[Federal Register Volume 80, Number 220 (Monday, November 16, 2015)]
[Rules and Regulations]
[Pages 71387-71615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28220]



[[Page 71387]]

Vol. 80

Monday,

No. 220

November 16, 2015

Part III

Book 2 of 2 Books

Pages 71387-71680





Securities and Exchange Commission





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17 CFR Parts 200, 227, 232, et al.



Crowdfunding; Final Rule

Federal Register / Vol. 80 , No. 220 / Monday, November 16, 2015 / 
Rules and Regulations

[[Page 71388]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 227, 232, 239, 240, 249, 269, and 274

[Release Nos. 33-9974; 34-76324; File No. S7-09-13]
RIN 3235-AL37


Crowdfunding

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting 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 
prescribes rules governing the offer and sale of securities under new 
Section 4(a)(6) of the Securities Act of 1933. Regulation Crowdfunding 
also provides a framework for the regulation of registered funding 
portals and broker-dealers that issuers are required to use as 
intermediaries in the offer and sale of securities in reliance on 
Section 4(a)(6). In addition, Regulation Crowdfunding conditionally 
exempts securities sold pursuant to Section 4(a)(6) from the 
registration requirements of Section 12(g) of the Securities Exchange 
Act of 1934.

DATES: The final rules and forms are effective May 16, 2016, except 
that instruction 3 adding part 227 and instruction 15 amending Form ID 
are effective January 29, 2016.

FOR FURTHER INFORMATION CONTACT: With regard to requirements for 
issuers, Eduardo Aleman, Julie Davis, or Amy Reischauer, Division of 
Corporation Finance, at (202) 551-3460, and with regard to requirements 
for intermediaries, Joseph Furey, Joanne Rutkowski, Timothy White, 
Devin Ryan, or Erin Galipeau, 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
    A. Background
    B. Title III of the JOBS Act
II. Final Rules Implementing Regulation Crowdfunding
    A. Crowdfunding Exemption
    1. Limit on Capital Raised
    2. Investment Limits
    3. Transaction Conducted Through an Intermediary
    4. Exclusion of Certain Issuers From Eligibility Under Section 
4(a)(6)
    B. Issuer Requirements
    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. Intermediary Requirements
    1. Definitions of Funding Portals and Associated Persons
    2. General Requirements for Intermediaries
    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 Funding Portal Requirements
    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 Provisions
    7. Secondary Market Trading
III. Economic Analysis
    A. Baseline
    1. Current Methods of Raising Up to $1 Million of Capital
    2. Current Sources of Funding for Startups and Small Businesses 
That Could Be Substitutes or Complements To Crowdfunding
    3. Current Crowdfunding Practices
    4. Survival Rates for Startups and Small Businesses
    5. Market Participants
    B. Analysis of Final 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
IV. Paperwork Reduction Act
    A. Background
    B. Estimate of Issuers and Intermediaries
    1. Issuers
    2. Intermediaries That Are Registered Brokers
    3. Funding Portals
    C. Estimate of Burdens
    1. Issuers
    2. Brokers and Funding Portals
    D. Collections of Information Are Mandatory
    E. Confidentiality
    F. Retention Period of Recordkeeping Requirements
V. Final Regulatory Flexibility Act Analysis
    A. Need for the Rule
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Rules
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities
    1. Issuers
    2. Intermediaries
VI. Statutory Authority
Exhibit A

I. Introduction

A. Background

    Crowdfunding is a relatively new and evolving method of using the 
Internet to raise 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. 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 to 
fund the campaign based on the collective ``wisdom of the crowd.''
    The Jumpstart Our Business Startups Act (the ``JOBS Act''),\1\ 
enacted on April 5, 2012, establishes a regulatory structure for 
startups and small businesses to raise capital through securities 
offerings using the Internet through crowdfunding. The crowdfunding 
provisions of the JOBS Act were intended to help provide startups and 
small businesses with capital by making relatively low dollar offerings 
of securities, featuring relatively low dollar investments by the 
``crowd,'' less costly.\2\ Congress included a number of provisions 
intended to protect investors who engage in these transactions,\3\ 
including

[[Page 71389]]

investment limits, required disclosures by issuers, and a requirement 
to use regulated intermediaries. The provisions also permit Internet-
based platforms to facilitate the offer and sale of securities in 
crowdfunding transactions without having to register with the 
Commission as brokers.
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    \1\ Pub. L. 112-106, 126 Stat. 306 (2012).
    \2\ See, e.g., congressional statements regarding crowdfunding 
bills that were precursors to the JOBS Act: 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[.]'').
    \3\ See, e.g., congressional statements regarding crowdfunding 
bills that were precursors to the JOBS Act: 158 Cong. Rec. S1781 
(daily ed. Mar. 19, 2012) (statement of Sen. Carl Levin) (``Our bill 
creates new opportunities for crowdfunding but establishes basic 
regulatory oversight, liability, and disclosure rules that will give 
investors the confidence to participate in this promising emerging 
source of money for growing companies.'').
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    In the United States, crowdfunding 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. Such a profit or revenue-sharing model--sometimes 
referred to as the ``equity model'' of crowdfunding--could trigger the 
application of the federal securities laws because it likely would 
involve the offer and sale of a security. Under the Securities Act of 
1933 (``Securities Act''), the offer and sale of securities is required 
to be registered unless an exemption is available. Some observers have 
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. Limitations under existing regulations, including purchaser 
qualification requirements for offering exemptions that permit general 
solicitation and general advertising, have made private placement 
exemptions generally unavailable for crowdfunding transactions, which 
are intended to involve a large number of investors \4\ and not be 
limited to investors that meet specific qualifications.\5\
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    \4\ In this release, ``investors'' includes investors and 
potential investors, as the context requires. See Rule 100(d) of 
Regulation Crowdfunding.
    \5\ 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)] (adopting 
rules to implement Title II of the Jumpstart Our Business Startups 
Act) (``Rule 506(c) Adopting Release''). 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, someone who operates a Web site to effect the purchase 
and sale of securities for the account of others generally would, under 
pre-existing regulations, be required to register with the Commission 
as a broker-dealer and comply with the laws and regulations applicable 
to broker-dealers.\6\ 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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    \6\ 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. 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 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 4(a)(6),\7\ which provides an exemption from the registration 
requirements of Securities Act Section 5 \8\ 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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    \7\ 15 U.S.C. 77d(a)(6).
    \8\ 15 U.S.C. 77e.
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     The amount raised must not exceed $1 million in a 12-month 
period;
     individual investments in all crowdfunding issuers 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; and
     transactions must be conducted through an intermediary 
that either is registered as a broker-dealer or is registered as a new 
type of entity called a ``funding portal.''
    In addition, Title III:
     Adds Securities Act Section 4A,\9\ 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 other actions and provide notices and other information 
to the Commission;
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    \9\ 15 U.S.C. 77a.
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     adds Exchange Act Section 3(h),\10\ which requires the 
Commission to adopt rules to exempt, either conditionally or 
unconditionally, ``funding portