crowdfunding sites during the period 2009 through 2011 
involved film and musical endeavors.\862\
---------------------------------------------------------------------------

    \861\ See Massolution, Crowdfunding Industry Report: Market 
Trends, Composition and Crowdfunding Platforms (Abridged) (May 
2012), available at http://www.crowdsourcing.org/document/crowdfunding-industry-report-abridged-version-market-trends-composition-and-crowdfunding-platforms/14277 (``Massolution''). 
Lending-based crowdfunding includes peer-to-peer lending, a funding 
source that is discussed above. Id.
    \862\ Id.
---------------------------------------------------------------------------

    According to the industry report, approximately $1.5 billion in 
financing was raised through crowdfunding platforms during 2011, with 
over half of that amount raised in the United States, although only 
approximately $174 million was attributable to ``equity-based'' (or the 
equity model of crowdfunding) and ``reward-based'' crowdfunding.\863\ 
The industry report further states that equity-based crowdfunding is 
the fastest-growing of all the crowdfunding categories, at a 114% 
compound annual growth rate (``CAGR'') in 2011.\864\ According to the 
report, the rapid growth in equity-based crowdfunding has been driven 
largely by European platforms.\865\
---------------------------------------------------------------------------

    \863\ One observer stated that most of the $1.5 billion in 
financing cited in the Massolution industry report was attributable 
to ``donation-based'' and ``lending-based'' crowdfunding. See Felix 
Salmon, Annals of Dubious Statistics, Crowdfunding Edition, REUTERS 
(July 27, 2012), available at http://blogs.reuters.com/felix-salmon/2012/07/27/annals-of-dubious-statistics-crowdfunding-edition. 
Another observer reported that Massolution CEO Carl Esposti 
clarified that the amount directly attributed to reward-based and 
equity-based crowdfunding is $174 million. See Liz Gannes, Widely 
Cited Crowdfunding Market Estimates Are Probably Too Optimistic, 
ALLTHINGSD (July 28, 2012), available at http://allthingsd.com/20120728/crowdfunding-market-nearly-10-times-smaller-than-widely-cited-estimate.
    \864\ See Massolution, note 861 at 17. By comparison, ``reward-
based'' crowdfunding had a 79% CAGR in 2011, while ``lending-based'' 
crowdfunding and ``donation-based'' crowdfunding had CAGRs of 50% 
and 41%, respectively.
    \865\ Id.
---------------------------------------------------------------------------

    According to the industry report, most current crowdfunding 
projects solicit low levels of funding, with the average successful 
project receiving less than $10,000.\866\ The industry report also 
states that, in 2011, equity-based offerings were, on average, much 
larger than donation-based offerings, with 68% of total funds raised on 
equity-based crowdfunding platforms drawing $50,000 or more in 
financing, suggesting that the types of ventures financed through 
equity-based crowdfunding could be different than those financed 
through other crowdfunding methods.\867\ Because the prohibition on 
general solicitation and general advertising (which was recently lifted 
for offerings made in reliance on Rule 506(c) of Regulation D \868\) 
would have made equity-based crowdfunding difficult in the United 
States, we assume that the data for equity-based crowdfunding comes 
from offerings outside the United States.
---------------------------------------------------------------------------

    \866\ Id. at 20-21.
    \867\ Id. at 20-21.
    \868\ See General Solicitation Adopting Release, note 12.
---------------------------------------------------------------------------

    We are unaware of any domestic issuers and investors that are 
currently participating in securities-based crowdfunding offerings on 
Internet-based crowdfunding platforms that are operating outside of the 
United States (other than offerings made in reliance on Rule 506(c) of 
Regulation D), although we recognize that these platforms may represent 
an additional source of funding for startups and small businesses.
3. Survival Rates for Startups and Small Businesses
    Startups and small businesses that lack tangible assets or business 
experience needed to obtain conventional financing might turn to 
securities-based crowdfunding in reliance on Section 4(a)(6) as an 
attractive potential source of financing. There is broad evidence that 
many of these potential issuers are likely to fail after receiving 
funding. For example, a 2010 study reports that of a random sample of 
4,022 new high-technology businesses started in 2004, only 68% survived 
by the end of 2008.\869\ Other studies also have documented high 
failure rates for small newly listed companies. For example, the ten-
year delist rate for newly listed firms during the period 1981-1991 is 
44.1%, compared to 16.9% for newly listed firms in the 1970s.\870\
---------------------------------------------------------------------------

    \869\ See Alicia Robb, E.J. Reedy, Janice Ballou, David 
DesRoches, Frank Potter and Zhanyun Zhao, An Overview of the 
Kauffman Firm Survey: Results from the 2004-2008 Data, Kauffman 
Foundation (``Kauffman Firm Survey''), available at http://www.kauffman.org/uploadedFiles/kfs_2010_report.pdf.
    \870\ See Eugene F. Fama and Kenneth R. French, New Lists: 
Fundamentals and Survival Rates, 73 J. of Fin. Econ. 229-269 (2004).
---------------------------------------------------------------------------

    Similarly, other studies suggest that startups and small businesses 
financed by venture capitalists also tend to have high failure rates. 
One study finds that for 16,315 VC-backed companies that received their 
first institutional funding round between 1980 and 1999, approximately 
one-third failed after the first funding round.\871\ Additionally a 
recent study of more than 2,000 companies that received at least $1 
million in venture funding, from 2004 through 2010, finds that almost 
three-quarters of these companies failed.\872\

[[Page 66515]]

These failure rates are high, despite the involvement of sophisticated 
investors like VCs that are likely better equipped than the average 
retail investor to deal with uncertainty and risk associated with 
investments in startups and that generally specialize in selecting 
firms with good prospects, have direct access to management, have board 
representation and have at least some degree of control over operating 
decisions.
---------------------------------------------------------------------------

    \871\ See Yael V. Hochberg, Alexander Ljungqvist and Yang Lu, 
Whom You Know Matters: Venture Capital Networks and Investment 
Performance, 62 J. of Fin. 251-301 (2007).
    \872\ See Deborah Gage, The Venture Capital Secret: 3 Out of 4 
Start-Ups Fail, Wall St. J., Sept. 19, 2012.
---------------------------------------------------------------------------

    Because we expect that issuers that would engage in offerings made 
in reliance on Section 4(a)(6) would potentially be in an earlier stage 
of business development than the businesses included in the above 
studies, we believe that issuers that engage in securities-based 
crowdfunding may have higher failure rates than those in the studies 
cited above.\873\
---------------------------------------------------------------------------

    \873\ See Rajshree Agarwal and Michael Gort, Firm and Product 
Life Cycles and Firm Survival, 92 Am. Econ. Rev. 184-190 (2002) 
(``Agarwal'').
---------------------------------------------------------------------------

4. Market Participants
    The proposed rules will have their most significant impact on the 
market for the financing of startups and small businesses. The number 
of participants in this market and the amounts raised through 
alternative sources indicate that this is a large market. In 2011, 
there were almost 5 million small businesses, defined by the U.S. 
Census Bureau as having fewer than 500 paid employees.\874\ In the same 
year, FDIC-insured depositary institutions held approximately $626 
billion in small business loans,\875\ and VCs contributed an additional 
$30 billion of capital to startups and small businesses.\876\
---------------------------------------------------------------------------

    \874\ See U.S. Department of Commerce, United States Census 
Bureau, Business Dynamics Statistics, Data: Firm Characteristics 
(2011), available at http://www.census.gov/ces/dataproducts/bds/data_firm.html.
    \875\ Small business loans are defined as loans secured by 
nonfarm nonresidential properties and commercial and business loans 
of $1,000,000 or less. See Federal Deposit Insurance Corporation, 
note 835.
    \876\ See National Venture Capital Association, Recent Stats & 
Studies, available at http://www.nvca.org/index.php?option=com_content&view=article&id=344&Itemid=103.
---------------------------------------------------------------------------

    We analyze the economic effect of the proposed rules on the 
following parties: (1) Issuers, typically startups and small businesses 
seeking to raise capital by issuing securities; (2) intermediaries, 
through which issuers seeking to engage in transactions in reliance on 
Section 4(a)(6) will offer and sell their securities; (3) investors who 
purchase or may consider purchasing securities in such offerings; and 
(4) other capital providers, broker-dealers and finders who currently 
participate in private offerings. The potential economic impact of the 
proposed rules will depend on how these market participants respond to 
the proposed rules. Each party is discussed in further detail below.
a. Issuers
    The proposed rules would permit certain entities to raise capital 
by issuing securities for the first time. The number, type and size of 
the potential issuers that would seek to use crowdfunding to offer and 
sell securities in reliance on Section 4(a)(6) is uncertain, but data 
regarding current market practices may help identify the number and 
characteristics of potential issuers.
    Although it is not possible to predict the number of future 
securities offerings that might rely on Section 4(a)(6), particularly 
because rules governing the process are not yet in place, we estimate 
that the number could be in the thousands per year. We base this 
estimate on the current number of businesses pursuing similar levels of 
financing through alternate capital raising methods: small business 
loans, reward-based and donation-based crowdfunding and Regulation D 
offerings. According to the SBA's fiscal year 2011 annual performance 
report, 54,500 small businesses received funding in 2011 through SBA's 
main lending programs, 7(a) and 504 loans.\877\ A crowdfunding industry 
report estimates that there were 430,920 donation-based or reward-based 
campaigns in the U.S., which we estimate were conducted by 181,440 
unique issuers.\878\ Finally, a large number of Regulation D offerings 
are within the offer limits established for crowdfunding under Section 
4(a)(6). According to filings made with the Commission, from 2009 to 
2012, there were 25,274 new Regulation D offerings with offer sizes of 
$1 million or less. These offerings involved 19,652 unique issuers. 
When excluding hedge funds and investment companies, entities that 
generally would not be eligible to raise capital in reliance on the 
exemption in Section 4(a)(6),\879\ the number of unique issuers was 
15,616. Among these issuers, 24% reported no revenue, while 
approximately 20% had revenues of less than $1 million.\880\ 
Approximately 92% of these issuers were organized as either a 
corporation or a limited liability company.
---------------------------------------------------------------------------

    \877\ See 2011 Annual Performance Report, note 844.
    \878\ The estimated number of campaigns is based on 532,000 
successful fundraising campaigns in North America, 90% of which were 
in the U.S. and most of which (90%) were either rewards-based or 
donation-based. According to the industry report, 69% of issuers 
engaged in one to two campaigns, 26% in three to five campaigns and 
5% in more than five campaigns. To estimate the number of unique 
issuers, we used the midpoint from the first two groupings and 
assumed that issuers in the third grouping engage in six campaigns. 
The number of unique issuers is thus estimated as follows: (90% x 
90% x 532,000)/((69% x 1.5) + (26% x 4) + (5% x 6)) = 181,440. See 
Massolution, note 861.
    \879\ See discussion in Section II.A.3 above.
    \880\ These percentages could be higher because almost 45% of 
the Regulation D issuers declined to disclose their size.
---------------------------------------------------------------------------

    It is expected that many future issuers of securities in 
crowdfunding offerings would have otherwise raised capital from one of 
these alternative sources of financing, while others would have been 
financed by friends and family or not financed at all. Hence, while the 
total number of businesses using these alternative funding sources 
provides a basis for the potential number of issuers offering and 
selling securities in reliance on Section 4(a)(6) in the future, we 
cannot know how many of these businesses would elect securities-based 
crowdfunding in reliance on Section 4(a)(6) once it becomes available, 
nor can we know how many future businesses may not be financed at all. 
Further, SBA loan programs and other government contracting programs 
classify ``small businesses'' as those with fewer than 500 
employees,\881\ and we expect that some of these businesses might be 
too large for crowdfunding in reliance on Section 4(a)(6) to be an 
effective capital-raising option. Separately, many of the current 
rewards-based or donations-based crowdfunding projects likely entail 
applications that may not be suitable to a long-lived security issuance 
(e.g., certain artistic endeavors or artistic projects). Nevertheless, 
these data show that the potential number of businesses that might seek 
to offer and sell securities in reliance on Section 4(a)(6) is large, 
particularly when compared to the current number of Exchange Act 
reporting issuers, which is less than 10,000.\882\
---------------------------------------------------------------------------

    \881\ See, e.g., 13 CFR 121.406(b) (a non-manufacturing business 
may qualify as a small business concern under Small Business 
Administration regulations, in part, if it does not exceed 500 
employees); 7 CFR 3403.2 (defining small business concern under U.S. 
Department of Agriculture regulations, in part, as a concern that 
has not more than 500 employees).
    \882\ In fiscal year 2012, there were approximately 9,140 
reporting companies. U.S. Securities and Exchange Commission, FY 
2014 Congressional Budget Justification, 2014 Annual Performance 
Plan, FY 2012 Annual Performance Report, at 80, available at http://www.sec.gov/about/reports/secfy14congbudgjust.pdf.
---------------------------------------------------------------------------

    We believe that many potential issuers of securities through 
crowdfunding would be startups and small businesses that are close to 
the

[[Page 66516]]

``idea'' stage of the business venture and that have business plans 
that are not sufficiently well-developed or do not offer the profit 
potential or business model to attract VCs or angel investors that 
otherwise specialize in investing in high risk ventures. In this 
regard, a study of one large platform revealed that relatively few 
companies on that platform operate in technology sectors that typically 
attract VC investment activity.\883\
---------------------------------------------------------------------------

    \883\ See Ethan R. Mollick, The Dynamics of Crowdfunding: An 
Exploratory Study (Working Paper) (June 26, 2013), available at 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298.
---------------------------------------------------------------------------

b. Crowdfunding Intermediaries
    Section 4(a)(6)(C) requires that an offer and sale of securities in 
reliance on Section 4(a)(6) be conducted through a registered funding 
portal or a broker. Registered brokers, both those that are already 
registered with the Commission and those that would register, might 
wish to facilitate securities-based crowdfunding transactions. New 
entrants that do not wish to register as brokers might decide to 
register as funding portals to facilitate securities-based crowdfunding 
transactions in reliance on Section 4(a)(6). Donation-based or reward-
based crowdfunding platforms with established customer relations might 
seek to leverage these relations and register as funding portals, or 
register as or associate with registered broker-dealers. Although the 
number of potential intermediaries that would fill these roles is 
uncertain, practices of existing brokers and crowdfunding platforms 
provide insight into how the market might develop.
    As of December 2012, there were 4,450 broker-dealers registered 
with the Commission, with average total assets of approximately $1.1 
billion per broker-dealer. The aggregate total assets of these 
registered broker-dealers are approximately $4.9 trillion. Of these 
registered broker-dealers, 410 also are dually registered as investment 
advisers.
    Existing crowdfunding platforms are diverse and actively involved 
in financing, allowing thousands of projects to search for capital. A 
recent industry survey of crowdfunding platforms reports that 191 
platforms were estimated to be operating in the U.S. as of 2012.\884\ 
Additionally, based on 135 participants in the survey worldwide 
(including the U.S.), 15% of platforms were engaged in equity-based 
crowdfunding, 11% in lending-based crowdfunding, 27% in donation-based 
crowdfunding and 47% in reward-based crowdfunding.\885\ Moreover, the 
industry survey stated that current crowdfunding portals typically 
charge entrepreneurs a listing fee that is based on how large the 
target amount is and/or upon reaching the target. According to the 
survey, fees from survey participants worldwide ranged from 2% to 25%, 
with an average of 7% in North America and Europe.\886\
---------------------------------------------------------------------------

    \884\ See Massolution, note 861 at 16.
    \885\ Id. at 17.
    \886\ Id. at 23.
---------------------------------------------------------------------------

    We do not know at present which market participants would become 
intermediaries under Section 4(a)(6) after final rules are adopted, but 
we believe that existing crowdfunding platforms might seek to leverage 
their already-existing Internet-based platforms, brand recognition and 
user bases to facilitate offerings in reliance on Section 4(a)(6).\887\ 
Industry participants have suggested that they expect three to four of 
the crowdfunding platforms that currently have the majority of market 
share in rewards-based and donation-based crowdfunding to obtain the 
majority of market share in the newly-developed securities-based 
crowdfunding market that relies on Section 4(a)(6).\888\
---------------------------------------------------------------------------

    \887\ For example, a recent crowdfunding industry report 
suggests that funding portal reputation is important in the 
crowdfunding market, especially for equity-based crowdfunding. See 
id.
    \888\ For information on Commission staff discussions with 
industry participants, see Meetings with SEC Officials, available at 
http://www.sec.gov/comments/jobs-title-iii/jobs-title-iii.shtml#meetings.
---------------------------------------------------------------------------

    Under the statute and the proposed rules, funding portals are 
constrained in the services they could provide, and persons (or 
entities) seeking the ability to participate in activities unavailable 
to funding portals, such as offering investment advice or holding, 
managing, possessing or otherwise handling investor funds, would 
instead need to register as brokers or investment advisers, depending 
on their activities. Although we believe, based on conversation with 
industry participants, that initially, upon adoption of the final 
rules, more new registrants would register as funding portals than as 
broker-dealers, our conversations with industry participants \889\ 
indicate that market competition to offer broker-dealer services as 
part of intermediaries' service capabilities might either drive more 
broker-dealer growth in the longer term or provide registered funding 
portals with the incentive to form long-term partnerships with 
registered broker-dealers. For example, crowdfunding platforms could 
have incentives to partner with broker-dealers because of broker-
dealers' experience in providing recommendations or investment advice, 
as well as broker-dealers' access to investors.\890\ There is anecdotal 
evidence that these partnerships are already forming under existing 
regulations, and one report predicted that in the first quarter of 
2013, two to three dozen crowdfunding portals would partner with 
broker-dealers to start conducting private offerings under Regulation D 
in anticipation of securities-based crowdfunding.\891\
---------------------------------------------------------------------------

    \889\ Id.
    \890\ See Mohana Ravindranath, Crowdfunding platform ships 
product samples to potential investors, Wash. Post, Nov. 29, 2012.
    \891\ See David Drake, Rich Man's Crowd Funding, Forbes, Jan. 
15, 2013. See also Mohana Ravindranath, Quickly adapting to 
crowdfunding laws, Wash. Post, Sept. 7, 2012; J.J. Colao, In the 
Crowdfunding Gold Rush, This Company Has a Rare Edge, Forbes, June 
5, 2013.
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c. Investors
    It is unclear what types of investors would participate in 
offerings made in reliance on Section 4(a)(6), but based on the profile 
of investors in the current domestic reward-based and donation-based 
crowdfunding market, we believe that many investors affected by the 
proposed rules would likely be individual retail investors who 
currently do not have broad access to investment opportunities in 
early-stage ventures, either because they do not have the necessary 
accreditation or sophistication to invest in most private offerings or 
because they do not have sufficient funds to participate as angel 
investors. Offerings made in reliance on Section 4(a)(6) might provide 
retail investors with additional investment opportunities, although the 
extent to which they invest in such offerings would likely depend on 
their view of the potential return on investment as well as the risk 
for fraud.
    In contrast, larger, more sophisticated or well-funded investors 
may be less likely to invest in offerings made in reliance on Section 
4(a)(6). The relatively low investment limits set by the statute for 
crowdfunding investors might make these offerings less attractive for 
professional investors, including VCs and angel investors.\892\ While 
an offering made in reliance on Section 4(a)(6) could bring an issuer 
to the attention of these investors, it is possible that professional 
investors would prefer, instead, to invest in a

[[Page 66517]]

Rule 506 offering, which is not subject to the investment limitations 
applicable to offerings made in reliance on Section 4(a)(6).
---------------------------------------------------------------------------

    \892\ An observer suggests that, unlike angels, VCs may be less 
interested in crowdfunding because, if VCs rely on crowdfunding 
sites for their deal flow, it would be difficult to justify charging 
a 2% management fee and 20% carried interest to their limited 
partners. See Ryan Caldbeck, Crowdfunding--Why Angels, Venture 
Capitalists And Private Equity Investors All May Benefit, Forbes, 
Aug. 7, 2013.
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d. Other Capital Providers, Broker-Dealers and Finders in Private 
Offerings
    The proposed rules might affect the capital providers that 
currently finance small private businesses: small business lenders, 
VCs, family and friends and angel investors. The current scope of 
fundraising done by these capital providers is discussed above. As 
discussed below, the magnitude of the impact would depend on whether 
crowdfunding in reliance on Section 4(a)(6) emerges as a substitute or 
a complement to these financing sources.
    In addition, issuers conducting private offerings might currently 
use broker-dealers to help them with various aspects of the offering 
and to help ensure compliance with the ban on general solicitation and 
advertising that exists for most private offerings. Private offerings 
also could involve finders who connect issuers with potential investors 
for a fee.\893\ These private offering intermediaries also may be 
affected by the proposed rules because once these rules come into 
effect, issuers might no longer need the services of those broker-
dealers and finders. Although we are unable to predict the exact size 
of the market for broker-dealers and finders in private offerings that 
are comparable to those that the proposed rules would permit,\894\ data 
on the use of broker-dealers and finders in the Regulation D markets 
suggest that they may not currently play a large role in private 
offerings. Only 13% of all new Regulation D offerings from 2009 to 2012 
used an intermediary such as a broker-dealer or a finder.\895\ 
Approximately 11% of new offerings reported sales commissions greater 
than zero, while approximately 3% reported finder fees greater than 
zero. The use of a broker-dealer or a finder increased with offering 
size; they participated in 13% of offerings for up to $1 million and 
18% of offerings for more than $50 million. Moreover, broker-dealer 
commissions and finder fees tend to decrease with offering size. Unlike 
the gross spreads in registered offerings, the differences in 
commissions for Regulation D offerings of different sizes are large: 
the average commission paid by issuers conducting offerings of up to $1 
million (6.5%) is almost three times larger than the average commission 
paid by issuers conducting offerings of more than $50 million (1.9%). 
Similarly, the average finder's fee for offerings of up to $1 million 
is approximately 6.1%, compared to 1.4% for offerings of more than $50 
million. We base these estimates, however, only on the Regulation D 
market. It is possible that issuers engaging in other types of private 
offerings (e.g., those relying on Section 4(a)(2)), for which we do not 
have data, might use broker-dealers and finders more frequently and 
have different fee structures.
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    \893\ Depending on their activities, these persons may need to 
be registered as broker-dealers.
    \894\ See The Task Force on Private Placement Broker-Dealers, 
ABA Section of Business Law, Report and Recommendations of the Task 
Force on Private Placement Broker-Dealers, 60 Bus. Law. 959, 969-70 
(2005) (``Task Force on Private Placement Broker-Dealers'').
    \895\ See Ivanov/Bauguess Study, note 816.
---------------------------------------------------------------------------

B. Analysis of Proposed Rules

    As noted above, we are sensitive to the costs and benefits of the 
proposed rules, as well as the impact that the proposed rules would 
have on efficiency, competition and capital formation. In enacting 
Title III, Congress established a framework for a new type of exempt 
offering and required us to adopt rules to implement that framework. To 
the extent that crowdfunding rules are successfully utilized, the 
crowdfunding provisions of the JOBS Act should provide startups and 
small businesses with the means to raise relatively modest amounts of 
capital, from a broad cross section of potential investors, through 
securities offerings that are exempt from registration under the 
Securities Act. They also should permit small investors to participate 
in a wider range of securities offerings than may be available 
currently.\896\ Specifically, the statutory provisions and the proposed 
rules address several challenges specific to financing startups and 
small businesses, including, for example, accessing a large number of 
potential investors, the regulatory requirements associated with 
issuing a security, protecting investors and making such securities 
offerings cost-effective for the issuer.
---------------------------------------------------------------------------

    \896\ See, e.g., 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012) 
(statement of Sen. Carl Levin) (``Right now, the rules generally 
prohibit a company from raising very small amounts from ordinary 
investors without significant costs.'').
---------------------------------------------------------------------------

    In the sections below, we analyze the costs and benefits associated 
with the proposed crowdfunding regulatory regime, as well as the 
potential impacts of such a regulatory regime on efficiency, 
competition and capital formation, in light of the background discussed 
above.
1. Broad Economic Considerations
    In this release, we discuss costs and benefits that are related to 
the proposed rules. Many of these costs and benefits are difficult to 
quantify or estimate with any degree of certainty, especially 
considering that Section 4(a)(6) provides a new method for raising 
capital in the United States. Some costs are difficult to quantify or 
estimate because they represent transfers between various market 
participants. For instance, costs to issuers could be passed on to 
investors and costs to intermediaries could be passed on to issuers and 
investors. These difficulties in estimating and quantifying are 
exacerbated by the limited public data that indicates how issuers, 
intermediaries and investors would respond to these new investment 
opportunities.
    The discussion below highlights several general areas where 
uncertainties regarding the new crowdfunding market might affect the 
potential costs and benefits of the proposed rules. It also highlights 
the potential effects on efficiency, competition and capital formation, 
as well as our ability to quantify relevant benefits and costs. In 
light of these uncertainties, we encourage commenters to provide data 
and analysis to help further quantify or estimate the potential 
benefits and costs of these proposed rules.
    The extent to which the statute and the proposed rules would affect 
capital formation and the cost of capital to issuers depends in part on 
the issuers that choose to participate. In particular, if the offering 
exemption under Section 4(a)(6) only attracts issuers that are 
otherwise able to raise capital through alternative venues (e.g., 
offerings relying on an exception from registration under Securities 
Act Section 3(a)(11), Securities Act Section 4(a)(2), Regulation A or 
Regulation D), the statute and the proposed rules could result in a 
redistribution of capital flow, which would enhance allocative 
efficiency but have a limited impact on the aggregate level of capital 
formation.\897\ In addition, the degree to which the proposed rules 
would affect capital formation depends on the implementation of other 
provisions of the JOBS Act that may alter existing options for small 
companies to raise

[[Page 66518]]

capital. For example, Title II allows issuers relying on the exemption 
in Securities Act Rule 506(c) to use general solicitation and general 
advertising, while Title IV envisions a modified Regulation A offering 
exemption with a higher dollar limit.
---------------------------------------------------------------------------

    \897\ For example, a recent GAO report on Regulation A offerings 
suggests that a significant decline in the use of this funding 
alternative after 1997 could be partially attributed to a shift in 
offerings to Rule 506 offerings under Regulation D, as a result of 
the preemption of state securities laws for Rule 506 offerings that 
occurred in 1996. See GAO Report, note 824.
---------------------------------------------------------------------------

    Notwithstanding these alternatives, we believe that the Section 
4(a)(6) offering exemption would likely represent a new source of 
capital for many issuers that currently have difficulty raising capital 
and that would continue to have difficulty raising capital when other 
JOBS Act provisions are implemented. Startups and small businesses 
usually have smaller and more variable cash flows than larger more 
established companies, and internal financing from their own business 
operations tends to be limited and unstable. Moreover, these businesses 
tend to have smaller asset bases \898\ and, thus, less collateral for 
traditional bank loans. Startups and small businesses, which are widely 
viewed to have more financial constraints than publicly-traded 
companies and large private companies, could therefore benefit 
significantly from a securities-based crowdfunding market. We believe 
that the statute, as it would be implemented by the proposed rules, 
could increase both capital formation and the efficiency of capital 
allocation. The extent to which such issuers would use the Section 
4(a)(6) offering exemption, however, is difficult to assess.
---------------------------------------------------------------------------

    \898\ See, e.g., John Asker, Joan Farre-Mensa and Alexander 
Ljungqvist, Corporate Investment and Stock Market Listing: A Puzzle? 
(European Corporate Governance Institute Finance Working Paper, June 
2012), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1603484.
---------------------------------------------------------------------------

    If startups and small businesses find alternative capital raising 
options more attractive than securities-based crowdfunding, the impact 
of Section 4(a)(6) on capital formation could be limited. Even so, the 
availability of securities-based crowdfunding as a financing option 
could increase competition among suppliers of capital, resulting in a 
potentially lower cost of capital for all issuers, including those that 
choose not to use securities-based crowdfunding.
    For issuers that pursue offerings in reliance on Section 4(a)(6), 
establishing an initial price might be challenging. Although the 
statute requires certain issuer disclosures and the proposed rules are 
intended to help investors evaluate the viability of the issuer and the 
initial offering, these disclosures may be insufficient for investors 
to determine an appropriate price since there would be no underwriter 
of the offering and the issuer may not otherwise be skilled in 
valuation. It is not clear, therefore, how an initial offering price 
would be reached for many of the securities offered, nor how investors 
would be protected against poor initial valuations.\899\ These 
potential difficulties might limit investor participation in offerings 
made in reliance on Section 4(a)(6) and mitigate some of the associated 
benefits of capital formation.
---------------------------------------------------------------------------

    \899\ There also is a chance that valuations that emerge are 
inaccurate. For example, there is vast literature documenting that, 
on average, IPOs are significantly underpriced relative to their 
initial prices on the secondary market. For a review of the theory 
and evidence of IPO underpricing, see Jay Ritter and Ivo Welch, A 
Review of IPO Activity, Pricing, and Allocations, 57 J. Fin. 1795-
1828 (2002). See also Ivo Welch, Sequential Sales, Learning, and 
Cascades, 47 J. Fin. 695-732 (1992) (analyzing the risk of herding 
among investors when shares are sold sequentially).
---------------------------------------------------------------------------

    Uncertainty surrounding exit strategies for investors in 
crowdfunding offerings also might limit the benefits. In particular, it 
is unlikely that purchasers in crowdfunding transactions would be able 
to follow the typical path to liquidity that investors in other exempt 
offerings follow. For instance, investors in a VC-backed startup might 
eventually sell their securities in an initial public offering on a 
national securities exchange or to another company in an 
acquisition.\900\ We anticipate that most businesses engaging in 
offerings in reliance on Section 4(a)(6) are unlikely to progress 
directly to an initial public offering on a national securities 
exchange given their small size,\901\ and investors might lack adequate 
strategies or opportunities to eventually divest their holdings.\902\ A 
sale of the business would require the issuer to have a track record in 
order to attract investors with the capital willing to buy the 
business. Moreover, the likely broad geographical dispersion of 
crowdfunding investors might make shareholder coordination difficult, 
although the electronic means may mitigate any difficulties. Even if an 
issuer could execute a sale or otherwise offer to buy back or retire 
the securities, it might be difficult for investors to determine 
whether the issuer was offering a fair market price. These 
uncertainties might limit the use of the Section 4(a)(6) exemption.
---------------------------------------------------------------------------

    \900\ See Gompers, note 830.
    \901\ As noted, under the statute and the proposed rules, 
businesses relying on Section 4(a)(6) would be limited to raising an 
aggregate of $1 million during a 12-month period. By contrast, as 
noted in the IPO Task Force report, the size of an initial public 
offering generally exceeds $50 million. See IPO Task Force, note 
818.
    \902\ In contrast, given the required qualifications and capital 
amount limits, Regulation D offerings may generally attract issuers 
that are more knowledgeable and better capitalized. Moreover, such 
offerings are likely to have a larger proportion of accredited 
investors because, in contrast to securities-based crowdfunding, 
there are no limitations on individual investment amounts. As a 
result, we believe that Regulation D issuers and investors are more 
likely to have potential exit strategies in place.
---------------------------------------------------------------------------

    The potential benefits of the proposed rules also might depend on 
how investors respond to potential liquidity issues unique to the 
securities-based crowdfunding market. It is currently unclear how 
securities offered and sold in reliance on Section 4(a)(6) would be 
transferred in the secondary market after the one-year restricted 
period ends, and investors who purchased securities in reliance on 
Section 4(a)(6) and who seek to divest their securities would be 
unlikely to find a liquid market.\903\ Shares might migrate to the 
over-the-counter market or to trading platforms that trade shares of 
private companies.\904\ It is possible that secondary trading costs for 
investors might be substantial, effective and quoted spreads might be 
wide, and price volatility might be high compared to those of listed 
securities.\905\ Illiquidity is a concern for other exempt offerings 
and small registered offerings. However, because investors purchasing 
securities in reliance on Section 4(a)(6) might be less sophisticated 
than investors in other private offerings due to the fact

[[Page 66519]]

that there would be no investor qualification requirements, we expect 
that they would face additional challenges in addressing the impact of 
illiquidity, either in finding a suitable trading venue or negotiating 
with the issuer for an alternative retirement provision. The 
potentially high degree of illiquidity associated with securities 
purchased in reliance on Section 4(a)(6) might prevent investors from 
investing in businesses through such offerings, thus limiting potential 
capital formation.
---------------------------------------------------------------------------

    \903\ Academic studies have shown that the over-the-counter 
market is less liquid than the national exchanges. See Christie, 
Market Microstructure of the Pink Sheets, 33 J. Banking & Fin. 
1,326-1,339 (2009); Andrew Ang, Assaf Shtauber and Paul Tetlock, 
Asset Pricing in the Dark: The Cross Section of OTC Stocks, Rev. 
Fin. Stud. (forthcoming).
    \904\ Given the services that funding portals are permitted to 
provide under the statute and the proposed rules, investors would 
not be able to use funding portals to trade in securities offered 
and sold in reliance on Section 4(a)(6) in a secondary market.
    \905\ Academic studies show that reducing the information 
transparency about an issuer increases the effective and quoted 
spreads of its shares, reduces share price and increases price 
volatility. Specifically, percentage spreads triple and volatility 
doubles when NYSE issuers are delisted to the Pink Sheets. See 
Jonathan Macey, Maureen O'Hara and David Pompilio, Down and Out in 
the Stock Market: The Law and Finance of the Delisting Process, 51 
J.L. & Econ 683-713 (2008). When NASDAQ issuers delist and 
subsequently trade on the OTC Bulletin Board and/or the Pink Sheets, 
share volume declines by two-thirds, quoted spreads more than 
double, effective spreads triple and volatility triples. See Jeffrey 
H. Harris, Venkatesh Panchapagesan and Ingrid M. Werner, Off But Not 
Gone: A Study of NASDAQ Delistings, Fisher College of Business 
Working Paper No. 2008-03-005 and Dice Center Working Paper No. 
2008-6 (Mar. 4, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=628203. One factor that may alleviate 
transparency concerns is the fact that issuers that sold securities 
in an offering made in reliance on Section 4(a)(6) would have an 
ongoing reporting obligation, so disclosure of information about the 
issuer would continue to be required.
---------------------------------------------------------------------------

    Even with the mandated disclosures, unsophisticated investors 
purchasing securities issued in reliance on Section 4(a)(6) also may 
face certain expropriation risks, potentially limiting the upside of 
their investment, even when they select investments in successful 
ventures. This could occur if issuers issue securities with certain 
features (e.g., callable securities or securities with differential 
control rights) or have insider-only financing rounds or financing 
rounds at reduced prices (the so-called ``down rounds'') that could 
have the effect of diluting an investor's interest or otherwise 
diminishing the value of the securities offered and sold in reliance on 
Section 4(a)(6). Investors purchasing securities issued in reliance on 
Section 4(a)(6) might not have the experience or the market power to 
negotiate various anti-dilution provisions, right of first refusal, 
tag-along rights, superior liquidation preferences and rights upon a 
change in control that have been developed by institutional and angel 
investors as protections against fundamental changes in a 
business.\906\ If these or similar types of protections are absent, the 
expropriation risk could discourage some potential investors from 
participating in offerings made in reliance on Section 4(a)(6), 
potentially hindering efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \906\ See Kaplan, note 858.
---------------------------------------------------------------------------

    The proposed rules also might have an effect on broker-dealers and 
finders participating in private offerings. Some issuers that 
previously relied on broker-dealers and finders to assist with raising 
capital through private offerings may, instead, begin to rely on the 
Section 4(a)(6) exemption to find potential investors. The precise 
impact of the proposed rules on these intermediaries would depend on 
whether (and, if so, to what extent) issuers switch from using existing 
exemptions to using the exemption provided by Section 4(a)(6) or 
whether the proposed rules primarily attract new issuers. If a 
significant number of issuers switch from raising capital under 
existing private offering exemptions to relying on the exemption 
provided by Section 4(a)(6), this likely would negatively affect the 
revenue of finders in the market for private offerings, while 
intermediaries under Section 4(a)(6) likely would gain from the 
potential losses in revenue that finders may face. This may 
disadvantage finders, but competition may ultimately lead to more 
efficient allocation of capital.
    Using information from the Regulation D market allows us to 
quantify at least some of these potential losses. For example, from 
2009 to 2012, the estimated cumulative dollar amount of finder fees 
charged for Regulation D offerings of up to $1 million was 
approximately $18 million, covering 437 offerings.\907\ In a similar 
vein, from 2009 to 2012, the estimated cumulative dollar amount of 
commissions charged by broker-dealers for Regulation D offerings of up 
to $1 million was approximately $76.6 million, covering 1,480 
offerings.\908\ Thus, to the extent that issuers rely on Section 
4(a)(6) to offer and sell securities in lieu of relying on Regulation 
D, the dollar amount of commissions and finder fees generated would be 
reduced, unless broker-dealers and finders provide new services that 
such issuers are willing to pay. For example, under the statute, 
broker-dealers would be able to operate portals. If securities-based 
crowdfunding primarily attracts new issuers to the market, the impact 
on broker-dealers and finder revenue could be negligible and the 
proposed rules may even have a positive effect on their revenues by 
revealing more potential clients for them. Additionally, greater 
investor interest in private company investment might increase capital 
formation, creating new opportunities for broker-dealers and finders 
that otherwise would have been unavailable.
---------------------------------------------------------------------------

    \907\ We use data from new Form D filings and include in the 
analysis only filings with an offer amount greater than zero. We 
also exclude indefinite offerings because, for those, we cannot 
determine the offer size.
    \908\ Since we do not have data on broker-dealer and finder 
participation in other types of private offerings (e.g., Section 
4(a)(2) offerings), it is possible that the impact of crowdfunding 
in those offerings could be different than the impact on broker-
dealers and finders in Regulation D offerings.
---------------------------------------------------------------------------

    Rules implementing Section 4(a)(6) also could encourage current 
participants in the securities-based crowdfunding market to diversify 
their funding models to attract a broader group of issuers and to 
provide additional investment opportunities for investors. For example, 
donation-based crowdfunding platforms that currently offer investment 
opportunities in micro-loans generally do not permit donors to collect 
interest on their investments because of concerns that this activity 
would implicate the federal securities laws unless an exemption from 
registration is available.\909\ Under the proposed rules, these 
platforms might choose to permit businesses to offer securities that 
would provide investors with the opportunity to obtain a return on 
investment. This could broaden their user base and attract a group of 
investors different from those already participating in reward-based or 
donation-based crowdfunding. It is likely that some registered broker-
dealers will find it profitable to enter the securities-based 
crowdfunding market and operate funding portals as well. Such an entry 
will increase the competition among intermediaries and likely lead to 
lower costs for issuers.
---------------------------------------------------------------------------

    \909\ See, e.g., Deutsche Bank Microcredit Development Fund, 
Inc., SEC No-Action Letter (Apr. 8, 2012).
---------------------------------------------------------------------------

    However, many projects that are well suited for reward-based or 
donation-based crowdfunding (e.g., because they have finite lives, 
their payoffs to investors could come before the project is completed, 
they could be contingent on the project's success, etc.) may have 
little in common with startups and small businesses that are well 
suited for an offering in reliance on Section 4(a)(6). As a result, 
diversification among existing platforms might not always be optimal or 
preferred, particularly if complying with the proposed rules proves 
disproportionately costly compared to the amount of potential capital 
to be raised.
2. Crowdfunding Exemption
a. Limitation on Capital Raised
    The statute imposes certain limitations on the total amount of 
securities that may be sold by an issuer during the 12-month period 
preceding the date of the transaction made in reliance on Section 
4(a)(6). Specifically, Section 4(a)(6)(A) provides for a maximum 
aggregate amount of $1 million sold in reliance on the exemption during 
the 12-month period.\910\
---------------------------------------------------------------------------

    \910\ See also proposed Rule 100(a)(1) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    The limitation on the amount that may be raised could benefit 
investors by reducing the potential for dilution or fraud. However, we 
recognize that the cap on the maximum amount that may be sold in 
reliance on Section 4(a)(6) also could prevent certain issuers from 
raising all the capital they need to make

[[Page 66520]]

their businesses viable, which in turn could result in lost 
opportunities. It also is likely to reduce efficiency to the extent 
that resources cannot be channeled to productive use. Due to the lack 
of data, however, we are not able to quantify the size of the 
efficiency loss. We are proposing, however, to allow issuers to conduct 
other exempt offerings that would not necessarily be integrated with 
the offering made in reliance on Section 4(a)(6), as long as the issuer 
satisfies the requirements of the exemption relied upon for the 
particular offering. We could have selected an alternative that would 
have aggregated the amounts offered in reliance on Section 4(a)(6) with 
the amounts offered pursuant to other exempt offerings. Under such an 
alternative, the amounts raised in other exempt offerings would count 
toward the maximum offering amount under Section 4(a)(6). Compared to 
this alternative, the ability of issuers to conduct other exempt 
offerings that would not count toward the maximum offering amount under 
Section 4(a)(6) might alleviate some of the concerns that certain 
issuers would not be able to raise sufficient capital.
b. Investment Limitations
    The statute and the proposed rules also impose certain limitations 
on the aggregate dollar amount of securities that may be sold to any 
investor in reliance on Section 4(a)(6) during the preceding 12 
months.\911\ These provisions would cap the potential investment and, 
consequently, the potential losses for any single investor. Offerings 
made in reliance on Section 4(a)(6) would not be subject to review by 
Commission staff prior to the sale of securities, but the aggregate 
investment limits would provide some measure of protection for 
investors.
---------------------------------------------------------------------------

    \911\ See Section 4(a)(6)(B). See also proposed Rule 100(a)(2) 
of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We recognize that the investment caps would limit the potential 
upside for investors. This might particularly affect the decisions of 
those with large portfolios who might be able to absorb losses and 
understand the risks associated with risky investments. For these 
investors, the $100,000 aggregate cap might limit their incentive to 
participate in the securities-based crowdfunding market, compared to 
other types of investments, potentially depriving the securities-based 
crowdfunding market of more experienced and knowledgeable investors and 
possibly impeding capital formation. Limiting the participation of such 
investors would be likely to negatively affect the informational 
efficiency of the securities-based crowdfunding market because 
sophisticated investors are better able to accurately price such 
offerings. These investors also could add value to the discussions 
taking place through an intermediary's communication channels about a 
potential offering by providing their views on financial viability.
    The aggregate cap on investments also could limit the ability of 
investors to diversify within the securities-based crowdfunding market. 
As securities-based crowdfunding investments might have inherently high 
failure rates,\912\ investors who do not diversify their investments 
across a number of offerings could face an increased risk of incurring 
large losses, relative to their investments, even when they investigate 
offerings thoroughly. By comparison, VC firms typically construct 
highly diversified portfolios with the understanding that many ventures 
fail, resulting in a complete loss of some investments, but with the 
expectation that those losses will be offset by the large upside of the 
relatively fewer investments that succeed.\913\ The securities-based 
crowdfunding market is expected to involve earlier-stage financing 
compared to venture capital financing, and therefore, the chances of 
investment success may be lower.\914\ The statutory thresholds for 
overall securities-based crowdfunding investments under Section 4(a)(6) 
might limit an investor's ability to choose a sufficiently large number 
of investments to offset this risk and to recover the due diligence 
costs of sufficiently investigating individual investments. One 
potential solution to this diversification problem would be to invest 
smaller amounts in more ventures. The drawback is that the costs 
associated with identifying and reviewing investment opportunities are, 
to a large extent, fixed.
---------------------------------------------------------------------------

    \912\ See discussion in Section III.A.3 above.
    \913\ See John Cochrane, The Risk and Return of Venture Capital, 
75 J. of Fin. Econ. 3 (2005).
    \914\ See Agarwal, note 873.
---------------------------------------------------------------------------

c. Issuer Eligibility
    The statute and the proposed rules exclude certain categories of 
issuers from eligibility to rely on Section 4(a)(6) to engage in 
crowdfunding transactions.\915\ We are proposing to exclude three 
additional categories of issuers, beyond those identified in the 
statute, from being eligible to rely on Section 4(a)(6) to engage in 
crowdfunding transactions. First, we propose to exclude issuers that 
would be disqualified from relying on Section 4(a)(6) pursuant to the 
disqualification provisions of Section 302(d) of the JOBS Act.\916\ 
Second, we propose to exclude issuers that sold securities in reliance 
on Section 4(a)(6) and have not filed with the Commission and provided 
to investors the ongoing annual reports required by Regulation 
Crowdfunding during the two years immediately preceding the filing of 
the required offering statement.\917\ This additional exclusion would 
not impose any additional burdens and costs on an issuer that the 
issuer would not have already incurred had it complied with the ongoing 
reporting requirements as they came due. Further, the requirement that 
a delinquent issuer prepare two annual reports at one time should 
provide updated and current information to investors without requiring 
an issuer to become current in its reporting obligations. As a result, 
we believe that this exclusion would incentivize issuers to comply with 
its ongoing reporting requirements, if they intend to rely again on 
Section 4(a)(6) to raise additional capital, which would allow 
investors to make more informed investment decisions. We also recognize 
that conditioning an issuer's Section 4(a)(6) eligibility on the 
requirement that issuers provide ongoing reports for only the previous 
two-years may deprive investors of information in some periods that 
might otherwise have negative effects on the price formation and 
liquidity of the securities in the secondary market. The potential 
damage to an issuer's reputation resulting from being delinquent, 
however, may provide the issuer with sufficient incentive to 
consistently comply with the ongoing reporting requirements.
---------------------------------------------------------------------------

    \915\ See Section 4A(f). See also proposed Rule 100(b) of 
Regulation Crowdfunding.
    \916\ See proposed Rule 100(b)(4) of Regulation Crowdfunding.
    \917\ See discussion in Section II.A.4 above.
---------------------------------------------------------------------------

    Third, we propose to exclude a company that has no specific 
business plan or has indicated that its business plan is to engage in a 
merger or acquisition with an unidentified company or companies. This 
proposed ineligibility requirement will have only a marginal effect on 
issuer participation and capital formation because the startups and 
small businesses seeking the exemption would generally have, even in 
the early stage of their development, a business plan specific enough 
to distinctly differentiate them from companies with no specific 
business plan.

[[Page 66521]]

3. Issuer Requirements
    We recognize that there are benefits and costs associated with the 
statutory requirements and the proposed rules, including the disclosure 
requirements, pertaining to issuers. While the estimated costs to 
issuers are discussed in further detail elsewhere in this section, the 
following table summarizes these costs:
---------------------------------------------------------------------------

    \918\ See discussion in Section III.B.4 below. For purposes of 
the table, we estimate the range of compensation that an issuer 
would pay the intermediary assuming the following: (1) The 
compensation would be calculated as a percentage of the offering 
amount ranging from 5% to 15% of the total offering amount; and (2) 
the issuer is offering $50,000, $300,000 and $750,000, which are the 
mid-points of the offering amounts under each of the respective 
columns. The compensation paid to the intermediary may, or may not, 
cover services to an issuer in connection with the preparation and 
filing of the proposed filings identified in this table.
    \919\ See Section IV.C.1.d below for a discussion of the hourly 
burdens for obtaining EDGAR access codes on Form ID. We estimate, 
for purposes of the Paperwork Reduction Act, the cost of outside 
counsel at a rate of $400 an hour. We recognize that the costs of 
retaining outside professionals may vary depending on the nature of 
the professional service and that many small issuers are likely to 
face substantially lower costs. Small issuers also may choose to 
prepare the proposed forms without seeking the assistance of outside 
counsel. The table shows only those costs we attribute to outside 
professionals, for purposes of this analysis, as we believe internal 
costs would vary greatly among issuers.
    \920\ See proposed Rule 203(a)(1) of Regulation Crowdfunding. 
See also Section IV.C.1.a below for a discussion of the hourly 
burdens for preparing and filing Form C for each offering. For 
purposes of the table, we estimate that 25 percent of the hourly 
burden would be carried by outside professionals retained by the 
issuer at an average cost of $400 per hour.
    \921\ See proposed Rule 203(a)(3) of Regulation Crowdfunding. 
See also Section IV.C.1.a below for a discussion of the hourly 
burdens for preparing and filing the progress updates on Form C-U. 
For purposes of the table, we estimate that the hourly burden would 
be carried by outside professionals retained by the issuer at an 
average cost of $400 per hour.
    \922\ See proposed Rule 203(b)(1) of Regulation Crowdfunding. 
See also Section IV.C.1.b below for a discussion of the hourly 
burdens for preparing and filing each annual report on Form C-AR. 
For purposes of the table, we estimate that 25 percent of the hourly 
burden would be carried by outside professionals retained by the 
issuer at an average cost of $400 per hour.
    \923\ See proposed Rule 201(t) of Regulation Crowdfunding. See 
also Section II.B.1.a.ii above.
    \924\ See proposed Rule 203(b)(2) of Regulation Crowdfunding. 
See also Section IV.C.1.c below for a discussion of the hourly 
burdens for preparing and filing Form C-TR. For purposes of the 
table, we estimate that the hourly burden would be carried by 
outside professionals retained by the issuer at an average cost of 
$400 per hour.

----------------------------------------------------------------------------------------------------------------
                                                                                   Offerings of
                                                                                     more than     Offerings of
                                                  Offerings of $100,000 or less    $100,000, but     more than
                                                                                   not more than     $500,000
                                                                                     $500,000
----------------------------------------------------------------------------------------------------------------
Compensation to the intermediary \918\........  $2,500-7,500....................  $15,000-45,000  $37,500-112,50
                                                                                                               0
Costs per issuer for obtaining EDGAR access     60..............................              60              60
 codes on Form ID \919\.
Costs per issuer for preparation and filing of  6,000...........................           6,000           6,000
 Form C for each offering \920\.
Costs per issuer for preparation and filing of  400.............................             400             400
 the progress updates on Form C-U \921\.
Costs per issuer for preparation and filing of  4,000...........................           4,000           4,000
 annual report on Form C-AR \922\.
Costs for annual review or audit of financial   Not required....................          14,350          28,700
 statements per issuer \923\.
Costs per issuer for preparation and filing of  600.............................             600             600
 Form C-TR to terminate reporting \924\.
----------------------------------------------------------------------------------------------------------------

a. General Disclosure Requirements
    The statute and the proposed rules related to issuer disclosures 
are intended to reduce the information asymmetries that currently exist 
between small businesses and potential investors. Small private 
businesses typically do not disclose information as frequently or as 
extensively as public companies, if at all. Moreover, unlike public 
companies, small private businesses are not required to hire an 
independent third party to validate the information disclosed. When 
information about a company is difficult to obtain or the quality of 
the information is uncertain, investors are at risk of making poorly-
informed investment decisions regarding that company.
    Such information asymmetries might be especially acute in the 
securities-based crowdfunding market because the market includes 
startups and small businesses that have significant risk factors and 
that might have characteristics that have led them to be rejected by 
other potential funding sources, including banks, VCs and angel 
investors. In addition, the securities-based crowdfunding market may 
attract unsophisticated retail investors who may not have the resources 
necessary to effectively monitor issuers. For instance, some issuers 
might use capital to fund riskier projects than what was disclosed to 
investors, or they might not make best efforts to achieve their stated 
business objectives. If investors in securities-based crowdfunding are 
unable to monitor such issuers because of limited information or 
credible third-party validation of this information, they might 
eventually seek higher yields or choose to withdraw from the 
securities-based crowdfunding market altogether, thus increasing the 
cost of capital to issuers and impeding capital formation. In addition, 
investors in offerings made in reliance on Section 4(a)(6) might make 
relatively small investments. The potential dispersed investor base may 
make it difficult for investors to solve collective action problems.
    The statute and the proposed rules seek to reduce information 
asymmetries by requiring issuers to file specified disclosures with the 
Commission for offerings made in reliance on Section 4(a)(6) on the 
offer date and on an annual basis thereafter.\925\ Issuers also would 
be required to provide these disclosures to investors, and in the case 
of offering documents, to potential investors and the relevant broker 
or funding portal. The proposed disclosure requirements described above 
\926\ are more extensive than those required under existing offering 
exemptions. For example, although the current requirements under 
Regulation A require similar initial financial disclosures, they do not 
require periodic reporting.\927\ Issuers using the Rule 504 exemption 
under Regulation D to raise up to $1 million do not need to provide 
audited financial statements and there are no periodic disclosure 
requirements. Regulation D offerings under Rules 505 and 506 for up to 
$2 million require issuers to provide audited current balance sheets to 
non-accredited

[[Page 66522]]

investors (and unaudited statements of income, cash flows and changes 
in stockholders' equity), but there are no periodic reporting 
requirements. The disclosure requirements in the proposed rules should 
benefit investors by enabling them to better evaluate the issuer and 
the offering, monitor how the issuer is doing over time and be aware of 
when the issuer may terminate its ongoing reporting obligations. This 
would allow investors with various risk preferences to invest in the 
offerings best suited for their risk tolerance, thus improving 
allocative efficiency.
---------------------------------------------------------------------------

    \925\ See Section 4A(b). See also proposed Rules 201, 202 and 
203 of Regulation Crowdfunding.
    \926\ See Section II.B.1 above.
    \927\ Securities Act Rule 257 (17 CFR 230.257), however, 
requires issuers conducting offerings pursuant to Regulation A to 
file Form 2-A (17 CFR 239.91) with the Commission at certain 
intervals to report sales and the use of proceeds until termination, 
completion or final sale of securities in the offering or until the 
proceeds have been applied, whichever is later.
---------------------------------------------------------------------------

    The disclosure requirements also could improve informational 
efficiency in the market. Specifically, the required disclosure would 
provide investors with a useful benchmark to evaluate other private 
issuers both within and outside of the securities-based crowdfunding 
market.\928\ Additionally, disclosure by issuers engaging in 
crowdfunding transactions in reliance on Section 4(a)(6) could inform 
financial markets more generally by providing information about new 
consumer trends and new products, thus creating externalities that 
benefit other types of investors and issuers.
---------------------------------------------------------------------------

    \928\ See Christian Leuz and Peter Wysocki, Economic 
Consequences of Financial Reporting and Disclosure Regulation: A 
Review and Suggestions for Future Research, (Working Paper, 
University of Chicago) (2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105398.
---------------------------------------------------------------------------

    We recognize, however, that the proposed disclosure requirements 
also would have associated limitations and costs, including the direct 
costs of preparation, certification (when necessary) and dissemination 
of the disclosure documents. We note that, under the statute, the 
disclosure requirements for offerings made in reliance on Section 
4(a)(6) are more extensive, in terms of breadth and frequency, than 
those for other private offerings. The statute also provides us with 
the discretion to impose additional requirements on issuers engaging in 
crowdfunding transactions, and in some cases, the proposed rules would 
require issuers to disclose information in addition to the information 
specifically listed in the statute.\929\ For example, we are proposing 
to require disclosure of any indebtedness of the issuer \930\ because 
we believe that servicing debt could place additional pressures on a 
company in the early stages of development and this information would 
be important to investors. The proposed rules also would require 
disclosure of any prior securities-based crowdfunding or other exempt 
offerings conducted within the past three years.\931\ In some cases, an 
issuer might have previously engaged in crowdfunding in reliance on 
Section 4(a)(6) and may be returning for additional funding. We believe 
that it would be important to investors to know whether the prior 
securities-based crowdfunding or other offerings of securities were 
successful, and if so, the amount raised in these prior offerings. 
Compared to the disclosure requirements under existing private offering 
exemptions, this information would better inform investors about the 
capital structure of an issuer, might provide insight into how prior 
offerings were valued and could enable investors to more fully assess 
the issuer and the potential risks associated with the current 
offering.
---------------------------------------------------------------------------

    \929\ See Section 4A(b)(5). See also Section II.B.1.a.i(g) for a 
description of the additional disclosure requirements.
    \930\ See proposed Rule 201(p) of Regulation Crowdfunding.
    \931\ See proposed Rule 201(q) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We recognize that the additional information required by the 
discretionary requirements would increase the disclosure costs to 
issuers, but we believe that this would improve investor decision-
making and ultimately benefit issuers with viable investment 
opportunities by improving price efficiency in the securities-based 
crowdfunding market. Although we recognize that requiring less 
disclosure would impose lower compliance costs, we believe that the 
additional disclosure requirements we are proposing strike the 
appropriate balance between enhancing the ability of issuers relying on 
Section 4(a)(6) to raise capital and enabling investors to make 
informed investment decisions. Additionally, disclosure might have 
indirect costs to the extent that information disclosed by issuers 
relying on Section 4(a)(6) could be used by their competitors. 
Requiring significant levels of disclosure at an early stage of an 
issuer's lifecycle might affect an issuer's competitive position and 
might limit the use of the exemption in Section 4(a)(6) by issuers who 
are especially concerned with confidentiality. It also is possible that 
these disclosure costs would make other types of private offerings more 
attractive to potential securities-based crowdfunding issuers. For 
example, the recent changes to Rule 506 of Regulation D,\932\ which 
allow for general solicitation, subject to certain conditions, are 
likely to increase its attractiveness and, thus, may divert potential 
issuers from crowdfunding.
---------------------------------------------------------------------------

    \932\ See General Solicitation Adopting Release, note 12.
---------------------------------------------------------------------------

    In addition, under the statute and the proposed rules, issuers that 
complete a crowdfunding transaction in reliance on Section 4(a)(6) 
would be subject to ongoing reporting requirements,\933\ which are not 
required under other private offering exemptions and which might 
increase compliance costs. The ongoing reporting, however, might 
provide a liquidity benefit for secondary sales of the issuers' 
securities.
---------------------------------------------------------------------------

    \933\ See Section 4A(b)(4). See also proposed Rule 202 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

b. Financial Condition and Financial Statement Disclosure Requirements
    With respect to the statutory requirement to provide disclosure 
about the issuer's financial condition, the proposed rules would 
require narrative disclosure addressing the issuer's historical results 
of operations, in addition to information about its liquidity and 
capital resources.\934\ We expect that this discussion would inform 
investors about the financial condition of the issuer, without imposing 
significant costs, because the issuer should already have such 
information readily available. In addition, the proposed rules would 
not prescribe the content or format for this information.
---------------------------------------------------------------------------

    \934\ See proposed Rule 201(s) of Regulation Crowdfunding. See 
also Section II.B.1.a.ii(a) above.
---------------------------------------------------------------------------

    With respect to the requirement to provide financial statements, 
the proposed rules would implement the tiered financial disclosure 
requirements specified by the statute, which are based on the aggregate 
amount of securities offered and sold during the preceding 12-month 
period, inclusive of the offering amount in the offering for which 
disclosure is being provided.\935\ Although the disclosure requirements 
would provide investors with more information than might otherwise be 
obtained in private offerings, the disclosures might create additional 
costs for those issuers who have limited financial and accounting 
expertise necessary to produce the financial disclosures envisioned by 
the statute and the proposed rules. In this respect, the statute 
anticipates a level of development among issuers that might not be 
present in the relevant securities-based crowdfunding market. For 
instance, a startup with a promising business idea might have little 
capital prior to the offering, leaving limited amounts to be audited or 
certified. The issuer disclosures required for offerings made in 
reliance on Section 4(a)(6),

[[Page 66523]]

therefore, might not always help investors with their investment 
decisions or may weigh against an issuer when a potential investor is 
deciding whether to make an investment.
---------------------------------------------------------------------------

    \935\ See proposed Rule 201(t) of Regulation Crowdfunding. See 
also Section II.B.1.a.ii(b) above.
---------------------------------------------------------------------------

    The proposed rules would require all issuers to provide a complete 
set of their financial statements (a balance sheet, income statement, 
statement of cash flows and statement of changes in owners' equity) 
that are prepared in accordance with U.S. GAAP and cover the shorter of 
the two most recently completed fiscal years or the period since 
inception.\936\ This proposed requirement may impose a cost on 
potential issuers, especially those smaller issuers that may have 
historically prepared their financial statements in accordance with 
other comprehensive bases of accounting, such as a cash basis of 
accounting or a tax basis of accounting, rather than U.S. GAAP. 
Investors, however, would benefit from the requirement that financial 
statements be prepared in accordance with U.S. GAAP, as U.S. GAAP is 
widely used and would allow for more comparability among issuers.
---------------------------------------------------------------------------

    \936\ See proposed Instruction 2 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules also specify that an issuer could conduct an 
offering in reliance on Section 4(a)(6) using financial statements for 
the fiscal year prior to the most recently completed fiscal year, 
provided that not more than 120 days have passed since the end of the 
issuer's most recently completed fiscal year, the issuer was not 
otherwise required to update the financial statements and updated 
financial statements are not otherwise available.\937\ This might 
impose a cost on potential investors to the extent that the investors 
would not have the most recent information about the issuer's financial 
condition. However, this concern is somewhat mitigated by the proposed 
requirement that issuers include a discussion of changes in their 
financial condition since the period covered by the financial 
statements, including changes in revenue or net income and other 
relevant financial measures.\938\
---------------------------------------------------------------------------

    \937\ See proposed Instruction 8 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
    \938\ See proposed Instruction 9 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Requiring financial statements covering the two most recently 
completed fiscal years, as proposed, would benefit investors by 
providing a basis for comparison against the most recently completed 
fiscal year and by allowing investors to identify changes in the 
development of the business. Compared to an alternative that we could 
have selected, that of requiring financial statements covering only the 
most recently completed fiscal year as one commenter suggested,\939\ 
requiring a second year of financial statements might increase the cost 
for the issuer.\940\ Also, to the extent that the issuer had no or 
little operations in the prior year, the benefit of comparability might 
not apply. In this regard, we recognize that many issuers might not 
have any financial history, and potential investors might make 
investment decisions without a track record of issuer performance, 
relying largely on the belief that an issuer can succeed based on the 
concept and other factors.
---------------------------------------------------------------------------

    \939\ See CompTIA Letter.
    \940\ But see note 174.
---------------------------------------------------------------------------

    For offerings of $100,000 or less, the statute and the proposed 
rules would require the issuer to provide its filed income tax returns 
for the most recently completed year (if any) and financial statements 
that are certified by the principal executive officer to be true and 
complete in all material respects.\941\ While providing an income tax 
return is not expected to impose a significant cost on issuers, it is 
not clear to what extent the information presented in a tax return 
would be useful for an investor evaluating whether or not to purchase 
securities from the issuer. Although the information might be limited, 
it would not be uninformative. Under the proposed rules, issuers would 
be required to redact personal information from the required tax 
returns.\942\ We believe that this would alleviate privacy concerns, 
while still satisfying the statutory requirement to provide tax return 
information.
---------------------------------------------------------------------------

    \941\ See Section 4A(b)(1)(D)(i). See also proposed Rule 
201(t)(1) of Regulation Crowdfunding.
    \942\ See proposed Instruction 3 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Moreover, the proposed rules would specify that if an issuer is 
offering securities in reliance on Section 4(a)(6) before filing a tax 
return for the most recently completed fiscal year, the issuer could 
use the tax return filed for the prior year, on the condition that the 
issuer provides the tax return for the most recent fiscal year when it 
is filed, if it is filed during the offering period.\943\ This 
accommodation should benefit issuers by enabling them to engage in 
transactions during the time period between the end of their fiscal 
year and when they file their tax return for that year. This might 
impose a cost on potential investors because they might not receive the 
most up-to-date information about the issuer's financial condition. 
However, this concern is somewhat mitigated by the proposed requirement 
that issuers provide disclosure about material changes in their 
financial condition since the prior year.\944\ In addition, we are 
proposing a form of certification for the principal executive officer 
to provide in the issuer's offering statement, which we believe would 
help issuers comply with the certification required by the statute and 
the proposed rules.\945\
---------------------------------------------------------------------------

    \943\ Id.
    \944\ See proposed Instruction 9 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
    \945\ See proposed Instruction 4 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    For offerings of more than $100,000, but not more than $500,000, 
the proposed rules specify that the required financial statements must 
be reviewed in accordance with SSARS issued by the AICPA.\946\ Although 
one alternative we could have selected is to develop a new review 
standard for purposes of these rules, we believe that issuers would 
benefit from a rule that requires the use of the AICPA's widely-
utilized review standard, particularly in light of the fact that there 
are no other widely-utilized review standards from which to choose. We 
believe that many accountants reviewing financial statements of issuers 
raising capital in reliance on Section 4(a)(6) would be familiar with 
the AICPA's standards and procedures for review, which should help to 
lessen review costs.
---------------------------------------------------------------------------

    \946\ See proposed Rule 201(t)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    For offerings of more than $500,000, the statute and the proposed 
rules would require that financial statements be audited.\947\ The 
statute gives us discretion to change the threshold that would require 
audited financial statements, but we are not proposing to change it at 
this time. We believe that audited financial statements would benefit 
investors in offerings by issuers with substantive prior business 
activity by providing them with greater confidence in the quality of 
the financial statements of issuers seeking to raise larger amounts of 
capital. We also understand that requiring audited financial statements 
would increase the cost to issuers, and for issuers that are newly 
formed, with no or very limited operations, the benefit of the audit 
may not justify the cost of the audit. Compared to an alternative that 
we could have taken, that of a higher threshold (e.g., offerings of 
more than $700,000) for providing audited financial statements, our 
approach in the proposed rules would likely result in more issuers 
having to provide audited financial statements, as well as

[[Page 66524]]

higher compliance costs for those issuers. Based on a compilation of 
data submitted to us by reporting companies, the average cost of an 
audit for an issuer with less than $1 million in market capitalization 
and less than $1 million in revenues is approximately $28,700.\948\ We 
expect that the cost of an audit for many issuers engaging in a 
crowdfunding transaction in reliance on Section 4(a)(6) might be less, 
because they likely would be at an earlier stage of development than 
issuers that file Exchange Act reports with us and, thus, would be less 
complex to audit.
---------------------------------------------------------------------------

    \947\ See Section 4A(b)(1)(D)(iii). See also proposed Rule 
201(t)(3) of Regulation Crowdfunding.
    \948\ See Audit Analytics, Auditor-Fees, available at http://www.auditanalytics.com/0002/audit-data-company.php. The auditor fee 
database contains fee data disclosed by Exchange Act reporting 
companies in electronic filings since January 1, 2001. For purposes 
of our calculation, we averaged the auditor fee data for companies 
with both market capitalization and revenues of less than $1 million 
(the smallest subgroup of companies for which data is compiled).
---------------------------------------------------------------------------

    For offerings of more than $500,000, the proposed rules also would 
require financial statements to be audited in accordance with the 
auditing standards issued by either the AICPA or the PCAOB.\949\ We 
believe that letting issuers choose the auditing standards could 
provide a number of benefits. If an issuer currently has financial 
statements audited under one of the specified standards, the issuer 
would not need to obtain a new audit or engage a different auditor to 
conduct an audit to engage in a crowdfunding transaction in reliance on 
Section 4(a)(6) and the proposed rules. If an issuer chooses to have an 
audit conducted in accordance with PCAOB auditing standards, it would 
not need to obtain a new audit to file a registration statement with 
the Commission for a registered offering. By not taking an alternative 
approach, that of requiring the audits to be conducted by PCAOB-
registered firms, the proposed rules should allow for the eligibility 
of a greater number of accountants to audit the issuers' financial 
statements, and thereby, could reduce costs for crowdfunding issuers.
---------------------------------------------------------------------------

    \949\ See proposed Rule 201(t)(3) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    As described above, the statute and the proposed rules require some 
financial statements to be reviewed or audited by a public accountant. 
The proposed rules would specify that a public accountant must be 
independent of the issuer, in accordance with the independence 
standards set forth in Rule 2-01 of Regulation S-X.\950\ The proposed 
requirement to comply with our independence standards may impose costs 
to the extent that there are higher costs associated with engaging an 
accountant that satisfies the independence standards. Also, the 
independence standards set forth in Rule 2-01 of Regulation S-X may 
impose higher costs than other independence standards, such as the 
AICPA independence standards.\951\
---------------------------------------------------------------------------

    \950\ See proposed Instruction 7 to paragraph (t) of proposed 
Rule 201 of Regulation Crowdfunding.
    \951\ For example, under the independence standards set forth in 
Rule 2-01 of Regulation S-X, an auditor cannot provide bookkeeping 
services to an audit client, so an issuer would need to retain a 
different accountant to provide those services. See Rule 2-01(c)(4) 
of Regulation S-X [17 CFR 210.2-01(c)(4)].
---------------------------------------------------------------------------

    In addition, the proposed rules would require an issuer to file a 
review report or audit report, whichever is applicable.\952\ This could 
impose an additional cost on issuers to the extent that the accountant 
or auditor increases the fee associated with the review or audit to 
compensate for any additional liability that may result.
---------------------------------------------------------------------------

    \952\ See proposed Instructions 5 and 6 to paragraph (t) of 
proposed Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

c. Issuer Filing Requirements
    The statute does not specify a format that issuers must use to 
present the required disclosures and file the disclosures with the 
Commission. As noted above, we are proposing to require issuers to file 
the mandated disclosure on EDGAR using new Form C.\953\ Issuers would 
incur the cost to comply with the disclosure requirements and file the 
information in the new proposed Form C: Offering Statement and Form C-
U: Progress Update before the offering was funded, thus imposing a cost 
on issuers regardless of whether their offerings were successful. In 
addition, issuers would incur the cost to comply with the ongoing 
reporting requirements and file information in the new proposed Form C-
AR: Annual Report.\954\
---------------------------------------------------------------------------

    \953\ See proposed Rule 203(a) of Regulation Crowdfunding. See 
also Section II.B.3 above.
    \954\ See proposed Rule 203(b) of Regulation Crowdfunding. See 
also Section II.B.3 above.
---------------------------------------------------------------------------

    Form C would require certain disclosures to be submitted using an 
XML-based filing,\955\ while allowing the issuer to customize the 
presentation of other required disclosures. This proposed approach 
would provide issuers with the flexibility to present required 
disclosures in a cost-effective manner, while also requiring the 
disclosure of certain key offering information that would be collected 
in a standardized format, which we believe would benefit investors and 
help facilitate capital formation.
---------------------------------------------------------------------------

    \955\ See proposed Instruction to paragraph (a)(1) of proposed 
Rule 203 of Regulation Crowdfunding. See also Section II.B.3 above.
---------------------------------------------------------------------------

    We expect that requiring certain disclosures to be submitted using 
XML-based filings would produce numerous benefits for issuers, 
investors and the Commission. For instance, using information filed 
pursuant to these proposed requirements, users of the information could 
readily track capital generated through crowdfunding offerings without 
requiring the manual inspection of each filing. The ability to 
efficiently collect information on all issuers also could provide an 
incentive for data aggregators or other market participants to offer 
services or analysis that investors could use to compare and choose 
among different offerings. For example, reporting key financial 
information using XML-based filings would allow investors, analysts and 
data aggregators to more easily compile, analyze and compare 
information regarding the capital structure and financial position of 
various issuers. XML-based filings also would provide the Commission 
with data about the use of the new exemption that would allow the 
Commission to evaluate whether the rules implementing the exemption 
include appropriate investor protections and whether the rules unduly 
restrict capital formation. In addition, requiring disclosure of the 
compensation paid to intermediaries would help inform the Commission, 
issuers and investors about the costs of raising capital in this 
market.
    We expect that the cost of preparing and filing Form C could vary 
significantly among issuers. For example, issuers with little operating 
activity might have lower costs because they likely would have less to 
disclose than a more complex operation. Further, small issuers might 
choose to prepare and file Form C without seeking the assistance of 
outside counsel.\956\ Thus, the Commission also expects that reporting 
costs for many small issuers may be insignificant.\957\
---------------------------------------------------------------------------

    \956\ See Section IV.C.1. below.
    \957\ We estimate, for purposes of the Paperwork Reduction Act, 
that 25 percent of the 60 hours anticipated to prepare and file Form 
C could be performed by outside counsel at a rate of $400 an hour. 
See Section IV.C.1.a below. We recognize that the costs of retaining 
outside professionals may vary depending on the nature of the 
professional service and that many small issuers are likely to face 
substantially lower costs.
---------------------------------------------------------------------------

    The proposed rules also would require that issuers file a Form C-U: 
Progress Update to describe the progress of the issuer in meeting the 
target offering amount.\958\ The proposed rules would require the 
issuer to file two progress updates within five business

[[Page 66525]]

days from the day when the issuer reaches one-half and 100 percent of 
the target offering amount, as well as a final progress update within 
five business days after the end of the offering period if the issuer 
will accept proceeds in excess of the target offering amount. The 
Commission expects the costs of preparing these updates to vary but to 
be relatively small, given how little information is required.\959\ 
However, if the size of the security-based crowdfunding market 
developed to a level commensurate with the current non-security-based 
crowdfunding market, this could result in tens of thousands of filings 
with the Commission each year. To the extent that this same progress 
information also would be available on the registered intermediary's 
Web site, as is already occurring with existing non-security-based 
offering platforms, then there might be little marginal benefit to 
these filings. For these reasons, we are seeking comment on alternative 
frequencies and manner of progress updates.
---------------------------------------------------------------------------

    \958\ See proposed Rule 203(a)(3) of Regulation Crowdfunding. 
See also Sections II.B.1.b and II.B.3 above.
    \959\ See Section IV.C.1.a below.
---------------------------------------------------------------------------

    As noted above, the statute also requires an issuer to file and 
provide to investors information about the issuer's financial condition 
on at least an annual basis, as determined by the Commission.\960\ To 
implement this statutory requirement, the proposed rules would require 
any issuer that sold securities in a crowdfunding transaction in 
reliance on Section 4(a)(6) to file annually with the Commission a new 
Form C-AR: Annual Report, no later than 120 days after the end of each 
fiscal year covered by the report.\961\ We believe that annual reports 
would inform investors in their portfolio decisions and could enhance 
price efficiency. Moreover, as discussed above, under the statute and 
the proposed rules, the securities would be freely tradable after one 
year,\962\ and therefore, this information also would benefit potential 
future holders of the issuer's securities by enabling them to update 
their assessments as new information was made available through the 
annual updates, potentially allowing for more efficient pricing. More 
generally, these proposed continued disclosures also might help 
facilitate the transfer of securities in secondary markets after the 
one-year restricted period ends, which could mitigate some of the 
potential liquidity issues that are unique to the securities-based 
crowdfunding market, discussed above.
---------------------------------------------------------------------------

    \960\ See Section 4A(b)(4).
    \961\ See proposed Rule 202 of Regulation Crowdfunding. See also 
Section II.B.2 above for a discussion of the disclosure requirements 
for Form C-AR.
    \962\ See Section 4A(e). See also proposed Rule 501 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    Annual reporting requirements, however, would impose ongoing costs 
on issuers. The proposed rules would require that issuers continue to 
file Form C-AR: Annual Report until the earlier of the following: (1) 
The issuer becomes a reporting company required to file reports under 
Exchange Act Sections 13(a) or 15(d); (2) the issuer or another party 
repurchases all of the securities issued pursuant to Securities Act 
Section 4(a)(6), including any payment in full of debt securities or 
any complete redemption of redeemable securities; or (3) the issuer 
liquidates or dissolves its business in accordance with state law.\963\ 
We estimate that the cost to prepare and file Form C-AR would be 
approximately two-thirds of the cost to prepare and file Form C: 
Offering Statement. Form C-AR requires similar disclosure as Form C. If 
an issuer undertakes multiple offerings, which individually require 
different levels of financial statements, the issuer would be required 
to provide financial statements that meet the highest standard 
previously provided. An issuer would not be required to provide the 
offering-specific information that was filed at the time of the 
offering, but the disclosure requirements would otherwise be the same 
as those required in connection with the offer and sale of the 
securities,\964\ which should minimize the disclosure burden for 
issuers. Any issuer terminating its annual reporting obligations would 
be required to file a notice under cover of ``Form C-TR: Termination of 
Reporting'' to notify investors and the Commission that it would no 
longer file and provide annual reports pursuant to the requirements of 
Regulation Crowdfunding.\965\ The Commission expects the costs of 
preparing these updates to vary significantly among issuers.\966\
---------------------------------------------------------------------------

    \963\ See proposed Rule 202(b) of Regulation Crowdfunding.
    \964\ See proposed Rule 202(a) of Regulation Crowdfunding.
    \965\ See proposed Rule 203(b)(2) of Regulation Crowdfunding.
    \966\ Issuers would spend, on average, approximately 1.5 hours 
to complete this task. Again, we do not have the information 
necessary to provide a reasonable estimate of the costs associated 
with this time burden because these costs would vary significantly 
among small issuers and would depend, in part, on the stage of the 
issuer's development. See Section IV.C.1.c below.
---------------------------------------------------------------------------

d. Advertising--Notice of Offering
    The statute and the proposed rules would prohibit an issuer from 
advertising the terms of the offering, except for notices that direct 
investors to an intermediary's platform.\967\ The terms of the offering 
would include the amount offered, the nature of the securities, price 
of the securities and length of the offering period.\968\ The proposed 
rules would allow an issuer to publish a notice about the terms of the 
offering made in reliance on Section 4(a)(6), subject to certain 
limitations on the content of the notice.\969\ The notices would be 
similar to the ``tombstone ads'' permitted under Securities Act Rule 
134,\970\ except that the proposed rules would require the notices to 
direct potential investors to the intermediary's platform, through 
which the offering made in reliance on Section 4(a)(6) would be 
conducted.
---------------------------------------------------------------------------

    \967\ See Section 4A(b)(2). See also proposed Rule 204 of 
Regulation Crowdfunding.
    \968\ See proposed Instruction to proposed Rule 204 of 
Regulation Crowdfunding.
    \969\ See proposed Rule 204(b) of Regulation Crowdfunding. See 
also Section II.B.4 above.
    \970\ 17 CFR 230.134.
---------------------------------------------------------------------------

    We believe this approach would allow issuers to generate interest 
in offerings and to leverage the power of social media to attract 
potential investors. At the same time, we believe it also would protect 
potential investors by limiting the ability of issuers to provide 
certain advertising materials without also providing the disclosures, 
available on the intermediary's platform, that are required for an 
offering made in reliance on Section 4(a)(6). Moreover, this proposed 
requirement that limits the issuer's ability to advertise the terms of 
the offering, while directing investors to the intermediary's platform 
for more offering-specific information, would not impose costs to 
market participants.
e. Compensation of Persons Promoting the Offering
    The statute and the proposed rules would prohibit an issuer from 
compensating, or committing to compensate, directly or indirectly, any 
person to promote the issuer's offering through communication channels 
provided by the intermediary unless the issuer takes reasonable steps 
to ensure that such person clearly discloses the receipt of such 
compensation (both past and prospective) each time a promotional 
communication is made.\971\
---------------------------------------------------------------------------

    \971\ See Section 4A(b)(3). See also proposed Rule 205 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that such requirement would benefit the securities-based 
crowdfunding market because it would allow investors to make better 
informed investment decisions. A premise of crowdfunding is that 
investors would rely, at least in part, on the collective wisdom of the 
crowd to make better informed investment decisions.

[[Page 66526]]

Accordingly, we propose to require intermediaries to provide 
communication channels for issuers and investors to exchange 
information about the issuer and its offering.\972\ Although the 
requirement to take steps to ensure disclosure of compensation paid to 
persons promoting the offering would impose compliance costs for 
issuers, we believe that investors would benefit from knowing if the 
investment they are considering and discussing with other potential 
investors is being touted by a promoter who is compensated by the 
issuer.
---------------------------------------------------------------------------

    \972\ See proposed Rule 303(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

f. Oversubscription and Offering Price
    The proposed rules would permit an issuer to accept investments in 
excess of the target offering amount, subject to the $1 million 
limitation and certain conditions.\973\ We believe that permitting 
oversubscriptions would provide flexibility to issuers so that they can 
raise the amount of capital they deem necessary to finance their 
businesses. For example, permitting oversubscriptions would allow an 
issuer to raise more funds, while lowering compliance costs, if the 
issuer discovers during the offering process that there is greater 
investor interest in the offering than initially anticipated or if the 
cost of capital is lower than initially anticipated.
---------------------------------------------------------------------------

    \973\ See proposed Rule 201(h) of Regulation Crowdfunding. See 
also Section II.B.6.i above.
---------------------------------------------------------------------------

    The proposed rules also would not require issuers to set a fixed 
price or prohibit dynamic pricing. We believe that allowing issuers 
flexibility in setting the offering price would allow them to extract 
investors' reservation price for a given offering or to incentivize 
investors to subscribe to an offering early, thus increasing the 
likelihood that the offering would be successful. Further, the proposed 
required disclosure of the pricing method used and the final prices for 
the securities before an offering closes,\974\ coupled with the 
investor's ability to cancel his or her investment commitment,\975\ 
could mitigate potential concerns that dynamic pricing could be used to 
provide preferential treatment to certain investors (e.g., when an 
issuer offers better prices to relatives or insiders). We also believe 
that the proposed cancellation rights would address the concerns about 
time pressure on the investment decision because investors would have 
the opportunity to cancel their investment commitments if they decide 
to do so.
---------------------------------------------------------------------------

    \974\ See proposed Rule 201(l) of Regulation Crowdfunding.
    \975\ See proposed Rule 201(j) of Regulation Crowdfunding.
---------------------------------------------------------------------------

h. Restrictions on Resales
    The statute and the proposed rules also include restrictions on 
transfers of securities for one year, subject to limited exceptions 
(e.g., for transfers to the issuer of the securities, in a registered 
offering, to an accredited investor or to certain family members).\976\ 
The proposed rules also would permit transfers to trusts controlled by, 
or held for the benefit of, covered family members.\977\ We believe 
that including such proposed restrictions is important for investor 
protection. By restricting the transfer of securities for a one-year 
period, the proposed rules would give investors in a business a defined 
period to observe the performance of the business and to potentially 
obtain more information about the potential success or failure of the 
business before trading occurs. The restrictions on resales, however, 
may impede price discovery.
---------------------------------------------------------------------------

    \976\ See Section 4A(e). See also proposed Rule 501 of 
Regulation Crowdfunding.
    \977\ See proposed Rule 501(a)(4) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed one-year restriction on transfers of securities 
purchased in a transaction conducted in reliance on Section 4(a)(6) 
might reduce trading liquidity, raise capital costs to issuers and 
limit investor participation, particularly for investors who cannot 
risk locking up their investments for this period. The illiquidity cost 
would be mitigated, in part, by provisions that allow investors to 
transfer the securities within one year of issuance by reselling the 
securities to accredited investors, back to the issuer or in a 
registered offering or transferring them to certain family members or 
trusts of those family members. These provisions likely would improve 
the liquidity of these securities and, thus, could increase investor 
participation in securities-based crowdfunding offerings.
4. Intermediary Requirements
    The statute and the proposed rules require that transactions be 
conducted through a registered broker or registered funding portal. The 
use of a registered intermediary to match issuers and investors would 
require that they incur certain transactions costs necessary to support 
the intermediation activity, but also would provide centralized venues 
for crowdfunding activities that should lower investor and issuer 
search costs. As discussed earlier, existing rewards-based and 
donations-based crowdfunding platforms already engage in a large number 
of transactions, estimated at over 500,000 successful campaigns in the 
aggregate,\978\ demonstrating that the use of platforms for 
crowdfunding may be familiar to investors and issuers.
---------------------------------------------------------------------------

    \978\ See note 863.
---------------------------------------------------------------------------

    We believe that existing crowdfunding platforms would initially be 
the primary, non-broker-dealer intermediaries in the securities-based 
crowdfunding market. Registered brokers, or broker-dealers that are 
currently unregistered, but are planning to register in the future, 
also might wish to enter the securities-based crowdfunding market, 
which would increase the competition among crowdfunding intermediaries 
and potentially lower the cost of intermediation to issuers. Both 
existing non-securities-based crowdfunding platforms and registered 
brokers might need to invest resources (including costs to comply with 
the proposed regime) to create the infrastructure for securities-based 
crowdfunding, with brokers likely investing to develop an Internet-
based platform and non-securities-based crowdfunding platforms 
investing to register as funding portals and revise their existing 
sites to comply with the requirements of the statute and the proposed 
rules. Although the eventual extent of broker involvement in the 
securities-based crowdfunding market is difficult to anticipate, we 
believe that some brokers might acquire or form partnerships with 
funding portals to obtain access to a new and diverse investor base. In 
addition, some existing non-securities-based crowdfunding platforms 
might eventually either register as brokers or form partnerships with 
registered brokers to offer brokerage services as part of their service 
offerings. As discussed above, we believe that there could be 
incentives for funding portals to pursue such partnerships, because of 
brokers' expertise and access to investors, as well as because of the 
statutory and proposed rule restrictions on funding portal activities.
    Although it is not possible to predict precisely the future number 
of persons (or entities) who would register as either brokers or 
funding portals to act as intermediaries in securities-based 
crowdfunding transactions,\979\ we

[[Page 66527]]

estimate that intermediaries would number approximately 110, including 
approximately 10 intermediaries that would register as brokers in order 
to engage in crowdfunding, approximately 50 intermediaries that would 
already be registered as brokers and approximately 50 intermediaries 
that would register as funding portals.\980\ It is possible that the 
actual number of participants could deviate significantly from these 
estimates, and it is likely that there would be significant competition 
between existing crowdfunding venues and new entrants that could result 
in further changes in the number and types of intermediaries as the 
market develops and matures. It also is likely that there will be 
significant developments in the types and ranges of crowdfunding 
products and services offered to potential issuers and investors, 
particularly as competitors learn from their experiences. Moreover, the 
business models of the successful crowdfunding intermediaries are 
likely to change over time as they grow in size or market share or if 
they are forced to differentiate from other market participants in 
order to maintain a place in the market.
---------------------------------------------------------------------------

    \979\ There are significant challenges to establishing a 
statistically reliable estimate of the number of intermediaries that 
would participate in the securities-based crowdfunding market. For 
example, in a similar context, a 2005 report on private placement 
broker-dealers determined that there is no effective measuring 
device to estimate the number of intermediaries for small businesses 
currently in the marketplace. See Task Force on Private Placement 
Broker-Dealers, note 894. We also recognize that there are 
limitations on predicting the number of intermediaries that would 
participate in securities-based crowdfunding, based on existing 
practices in the donation-based and rewards-based crowdfunding 
markets or foreign securities-based crowdfunding. In particular, 
platforms currently involved in donation-based and rewards-based 
crowdfunding may be motivated by philanthropic interests and may not 
intend to expand their platforms to offer securities-based 
crowdfunding opportunities. In addition, foreign securities-based 
crowdfunding takes place in a different regulatory setting, and 
thus, the market may not develop the same way in the United States.
    \980\ These estimates are based, in part, on current indications 
of interest, which may change as the market develops. According to 
FINRA, as of October 3, 2013, approximately 36 entities have 
submitted the voluntary Interim Form for Funding Portals to FINRA to 
indicate their intention to act as funding portals under the JOBS 
Act. See Press Release, Financial Industry Regulatory Authority, 
FINRA Issues Voluntary Interim Form for Crowdfunding Portals (Jan. 
10, 2013), available at http://www.finra.org/Newsroom/NewsReleases/2013/P197636; Financial Industry Regulatory Authority, Crowdfunding 
Portals, available at http://www.finra.org/industry/issues/crowdfunding. Based on the current indication of interest, we expect 
that the number of funding portals that would ultimately register 
with the Commission will be approximately 50. This estimate may 
change as the market develops.
---------------------------------------------------------------------------

    As a result of the uncertainty over how the market may develop, any 
estimates of the potential number of market participants, their 
services or fees charged are subject to significant estimation error. 
While we recognize that there are benefits as well as costs associated 
with the statutory requirements and the proposed rules pertaining to 
intermediaries, there are significant limitations to our ability to 
estimate the potential benefits and costs.
    The statute requires that the offer or sale of securities in 
reliance on Securities Act Section 4(a)(6) be conducted through a 
broker or a funding portal that complies with the requirements of 
Securities Act Section 4A(a).\981\ Among other things, the intermediary 
must register with the Commission as a broker or a funding portal, and 
it also must register with a registered national securities 
association.\982\ The proposed rules would implement these statutory 
requirements, including by requiring an intermediary to be a member of 
FINRA or any other applicable registered national securities 
association.
---------------------------------------------------------------------------

    \981\ Section 4(a)(6)(C).
    \982\ Section 4A(a)(2).
---------------------------------------------------------------------------

    We recognize that there are benefits and costs associated with the 
statutory requirements and the proposed rules pertaining to 
intermediaries. While the benefits and costs are described in further 
detail below, the following tables summarize the estimated direct costs 
to intermediaries, including brokers and funding portals. Some of the 
direct costs of the rules would be incurred by all intermediaries, 
while others are specific to whether the intermediary is a new entrant 
(either broker or funding portal) or is already registered as a broker.
    Although we have attempted to estimate the direct costs on 
intermediaries, we recognize that some costs could vary significantly 
across intermediaries, and within categories of intermediaries. For 
example, some intermediaries may choose to leverage existing platforms 
or systems and so may not need to incur significant additional expenses 
to develop a platform or comply with specific proposed requirements of 
Regulation Crowdfunding. In light of these uncertainties, we encourage 
commenters to provide data and analysis to help analyze and quantify 
further the potential benefits and costs of these rules.
    We estimate that the cost for an entity to register as a broker and 
become a member of a national securities association in order to engage 
in crowdfunding pursuant to Section 4(a)(6) would be approximately 
$275,000, with an ongoing annual cost of approximately $50,000 to 
maintain that registration and membership.\983\ In addition, we 
estimate that the cost to comply with the various requirements that 
apply to registered brokers engaging in transactions pursuant to 
Section 4(a)(6) would be approximately $245,000 initially, and $180,000 
each year thereafter. In making this estimate, we assume that brokers 
acting as intermediaries in transactions pursuant to Section 4(a)(6) 
would provide a full range of brokerage services in connection with 
these transactions, including certain services such as providing 
investment advice and recommendations, soliciting investors, and 
managing and handling customer funds and securities, that funding 
portals cannot provide.\984\
---------------------------------------------------------------------------

    \983\ We recognize that the cost of registering and becoming a 
member of a national securities association varies significantly 
among brokers, depending on facts and circumstances. Among other 
things, the cost can vary depending on the number of associated 
persons of the broker entity and their licensing requirements, the 
scope of the proposed brokerage activities, and the means by which 
the broker administers the registration process (e.g., it may choose 
to hire outside counsel to assist with the process). We also 
recognize that the time required for a broker to become a member of 
a national securities association varies and could take six months 
to one year. We estimate the range of this cost to be between 
$50,000 and $500,000, and so we have chosen the average amount of 
$275,000 for purposes of this discussion.
    \984\ Among other things, a broker providing recommendations and 
investment advice would be required to comply with FINRA rules on 
suitability. See FINRA Rule 2111. A broker soliciting through 
advertisements would be required to comply with FINRA rules relating 
to communications with the public. See FINRA Rule 2210. Brokers 
handling customer funds and securities also would be required to 
maintain net capital, segregate customer funds and comply with 
Exchange Act Rule 15c2-4. See Exchange Act Rules 15c3-1, 15c3-3 and 
15c2-4 [17 CFR 240.15c3-1, 15c3-3 and 15c2-4].
---------------------------------------------------------------------------

    If instead an entity were to register as a funding portal and 
become a funding portal member of a national securities association, we 
estimate the initial cost would be approximately $100,000, with an 
ongoing cost of approximately $10,000 in each year thereafter to 
maintain this registration and membership.\985\
---------------------------------------------------------------------------

    \985\ In making these estimates, we assume that the membership 
process would take approximately one month and that there would be 
no related licensing requirement for associated persons of the 
funding portal. We also only include domestic entities in these 
estimates, which would not need to comply with the proposed 
requirements in Regulation Crowdfunding that would apply to 
nonresident funding portals. Nonresident funding portals would be 
subject to an additional cost of approximately $25,870 to comply 
with the costs of completing Schedule C to Form Funding Portal, 
hiring and maintaining an agent for service of process and providing 
the required opinion of counsel.
---------------------------------------------------------------------------

    These estimated costs are exclusive of the cost of establishing and 
maintaining a platform and related functionality. We anticipate that a 
significant percentage of intermediaries (whether brokers or funding 
portals) will already have in place platforms and related systems that 
would only need to be tailored to comply with the requirements of Title 
III of the JOBS Act and Regulation Crowdfunding. We estimate that a 
cost

[[Page 66528]]

of approximately $100,000 in the first year, and approximately $40,000 
annually thereafter for an intermediary that already has in place a 
platform and related systems. However, for an intermediary (whether 
broker or funding portal) that would need to develop a platform from 
scratch, we estimate the cost to do so would be approximately $400,000 
in the initial year, and approximately $40,000 annually to maintain 
thereafter.
---------------------------------------------------------------------------

    \986\ As discussed above, these costs include, among others, the 
costs to the broker of having associated persons, who have licensing 
requirements, suitability requirements, requirements relating to 
advertisements, net capital and fidelity bond requirements, and 
compliance with Exchange Act Rule 15c2-4 (17 CFR 240.15c2-4), as 
well as the costs of complying with proposed Subpart C of Regulation 
Crowdfunding. See Section IV.C. 2 below for further detail on the 
costs associated with the requirements under proposed Subpart C.
    \987\ As described above, the cost to develop a platform is 
expected to vary depending on the extent to which the entity already 
has a platform and related systems in place. For purposes of this 
chart, we use the average of the range provided above ($100,000 to 
$400,000 in the initial year).
    \988\ As described above, this estimate reflects a streamlined 
process of becoming a member of a national securities association, 
which we assume would take approximately one month and not involve 
application or licensing of associated persons.
    \989\ This includes the costs of complying with the requirements 
of proposed Subparts C and D of Regulation Crowdfunding. See Section 
IV.C.2 below for further detail on these costs.
    \990\ As described above, the cost to develop a platform is 
expected to vary depending on the extent to which the entity already 
has a platform and related systems in place. For purposes of this 
chart, we use the average of the range provided above. See Section 
IV.C.2 below for further detail on costs associated with developing 
a platform.

       Estimated Costs of Intermediaries That Register as Brokers
------------------------------------------------------------------------
                                                  Estimated costs
                                         -------------------------------
                                           Initial cost    Ongoing cost
                                             (year 1)        per year
------------------------------------------------------------------------
Form BD Registration and National               $275,000         $50,000
 Securities Association Membership......
Complying with Requirements to Act as an         245,000         180,000
 Intermediary in, and to Engage in
 Broker Activities Related to,
 Transactions pursuant to Section
 4(a)(6) \986\..........................
Platform Development....................   \987\ 250,000          40,000
                                         -------------------------------
    Subtotal............................         770,000         270,000
------------------------------------------------------------------------


   Estimated Costs of Intermediaries That Register as Funding Portals
------------------------------------------------------------------------
                                                  Estimated costs
                                         -------------------------------
                                           Initial cost    Ongoing cost
                                             (year 1)        per year
------------------------------------------------------------------------
Form Funding Portal Registration and            $100,000         $10,000
 National Securities Association
 Membership \988\.......................
Complying with Requirements to Act as an          67,000          40,000
 Intermediary \989\.....................
Platform Development \990\..............         250,000          40,000
                                         -------------------------------
    Subtotal............................         417,000          90,000
------------------------------------------------------------------------


   Estimated Incremental Costs of Intermediaries Already Registered as
                                 Brokers
------------------------------------------------------------------------
                                                  Estimated costs
                                         -------------------------------
                                           Initial cost    Ongoing cost
                                             (year 1)        per year
------------------------------------------------------------------------
Complying with Requirements to Act as an         $45,000         $30,000
 Intermediary in Transactions pursuant
 to Section 4(a)(6) \991\...............
Platform Development \992\..............         250,000          40,000
                                         -------------------------------
    Subtotal............................         295,000          70,000
------------------------------------------------------------------------

    We believe that, while the registration requirements would 
necessarily impose costs on intermediaries, they also would provide 
significant protections for the crowdfunding investor marketplace. 
Among other things, in addition to the Commission's oversight and rule-
writing functions with regard to broker-dealers, FINRA currently is 
responsible for conducting most broker-dealer examinations, mandating 
certain disclosures by its members, writing rules governing the conduct 
of its members and associated persons, and informing and educating the 
investing public. Similarly, the regulatory framework that a registered 
national securities association--likely initially FINRA--would be 
required to create for funding portals would play an important role in 
the oversight of these entities.
---------------------------------------------------------------------------

    \991\ This includes the incremental costs of complying with the 
requirements of proposed Subpart C of Regulation Crowdfunding, but 
it excludes any registration or membership requirements. See Section 
IV.C.2 below for further detail on these costs.
    \992\ As described above, the cost to develop a platform is 
expected to vary depending on the extent to which the entity already 
has a platform and related systems in place. For purposes of this 
chart, we use the average of the range provided above. See Section 
IV.C.2 below for further detail on costs associated with developing 
a platform.
---------------------------------------------------------------------------

    The estimated costs in the table above reflect the direct, 
quantifiable costs that intermediaries would incur in connection with 
registering as a broker on Form BD or as a funding portal on Form 
Funding Portal, submitting amendments to registrations and withdrawing 
registrations. We estimate that approximately 50 intermediaries that 
would already be brokers that have already registered with the

[[Page 66529]]

Commission \993\ and, as such, these brokers would not incur additional 
SEC registration costs associated with the proposed rules. 
Additionally, intermediaries that are not otherwise registered with 
FINRA or any other registered national securities association would 
need to register, and the estimated cost for such registration is 
included in the table above. We anticipate that the cost for a funding 
portal to become a member of a registered national securities 
association would be proportionately less than the cost for a broker to 
do so because of the more limited nature of a funding portal's 
permissible activities, and the streamlined set of rules that the 
association would impose on funding portals.\994\ However, the exact 
cost of registration for funding portals would not be known until a 
registered national securities association adopts rules applicable to 
funding portals, and for purposes of this economic analysis, we have 
used a conservative estimate for this cost based on the current fee and 
costs applicable to brokers applying to become members of a national 
securities association.
---------------------------------------------------------------------------

    \993\ See Section IV.C.2 below.
    \994\ See FINRA, Jumpstart Our Business Startups Act: FINRA 
Requests Comment on Proposed Regulation of Crowdfunding Activities, 
FINRA Regulatory Notice 12-34 (July 2012), available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p131268.pdf (``In writing rules specifically for registered 
funding portals, FINRA would seek to ensure that the capital-raising 
objectives of the JOBS Act are advanced in a manner consistent with 
investor protection. Commenters are urged to identify the types of 
requirements that should apply to registered funding portals, taking 
into account the relatively limited scope of activities by a 
registered funding portal permitted under the JOBS Act.'')
---------------------------------------------------------------------------

    The proposed rules would also require that an intermediary execute 
transactions exclusively through its online platform. This requirement 
should help to minimize the potential for ``boiler room'' and other 
similar abusive sales practices. Based on comments received and our 
discussions with industry participants,\995\ we believe that the use of 
an online platform would enhance the ability of issuers and investors 
to transparently communicate as compared to the alternative of allowing 
transactions to occur offline. This requirement should help issuers 
gain exposure to a wide range of potential investors, who also may 
benefit from having numerous investment opportunities aggregated in one 
place, resulting in lower search costs or burdens related to 
identifying suitable investment opportunities.
---------------------------------------------------------------------------

    \995\ See note 888.
---------------------------------------------------------------------------

    We preliminarily estimate that the requirement to use an 
intermediary could result in transaction costs for issuers of 5% to 15% 
of the amount of the offering made in reliance on Section 4(a)(6),\996\ 
depending on the intermediary used and the fees charged for services, 
including payment processing. Although crowdfunding intermediaries are 
not expected to provide issuers with underwriting services commensurate 
with registered offerings (and, in fact, funding portals would be 
prohibited from doing so), the fees charged in a crowdfunding offering 
could be significantly larger on a percentage basis relative to the 
underwriting fees for registered offerings, which range from as high as 
7% for initial public offerings to less than 1% for certain bond 
issuances.\997\ In general, to the extent that a significant component 
of the fees is fixed, the transaction costs for issuers would make 
smaller issues more expensive. Although crowdfunding offerings would 
likely vary in size, based on an offering size of $100,000, an issuer 
would incur an average of $5,000 to $15,000 in fees. As previously 
discussed, we believe that competition among potential crowdfunding 
venues and the potential development of new products and services could 
have a significant impact on these estimates over time.
---------------------------------------------------------------------------

    \996\ See note 918.
    \997\ See note 817 and accompanying text.
---------------------------------------------------------------------------

a. Disclosure and Dissemination Requirements
    The statute and proposed rules include disclosure and dissemination 
provisions designed to provide information to security-based 
crowdfunding investors. These provisions, together with the issuer 
disclosure provisions discussed above, are expected to limit 
information asymmetries and promote the efficient allocation of capital 
amongst crowdfunding issues. Additionally, these disclosure and 
dissemination provisions would provide information intended to ensure 
that investors are aware of the risks associated with their investment, 
which would help protect investors in this new market. As discussed 
above, many of these costs and benefits are difficult to quantify or 
estimate with any degree of certainty, especially considering 
securities-based crowdfunding provides a new method for raising capital 
in the United States. To the extent possible, however, we have 
quantified the direct costs to intermediaries associated with these 
provisions in the table above. The proposed rules would prohibit any 
intermediary or its associated persons from accepting an investment 
commitment until the investor has opened an account with the 
intermediary and the intermediary has obtained the investor's consent 
to electronic delivery of materials. This requirement would help ensure 
that certain basic information about the investor is on file with the 
intermediary and that all investors are on notice of the primary method 
of delivery for communications from the intermediary. We estimate the 
direct cost of this requirement in the table above.
    The statute requires intermediaries to provide disclosures related 
to risks and other investor education materials. The proposed rules 
would implement this statutory mandate by requiring intermediaries to 
deliver educational materials that explain how the offering process 
works and the risks associated with investing in crowdfunding 
securities.\998\
---------------------------------------------------------------------------

    \998\ See proposed Rule 302(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed educational requirements would help make investors 
aware of the limits and risks associated with purchasing crowdfunding 
securities. Such knowledge would help investors understand the payoff 
structures that are specified by the offering contractual features and 
the circumstances under which they could expect to be compensated. It 
also would help ensure that offerings proceed more efficiently as 
investors would be more informed by the time they decide to make their 
investment commitments and receive required notices. We recognize that 
the effectiveness of the educational materials to enhance investor 
protection would vary depending upon the education and experience of 
retail investors.\999\ In addition, a presentation that highlights the 
risks of securities-based crowdfunding could discourage investor 
participation.
---------------------------------------------------------------------------

    \999\ See Jennifer E. Bethel and Allen Ferrell, Policy Issues 
Raised by Structured Products, Harv. L. & Econ. Discussion Paper No. 
560, 2007, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=941720.
---------------------------------------------------------------------------

    Under the proposed rules, the educational materials could be in any 
electronic format, including video format, and the intermediary would 
have the flexibility to determine how best to communicate the contents 
of the educational material, thus the cost for intermediaries to 
develop educational materials is expected to vary widely. The table 
above includes our current estimates of the direct, quantifiable costs 
that would be incurred to comply with the proposed requirement, as well

[[Page 66530]]

as additional costs to update or revise the materials from time to 
time.
    The proposed rules also require that intermediaries obtain 
representations from investors regarding their review of the investor 
education materials and their understanding of the risks.\1000\ The 
Commission believes these proposed rules would improve investors' 
understanding of crowdfunding generally, as well as aspects of certain 
types of securities and the implications for their investments in 
issuers that are raising capital through securities-based crowdfunding 
in reliance on Section 4(a)(6). We estimate that the direct costs of 
this requirement to an intermediary would be incorporated into the 
costs of developing a platform and that the ongoing burden to comply 
would be minimal. This proposed requirement also might impose a further 
cost to the extent that the requirement deters investors from making 
investment commitments or otherwise participating in offerings made in 
reliance on Section 4(a)(6).
---------------------------------------------------------------------------

    \1000\ See proposed Rule 303(b)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would also require an intermediary to clearly 
disclose the manner in which the intermediary is compensated in 
connection with offers and sales of securities in reliance on Section 
4(a)(6).\1001\ As explained above, we believe that investors would 
benefit by having information about how intermediaries are compensated, 
such as through compensation arrangements with affiliates. We believe 
that the costs of complying with this requirement also generally would 
be included in the overall cost for intermediaries to develop their 
platforms, as it would entail adding an item of disclosure that would 
be built into the functionality of their platforms. The costs are 
reflected in the table above, and we believe that this requirement 
would impose only nominal incremental costs on intermediaries on an 
ongoing basis. We also do not expect significant competitive costs from 
the disclosure of such compensation arrangements.
---------------------------------------------------------------------------

    \1001\ See proposed Rule 302(d) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The statute and the proposed rules further would require that 
intermediaries make available certain issuer-provided information. As 
described above, intermediaries would have to implement and maintain 
systems to comply with the information disclosure requirements so that 
the information was publicly available and easily accessible on the 
intermediary's platform by interested persons.
    The issuer disclosure requirements should benefit investors by 
enabling them to better evaluate the issuer and the offering. Requiring 
intermediaries to make the issuer information publicly available and 
easily accessible on their platforms would reduce information 
asymmetries between issuers and investors and would enhance both 
transparency and efficiency of the market. We expect that 
intermediaries would incur costs to develop the functionality that 
would allow the uploading and downloading of issuer information. We 
believe that the direct costs of complying with this requirement would 
be included in the overall cost to intermediaries to develop their 
platforms and that this requirement would impose only nominal 
incremental costs on intermediaries on an ongoing basis, primarily 
because the functionality necessary to upload the required issuer 
disclosure information is a standard feature offered on many Web sites 
and would not require frequent updates.
    The proposed rules would also require an intermediary to provide 
communication channels on its platform, meeting certain conditions, 
which would allow investors who have opened accounts with 
intermediaries and representatives of the issuer to interact and 
exchange comments about the issuer's offering on that intermediary's 
platform, and which would be publicly available for viewing (i.e., by 
those who may not have opened accounts with the intermediary).\1002\ 
While Congress contemplated the use of such communication channels, the 
statute does not explicitly require intermediaries to provide 
them.\1003\ Compared with the alternative of not requiring 
intermediaries to provide communication channels, we believe that 
requiring the communications channel to be on the intermediary's 
platform would allow investors, particularly those who might be less 
familiar with online social media, to participate in online discussions 
regarding ongoing offerings without having to actively search for such 
discussions on external Web sites. We do recognize, however, that this 
requirement would not preclude investors from initiating additional 
discussions on external Web sites. Furthermore, the requirements that 
the communication channels be viewable by the public and that promoters 
be clearly identified on these channels would enhance transparency 
about the issuer and its offering with appropriate disclosures, 
ultimately allowing investors to make more informed investment 
decisions. We estimate that the costs of this proposed requirement are 
incorporated into the costs of developing a platform and that once the 
platform has been set up the ongoing burden to comply would be minimal.
---------------------------------------------------------------------------

    \1002\ See proposed Rule 303(c) of Regulation Crowdfunding.
    \1003\ See Section 4A(b)(3).
---------------------------------------------------------------------------

    We are also proposing to require intermediaries to, upon receipt of 
an investment commitment from an investor, promptly provide or send to 
the investor a notification of that investment commitment.\1004\ While 
this notice is not statutorily required, we believe that this 
requirement is appropriate as it would provide investors with key 
information about their investment commitments, including notice of the 
opportunity, as relevant, to cancel their investment commitments. 
Investors would benefit from these requirements because they would be 
provided with the necessary information to evaluate their investment 
commitments, their securities transactions and the intermediaries that 
are effecting those transactions. We estimate that the costs of these 
requirements are incorporated into the costs of developing a platform 
and that the ongoing burden to comply would be minimal.
---------------------------------------------------------------------------

    \1004\ See proposed Rule 303(d) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We also propose to implement the statutory requirement for 
intermediaries to allow investors to cancel their commitments to 
invest, by requiring investors to have until 48 hours prior to the 
deadline identified in the issuer's offering materials to cancel their 
investment commitments.\1005\ If an issuer reaches its target offering 
amount prior to the target offering deadline, the proposed rules would 
permit early closing of the offering, provided that the intermediary 
sends notices to investors informing them of the closing and the 
deadline for the opportunity to cancel.\1006\ The proposed rules also 
would set forth notice requirements and requirements related to the 
intermediary directing payments in the event of cancellations and 
material changes to offerings.\1007\ The proposed rules would impose 
specific obligations on intermediaries related to informing investors 
about their right to cancel, depending on particular circumstances 
relating to timing of the offering, such as in the event of early 
closings,

[[Page 66531]]

cancellations and material changes that trigger reconfirmations of 
investment commitments.
---------------------------------------------------------------------------

    \1005\ See proposed Rule 304(a) of Regulation Crowdfunding.
    \1006\ See proposed Rule 304(b) of Regulation Crowdfunding.
    \1007\ See proposed Rules 304(c) and (d) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    We believe that investors would benefit from receiving these 
notices because the notifications and accompanying information would 
keep investors informed about the status of the offering and help them 
make informed investment decisions. We further believe that investors 
would reasonably expect to be informed of changes impacting the timing 
of offerings and other material changes. This approach also would 
benefit investors by providing investors with sufficient time to review 
and assess information and communications about the issuer.
    We recognize that allowing investors to cancel their investment 
commitments up to 48 hours prior to the deadline identified in the 
issuer's offering materials may impose a cost on issuers who, because 
of investors cancelling commitments late in the offering period, may 
fall below the target offering amount and so decide to cancel the 
offering or to extend the offering period. Accordingly, we recognize 
that this requirement may have an effect on capital formation. 
Intermediaries also may incur direct costs in developing and 
maintaining such systems, for instance to send the relevant notices to 
investors, as part of the cost of developing a platform reflected in 
the table above.
b. Measures To Reduce the Risk of Fraud and Limitations
    The statute and proposed rules require intermediaries to take 
certain steps to reduce the risk of fraud, including steps related to 
checking whether issuers are eligible to rely on Section 4(a)(6) and 
whether investors comply with investment limits in order to participate 
in an offering pursuant to Section 4(a)(6). We believe that 
intermediaries will be in the best position to take these steps and 
that these requirements will increase investor protections. 
Additionally, the statute and proposed rules place certain limitations 
on intermediaries. These limitations are further meant to increase 
investor protection in the securities-based crowdfunding market. As 
noted above, the costs and benefits of these provisions are difficult 
to quantify or estimate with any degree of certainty. To the extent 
possible, however, we have quantified estimates of the direct costs 
associated with these provisions and the proposed rules in the table 
above.
    The proposed rules would require that an intermediary have a 
reasonable basis for believing that an issuer seeking to offer and sell 
securities in reliance on Section 4(a)(6) through the intermediary's 
platform complies with the requirements in Section 4A(b) of the 
Securities Act and the related requirements in Regulation Crowdfunding. 
In satisfying this requirement, an intermediary may rely on the 
representations of the issuer concerning compliance with these 
requirements unless the intermediary has reason to question the 
reliability of those representations. The proposed rules would also 
require that an intermediary have a reasonable basis for believing that 
an issuer seeking to offer and sell securities on the intermediary's 
platform complies with all issuer requirements and has established 
means to keep accurate records of holders of the securities. The 
proposed rules would permit an intermediary to rely on an issuer's 
representations concerning compliance with these requirements unless 
the intermediary has reason to question the reliability of the 
representations. The proposed rules also would require an intermediary 
to deny access to an issuer if it has a reasonable basis for believing 
that the issuer or any of its officers, directors (or any person 
occupying a similar status or performing a similar function) or 20 
Percent Beneficial Owners was subject to a disqualification under the 
proposed rules. As required by the statute, the proposed rules would 
require the intermediary to conduct a background and securities 
enforcement check on each of these persons. Furthermore, the proposed 
rules would require an intermediary to deny access to its platform if 
the intermediary believes that the issuer or the offering presents the 
potential for fraud or otherwise raises concerns regarding investor 
protection.\1008\ Each of these proposed requirements is intended to 
help reduce the risk of fraud in securities-based crowdfunding.
---------------------------------------------------------------------------

    \1008\ See proposed Rule 301 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that if intermediaries take the measures we propose to 
require, investors would be more willing to participate in securities-
based crowdfunding offerings. Investors would rely on the efforts of 
the intermediary that conducted a background and securities enforcement 
regulatory history check, solving a collective action problem that 
would be prohibitively costly if left to individual investors. To the 
extent these checks lessened the likelihood of inappropriate or 
nefarious activity, they could increase investor willingness to 
purchase crowdfunding securities, thereby potentially resulting in 
issuers having greater access to capital. We anticipate that most 
intermediaries would employ third parties to perform background checks.
    We also recognize that permitting an intermediary to rely on an 
issuer's representations unless the intermediary has reason to question 
the reliability of the representations could potentially lessen the 
incentive for an intermediary to thoroughly investigate the issuers and 
securities to be offered on its platform. Such an outcome could result 
in a higher levels of fraud compared to a requirement that 
intermediaries perform a thorough investigation to ensure that the 
issuer complied with all the requirements. A higher level of fraud 
would negatively affect both investors in crowdfunding offerings and 
non-fraudulent issuers. Based on comments and conversations with 
industry participants,\1009\ however, we believe it is likely that 
investors and interested participants would provide relevant adverse 
information about an issuer or an offering through postings on chat 
sites, message boards, and other communication channels, including, but 
not limited to, the communication channels to be provided by the 
intermediary. These media would provide a potential source of 
information for intermediaries who may be subject to liability as 
``issuers.''
---------------------------------------------------------------------------

    \1009\ See note 888.
---------------------------------------------------------------------------

    The proposed rules also would require an intermediary to have a 
reasonable basis for believing that an investor has not exceeded the 
investment limits discussed above before accepting an investment 
commitment from that investor.\1010\ Under the proposed rules, an 
intermediary may rely on an investor's representations concerning 
compliance with the investment limits unless the intermediary has 
reason to question the reliability of the representations. We believe 
that this requirement would help to ensure that the investor protection 
benefits associated with the investment limits are realized. This 
ability to rely on investor representations should help mitigate the 
potential cost that intermediaries could incur in relation to this 
requirement. At the same time, we realize that investors might make 
inaccurate representations, whether intentionally or not. Although some 
of these concerns could be addressed by the use of a central data 
repository, for example, the statute does not mandate the use of such a 
central

[[Page 66532]]

data repository and we are not proposing to require one because, as we 
consider this alternative to the proposed standard, we believe that the 
benefits of establishing such a repository would not at this time 
justify the potentially significant costs. Accordingly, we believe that 
the standard proposed represents a reasonable approach to implement the 
statutory requirement, achieving an appropriate balance between 
competing concerns.
---------------------------------------------------------------------------

    \1010\ See proposed Rule 303(b)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We expect that because system functionality to obtain user 
acknowledgments is standard on many online trading and electronic 
commerce Web sites, the market to build such system functionality is 
highly commoditized and the average cost to both develop and maintain 
systems that allow an investor to represent that he or she has not 
exceeded allowable investment limits would not be unduly high. As noted 
in the table above, we estimate that the cost to comply with this 
requirement would be incorporated into the costs to develop a platform 
and that the ongoing burden to comply would be minimal.
    As noted above, the statute and the proposed rules would also 
prohibit an issuer from compensating, or committing to compensate, 
directly or indirectly, any person to promote the issuer's offering 
through communication channels provided by the intermediary unless the 
issuer takes reasonable steps to ensure that such person clearly 
discloses the receipt (both past and prospective) of such compensation 
each time a promotional communication is made. We also are proposing to 
require that an intermediary take certain steps to ensure that 
investors are made aware of such compensation, and that such 
compensation is disclosed in the communication channels, so that 
investors can gauge the promoter's communications appropriately.\1011\ 
We believe that intermediaries would be in an appropriate position to 
take such steps. As part of the account opening, the intermediary would 
be required disclose to persons opening accounts that any person who 
receives compensation to promote an issuer's offering, or who is a 
founder or an employee of an issuer that engages in promotional 
activities on behalf of the issuer on the intermediary's platform, must 
clearly disclose on the platform the receipt of the compensation and 
that he or she is engaging in promotional activities on behalf of the 
issuer. In addition, under the proposed rules, the intermediary must 
require that any person posting a comment in the communication channels 
clearly disclose with each posting whether he or she is a founder or an 
employee of an issuer engaging in promotional activities on behalf of 
the issuer, or is otherwise compensated, whether in the past or 
prospectively, to promote the issuer's offering.
---------------------------------------------------------------------------

    \1011\ See proposed Rules 302(c) and 303(c)(4) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    Under the proposed rules, intermediaries might incur direct costs 
in complying with the requirements to disclose compensation to 
promoters, and certain additional costs from time to time to ensure 
continued compliance, as outlined in the table above. In addition, if 
this proposed requirement discourages the use of promoters by issuers, 
it could limit the investor pool for a securities-based offering made 
in reliance on Section 4(a)(6), thus limiting the ability of an issuer 
to raise capital.
    Additionally, the statute prohibits the directors, officers or 
partners of an intermediary, or any person occupying a similar status 
or performing a similar function, from having any financial interest in 
an issuer that uses the services of the intermediary. The proposed 
rules would implement this statutory requirement but extend the 
prohibition to the intermediary as well.\1012\ Such a prohibition would 
be beneficial to investors and issuers because if an intermediary were 
to have a financial interest in one or more issuers that plan to use 
its services, the intermediary could have an incentive not based solely 
on merit to promote that issuer's offering, potentially to the 
detriment of investors and other issuers. The prohibition would, 
however, impose a cost on an issuer who might otherwise seek to 
compensate an intermediary with an interest in the issuer, rather than 
cash, for its services. It is thus possible that the prohibition could 
make securities-based crowdfunding unavailable to an issuer that does 
not have the ability to otherwise compensate an intermediary.
---------------------------------------------------------------------------

    \1012\ See proposed Rule 300(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The statute requires that intermediaries ensure that all offering 
proceeds are provided to the issuer only when the aggregate capital 
raised from all investors is equal to or greater than a target offering 
amount. The proposed rules would implement this requirement by 
requiring intermediaries that are registered as brokers to comply with 
the existing requirements of Exchange Act Rule 15c2-4.\1013\ 
Intermediaries registered as funding portals would be required to 
direct investors to transmit the funds or other consideration directly 
to a qualified third party, which is a bank, that has agreed in writing 
to hold the funds or maintain a bank account (or accounts) for the 
exclusive benefit of, and to promptly transmit the funds to, the issuer 
or the investors, depending on circumstances such as whether the 
offering was completed or was cancelled, and whether the investment 
commitment was cancelled. The proposed rules also would require a 
funding portal to direct the qualified third party to transmit funds to 
the issuer once the target offering amount is reached and the 
cancellation period has elapsed; to return funds to an investor when an 
investment commitment has been cancelled; and to return funds to 
investors when the offering has not been completed.
---------------------------------------------------------------------------

    \1013\ See proposed Rule 303(e) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    These requirements would benefit investors and issuers by helping 
to ensure that funds are appropriately refunded or transmitted in 
accordance with the terms of the offering. In particular, the 
requirement that the account in which funds are deposited be 
exclusively for the benefit of investors and the issuer would help 
prevent the intermediary or other parties from claiming or otherwise 
unlawfully taking funds from that account.
    Under the statute, intermediaries also may not compensate 
promoters, finders or lead generators for providing brokers or funding 
portals with the personally identifiable information of any potential 
investor. We propose to implement this statutory requirement by 
prohibiting an intermediary from compensating any person for providing 
the personally identifiable information of any crowdfunding investor or 
potential investor to intermediaries.\1014\ We anticipate that 
intermediaries would have some need for referrals to the intermediary's 
platform and, therefore, we are proposing to permit an intermediary to 
compensate a person for directing issuers or potential investors to the 
intermediary's platform in certain situations.\1015\ These requirements 
would benefit intermediaries by providing them with a means to attract 
more investors to their crowdfunding portals, without allowing the 
sharing of personally identifiable information. Investors would 
meanwhile benefit from the additional privacy protection. 
Intermediaries might incur a cost because the proposed requirement 
would not allow them to use personally identifiable information to 
target and

[[Page 66533]]

seek out specific investors, thus reducing the potential investor pool 
for certain offerings.
---------------------------------------------------------------------------

    \1014\ See proposed Rule 305(a) of Regulation Crowdfunding.
    \1015\ See proposed Rule 305(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

5. Additional Funding Portal Requirements
    Under the proposed rules, a funding portal would register with the 
Commission by filing a complete Form Funding Portal with information 
concerning the funding portal's operation.\1016\ In the table above, we 
estimate the costs that intermediaries would incur related to 
registering as a funding portal on Form Funding Portal.
---------------------------------------------------------------------------

    \1016\ See proposed Rule 400(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would include the statutory requirement that a 
funding portal be a member of a registered national securities 
association. As explained above, we believe that the statute 
effectively mandates that an intermediary be a FINRA member or any 
other registered national securities association (as applicable). The 
proposed requirement that funding portals register with the Commission 
and a registered national securities association benefits investors by 
providing oversight to reduce the risk for fraud. Although we estimate 
that there are costs associated with this requirement, we believe that 
the reduction in fraud risk deriving from this requirement might 
benefit portals by helping to create a marketplace in which investors 
are more willing to participate and issuers are more comfortable using 
this method of capital formation.
    The proposed rules also would require that funding portals use 
proposed Form Funding Portal to provide updates whenever information on 
file becomes inaccurate for any reason, to register successor funding 
portals and to withdraw from funding portal registration. Although 
funding portals would incur time and compliance costs to update Form 
Funding Portal, we expect funding portals would have navigated the 
filing process for Form Funding Portal when they register and would be 
familiar with the process by the time they update the form.
    We propose to allow nonresident funding portals to register with 
us, provided that certain conditions are met. One condition is that an 
information sharing agreement is in place between the Commission and a 
competent regulatory authority in the relevant jurisdiction. The 
proposed rules would also require a nonresident funding portal to 
appoint an agent for service of process in the United States, and to 
certify and provide opinion of counsel that as a matter of law, the 
funding portal can provide the Commission and any national securities 
association of which it is a member with prompt access to its books and 
records and can, as a matter of law, submit to onsite inspection and 
examination by the Commission and the national securities association.
    Compared to an alternative that we could have selected, i.e., that 
of not allowing nonresident entities to operate as funding portals in 
the U.S. crowdfunding market, the proposed rules would increase 
competition among crowdfunding intermediaries, which in turn is likely 
to reduce the fees that intermediaries charge issuers. The lack of data 
does not allow us to estimate the magnitude of this potential fee 
reduction. Lower costs of raising capital could also attract more 
potential issuers to use the crowdfunding exemption, thus enhancing 
capital formation. Conditioning the nonresident funding portal 
registration on the presence of an information sharing agreement as 
mentioned above would provide regulators and market participants with 
more information about the nonresident funding portals, thus reducing 
the likelihood of fraud.
    Although the requirements we propose with respect to appointment of 
an agent for service of process, and a certification and legal opinion 
would impose costs on nonresident funding portals, these requirements 
are consistent with regulations we have proposed to impose on other 
nonresident entities subject to our regulation. The proposed 
regulations would enhance investor protection by requiring steps to 
ensure that funding portals that were not based in the United States, 
or that were subject to laws other than those of the United States, 
would nevertheless be accessible to the Commission and other relevant 
regulators for purposes of conducting examinations of, and enforcing 
U.S. laws and regulations against these entities. While the JOBS Act 
does not distinguish between resident and nonresident funding portals, 
it clearly contemplates Commission oversight of registered funding 
portals and the tailoring of such requirements to varied circumstances.
    The statute also provides an exemption from broker-dealer 
registration for funding portals. The proposed rules would implement 
the statutory requirement by stating that a registered funding portal 
is exempt from the broker registration requirements of Exchange Act 
Section 15(a)(1) in connection with its activities as a funding 
portal.\1017\ This proposed rule would benefit funding portals because 
it would specify the scope of the limited exemption in the statute, 
thus providing clarity to the funding portals regarding their 
activities. We believe this approach of exempting funding portals from 
broker registration and its accompanying regulations would benefit the 
market and its participants. The activities of funding portals would be 
more limited than those of brokers. Thus, the proposed rules would 
require funding portals to comply with a registration requirement and 
set of regulations more appropriate for their activities, rather than 
the more extensive and higher cost requirements that accompany broker-
dealer registration. Lower registration costs of funding portals could 
translate into lower fees they charge issuers that use these portals, 
thus benefiting issuers of crowdfunding securities and potentially 
increasing capital formation. We are unable to quantify these potential 
benefits. We do not expect any significant benefits to registered 
broker-dealers from this limited exemption for funding portals. 
Registered broker-dealers could be put at a competitive disadvantage 
because of the higher registration cost. They, however, will be allowed 
a wider variety of activities compared to funding portals, the benefits 
of which could more than compensate for the higher registration costs.
---------------------------------------------------------------------------

    \1017\ See proposed Rule 401(a) of Regulation Crowdfunding. See 
also Section IV.C.2.j below.
---------------------------------------------------------------------------

    The proposed rules would also require a funding portal to obtain a 
fidelity bond, and maintain fidelity bond coverage for the duration of 
its registration as a funding portal.\1018\ This requirement would 
benefit investors by protecting them to some extent from potential 
losses caused by fraud. Investors and issuers that used funding portals 
for their offerings would likewise benefit from the added stability 
that the fidelity bond protection would provide.
---------------------------------------------------------------------------

    \1018\ See proposed Rule 400(f) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We estimated the costs of maintaining fidelity bond coverage based 
on conversations with insurance service companies for FINRA-registered 
firms and note that the actual cost of coverage for funding portals 
would vary depending on particular circumstances, such as the size of 
the firm. For instance, according to these sources, funding portals 
with fewer employees (e.g., up to 30 employees) might incur lower 
fidelity bond costs than funding portals with more employees.

[[Page 66534]]

a. Safe Harbor for Certain Activities
    Exchange Act Section 3(a)(80) prohibits funding portals from (1) 
offering investment advice or recommendations, (2) soliciting 
purchases, sales or offers to buy securities offered or displayed on 
the funding portal's platform, (3) compensating employees, agents or 
other such persons for solicitation or based on the sale of securities 
displayed or referenced on the funding portal's platform, or (4) 
holding, managing, possessing or otherwise handling investor funds or 
securities. The proposed rules would give funding portals, their 
associated persons, affiliates and business associates, a measure of 
clarity regarding activities that would be permissible without 
violating these statutory prohibitions, while also helping to protect 
investors from activities that would create potential conflicts of 
interest.\1019\ Thus, compared with the alternative that we could have 
chosen, that of not providing the safe harbor, the proposed rules will 
likely reduce funding portals' regulatory burden (e.g., it will be 
easier for funding portals to advertise their activities and attract 
issuers and investors, thus potentially increasing their revenue). The 
legal certainty provided by the safe harbors, for example proposed Rule 
402(b)(4) which permits a funding portal to provide on its platform 
communication channels, would help ensure that the benefits of the 
substantive rule provisions are realized. Such measures have the 
potential to attract greater numbers of investors to crowdfunding 
through funding portals than would otherwise participate, thereby 
encouraging capital formation.
---------------------------------------------------------------------------

    \1019\ See proposed Rule 402 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would permit a funding portal to apply objective 
criteria to limit the crowdfunding securities offered on its 
platform.\1020\ Investors would benefit by being able to search, sort 
or categorize offerings on a funding portal's platform in an organized 
manner, which would allow them to find investment opportunities meeting 
specific criteria. This functionality would more efficiently match 
investors with investment opportunities. These proposed rules would 
benefit funding portals by providing them with the flexibility to limit 
the use of their platform to certain types of issuers and to highlight 
certain offerings on their platforms which investors may find of 
interest.
---------------------------------------------------------------------------

    \1020\ See proposed Rule 402(b)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Under the proposed rules, funding portals would be permitted to 
provide advice to an issuer on the structure and content of its 
offerings, including assistance to the issuer in preparing 
documentation.\1021\ This proposed rule would allow issuers to obtain 
guidance that may not typically be available to them and lower funding 
costs. Many potential issuers seeking to offer and sell crowdfunding 
securities are unlikely to be familiar with how to best structure 
offerings so as to raise capital in the most cost effective manner, and 
they might not have the capital, knowledge or resources to hire outside 
advisors. Given that an issuer would be required to effect offerings 
through an intermediary, we believe that permitting funding portals to 
provide these services to issuers would lower overall transaction costs 
for issuers, as they would not need to engage another party to provide 
these services. This effect would in turn help to enhance market 
efficiency.
---------------------------------------------------------------------------

    \1021\ See proposed Rule 402(b)(5) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would also permit a funding portal to compensate 
a third party for referring a person to the funding portal in certain 
circumstances.\1022\ As discussed above, this proposed safe harbor 
would benefit funding portals by providing them with a means to attract 
more investors to their crowdfunding platforms, while protecting 
investors' personally identifiable information. Investors also would 
benefit from the prohibition on transaction-based compensation (other 
than to registered broker-dealers), which would help to reduce the 
incentive for abusive practices.
---------------------------------------------------------------------------

    \1022\ See proposed Rule 402(b)(6) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would permit a funding portal to pay or offer to 
pay compensation to a registered broker or dealer for services provided 
in connection with the offer or sale of securities in reliance on 
Section 4(a)(6), subject to certain conditions set forth in the 
rule.\1023\ Similarly, a funding portal could, subject to certain 
conditions, receive compensation from a registered broker or dealer for 
services provided by the funding portal.\1024\ Under these proposed 
rules, funding portals would benefit from being able to enter into 
these types of arrangements with registered broker-dealers who could 
provide services that the funding portals otherwise would be prohibited 
from providing. Brokers also would benefit from the additional business 
that funding portals might be able to attract through their platforms 
and online presence generally, as well as from services, such as those 
related to technology, which funding portals could provide. Issuers and 
investors might benefit from such arrangements by having more readily-
available services provided to them by entities subject to the 
applicable regulatory oversight.
---------------------------------------------------------------------------

    \1023\ See proposed Rule 402(b)(7) of Regulation Crowdfunding.
    \1024\ See proposed Rule 402(b)(8) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would permit a funding portal to advertise its 
existence, subject to certain conditions.\1025\ These requirements 
would benefit funding portals by allowing them to advertise publicly to 
attract more investors to their crowdfunding platforms; however, they 
might bear costs associated with ensuring compliance with the rule's 
conditions. The proposed rule also would enhance market efficiency as 
investors become more aware of available offerings through 
advertisements by funding portals and are thus able to better match 
their investments with projects that are most suitable for their risk 
preferences.
---------------------------------------------------------------------------

    \1025\ See proposed Rule 402(b)(9) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The statute requires intermediaries to take measures to reduce the 
risk of fraud, and we propose to implement this requirement by 
requiring a funding portal to deny access to its platform to an issuer 
that the funding portal believes presents the potential for fraud or 
otherwise raises concerns regarding investor protection.\1026\ The 
requirement would further enhance investor protection by giving funding 
portals the flexibility to deny access to potential bad actors. Funding 
portals also would benefit from the ability to deny access to certain 
issuers to protect the integrity of the offering process and the market 
reputation of the crowdfunding platforms without fear of violating the 
prohibition on providing investment advice.
---------------------------------------------------------------------------

    \1026\ See proposed Rules 301(c) and 402(b)(10) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would clarify that a funding portal would not be 
in violation of the statutory prohibitions on holding, managing, 
possessing or otherwise handling investor funds or securities by 
accepting investment commitments from potential investors.\1027\ Under 
the proposed rules funding portals could direct investors where to 
transmit funds or remit payment in connection with the purchase of 
securities offered and sold

[[Page 66535]]

in reliance on Section 4(a)(6).\1028\ Similarly, a funding portal could 
direct a qualified third party to release proceeds of a successful 
offering to the issuer upon completion of the offering or to return 
investor proceeds when an investment commitment or offering is 
cancelled.\1029\ These proposed rules would give both funding portals 
and entities with which they do business a measure of legal certainty 
that funding portals providing direction for funds to and from 
qualified third parties in compliance with the proposed rules would not 
constitute activity in violation of the statutory prohibitions on 
holding, managing, possessing or otherwise handling investor funds or 
securities.
---------------------------------------------------------------------------

    \1027\ See proposed Rule 402(b)(11) of Regulation Crowdfunding.
    \1028\ See proposed Rule 402(b)(12) of Regulation Crowdfunding.
    \1029\ See proposed Rule 402(b)(13) of Regulation Crowdfunding.
---------------------------------------------------------------------------

b. Compliance Requirements
    We are proposing to require that a funding portal implement written 
policies and procedures, reasonably designed to achieve compliance with 
proposed Regulation Crowdfunding and the rules and regulations 
thereunder, relating to its business as a funding portal.\1030\ This 
requirement would provide a benefit to investors and funding portals 
alike, as written policies and procedures would aid, enhance and help 
to ensure consistent compliance with the proposed rules. Funding 
portals would incur costs associated with the requirement to develop 
their own procedures and implement written policies and procedures, as 
well as to update and enforce them, as set forth in the table above.
---------------------------------------------------------------------------

    \1030\ See proposed Rule 403(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We are also proposing to require registered funding portals to 
comply with the requirements of the Bank Secrecy Act (BSA), including 
the reporting, recordkeeping and record retention requirements that 
apply to brokers.\1031\ We recognize that the proposed rules would 
impose costs on funding portals to implement anti-money laundering 
(AML) procedures, as set forth in the table above; however, we believe 
that the proposed requirements provide important benefits. As discussed 
above,\1032\ low-priced and privately-placed securities pose a money 
laundering risk because they are susceptible to market manipulation and 
fraud.\1033\ Requiring funding portals to follow these AML procedures, 
in particular the requirement to file SARs, would help identify to law 
enforcement and regulators potentially fraudulent activity. These AML 
requirements would help therefore to protect market participants from 
illegal activity that could potentially infiltrate new online 
investment opportunities. Requiring the implementation of AML 
procedures would, in turn, provide potential investors with some degree 
of confidence that adequate protections against illegal activity exist 
for this new fundraising approach and would encourage more investors to 
participate, thus facilitating capital formation.
---------------------------------------------------------------------------

    \1031\ See proposed Rules 401(b), 403(b) and 404(f) of 
Regulation Crowdfunding. See also Section II.D.4 above.
    \1032\ See Section II.D.4.b above.
    \1033\ See FATF Typology, note 641.
---------------------------------------------------------------------------

    Additionally, the statute requires that intermediaries take such 
steps to protect the privacy of information collected from investors as 
we determine appropriate. We are proposing to implement this statutory 
provision by requiring a funding portal to comply with Regulation S-P, 
S-ID and Regulation S-AM, which are applicable to brokers.\1034\ We 
believe that requiring a funding portal to comply with privacy 
obligations would help protect the personally identifiable information 
of investors and potential investors, consistent with how it is 
protected by other financial intermediaries. Compared with an 
alternative that we could have selected, that of developing a new 
privacy regime applicable only to funding portals, the proposed rules 
would introduce consistency between funding portals and broker-dealers 
with respect to privacy obligations. That will benefit investors by 
lowering their information search costs and reducing investor 
confusion. We recognize that the requirement would impose costs on 
funding portals to comply with the privacy requirements, as set forth 
in the table above; however, these additional privacy protections could 
give potential investors the confidence to participate in offerings 
made in reliance on Section 4(a)(6), which would facilitate capital 
formation and benefit the markets generally.
---------------------------------------------------------------------------

    \1034\ See proposed Rule 403(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    As a condition to exempting funding portals from the requirement to 
register as broker-dealers under Exchange Act Section 15(a)(1), 
Exchange Act Section 3(h)(1)(A) requires that registered funding 
portals remain subject to, among other things, the Commission's 
examination authority. Under the proposed rules, a funding portal would 
be required to permit the examination and inspection of all its 
business and business operations relating to its activities as a 
funding portal, including its premises, systems, platforms and records 
by Commission representatives and by representatives of the registered 
national securities association of which it is a member.\1035\ Although 
funding portals would face time and compliance costs in submitting to 
Commission and registered national securities association examinations, 
inspections or investigations, and potentially responding to any issues 
identified, funding portals, investors and issuers would benefit from 
the enhanced compliance with regulations due to the oversight, as well 
as the sanctions or other disciplinary actions that may follow upon 
findings of violations through such inspections, examinations or 
investigations.
---------------------------------------------------------------------------

    \1035\ See proposed Rule 403(d) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We are proposing to require a registered funding portal to maintain 
and preserve certain records relating to its business.\1036\ The 
proposed rules would require, among other things, that the funding 
portal maintain and preserve certain books and records for a period of 
not less than five years and in an easily-accessible place for the 
first two years. Recordkeeping requirements help registrants with their 
compliance. They are a familiar and important element of the approach 
to broker-dealer regulation, as well as the regulation of investment 
advisers and others, and are designed to maintain the effectiveness of 
our inspection program for regulated entities, facilitating our review 
of their compliance with statutory mandates and with our rules. The 
proposed rule would assist us in evaluating a funding portal's 
compliance with the Securities Act Sections 4(a)(6) and 4A and the 
rules issued thereunder. Regulators would benefit from standardized 
recordkeeping practices for intermediaries because they would be able 
to perform more efficient, targeted inspections and examinations, and 
have an increased likelihood of identifying improper conduct at earlier 
stages of the inspection or examination.
---------------------------------------------------------------------------

    \1036\ See proposed Rule 404 of Regulation Crowdfunding. We note 
that registered brokers already are expected to comply with the 
books and records requirements in Exchange Act Rules 17a-3, 17a-4 
and 17a-5 (17 CFR 240.17a-3, 17a-4 and 17a-5). Thus, all 
intermediaries, whether registered as brokers or as funding portals, 
would be required to make and preserve books and records.
---------------------------------------------------------------------------

    Funding portals may incur one-time costs in establishing the 
systems necessary to comply with the proposed books and records 
requirements. We note, however, that the records required to be made 
and preserved under the proposed rules are those that would ordinarily 
be made and preserved in the

[[Page 66536]]

ordinary course of business by a regulated broker engaging in these 
activities. We recognize that there may be a slight competitive 
advantage for funding portals over brokers to the extent that the 
proposed recordkeeping rule for funding portals is less burdensome for 
than the requirements applicable to brokers. At the same time, we 
believe that the proposed recordkeeping rule for funding portals is 
consistent with the narrow range of their activities. Our estimates of 
the costs associated with this requirement are set forth in the table 
above.
6. Insignificant Deviations
    We are proposing to provide a safe harbor for issuers for certain 
insignificant deviations from a term, condition or requirement of 
Regulation Crowdfunding.\1037\ The proposed safe harbor would provide 
that insignificant deviations from a term, condition or requirement of 
Regulation Crowdfunding would not result in a loss of the exemption, so 
long as the issuer relying on the exemption can show that: (1) The 
failure to comply was insignificant with respect to the offering as a 
whole; (2) the issuer made a good faith and reasonable attempt to 
comply with all applicable terms, conditions and requirements of 
Regulation Crowdfunding; and (3) the issuer did not know of the failure 
to comply, where the failure to comply with a term, condition or 
requirement was the result of the failure of the intermediary to comply 
with the requirements of Section 4A(a) and the related rules, or such 
failure by the intermediary occurred solely in offerings other than the 
issuer's offering.
---------------------------------------------------------------------------

    \1037\ See proposed Rule 502(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Providing a safe harbor could impose costs on investors, issuers, 
funding portals and regulators, compared with the alternative of not 
providing a safe harbor, to the extent that issuers lessen the vigor 
with which they develop and implement systems and controls to achieve 
compliance with the requirements of Regulation Crowdfunding. We believe 
that limiting the proposed safe harbor to insignificant instances of 
non-compliance and requiring a good faith and reasonable attempt to 
comply with the requirements would mitigate these potential costs and 
would benefit issuers and funding portals by providing greater 
certainty regarding their reliance on the exemption. In the absence of 
a safe harbor, issuers may extend significantly more effort and more 
resources to satisfy the requirements of Regulation Crowdfunding or 
they may face greater uncertainty regarding their reliance on the 
exemption, which could discourage participation in this market, 
impacting efficiency and capital formation.
7. Relationship With State Law
    Section 305 of the JOBS Act amended Securities Act Section 18(b)(4) 
\1038\ to preempt the ability of states to regulate certain aspects of 
crowdfunding conducted pursuant to Section 4(a)(6). This statutory 
amendment would benefit issuers by making transactions made in reliance 
on Section 4(a)(6) less costly, because an issuer would not be required 
to register transactions with each state where it offers and sells 
securities in reliance on Section 4(a)(6). It also could benefit 
investors because these cost savings ultimately may be passed on to 
investors. Absent preemption of the states' registration requirements, 
an offering made through the Internet in reliance on Section 4(a)(6) 
and the proposed rules could result in an issuer potentially violating 
state securities laws. Recent evidence in donation-based and reward-
based crowdfunding campaigns suggests that contributions are not 
exclusively local.\1039\ The statutory preemption of state registration 
laws would reduce issuer uncertainty regarding the necessity of state 
registration, and it would eliminate the costs that would be associated 
with state registration. On the other hand, state registration laws may 
provide an additional layer of investor protection, and their 
preemption will remove a potential layer of review and may lead to 
increased levels of fraud. This potential negative effect of state law 
preemption, however, could be offset by some of the statutory 
requirements and the proposed rules that are designed to deter fraud, 
such as public disclosure, investment limits and the use of a 
registered intermediary.
---------------------------------------------------------------------------

    \1038\ 15 U.S.C. 77r(b)(4).
    \1039\ For example, in crowdfunding campaigns for early stage 
musical projects, the average distance between artist-entrepreneurs 
and contributors was 3,000 miles. See Ajay Agrawal, Christian 
Catalini and Avi Goldfarb, The Geography of Crowdfunding, NET 
Institute Working Paper No. 10-08 (Oct. 29, 2010), available at 
http://ssrn.com/abstract=1692661.
---------------------------------------------------------------------------

8. Exemption From Section 12(g)
    Proposed Rule 12g-6 provides that securities issued pursuant to an 
offering made under Section 4(a)(6) would be permanently exempted from 
the record holder count under Section 12(g). This proposal delays the 
more extensive Exchange Act reporting requirements until the issuer 
either sells securities in a registered transaction or registers a 
class of securities under the Exchange Act to reach a trading market. 
This allows an issuer to time the decision to become a reporting 
company without forcing it to become a reporting company through 
actions outside of its control (e.g., secondary market trading). By 
conditioning the more burdensome reporting requirements on the decision 
to raise new capital or to actively seek a liquid trading market, the 
benefits of increased disclosure would scale with the scope of 
investment in the issuer, thus improving efficiency.
    This proposal could, however, result in an unintended and 
potentially costly outcome. It is possible that an issuer that sells 
securities in reliance on Section 4(a)(6) could become an Exchange Act 
reporting company, but then deregister and go dark with potentially 
thousands of investors. For example, in an attempt to provide 
additional liquidity to its shareholders, an issuer could voluntarily 
register a class of securities under Exchange Act Section 12(g) so that 
the securities could be quoted in the over-the-counter market. The 
issuer would become subject to Exchange Act reporting requirements and 
would no longer be subject to the ongoing reporting requirements of 
Regulation Crowdfunding. If the issuer does not sell securities in a 
registered offering or trigger the asset and holder of record 
thresholds for mandatory Exchange Act registration in Section 12(g), 
the issuer could deregister its securities and stop all ongoing 
reporting obligations even if all the securities sold in reliance on 
Section 4(a)(6) remain outstanding.\1040\ Given that securities-based 
crowdfunding could attract thousands of potential issuers, this is a 
possible outcome for some of these issuers. Under such an outcome, a 
significant number of investors in an issuer might be unable to obtain 
important information about that issuer, which could affect the 
liquidity and pricing of the securities these investors hold.
---------------------------------------------------------------------------

    \1040\ Although less likely, the same could happen if an issuer 
sells securities in reliance on Section 4(a)(6) and subsequently 
registers a class of securities under Exchange Act Section 12(b) in 
order to list its securities on a national securities exchange.
---------------------------------------------------------------------------

9. Disqualification
    The statute and the proposed rules impose disqualification 
provisions under which an issuer would not be eligible to offer 
securities pursuant to Section 4(a)(6) and an intermediary would not be 
eligible to effect or participate in transactions pursuant to

[[Page 66537]]

Section 4(a)(6).\1041\ The proposed disqualification provisions for 
issuers are substantially similar to those imposed under Rules 262 of 
Regulation A and 506 of Regulation D,\1042\ while the proposed 
disqualification provisions for intermediaries under Section 3(a)(39) 
are substantially similar to, while somewhat broader than, the 
provisions of Rule 262.
---------------------------------------------------------------------------

    \1041\ See Section 302(d) of the JOBS Act; proposed Rule 503 of 
Regulation Crowdfunding. See also discussion in Section II.E.6 
above.
    \1042\ See Disqualification Adopting Release, note 101.
---------------------------------------------------------------------------

a. Issuers
    The proposed rules should induce issuers to implement measures to 
restrict bad actor participation in offerings made in reliance on 
Section 4(a)(6). This should help reduce the potential for fraud in the 
market for such offerings, which should help reduce the cost of raising 
capital to issuers that rely on Section 4(a)(6), to the extent that 
disqualification standards lower the risk premium associated with the 
presence of bad actors in securities offerings. In addition, the 
requirement that issuers determine whether any covered persons are 
subject to disqualification might obviate the need for investors to do 
their own investigations and eliminate redundancies that might exist in 
otherwise separate investigations. This should help reduce information-
gathering costs to investors, to the extent that issuers are at an 
advantage in accessing much of the relevant information and to the 
extent that issuers could do so at a lower cost than investors.
    The proposed rules still would, however, impose costs on issuers, 
other covered persons and investors. If issuers are disqualified from 
relying on Section 4(a)(6) to make their offerings, they might 
experience increased costs in raising capital through alternative 
methods that do not require bad actor disqualification, if available, 
or alternative methods might be altogether unavailable. This could 
hinder potential investment opportunities for such issuers, with 
possible negative effects on capital formation. In addition, issuers 
and other covered persons may incur costs in connection with internal 
personnel changes that issuers may make to avoid the participation of 
those covered persons who are subject to disqualifying events. Issuers 
also might incur costs associated with restructuring share ownership 
positions to avoid having 20 Percent Beneficial Owners who are subject 
to disqualifying events. Finally, issuers might incur costs in 
connection with seeking waivers of disqualification from the Commission 
or determinations by other authorities that existing orders should not 
give rise to disqualification.
    We anticipate that the reasonable care exception \1043\ also would 
impose costs and benefits. In this regard, a reasonable care exception 
might encourage capital formation by eliminating any hesitation issuers 
might otherwise experience under a strict liability standard. However, 
such an exception also might encourage issuers to take fewer steps to 
inquire about offering participants than they would if a strict 
liability standard applied, increasing the potential for fraud in the 
market for offerings made in reliance on Section 4(a)(6). Nevertheless, 
some issuers, with regard to the exercise of reasonable care, might 
incur costs associated with conducting and documenting their factual 
inquiry into possible disqualifications. The lack of specificity in the 
rule, while providing flexibility to the issuer to tailor its factual 
inquiry as appropriate to a particular offering, might increase these 
costs because uncertainty could drive issuers to do more than necessary 
under the rule. Alternatively, it might reduce these costs because 
uncertainty might drive issuers to exert minimum effort in conducting 
and documenting a factual inquiry.
---------------------------------------------------------------------------

    \1043\ See proposed Rule 503(b)(4) of Regulation Crowdfunding. 
See also Section II.E.6.a.iii above.
---------------------------------------------------------------------------

    The requirement that issuers disclose matters that would have 
triggered disqualification, had they occurred after the effective date 
of proposed Regulation Crowdfunding,\1044\ also would impose costs and 
benefits. The disclosure requirement would reduce costs associated with 
covered persons who would be disqualified under the proposed rules but 
for the fact that the disqualifying event occurred prior to the 
effective date of the rules. However, this approach would allow the 
participation of past bad actors, whose disqualifying events occurred 
prior to the effective date of the proposed rules, which could expose 
investors to the risks that arise when bad actors are associated with 
an offering. Nevertheless, investors would benefit by having access to 
such information that could inform their investment decisions. Issuers 
also may incur costs associated with the factual inquiry, preparing the 
required disclosure and making any internal or share ownership changes 
they may decide to make to avoid the participation of covered persons 
that trigger the disclosure requirement. Disclosure of triggering 
events also may make it more difficult for issuers to attract 
investors, and issuers may experience some or all of the impact of 
disqualification as a result.
---------------------------------------------------------------------------

    \1044\ See proposed Rule 201(u) of Regulation Crowdfunding. See 
also Section II.E.6.a.v above.
---------------------------------------------------------------------------

    We believe the inclusion of Commission cease-and-desist orders in 
the list of disqualifying events would not impose a significant, 
incremental cost on issuers and other covered persons because many of 
these groups might already be subject to disqualifying orders issued by 
the states, federal banking regulators and the National Credit Union 
Administration.\1045\ The inclusion of such orders in the list of 
disqualifying events might change how settlement negotiations are 
conducted between respondents and the Commission, and the Commission 
could grant an appropriate waiver from disqualification.
---------------------------------------------------------------------------

    \1045\ See Disqualification Adopting Release, note 101.
---------------------------------------------------------------------------

    Under the proposed rules, orders issued by the CFTC would trigger 
disqualification to the same extent as orders of the regulators 
enumerated in Section 302(d)(2)(B)(i) of the JOBS Act (e.g., state 
securities, insurance and banking regulators, federal banking agencies 
and the National Credit Union Administration). We believe that 
including orders of the CFTC would result in the similar treatment, for 
disqualification purposes, of comparable sanctions. In this regard, we 
note that the conduct that would typically give rise to CFTC sanctions 
is similar to the type of conduct that would result in disqualification 
if it were the subject of sanctions by another financial services 
industry regulator. This should enable the disqualification rules to 
more effectively screen out bad actors.
    As discussed above, the baseline for our economic analysis of 
proposed Regulation Crowdfunding, including the baseline for our 
consideration of the effects of the proposed rules on efficiency, 
competition and capital formation, is the situation in existence today, 
in which startups and small businesses seeking to raise capital through 
securities offerings must register the offer and sale of securities 
under the Securities Act unless they can comply with an existing 
exemption from registration under the federal securities laws. Relative 
to the current baseline, we believe that the disqualification 
provisions may not impose significant incremental costs on issuers and 
other covered persons because the proposed rules are substantially 
similar to the

[[Page 66538]]

disqualification provisions under existing exemptions.
b. Intermediaries
    In implementing the statute, we are proposing to apply to 
intermediaries the disqualification provisions under Section 3(a)(39), 
rather than Rule 262 or the disqualification rules we are proposing for 
issuers. We believe that the standard of Section 3(a)(39) is already an 
established one among broker-dealers and their regulators and that, 
despite the differences, Section 3(a)(39) and Rule 262 are 
substantially similar in particular with regard to the persons and 
events they cover, their scope and their purpose.\1046\ We believe that 
imposing any new or different standard, including Rule 262, only for 
those intermediaries that engage in crowdfunding transactions would 
likely create confusion and unnecessary burdens, as currently-
registered broker-dealers and their associated persons would become 
subject to two distinct standards for disqualification. Consistent 
standards for all brokers and funding portals also would assist a 
registered national securities association in monitoring compliance and 
enforcing its rules.
---------------------------------------------------------------------------

    \1046\ See discussion in Section II.E.6.b above.
---------------------------------------------------------------------------

    The proposed rules would implement the statutory requirement for 
intermediaries by providing that a person subject to a statutory 
disqualification, as defined in Exchange Act Section 3(a)(39), may not 
act as, or be an associated person of, an intermediary in a transaction 
involving the offer or sale of securities in reliance on Section 
4(a)(6) unless so permitted by Commission rule or order. While this 
requirement would potentially reduce the number of intermediaries, we 
expect that it would strengthen investor protection by preventing bad 
actors from entering the securities-based crowdfunding market and by 
reducing the potential for fraud and other abuse.
    As discussed above, the baseline for our economic analysis of 
proposed Regulation Crowdfunding, including the baseline for our 
consideration of the effects of the proposed rules on efficiency, 
competition and capital formation, is the situation in existence today, 
in which intermediaries intending to facilitate securities transactions 
are required to register with the Commission as broker-dealers under 
Exchange Act Section 15(a). Relative to the current baseline, we 
believe that the disqualification provisions might not impose 
significant incremental costs to brokers because the proposed rules are 
the same as the disqualification provisions that are already imposed on 
broker-dealers.

C. Request for Comment

    Throughout this release, we have discussed the anticipated costs 
and benefits of the proposed rules and their potential impact on 
efficiency, competition and capital formation. We request and encourage 
any interested person to submit comments regarding the proposed rules, 
our analysis of the potential effects of the rules and other matters 
that may have an effect on the proposed rules. We request comment from 
the point of view of issuers, investors and other market participants. 
With regard to any comments, we note that such comments are of 
particular assistance to us if accompanied by supporting data and 
analysis of the issues addressed in those comments. We also are 
interested in comments on the qualitative benefits and costs we have 
identified and any benefits and costs we may have overlooked. We urge 
commenters to be as specific as possible.
    Comments on the following questions are of particular interest.
    285. How similar or different is a securities-based crowdfunding 
offering from a non-securities-based crowdfunding offering? To what 
extent should we base the anticipated effects of the proposed rules on 
the experience of current crowdfunding platforms and their 
participants, including those based on rewards and donations? Should we 
expect the same incidence of success, failure, fraud and other outcomes 
when crowdfunding involves participants providing financing with an 
expectation of a monetary return on their investments? Would 
securities-based crowdfunding attract similar projects, ventures and 
capital seekers as other forms of crowdfunding? If not, why not, and 
what differences in the types of ventures, participants and outcomes 
might be expected?
    286. How would securities issued in reliance on Section 4(a)(6) be 
valued? Would issuers and/or investors have sufficient financial 
sophistication or methods available to accurately assess the intrinsic 
risks associated with the issuance? If so, what mechanisms would help 
assure accurate pricing? If not, what specific challenges or issues 
would prevent issuers and/or investors from arriving at a price that 
reflects the intrinsic value of the offering?
    287. How would investors who purchase securities in an offering in 
reliance on Section 4(a)(6) exit their investment? Once the securities 
are issued, investors would have to wait, except in certain 
circumstances, for one year before selling a security sold in a Section 
4(a)(6) offering. At that time, how would existing security holders 
liquidate their positions? What is the likelihood that there would be a 
ready market for mature securities issued in reliance on Section 
4(a)(6)? What entities or investors are likely to supply the liquidity, 
and what discounts, if any, are investors likely to face when exiting 
their investments? To what extent would, or should, liquidity 
provisions be built into the design of the security issues (e.g., call 
provisions or self-liquidation features)?
    288. How, and to what extent, would the collective knowledge of 
crowdfunding investors (i.e., the ``wisdom of the crowd'') provide 
investor protections and mitigate potential fraud or unspecified 
offering risks at the time of issuance? Would ``the wisdom of the 
crowd'' provide ongoing investor protections to the community of 
securities-based crowdfunding investors? If so, how and to what extent?
    289. Do the proposed rules require sufficient disclosure and 
educational requirements to help ensure that investors have a 
reasonable understanding of the risks and costs of investing in 
crowdfunding securities? Are the proposed disclosure and educational 
requirements sufficient for investors to understand: (1) The methods 
used for valuing securities issued in reliance on Section 4(a)(6), (2) 
potential complexity in the security design, or (3) risks of subsequent 
dilution of their investment? If not, what additional requirements 
would further mitigate the associated risks?
    290. Should intermediaries be required to systematically collect 
and report information--to the Commission and/or publicly--about the 
progress, success and failures of issuers that relied on Section 
4(a)(6) to offer and sell securities subsequent to initial financing? 
Would collecting and reporting such statistics help investors better 
understand the risks associated with securities-based crowdfunding 
investments with the passage of time? If so, what information should be 
reported, and to whom and in what manner should it be reported? Would a 
requirement to collect and maintain information about issuers that 
relied on Section 4(a)(6) after the completion of the offering be too 
burdensome for intermediaries?
    291. Other than averting potential losses, what are the potential 
economic effects of limiting the investment size for any single 
investor to a maximum aggregate amount of $100,000? Would this reduce 
the incentive for some

[[Page 66539]]

investors to participate in offerings in reliance on Section 4(a)(6), 
and if so, would this impede potential capital formation or the 
efficiency with which offerings can be made? Would this limit the 
ability of investors to appropriately diversify their securities-based 
crowdfunding investments? Please explain.
    292. Would the permanent exemption of securities-based crowdfunding 
securities from the record holder count under Section 12(g) of the 
Exchange Act pose any significant risks to investors of successful 
ventures? For example, is it likely or possible that an issuers that 
offers and sells securities in reliance on Section 4(a)(6) could became 
subject to Exchange Act reporting, but then subsequently delist and go 
dark without regard to the number of record holders?
    293. We estimated the costs for a broker to act as an intermediary 
in transactions conducted pursuant to Section 4(a)(6), and to engage in 
related broker activities, to be approximately $770,000 in the first 
year and approximately $270,000 each year thereafter. In making these 
estimates, we assumed that brokers would engage in particular 
activities in connection with these transactions, namely providing 
investment advice and recommendations, soliciting investors, and 
managing and handling customer funds and securities. Are our 
assumptions correct? If not, please explain. Are our estimates of the 
cost of doing business as a broker, in general, accurate? If not, 
please explain and provide relevant data.
    294. We estimated the costs for a funding portal to act as an 
intermediary in transactions pursuant to Section 4(a)(6) to be 
approximately $417,000 in the first year, and approximately $90,000 
each year thereafter. Are our estimates of the costs of doing business 
as a funding portal, and the assumptions behind these estimates, in 
general, accurate? If not, please explain and provide relevant data.
    295. The Commission is interested in receiving comments, views, 
estimates and data concerning the following:
    [cir] Expected size of the securities-based crowdfunding market 
(e.g., number of offerings, number of issuers, number for funding 
portals, size of offerings, number of investors, etc., as well as 
information comparing these estimates to the current baseline);
    [cir] Overall economic impact of the proposed rules;
    [cir] Competitive effects on brokers of the development of funding 
portals; and
    [cir] Any other aspect of the economic analysis.

IV. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed rules contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\1047\ We are submitting the proposal 
to the Office of Management and Budget (``OMB'') for review in 
accordance with the PRA.\1048\ The titles for the collections of 
information are:
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    \1047\ 44 U.S.C. 3501 et seq.
    \1048\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Form ID'' (OMB Control Number 3235-0328);
    (2) ``Form C'' (a proposed new collection of information);
    (3) ``Form BD'' (OMB Control Number 3235-0012); and
    (4) ``Regulation Crowdfunding--Intermediaries and Funding Portals'' 
(a proposed new collection of information).
    In addition, the collections of information included under OMB 
Control Numbers 1506-0034 and 1506-0019, regarding the CIP and SAR 
requirements of the Department of Treasury, would be amended to reflect 
related burdens under proposed Rule 403(b) of Regulation Crowdfunding. 
An agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid OMB control number. We are applying for OMB control numbers for 
the proposed new collections of information in accordance with 44 
U.S.C. 3507(j) and 5 CFR 1320.13, and OMB has not yet assigned a 
control number to each new collection. Responses to these new 
collections of information would be mandatory.

B. Estimate of Issuers and Intermediaries

1. Issuers
    The number, type and size of the issuers that would participate in 
securities-based crowdfunding transactions are uncertain, but data 
regarding current market practices may help identify the number and 
characteristics of potential issuers that may offer and sell securities 
in reliance on Section 4(a)(6).\1049\ While it is not possible to 
predict the number of future offerings made in reliance on Section 
4(a)(6), particularly because rules governing the process are not yet 
in place, for purposes of this analysis, we estimate that the number 
would be 2,300 offerings per year. We base this estimate on the number 
of issuers that conducted a Regulation D offering that had no revenues 
or less than $1 million in revenues.\1050\ We believe those issuers 
would be similar in size to the potential issuers that may participate 
in securities-based crowdfunding, and we assume that each issuer would 
conduct one offering per year, raising an average of $100,000 per 
offering.
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    \1049\ See Section III.A.4.a above for a discussion of the data 
regarding current market practices.
    \1050\ See id.
---------------------------------------------------------------------------

2. Intermediaries That Are Registered Brokers
    We estimate that the proposed collections of information would 
apply to approximately 10 intermediaries per year that are not 
currently registered with the Commission and would choose to register 
as brokers to act as intermediaries for transactions made in reliance 
on Section 4(a)(6). However, we believe that, given the high cost that 
an unregistered entity would incur to register as a broker with us, 
compared with the lower cost of becoming a funding portal, unregistered 
entities generally would have less incentive to register as brokers 
than as funding portals.
    We further estimate that approximately 50 intermediaries per year 
that are already registered as brokers with the Commission would choose 
to add to their current service offerings by also becoming crowdfunding 
intermediaries. These entities would not have to register anew with us, 
and if doing business with the public, would already be members of 
FINRA (the applicable national securities association registered under 
Exchange Act Section 15A). Because we do not have any data indicating 
the number of currently-registered brokers that would be interested in 
becoming crowdfunding intermediaries, we cannot estimate how many would 
choose to enter the crowdfunding market.\1051\
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    \1051\ Similarly, we cannot estimate with any degree of 
certainty how many unregistered ``finders'' would potentially choose 
to enter the securities-based crowdfunding market. See, e.g., Task 
Force on Private Placement Broker-Dealers, note 894 (stating that 
quantifying the number of ``finders'' that help small businesses to 
obtain sources of capital ``is an impossibility, since there is no 
effective measuring device.'').
---------------------------------------------------------------------------

3. Funding Portals
    We estimate that approximately 50 intermediaries per year would 
choose to register as funding portals during the first three years 
following effectiveness of the proposed rules. This estimate assumes 
that, upon effectiveness of the proposed rules, about 15% of the 
approximately 200 U.S.-based

[[Page 66540]]

crowdfunding portals \1052\ currently in existence would participate in 
securities-based crowdfunding and that the number of crowdfunding 
portals would grow at 60% per year over the next three years.\1053\ 
Therefore, we estimate that an average of approximately 50 respondents 
would register as funding portals annually.\1054\ Of those 50 funding 
portals, we estimate that two would be nonresident funding portals. 
These estimates are based in part on current indications of interest 
expressed in responses to FINRA's voluntary interim form for funding 
portals.\1055\
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    \1052\ This estimate is based in part on an industry estimate 
that, as of April 2012, there were approximately 200 non-securities-
based crowdfunding portals operating in the United States. See 
Massolution, note 861 at 16.
    \1053\ A worldwide survey of crowdfunding portals indicated 
that, in 2011, approximately 14.8% of the surveyed crowdfunding 
portals (mostly based in Europe) participated in ``equity-based'' 
crowdfunding. Id. Also, the total number of crowdfunding portals 
worldwide grew by an estimated 60% from 2011 to 2012. Id. at 13.
    \1054\ 200 U.S.-based crowdfunding portals x 15% (estimated 
percentage of crowdfunding portals that would participate in 
securities-based crowdfunding) = 30 funding portals that would 
participate in securities-based crowdfunding. Assuming 60% growth 
over three years, the number of registered funding portals would be 
30 during the first year, 48 during the second year and 77 during 
the third year. The average number of registered funding portals 
over three years is (30 + 48 + 77)/3 = 52 funding portals (or 
approximately 50 funding portals per year).
    \1055\ See note 980.
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C. Estimate of Burdens

1. Issuers
a. Form C: Offering Statement and Progress Update
    Under the proposed rules, an issuer conducting a transaction in 
reliance on Section 4(a)(6) would file with us specified disclosures on 
a Form C: Offering Statement.\1056\ An issuer also would file with us 
amendments to Form C to disclose any material change in the offer terms 
or disclosure previously provided to investors.\1057\ Form C is similar 
to the Form 1-A offering statement under Regulation A, but it would 
require fewer disclosure items (e.g., it would not require disclosure 
about the plan of distribution, the compensation of officers and 
directors, litigation or a discussion of federal tax aspects). We note 
that offerings made in reliance on Regulation A allow issuers to offer 
up to $5 million, involve review by the staff and require filings at 
the state level. In light of these factors, we expect that issuers 
seeking to raise capital pursuant to a Regulation A offering generally 
would be at a more advanced stage of development than issuers likely to 
raise capital pursuant to Section 4(a)(6), so the complexity of the 
required disclosure and, in turn, the burden of compliance with the 
requirements of proposed Form C would be significantly less than for 
Form 1-A.\1058\ We estimate that the total burden to prepare and file 
the Form C, including any amendment to disclose any material change, 
would be approximately 60.00 hours, which is approximately 10 percent 
of the burden to prepare a Form 1-A for a Regulation A offering. We 
estimate that 75 percent of the burden of preparation would be carried 
by the issuer internally and that 25 percent would be carried by 
outside professionals\1059\ retained by the issuer at an average cost 
of $400 per hour.\1060\
---------------------------------------------------------------------------

    \1056\ See proposed Rule 203(a)(1) of Regulation Crowdfunding.
    \1057\ See proposed Rule 203(a)(2) of Regulation Crowdfunding.
    \1058\ We estimate the burden per response for preparing a Form 
1-A to be 608.00 hours. See Form 1-A at 1.
    \1059\ For example, an issuer could retain an outside 
professional to assist in the preparation of the financial 
statements, but could decide to address the remaining disclosure 
requirements internally.
    \1060\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour. This is the rate we 
typically estimate for outside legal services used in connection 
with public company reporting.
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    Under the proposed rules, the issuer also would be required to file 
with us regular updates regarding the progress of the issuer in meeting 
the target offering amount.\1061\ The issuer would make the filing 
under cover of a Form C-U: Progress Update. The issuer would be 
required to disclose its progress in meeting the target offering 
amount. Form C-U is similar to a Form D Notice of Exempt Offering of 
Securities under Regulation D \1062\ and a Form 2-A Report of Sales and 
Uses of Proceeds Pursuant to Rule 257 of Regulation A.\1063\ Form C-U 
would require significantly less disclosure than the Form D and the 
Form 2-A, however, as it would only require disclosure of the issuer's 
progress in meeting the target offering amount, rather than 
compensation and use of proceeds disclosures or other information about 
the issuer and the offering. Thus, the complexity of the required 
disclosure and the burden to prepare and file Form C-U would be 
significantly less than for either Form D or Form 2-A. We estimate that 
the burden to prepare and file each progress update, which only has one 
disclosure requirement, would be 0.50 hours. We further estimate that 
an issuer would be required to file an average of two progress updates 
during each offering.\1064\ Therefore, we estimate that an issuer's 
compliance with proposed Form C-U would result in an aggregate burden 
of 1.00 hours per issuer.\1065\
---------------------------------------------------------------------------

    \1061\ See proposed Rule 203(a)(3) of Regulation Crowdfunding.
    \1062\ We estimate the burden per response for preparing a Form 
D to be 4.00 hours. See Form D at 1.
    \1063\ We estimate the burden per response for preparing a Form 
2-A to be 12.00 hours. See Form 2-A at 1.
    \1064\ See proposed Rule 203(a)(3) of Regulation Crowdfunding. 
The proposed rules would require an issuer to file a progress update 
after reaching one-half and 100 percent of the target offering 
amount.
    \1065\ We estimate that the burden of preparing Form C-U would 
be approximately 1/8 of the burden for Form D. Therefore, the 
aggregate burden per issuer would be 100 hour (2 progress updates x 
0.50 hours/update).
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of a Form C 
submitted in connection with transactions made in reliance on Section 
4(a)(6) would require 138,000 burden hours (2,300 offering statements x 
60.00 hours/offering statement) in aggregate each year, which 
corresponds to 103,500 hours carried by the issuer internally (2,300 
offering statements x 60.00 hours/offering statement x 0.75) and costs 
of $13,800,000 (2,300 offering statements x 60.00 hours/offering 
statement x 0.25 x $400) for the services of outside professionals. We 
also estimate that compliance with the requirements of Form C-U 
submitted during an offering would require 2,300 burden hours (2,300 
offering statements x 2 progress updates per offering x 0.50 hours per 
progress update) in aggregate each year. These estimates include the 
time and cost of collecting the information, preparing and reviewing 
disclosure, filing documents and retaining records. We derived the 
above estimates by estimating the average number of hours it would take 
an issuer to prepare and review the proposed disclosure requirements. 
In deriving our estimates, we recognize that the burdens likely would 
vary among individual issuers based on a number of factors, including 
the stage of development of the business and the number of years since 
inception of the business. We believe that some issuers would 
experience costs in excess of this average and some issuers may 
experience less than these average costs.
b. Form C-AR: Annual Report
    Under the proposed rules, any issuer that sells securities in a 
transaction made pursuant to Section 4(a)(6) would be required to file 
annually with us an annual report on Form C-AR: Annual Report.\1066\ 
Form C-AR would require

[[Page 66541]]

disclosure substantially similar to the disclosure provided in the Form 
C: Offering Statement, except that offering-specific disclosure would 
not be required. Therefore, we estimate that the burden to prepare and 
file Form C-AR would be less than that required to prepare and file 
Form C. We estimate that compliance with proposed Form C-AR would 
result in a burden of 40.00 hours per response.\1067\ We further 
estimate that 75 percent of the burden of preparation would be carried 
by the issuer internally and that 25 percent would be carried by 
outside professionals \1068\ retained by the issuer at an average cost 
of $400 per hour.\1069\
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    \1066\ See proposed Rule 202 of Regulation Crowdfunding.
    \1067\ We estimate that the burden of preparing the information 
required by Form C-AR would be approximately 2/3 of the burden for 
the Form C: Offering Statement in light of the fact that offering-
specific disclosure would not be required and that the issuer may be 
able to update disclosure previously provided in the Form C: 
Offering Statement.
    \1068\ See note 1059.
    \1069\ See note 1060.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form C-AR 
after issuers sell securities pursuant to Section 4(a)(6) would require 
92,000 burden hours (2,300 issuers x 40.00 hours/issuer) in the 
aggregate each year, which corresponds to 69,000 hours carried by the 
issuer internally (2,300 issuers x 40.00 hours/issuer x 0.75) and costs 
of $9,200,000 (2,300 issuers x 40.00 hours/issuer x 0.25 x $400) for 
the services of outside professionals.
c. Form C-TR: Termination of Reporting
    Under the proposed rules, any issuer terminating its annual 
reporting obligations would be required to file a notice under cover of 
Form C-TR: Termination of Reporting to notify investors and the 
Commission that it no longer will file and provide annual reports 
pursuant to the requirements of Regulation Crowdfunding.\1070\ We 
estimate that eight percent of the issuers that sell securities 
pursuant to Section 4(a)(6) would file a notice under cover of Form C-
TR during the first year.\1071\ The Form C-TR would be similar to the 
Form 15 that issuers file to provide notice of termination of the 
registration of a class of securities under Exchange Act Section 12(g) 
or to provide notice of the suspension of the duty to file reports 
required by Exchange Act Sections 13(a) or 15(d).\1072\ Therefore, we 
estimate that compliance with the proposed Form C-TR would result in a 
similar burden as compliance with Form 15, a burden of 1.50 hours per 
response. We estimate that compliance with proposed Form C-TR would 
result in a burden of 276 hours (2,300 issuers x 0.08 issuers filing 
Form C-TR x 1.50 hours/issuer) in the aggregate during the first year 
for issuers terminating their reporting obligations.
---------------------------------------------------------------------------

    \1070\ See proposed Rule 203(b)(2) of Regulation Crowdfunding.
    \1071\ For purposes of the PRA, we estimate that eight percent 
of issuers will not survive past their first year, based on a recent 
study that found that of a random sample of 4,022 new high-
technology businesses started in 2004, 92.3% survived past their 
first year. See Kauffman Firm Survey, note 869 at 13.
    \1072\ We currently estimate the burden per response for 
preparing a Form 15 to be 1.50 hours. See Form 15 at 1.
---------------------------------------------------------------------------

d. Form ID Filings
    Under the proposed rules, an issuer would be required to file 
specified disclosures with us on EDGAR.\1073\ We anticipate that the 
majority of first-time issuers seeking to offer and sell securities in 
reliance on Section 4(a)(6) would not previously have filed an 
electronic submission with us and so would need to file a Form ID. Form 
ID is the application form for access codes to permit filing on EDGAR. 
The proposed rules would not change the form itself, but we anticipate 
that the number of Form ID filings would increase due to new issuers 
seeking to offer and sell securities in reliance on Section 4(a)(6). 
For purposes of this PRA discussion, we estimate that all of the 
issuers who would seek to offer and sell securities in reliance on 
Section 4(a)(6) would not have filed an electronic submission with us 
previously and would, therefore, be required to file a Form ID. As 
noted above, we estimate that approximately 2,300 issuers per year 
would seek to offer and sell securities in reliance on Section 4(a)(6), 
which would correspond to 2,300 additional Form ID filings. As a 
result, we estimate the additional annual burden would be approximately 
345 hours (2,300 filings x 0.15 hours/filing).\1074\
---------------------------------------------------------------------------

    \1073\ See proposed Rules 201-203 of Regulation Crowdfunding.
    \1074\ We currently estimate the burden associated with Form ID 
is 0.15 hours per response. See Form ID at 1.
---------------------------------------------------------------------------

2. Brokers and Funding Portals
a. Registration Requirements
i. Time Burden
    The proposed rules would require intermediaries to register with us 
as either a broker or funding portal. We believe that some entities 
that may engage in crowdfunding pursuant to Section 4(a)(6) and the 
proposed regulation would already be registered as brokers. Therefore, 
this registration requirement would impose no new requirement on these 
entities and no additional burden for purposes of this PRA discussion. 
Entities that are not already registered as brokers may decide to 
register as brokers or as funding portals and to become members of a 
registered national securities association, pursuant to the proposed 
rules. We estimate that each year, approximately 10 entities may decide 
to register as brokers, and on average, approximately 50 entities may 
decide to register as funding portals by filing Form Funding Portal. In 
addition, we estimate that of those 50 entities that register as 
funding portals, two would be nonresident funding portals and subject 
to the additional requirements of completing Schedule C, hiring an 
agent for service of process in the United States and providing an 
opinion of counsel.
    We estimate the burden for registering as a broker with us based 
upon the existing burdens for completing and filing Form BD.\1075\ 
Consequently, we estimate that total annual burden hours required for 
all intermediaries, including brokers and funding portals, to register 
with us under the proposed rules would be approximately 165 hours (2.75 
hours/respondent x (10 brokers + 50 funding portals)). In addition, 
those entities that register as nonresident funding portals would face 
an additional burden of half an hour to complete Schedule C, half an 
hour to hire an agent for the service of process, and one hour to 
provide an opinion of counsel. Consequently, we estimate that of the 50 
registered funding portals, two would face the burden of an additional 
two hours to register.
---------------------------------------------------------------------------

    \1075\ While it is likely that the time necessary to complete 
Form BD varies depending on the nature and complexity of the 
entity's business, we previously estimated that the average time 
necessary for a broker-dealer to complete and file an application 
for broker-dealer registration on Form BD would be approximately 
2.75 hours. We also estimate that the time burden to register as a 
funding portal on Form Funding Portal would be, for purposes of this 
PRA discussion, the same, based upon the time required to complete 
and file Form BD because the information required for that form is 
similar.
---------------------------------------------------------------------------

    We take into consideration that brokers that register to engage in 
crowdfunding transactions conducted in reliance on Section 4(a)(6) may 
eventually decide to withdraw their registration. Withdrawal requires 
the entity to complete and file with us a Form BDW.\1076\ We further 
estimate that

[[Page 66542]]

approximately 500 broker-dealers withdraw from Commission registration 
annually \1077\ and, therefore, file a Form BDW. Of them, we estimate 
that approximately one broker who had registered in order to facilitate 
crowdfunding transactions made in reliance on Section 4(a)(6) may 
decide to withdraw in each year following adoption of the rules.\1078\ 
Therefore, the one broker-dealer that withdraws from registration by 
filing Form BDW would incur an aggregate annual reporting burden of 
approximately one hour (one hour/respondent x one broker). Similarly, 
we estimate that approximately six funding portals may choose to 
withdraw from registration each year \1079\ and that each withdrawal, 
as with Form BDW, would take one hour. This would result in an 
aggregate annual reporting burden of approximately six hours (one hour/
respondent x 6 funding portals).
---------------------------------------------------------------------------

    \1076\ The time necessary to complete Form BDW varies depending 
on the nature and complexity of the applicant's securities business. 
We previously estimated that it would take a broker-dealer 
approximately one hour to complete and file a Form BDW to withdraw 
from Commission registration, as required by Exchange Act Rule 15b6-
1 (17 CFR 240.15b6-1).
    \1077\ This estimate is based on Form BDW data collected over 
the past five years and may be skewed as a result of the impact of 
the financial crisis on broker-dealers. For the past five fiscal 
years (from 10/1 through 9/30), the number of broker-dealers that 
withdrew from registration were as follows: 503 in 2008, 533 in 
2009, 510 in 2010, 524 in 2011 and 428 in 2012. (503 + 533 + 510 + 
524 + 428)/5 = 500.
    \1078\ As of September 30, 2012, there were 4,653 broker-dealers 
registered with the Commission. An average of 500 broker-dealers per 
year withdraw from registration, or 11% of the number of registered 
broker-dealers (500 withdrawing broker-dealers/4,653 registered 
broker-dealers). We are assuming that the same percentage of broker-
dealers that withdraw from registration would apply to the 
population of registered broker-dealers participating in offerings 
in reliance on Section 4(a)(6). Of our estimate of 10 registered 
broker-dealers per year registering to participate in crowdfunding 
transactions in reliance on Section 4(a)(6), we estimate that 
approximately one broker-dealer per year (10 registered broker-
dealers x 11%) would withdraw from registration.
    \1079\ We estimate that the percentage of registered funding 
portals participating in crowdfunding transactions in reliance on 
Section 4(a)(6) that would withdraw from registration annually would 
be the same as the percentage of broker dealers that withdraw from 
registration annually because of the similarity of the businesses. 
Of our estimate of 50 registered funding portals participating in 
crowdfunding transactions in reliance on Section 4(a)(6), we 
estimate that approximately six funding portals per year (50 
registered funding portals x 11%) would withdraw from registration. 
For funding portals, a decision to withdraw registration would be 
required to be reported to us in the same way an amendment would; 
however, for brokers, withdrawal requires the fling of Form BDW.
---------------------------------------------------------------------------

    Newly-registered intermediaries would be required to also become 
members of FINRA or any other registered national securities 
association. Based on discussions with industry participants, we 
estimate that the burden associated with this requirement would be 
approximately 220 hours per intermediary that registers as a broker-
dealer. We also assume that approximately one-half of that amount or 
110 hours would be required of an intermediary registering as a funding 
portal. Consequently, we estimate that total annual burden hours 
required for all intermediaries, including brokers and funding portals, 
to register with FINRA or any other registered national securities 
association would be approximately 6,600 hours (220 hours/broker-dealer 
respondent x 10 brokers + 110 hours/funding portal respondent x 50 
funding portals). For intermediaries who choose to hire a third party 
to assist in the membership process, we assume that the hours would be 
further reduced by at least one-half for a total of 3,300 hours.
    Once registered, a broker must promptly file an amended Form BD 
when information it originally reported on Form BD changes or becomes 
inaccurate. Similarly, a registered funding portal must report to us 
amendments relating to its Form Funding Portal filing.\1080\ Based on 
the number of amended Forms BD that we received from October 1, 2007 
through September 30, 2012, we estimate that the total number of 
amendments that we would receive on Form BD from the 10 brokers that 
register under this proposed system would be approximately 34.\1081\ 
Therefore, we estimate that the total additional annual burden hours 
necessary for broker-dealers to complete and file amended Forms BD 
would be approximately 11.2 hours (34 amended Forms BD per year x 0.33 
hours, i.e., 20 minutes, per amendment). Similarly, we estimate that 
the total annual burden hours for funding portals to complete and file 
amended Forms Funding Portal would be approximately 56.1 hours (50 
funding portals x 3.4 amendments per year x 0.33 hours per amendment).
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    \1080\ We previously estimated that the average time necessary 
to complete an amended Form BD would be approximately 20 minutes. We 
estimate that an amendment to Form Funding Portal would take the 
same amount of time as an amendment to Form BD because the forms are 
similar.
    \1081\ We received 16,365, 17,247, 15,638, 15,491 and 13,271 
amended Forms BD during the fiscal years ending 2008, 2009, 2010, 
2011 and 2012, respectively, reflecting an average of 15,602 
amendment filings per year (16,365 + 17,247 + 15,638 + 15,491 + 
13,271)/5 years). As of September 30, 2012, there were 4,653 broker-
dealers registered with the Commission. Therefore, we estimate that 
there are approximately 3.4 amendments (15,602 amended Forms BD/
4,653 broker-dealers) per registered broker-dealer per year. We 
estimate that the 10 broker-dealers who register under this proposed 
regulation would submit, on aggregate, approximately 34 amendments 
per year.
---------------------------------------------------------------------------

ii. Cost
    We estimate that the initial registration cost for an intermediary 
to register with a national securities association would be 
approximately $10,000. This estimate is based on FINRA's current member 
application fee structure, which assesses fees depending on the size of 
the new member applicant. The current member application fee for 
broker-dealers with 1 to 10 associated registered persons is $7,500, 
and the fee for broker-dealers with 11 to 100 associated registered 
persons is $12,500.\1082\ We expect that the size of funding portals 
that would register with FINRA would be similar, and therefore, our 
preliminary estimate of FINRA's application fee for funding portals is 
based on the above fees. The average of the two fees is ($7,500 + 
$12,500)/2 = $10,000. The total cost across all intermediaries would be 
approximately ($10,000/intermediary x (10 brokers + 50 funding portals) 
= $600,000. In addition, two intermediaries would face an additional 
cost of $25,130 to complete Schedule C, retain an agent for the service 
of process and provide an opinion of counsel to register as a 
nonresident funding portal.
---------------------------------------------------------------------------

    \1082\ See FINRA, Revised Fees: Changes to Advertising, 
Corporate Financing, New Membership and Continuing Membership 
Application, Central Registration Depository and Branch Office 
Annual Registration Fees, FINRA Regulatory Notice 12-32 (June 2012), 
available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p127238.pdf.
---------------------------------------------------------------------------

    In addition to the initial registration cost, we estimate that 
costs associated with completing a membership process with FINRA or any 
other registered national securities association would be approximately 
$3,450,000 across all intermediaries. Discussions with industry 
participants have indicated that most broker-dealers currently hire a 
third party consultant or attorney to assist in the membership process. 
Assuming that 90% of intermediaries (9 brokers and 45 funding portals) 
would employ an outside party, we estimate total costs charged by the 
outside party to be $1,575,000 ($50,000/third party assisting broker-
dealers x 9 brokers + $25,0000/third party assisting funding portals x 
45 funding portals).\1083\ As indicated above, we assume that the 
intermediary's Chief Compliance Officer or person in a similar position 
would spend approximately 110 hours assisting in broker-dealer 
registration and 55 hours assisting in funding portal registration for 
a total approximate cost of $1,530,000 (110 hours/broker-dealer 
respondent x 9 brokers + 55 hours/funding portal respondent x 45 
funding

[[Page 66543]]

portals) x $441/hour.\1084\ For the remaining 10% of intermediaries (1 
broker and 5 funding portals) that would not employ an outside party to 
assist in the process, we estimate the total cost to be $340,000 ((220 
hours/broker-dealer respondent x 1 broker + 110 hours/funding portal 
respondent x 45 funding portals) x $441/hour).
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    \1083\ Discussions with industry participants indicated that 
third parties charge between $25,000 and $75,000, for an average of 
$50,000, to assist applicants seeking to register as broker-dealers. 
We assume that charges for intermediaries registering as funding 
portals would be approximately one-half of these costs, for an 
average of $25,000.
    \1084\ The hourly rate estimate for a Chief Compliance Officer 
is taken from SIFMA Management Data.
---------------------------------------------------------------------------

    Intermediaries would face an ongoing cost to remain registered with 
a national securities association. We expect these costs would vary 
based on the size and profitability of the intermediary. The current 
FINRA annual assessment fee for members that are brokers having annual 
revenue of up to $1,000,000 is $1,200. In addition, FINRA members 
currently pay $150.00 for each principal and each representative of the 
member entity, up to five principals and representatives, and also pay 
$175 for the first 250 branch offices registered by the member. For 
purposes of the PRA, we assume that brokers acting as intermediaries as 
well as funding portals would have on average a total of five 
principals or representatives (or their equivalent), would maintain 
fewer than 250 branch offices, and would have annual revenues less than 
$1,000,000. Also for purpose of these estimates, we assume that the 
fees the national securities association would set for funding portals 
would be the same as those FINRA currently has set for members that are 
brokers. We do recognize, however, that the national securities 
association fees for funding portals may be lower than those currently 
in place for brokers, proportionate to funding portals' more limited 
scope of activity compared to brokers.\1085\ Thus, we estimate that on 
average intermediaries would pay ongoing annual fees to a national 
securities association of $2,130, after the year they become members 
((5 x $150.00) + $175 + $1,200 = $2,125). Nonresident funding portals, 
would also be subject to an annual cost of $130 to maintain an agent 
for service of process in the United States
---------------------------------------------------------------------------

    \1085\ See note 994.
---------------------------------------------------------------------------

b. Development of Intermediary Platform
i. Time Burden
    The proposed rules are based on an intermediary developing an 
electronic platform to offer securities in reliance on Section 4(a)(6) 
to the public. A broker or funding portal that creates its initial 
platform in-house would incur an initial time burden associated with 
setting up systems functionality to comply with our proposed rules, and 
developing other platform capabilities and operations. Based on our 
discussions with potential intermediaries, we initially estimate that 
intermediaries would typically hire a team of approximately 4 to 6 
developers that would work on all aspects of platform development, 
including, but not limited to, front-end programming, data management, 
systems analysis, communication channels, document delivery, and 
Internet security. To develop a platform, we estimate, based on our 
discussions with potential intermediaries, that intermediaries would 
spend an average of 1,500 hours for planning, programming and 
implementation.
    As discussed above, we anticipate that 10 intermediaries would 
newly register as brokers, 50 intermediaries would be brokers that are 
already registered and 50 intermediaries would register as funding 
portals. It is difficult to estimate the number of intermediaries that 
would develop their platforms in-house, but if we assume that half of 
the 110 newly-registered intermediaries were to do so, then the total 
initial time burden would be 82,500 hours (55 intermediaries x 1,500 
hours = 82,500 hours).
    We estimate that annually updating the features and functionality 
of an intermediary's platform would require approximately 20% of the 
hours required to initially develop the platform, for an average burden 
of 300 hours per year. If we assume that half of the 110 newly-
registered intermediaries updated their systems accordingly, the total 
ongoing time burden would be 16,500 hours per year (55 intermediaries x 
300 hours = 16,500 hours).
ii. Cost
    There would be a cost to developing a platform. Based on our 
discussions with potential intermediaries, we initially estimate that 
it would cost an intermediary approximately $250,000 to $600,000 to 
build an Internet-based crowdfunding portal and all of its basic 
functionality. Assuming that half of the 110 newly-registered 
intermediaries were to hire outside developers to build their 
platforms, the total initial cost would be $13,750,000 to $33,000,000 
(55 intermediaries x $250,000 = $13,750,000; 55 intermediaries x 
$600,000 = $33,000,000). For purposes of the PRA, we are estimating the 
cost at $23,375,000.
    We estimate that it would typically cost an intermediary 
approximately one-fifth of the initial development cost per year to use 
a third-party developer to update an Internet-based crowdfunding portal 
and all of its basic functionality, or $85,000 per year on 
average.\1086\ If we assume that half of the 110 newly-registered 
intermediaries updated their systems accordingly, the total ongoing 
cost would be $4,675,000 per year (55 intermediaries x $85,000 = 
$4,675,000).
---------------------------------------------------------------------------

    \1086\ Our estimate of the average initial external cost per 
intermediary to develop a crowdfunding platform is the average of 
the cited range of $250,000 to $600,000, or (($250,000 + $600,000)/
)/)/2) = $425,000. One-fifth of the cost of $425,000 is ($425,000//
5) = $85,000.
---------------------------------------------------------------------------

c. Measures to Reduce the Risk of Fraud
i. Time Burden
    The proposed rules would require intermediaries to have a 
reasonable basis for believing that an issuer seeking to offer and sell 
securities in reliance on Section 4(a)(6) through the intermediary's 
platform complies with the requirements in Section 4A(b) and the 
related requirements in Regulation Crowdfunding.\1087\ The proposed 
rules would require intermediaries to have a reasonable basis for 
believing that an issuer has established means to keep accurate records 
of the holders of the securities it would offer and sell through the 
intermediary's platform. For both requirements, an intermediary may 
reasonably rely on the representations of the issuer. For the purposes 
of the PRA, we expect that 100% of intermediaries would rely on the 
representations of issuers. This would impose an estimated time burden 
in the first year of five hours per intermediary to establish standard 
representations it would request from issuers, and 6 minutes per 
intermediary per issuer to obtain the issuer representation, which is 
consistent with estimates we have used for other regulated entities to 
obtain similar documentation, such as consents, from customers. Based 
on our estimate that there would be approximately 2,300 offerings per 
year, that each issuer would conduct one offering per year, and that 
there would be 110 intermediaries, we calculate that each intermediary 
would facilitate approximately 20 offerings per year (2,300 offerings/
(10 newly registered broker-dealers + 50 previously registered broker-
dealers + 50 funding portals) = 20.9). Therefore, we estimate that the 
total initial burden hours would be approximately 770 hours ((5 hours/
intermediary x (10 newly-registered broker-dealers + 50 previously-
registered broker-dealers + 50 funding portals) + (6 minutes/issuer x 
20 issuers/intermediary x (10 newly-

[[Page 66544]]

registered broker-dealers + 50 previously-registered broker-dealers + 
50 funding portals)).
---------------------------------------------------------------------------

    \1087\ See proposed Rule 301(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that the ongoing time burdens for this requirement would 
be approximately one hour per intermediary per year to review and check 
that the standard representations it requests from issuers remain 
appropriate, and 6 minutes per intermediary per issuer to obtain the 
representation. Therefore, we estimate that the ongoing total burden 
hours necessary for intermediaries to rely on the representations of 
the issuers would be approximately 330 hours per year ((1 hour/
intermediary x (10 newly-registered broker-dealers + 50 previously-
registered broker-dealers + 50 funding portals)) + (6 minutes/issuer x 
20 issuers/intermediary x (10 newly-registered broker-dealers + 50 
previously-registered broker-dealers + 50 funding portals))).
ii. Cost
    The proposed rules would require intermediaries to conduct a 
background and securities enforcement regulatory history check on each 
issuer and each officer, director or 20 Percent Beneficial Owner to 
determine whether the issuer or such person is subject to a 
disqualification. We anticipate that most intermediaries would employ 
third-parties that perform background checks, and for the purposes of 
this PRA discussion, we assume that 100% of intermediaries would use 
these third-party services rather than develop the capability to 
conduct background and securities enforcement regulatory history checks 
in-house. The cost to perform a background check is estimated to be 
between $200 and $500, depending on the nature and extent of the 
information provided.\1088\ We recognize that some issuers would 
require more than one background check (e.g., for officers or directors 
of the issuer), and we estimate that intermediaries would perform four 
background checks per issuer, on average. We base this number on that 
assumption that most crowdfunding issuers will be startups and small 
businesses with small management teams and few owners. Assuming that 
there is an average of approximately 2,300 offerings made in reliance 
on Section 4(a)(6) per year,\1089\ the total estimated initial cost for 
all intermediaries to fulfill the required background and securities 
enforcement regulatory history checks would range from approximately 
$1,840,000 to $4,600,000 per year,\1090\or approximately $16,700 to 
$41,800 per intermediary per year.\1091\ For purposes of the PRA, we 
will average the cost to $29,250 per intermediary per year.
---------------------------------------------------------------------------

    \1088\ See, e.g., A Matter of Fact, Background Check FAQ: 
Frequently Asked Questions, available at http://www.amof.info/faq.htm (Matter of Fact is a background check provider accredited by 
the National Association of Professional Background Screeners and 
the Background Screening Credentialing Council and states that the 
cost for a comprehensive background check is $200 to $500).
    \1089\ Because crowdfunding transactions in reliance on Section 
4(a)(6) are a new approach to capital formation, it is difficult for 
us to accurately estimate an average number of offerings per year. 
As stated above, we assume that there would be approximately 2,300 
offerings made in reliance on Section 4(a)(6) per year.
    \1090\ 2,300 securities-based offerings made in reliance on 
Section 4(a)(6) per year x ($200 to $500 per background and 
securities enforcement regulatory history check) x 4 checks per 
offering = $1,840,000 to $4,600,000 per year.
    \1091\ $1,840,000/110 intermediaries = approx. $16,700 per 
intermediary; $4,600,000/110 intermediaries = approx. $41,800 per 
intermediary.
---------------------------------------------------------------------------

    We believe that, on an ongoing basis, intermediaries would continue 
to use third-party services to conduct background and securities 
enforcement regulatory history checks. We also believe that the total 
estimated ongoing cost for all intermediaries to fulfill the required 
background and securities enforcement regulatory history checks would 
be the same as the estimated initial cost, ranging from approximately 
$1,840,000 to $4,600,000 per year, or approximately $16,700 to $41,800 
per intermediary per year. For purposes of the PRA, we will average the 
cost to $29,250 per intermediary per year.
d. Account Opening: Accounts and Electronic Delivery
i. Time Burden
    The proposed rules would provide that no intermediary or associated 
person of an intermediary could accept an investment commitment in a 
transaction involving the offer or sale of securities made in reliance 
on Section 4(a)(6) until the investor has opened an account with the 
intermediary and consented to electronic delivery of materials.\1092\ 
For the purposes of the PRA, we expect that the functionality required 
to require an investor to open an account with an intermediary and 
obtain consents would result in an initial time burden of approximately 
10 hours per intermediary in the first year. Therefore, we estimate 
that the total initial burden hours necessary for this functionality 
would be approximately 1,100 hours (10 hours/intermediary x (10 newly-
registered broker-dealers + 50 previously-registered broker-dealers + 
50 funding portals)).
---------------------------------------------------------------------------

    \1092\ See proposed Rule 302(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that the ongoing time burdens for this requirement would 
be significantly less than the initial time burden, and thus we are 
estimating approximately two hours per intermediary per year, to review 
and check the related processes. Therefore, we estimate that the 
ongoing total burden hours necessary for this functionality would be 
approximately 220 hours per year (2 hours/intermediary x (10 newly-
registered broker-dealers + 50 previously-registered broker-dealers + 
50 funding portals)).
ii. Cost
    To the extent an intermediary uses a third party to establish 
account opening functionality, the initial costs relevant to this 
requirement would be incorporated into the cost of hiring a third party 
to develop the platform, discussed below in Section IV.C.2.f.
    We do not believe that there are any ongoing costs relevant to this 
requirement.
e. Account Opening: Educational Materials
i. Time Burden
    The proposed rules would require intermediaries to provide 
educational materials to investors,\1093\ to help ensure that investors 
have a baseline understanding of the risks and costs of investing in 
securities offered and sold in reliance on Section 4(a)(6). Given that 
the intermediary would determine what electronic format is effective in 
communicating the requisite contents of the educational material, the 
expected cost for intermediaries to develop the educational material is 
expected to vary widely and are difficult to estimate. For the purposes 
of the PRA, we are assuming that half of the intermediaries would 
develop their educational materials in-house, which would include 
online presentations and written documents, and that the other half 
would employ third-parties to produce professional-quality online video 
presentations. We estimate that, to develop their non-video educational 
materials in-house, each intermediary would incur an initial time 
burden of approximately 20 hours. Therefore, the total initial burden 
would be approximately 2,200 hours (110 intermediaries x 20 hours/
intermediary).
---------------------------------------------------------------------------

    \1093\ See proposed Rule 302(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Assuming that half of the intermediaries would develop their

[[Page 66545]]

educational materials in-house, we expect that these intermediaries 
also would update their educational materials in-house, as needed. We 
estimate that to update their educational materials in-house, each 
intermediary would incur an ongoing time burden of approximately 10 
hours per year. Therefore, the total ongoing burden would be 
approximately 1,100 hours per year (110 intermediaries x 10 hours/
intermediary).
ii. Cost
    As stated above, for the purposes of this PRA discussion, we assume 
that half of the intermediaries would employ third-party companies to 
produce professional-quality video materials instead of developing 
materials in-house. Public sources indicate that the typical cost to 
produce a professional corporate training video ranges from 
approximately $1,000 to $3,000 per production minute.\1094\ Based on 
discussions with industry participants, we assume that, on average, 
each intermediary would produce a series of short educational videos 
that would cover all of the requirements of the proposed rules, and the 
video material would be 10 minutes long in total. Based on this 
assumption, we estimate that the average initial cost for an 
intermediary to develop and produce educational materials would range 
from approximately $10,000 to $30,000. The total initial cost across 
all 110 intermediaries per year would be $1,100,000 to $3,300,000. For 
purposes of the PRA, we will average the cost to $20,000 per 
intermediary per year. We note that the estimated initial cost may be 
significantly lower, because not all intermediaries that outsource the 
development of educational materials may choose to produce educational 
videos, while others may produce videos of shorter length.
---------------------------------------------------------------------------

    \1094\ See, e.g., Lee W. Frederiksen, What Is the Cost of Video 
Production for the Web?, Hinge Marketing, available at http://www.hingemarketing.com/library/article/what-is-the-cost-of-video-production-for-the-web.
---------------------------------------------------------------------------

    We estimate that, on an ongoing basis, when using a third-party 
company to update their video educational materials, each intermediary 
would spend approximately half of the initial average cost. We 
estimate, therefore, that the average ongoing annual cost for an issuer 
to update its video educational materials would range from 
approximately $5,000 to $15,000 and that the total ongoing annual cost 
across all intermediaries would range from approximately $550,000 to 
$1,650,000 per year. For purposes of the PRA, we will average the cost 
to $10,000 per intermediary per year.
f. Account Opening: Promoters
i. Time Burden
    The proposed rules would require an intermediary, at the account 
opening stage, to disclose to investors that any person who receives 
compensation to promote an issuer's offering, or who is a founder or 
employee of an issuer engaging in promotional activities on behalf of 
the issuer, must clearly disclose the receipt of compensation and his 
or her engagement in promotional activities on the platform.\1095\ For 
purposes of the PRA, we expect that this requirement would result in an 
estimated time burden of five hours per intermediary in the first year, 
to prepare this particular disclosure and incorporate it into the 
account opening process. Therefore, we estimate that the total initial 
burden hours necessary for intermediaries to comply with this 
requirement would be approximately 550 hours (5 hours/intermediary x 
(10 newly-registered broker-dealers + 50 previously-registered broker-
dealers + 50 funding portals)).
---------------------------------------------------------------------------

    \1095\ See proposed Rule 302(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that the ongoing time burdens for this requirement would 
be approximately one hour per intermediary per year to review and check 
that the disclosures remain appropriate. Therefore, we estimate that 
the ongoing total burden hours necessary for intermediaries to comply 
with this requirement would be approximately 110 hours per year (1 
hour/intermediary x (10 newly-registered broker-dealers + 50 
previously-registered broker-dealers + 50 funding portals)).
ii. Cost
    To the extent an intermediary uses a third party to develop the 
functionality for this requirement, the initial costs relevant to this 
requirement would be incorporated into the cost of hiring a third party 
to develop the platform, discussed below in subsection IV.C.2.f.
    We do not believe that there are any ongoing costs relevant to this 
requirement.
g. Issuer Disclosures To Be Made Available
i. Time Burden
    The proposed rules would require an intermediary to make publicly 
available on its platform the information that an issuer of 
crowdfunding securities is required to provide to potential investors, 
in a manner that reasonably permits a person accessing the platform to 
save, download or otherwise store the information, until the offer and 
sale of securities is completed or cancelled.\1096\
---------------------------------------------------------------------------

    \1096\ See proposed Rule 303(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    For purposes of the PRA, our estimate of the hourly burdens related 
to the public availability of the issuer information is included as 
part of our estimate of the hourly burdens associated with overall 
platform development, as discussed above in Section IV.C.2.b. The 
platform functionality would include not only the ability to display, 
upload and download issuer information as required under the proposed 
rules, but also the ability to provide users with required online 
disclosures, as discussed below.
    We recognize that, over time, intermediaries may need to update 
their systems that allow issuer information to be uploaded to their 
platforms. We do not expect a significant ongoing burden for providing 
issuer disclosures, primarily because the functionality required for 
required issuer disclosure information to be uploaded is a standard 
feature offered on many Web sites and would not require frequent or 
significant updates.
ii. Cost
    We do not expect a significant ongoing cost for providing issuer 
disclosures, primarily because the functionality required to upload 
required issuer disclosure information is a standard feature offered on 
many Web sites and would not require frequent updates. Because we are 
including the burdens that are associated with providing issuer 
disclosures as part of our estimates for overall platform development, 
we discuss our cost estimates for ongoing platform development and 
updates there.
h. Other Disclosures to Investors and Potential Investors
i. Time Burden
    Intermediaries would be required to implement and maintain systems 
to comply with the information disclosure, communication channels, and 
investor notification requirements, including providing disclosure 
about compensation at account opening, obtaining investor 
acknowledgements to confirm investor qualifications and review of 
educational materials, providing investor questionnaires, providing 
communication channels with third parties and among investors,

[[Page 66546]]

notifying investors of investment commitments, confirming completed 
transactions and confirming or reconfirming offering cancellations. 
Based on our discussions with industry participants, these 
functionalities would generally be part of the overall platform 
development process and costs. We discuss platform development costs 
above, which would include developing the functionality that would 
allow intermediaries to comply with disclosure and notification 
requirements.\1097\
---------------------------------------------------------------------------

    \1097\ See Section IV.C.2.b.i above.
---------------------------------------------------------------------------

    We do not expect a significant ongoing burden for providing 
disclosures, as required by the proposed rules, because the 
functionality required to provide information and communication 
channels would likely not require frequent updates. We incorporate the 
total burden to update the required functionality for processing issuer 
disclosure and investor acknowledgment information in the total burden 
estimates discussed above relating to platform development.\1098\
---------------------------------------------------------------------------

    \1098\ See Section IV.C.2.b.i above.
---------------------------------------------------------------------------

ii. Cost
    We recognize that some intermediaries may add the required 
functionality for processing issuer disclosure and investor 
acknowledgments by using a third-party developer. We also do not expect 
there to be a significant ongoing cost for developing the functionality 
to process these disclosures and acknowledgments, primarily because 
this functionality would likely not require frequent updates by third-
party developers. The total cost to add the required functionality for 
processing issuer disclosure and investor acknowledgments, as well as 
to update the required functionality for processing issuer disclosure 
and investor acknowledgments, is incorporated into the total cost 
estimates discussed above relating to platform development.\1099\
---------------------------------------------------------------------------

    \1099\ See Section IV.C.2.b above.
---------------------------------------------------------------------------

i. Maintenance and Transmission of Funds
i. Time Burden
    Intermediaries would be required to comply with the requirements 
related to the maintenance and transmission of funds. A registered 
broker would be required to comply with the requirements of Rule 15c2-4 
of the Exchange Act (Transmission or Maintenance of Payments Received 
in Connection with Underwritings).\1100\ A registered funding portal 
would be required to enter into a written agreement with a qualified 
third party to hold its client funds, or to open a bank account for the 
exclusive benefit of the investors and issuer, and it also would be 
required to send directions to the qualified third party depending on 
whether an investing target is met or an investment commitment or 
offering is cancelled. For purposes of the PRA, we are providing an 
estimate for the time that a funding portal would need to enter into on 
an initial basis, and review and update on an ongoing basis, a written 
agreement with the qualified third party. We expect that the burden 
associated with the Web site functionality required to send directions 
to third parties would be included as part of the platform development 
discussed above. Based on discussion with industry participants, we 
estimate that funding portals would incur an initial burden of 
approximately 20 hours each to comply with these requirements, or 1,000 
hours total (20 hours per funding portal x 50 funding portals = 1,000 
hours).
---------------------------------------------------------------------------

    \1100\ 17 CFR 240.15c2-4. For purposes of this PRA discussion, 
the burdens associated with this rule, as well as for any other rule 
to which brokers are subject regardless of whether they engage in 
transactions pursuant to Section 4(a)(6), are not addressed here; 
rather, they are included in any OMB approvals for the relevant 
rule. Rule 15c2-4, however, does not include any information 
collection requests for purposes of the PRA, and so there is no 
relevant approval or control number from OMB for this rule.
---------------------------------------------------------------------------

    We expect that, on an ongoing basis, a registered funding portal 
would have to periodically review and update its written agreement with 
a bank or other third party to hold its client funds. A registered 
funding portal also would be required to send directions on an ongoing 
basis to a third party depending on whether an investing target is met 
or an investment commitment or offering is cancelled. Based on 
discussion with industry participants, we estimate that funding portals 
would incur an ongoing annual burden of approximately 5 hours each to 
comply with these requirements, or 250 hours total (5 hours per funding 
portal x 50 funding portals = 2,500 hours).
ii. Cost
    For purposes of the PRA, we are not providing any cost estimate for 
this requirement, because we expect that the cost associated with 
developing the functionality required to send instructions to third 
parties would be included as part of the platform development discussed 
above.\1101\
---------------------------------------------------------------------------

    \1101\ See Section IV.C.2.f above.
---------------------------------------------------------------------------

j. Fidelity Bond
i. Time Burden
    Funding portals would be required to comply with the requirements 
in proposed Rule 400(f) related to obtaining and maintaining fidelity 
bond coverage. A registered funding portal would be required to enter 
into a written agreement with a fidelity bond provider to obtain the 
required coverage. Based on discussion with industry participants, we 
estimate that funding portals would incur an initial burden of 
approximately 15 hours each to comply with these requirements, or 750 
hours total (15 hours per funding portal x 50 funding portals = 750 
hours).
    We expect that, on an ongoing basis, a registered funding portal 
would have to periodically review and update its fidelity bond 
coverage. We estimate that funding portals would incur an ongoing 
burden of approximately 5 hours each to comply with these requirements, 
or 250 hours total (5 hours per funding portal x 50 funding portals = 
2,500 hours).
ii. Cost
    We estimate the initial costs for the fidelity bond to be $825. We 
estimate that on an ongoing basis, the costs would be $825.
k. Compliance: Policies and Procedures
i. Time Burden
    Based on discussion with industry participants, we estimate that a 
funding portal would spend approximately 40 hours to establish written 
policies and procedures to achieve compliance with the JOBS Act and the 
rules and regulations thereunder, as required under the proposed rules. 
This would result in an aggregate initial recordkeeping burden of 2,000 
hours (40 hours x 50 funding portals).
    We estimate that, on an ongoing basis, funding portals would spend 
approximately 5 hours per year updating, as necessary, the policies and 
procedures required by the proposed rules. This would result in an 
aggregate ongoing recordkeeping burden of 250 hours (5 hours x 50 
funding portals).
ii. Cost
    As we anticipate that funding portals would comply with this 
requirement by using internal personnel and internal information 
technology resources integrated into their platforms, we estimate that 
there would be no costs related to this requirement. To the extent a 
funding portal employs a consultant or attorney to establish written 
policies and procedures, these costs would be incorporated into the

[[Page 66547]]

cost of hiring a third party to assist in the membership process.
l. Compliance: Anti-Money Laundering
    While the proposed CIP and the SAR Requirements, and other BSA 
requirements, impose burdens on relevant entities, the proposed rules 
do not impose any burden on funding portals in addition to that already 
imposed on broker-dealers by those requirements. The burden on funding 
portals, would be the same as broker-dealers, and would be included 
within those estimates provided by Treasury,\1102\ so we do not discuss 
those burdens here, and we would not be requesting any separate 
approval from OMB to impose the burdens associated with the information 
collection requirements to comply with the CIP and SAR Requirements.
---------------------------------------------------------------------------

    \1102\ See OMB File No. 1506-0034 for the CIP requirement and 
OMB File No. 1506-0019 for the SAR requirement.
---------------------------------------------------------------------------

m. Compliance: Privacy
i. Time Burden
    We estimate that the initial time burden of the requirement related 
to the proposed Privacy Rules, including Regulation S-P, S-AM and S-ID, 
would be negligible in light of the limited activities of funding 
portals, so we discuss it below only in relation to ongoing time 
burdens.
    Regulation S-P would require a funding portal to provide notice to 
investors about its privacy policies and practices; describes the 
conditions under which a broker may disclose nonpublic personal 
information about investors to nonaffiliated third parties; and 
provides a method for investors to prevent a funding portal from 
disclosing that information to most nonaffiliated third parties by 
``opting out'' of that disclosure, subject to certain exceptions. For 
funding portals, we expect that the privacy and opt-out notices would 
be delivered electronically, which reduces the delivery burden compared 
to paper delivery.
    Based on the proposed requirements, we estimate that all 50 funding 
portals would be subject to the requirements of Regulation S-P under 
the proposed regulation. In developing an estimate we have considered: 
(1) The minimal recordkeeping burden imposed by Regulation S-P 
(Regulation S-P has no recordkeeping requirement, and records relating 
to customer communications already must be made and retained pursuant 
to other Commission rules); (2) the summary fashion in which 
information must be provided to investors in the privacy and opt-out 
notices required by Regulation S-P (the model privacy form adopted by 
the Commission and the other agencies in 2009, designed to serve as 
both a privacy notice and an opt-out notice, is only two pages); and 
(3) the availability of the model privacy form and online model privacy 
form builder. Given these consideration and with the aid of our 
institutional knowledge, we estimate that each funding portal would 
spend, on an ongoing basis, an average of approximately 12 hours per 
year complying with the information collection requirement of 
Regulation S-P, for a total of approximately 600 annual burden-hours 
(12 hours/respondent x 50 funding portals).
    Regulation S-AM would require funding portals to provide a notice 
to each affected individual informing the individual of his or her 
right to prohibit such marketing before a receiving affiliate may make 
marketing solicitations based on the communication of certain consumer 
financial information from the broker. Based on the discussion with 
industry participants, we estimate that approximately 20 funding 
portals would have affiliations that would subject them to the 
requirements of Regulation S-AM under the proposed regulation, and that 
they would require an average one-time burden of 1 hour to review 
affiliate marketing practices, for a total of 20 hours (1 hour/
respondent x 20 funding portals). We also estimate that these 20 
funding portals would be required to provide notice and opt-out 
opportunities to consumers pursuant to the requirements of Regulation 
S-AM and that they would incur an average first-year burden of 18 hours 
in doing so, for a total estimated first-year burden of 360 hours (18 
hours/respondent x 20 funding portals). We estimate that funding 
portals would incur a continuing ongoing burden related to the 
requirements of Regulation S-AM to provide notice and opt-out 
opportunities of approximately 4 hours per respondent per year to 
create and deliver notices to new investors and record any opt-outs 
that are received on an ongoing basis, for a total of approximately 80 
annual burden-hours (4 hours/respondent x 20 funding portals).\1103\
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    \1103\ The average (blended) annual time burden per respondent 
for Regulation S-AM requirements would be 10 hours ((18 hours in the 
first year/3 years) + 4 hours/year continuing burden = 10 hours per 
year).
---------------------------------------------------------------------------

    Under our proposed rules, Regulation S-ID generally would require 
funding portals to develop and implement a written identity theft 
prevention program that is designed to detect, prevent and mitigate 
identity theft in connection with certain existing accounts or the 
opening of new accounts. Based on our institutional knowledge, we 
estimate that the initial burden for funding portals to comply with the 
applicable portions of proposed Regulation S-ID would be (1) 25 hours 
to develop and obtain board approval of a program; (2) 4 hours to train 
staff; and (3) 2 hours to conduct an initial assessment of relevant 
accounts, for a total of 31 hours. We estimate that all 50 funding 
portals would incur these initial time burdens, resulting in an 
aggregate time burden of 1,550 hours ((25 + 4 + 2 hours/respondent) x 
50 funding portals).
    With respect to the requirements of Regulation S-ID, we estimate 
that the ongoing burden per year would include: (1) 2 hours to 
periodically review and update the program, review and preserve 
contracts with service providers and review and preserve any 
documentation received from service providers; (2) 4 hours to prepare 
and present an annual report to a compliance director; and (3) 2 hours 
to conduct periodic assessments to determine if the entity offers or 
maintains covered accounts, for a total of 8 hours, of which we 
estimate 7 hours would be spent by internal counsel and 1 hour would be 
spent by a compliance director. We estimate that 50 funding portals 
would incur these ongoing time burdens, making the total ongoing burden 
400 hours (8 hours/respondent x 50 funding portals).
ii. Cost
    We estimate that, for PRA purposes, there is no cost associated 
with the requirements of Regulation S-P, Regulation S-AM or Regulation 
S-ID.
n. Records To Be Made and Kept by Funding Portals
i. Time Burden
    All funding portals would be required to make and keep records 
related to their activities to facilitate transactions in reliance on 
Section 4(a)(6) and the related rules. These proposed books and records 
requirements are based generally on Exchange Act Rules 17a-3 and 17a-4, 
which apply to broker-dealers. To estimate the initial burden for 
funding portals, we examined the current annual burdens of Rules 17a-3 
and 17a-4.\1104\
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    \1104\ See Collections of Information for Exchange Act Rules 
17a-3 and 17a-4 (OMB Control Nos. 3235-0033 and 3235-0279), Office 
of Information and Regulatory Affairs, Office of Management and 
Budget, available at http://www.reginfo.gov/public/do/PRAMain.

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[[Page 66548]]

    The most recently approved annual recordkeeping burden for broker-
dealer compliance with Rule 17a-3 is currently estimated at 394.16 
hours per respondent, and the most recently approved annual 
recordkeeping burden for broker-dealer compliance with Rule 17a-4 is 
currently estimated at 254 hours per respondent.
    Given the more limited scope of a funding portal's business as 
compared to that of a broker, the more limited scope of the proposed 
books and records rules, and the fact that funding portals would make, 
deliver and store records electronically (as required), we expect the 
burden of the proposed rules may be less than that of Rules 17a-3 and 
17a-4. For the purposes of the PRA, we assume that the recordkeeping 
burden, on average, for a funding portal to comply with the proposed 
rules would be 50% of the burdens of a broker-dealer to comply with 
Rules 17a-3 and 17a-4 (although 50% may turn out to be a high 
estimate). We expect the ongoing recordkeeping burden for funding 
portals would be the same as the initial burden because maintaining 
such records would be consistent each year. Therefore, we estimate the 
initial burden to be approximately 325 hours per respondent,\1105\ or 
16,250 hours total (325 hours/respondent x 50 respondents = 16,250 
hours). We estimate that the ongoing recordkeeping burden for funding 
portals would be approximately 325 hours per respondent, or 16,250 
hours total (325 hours/respondent x 50 funding portals).
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    \1105\ 394.16 hours (recordkeeping burden for Rule 17a-3) + 254 
hours (recordkeeping burden for Rule 17a-4) = 648.16 hours. 648.16 
hours/2 = 324.08 hours.
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ii. Cost
    For purposes of the PRA, we assume that a funding portal's initial 
recordkeeping cost associated with making and keeping records by a 
funding portal would not be significantly different from the ongoing 
recordkeeping cost because maintaining such records would be consistent 
each year. The most recently approved annual recordkeeping cost for 
broker-dealer compliance with Rule 17a-3 is currently estimated at 
$5,706.67 per respondent. These ongoing recordkeeping costs reflect the 
costs of systems and equipment development. The most recently approved 
annual recordkeeping cost for broker-dealer compliance with Rule 17a-4 
is currently estimated at $5,000 per respondent.
    Given the more limited scope of a funding portal's business as 
compared to that of a broker, the more limited scope of the proposed 
books and records rules, and the fact that funding portals would make, 
deliver (as required) and store records electronically, we expect the 
annual recordkeeping cost of the proposed rule requirements may be less 
than that of Rules 17a-3 and 17a-4. For purposes of the PRA, we assume 
that the annual recordkeeping cost on average for a funding portal to 
comply with the proposed requirements that records be made and kept 
would be about 50% less than burdens of a broker-dealer to comply with 
Rules 17a-3 and 17a-4. We expect the initial recordkeeping cost for 
funding portals, therefore, to be approximately $5,350 per 
respondent,\1106\ or $267,500 total ($5,350 per respondent x 50 
respondents = $267,500).
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    \1106\ $5,706.673 (recordkeeping cost for Rule 17a-3) + $5,000 
(recordkeeping cost for Rule 17a-4) = $10,706.673 multiplied by 50%.
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    We also estimate that the ongoing recordkeeping cost for funding 
portals would be approximately $5,350 per respondent, or $267,500 total 
($5,350 per respondent x 50 respondents = $267,500).

D. Collections of Information Are Mandatory

    The collections of information required under proposed Rules 201 
through 203 would be mandatory for all issuers. The collections of 
information required under proposed Rules 300 through 304 would be 
mandatory for all intermediaries. The collections of information 
required under proposed Rules 400 through 404 would be mandatory for 
all funding portals.

E. Confidentiality

    Responses on Form C, Form C-A, Form C-U, Form C-AR and Form C-TR 
would not be confidential. Responses on Form ID would be kept 
confidential by the Commission, subject to a request under the Freedom 
of Information Act.\1107\ Responses on Form Funding Portal would not be 
confidential.
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    \1107\ 5 U.S.C. 552. The Commission's regulations that implement 
the Freedom of Information Act are at 17 CFR 200.80 et seq.
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F. Retention Period of Recordkeeping Requirements

    Issuers are not subject to recordkeeping requirements under 
proposed Regulation Crowdfunding. Intermediaries that are brokers would 
be required to retain records and information relating to proposed 
Regulation Crowdfunding for the required retention periods specified in 
Exchange Act Rule 17a-4.\1108\ Intermediaries that are funding portals 
would be required to retain records and information under proposed 
Regulation Crowdfunding for the required retention periods specified in 
proposed Rule 404.\1109\
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    \1108\ 17 CFR 240.17a-4.
    \1109\ See proposed Rule 404 of Regulation Crowdfunding.
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G. Request for Comment

    The Commission invites comment on all of the above estimates. In 
particular, the Commission requests comment on the assumptions and 
estimates described above with respect to how issuers and 
intermediaries, especially funding portals, would comply with the 
proposed information collection requests. Pursuant to 44 U.S.C. 
3506(c)(2)(A), the Commission requests comment in order to: (1) 
Evaluate whether the proposed collections of information are necessary 
for the proper performance of our functions, including whether the 
information would have practical utility; (2) evaluate the accuracy of 
our estimate of the burden of the proposed collections of information; 
(3) determine whether there are ways to enhance the quality, utility 
and clarity of the information to be collected; and (4) evaluate 
whether there are ways to minimize the burden of the proposed 
collections of information on those who respond, including through the 
use of automated collection techniques or other forms of information 
technology.
    Persons submitting comments on the proposed collection of 
information requirements should direct their comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should also send a copy of their comments to 
Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 
F Street NE., Washington, DC 20549-1090, with reference to File No. S7-
09-13. Requests for materials submitted to OMB by the Commission, with 
regard to these collections of information, should be in writing, with 
reference to File No. S7-09-13, and they should be submitted to the 
Securities and Exchange Commission, Office of FOIA Services, 100 F 
Street NE., Washington, DC 20549-2736. As OMB is required to make a 
decision concerning the collections of information between 30 and 60 
days after publication, a comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days of publication.

[[Page 66549]]

V. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\1110\ the Commission must advise the OMB as 
to whether the proposed rules constitute a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' when, if adopted, it results or 
is likely to result in: (1) An annual effect on the economy of $100 
million or more (either in the form of an increase or a decrease); (2) 
a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effect on competition, 
investment or innovation. If a rule is ``major,'' its effectiveness 
will generally be delayed for 60 days pending Congressional review.
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    \1110\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various Sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
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    The Commission requests comment on the potential impact of the 
proposed rules on the economy on an annual basis, any potential 
increase in costs or prices for consumers or individual industries and 
any potential effect on competition, investment or innovation. 
Commenters are requested to provide empirical data and other factual 
support for their view to the extent possible.

VI. Initial Regulatory Flexibility Act Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA''), in accordance with the provisions of 
the Regulatory Flexibility Act,\1111\ regarding proposed Regulation 
Crowdfunding.
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    \1111\ 5 U.S.C. 603.
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A. Reasons for the Proposed Actions

    The proposed regulation is designed to implement the requirements 
of Title III. Title III added Securities Act Section 4(a)(6), which 
provides a new exemption from the registration requirements of 
Securities Act Section 5 for crowdfunding transactions, provided the 
transactions are conducted in the manner set forth in new Securities 
Act Section 4A. Section 4A includes requirements for issuers that offer 
or sell securities in reliance on the crowdfunding exemption, as well 
as for persons acting as intermediaries in those transactions. The 
proposed rules prescribe requirements governing the offer and sale of 
securities in reliance on Section 4(a)(6), and provide a framework for 
the regulation of registered funding portals and brokers that act as 
intermediaries in the offer and sale of securities in reliance on 
Section 4(a)(6).

B. Objectives

    As discussed above, the crowdfunding provisions of the JOBS Act, 
which we woul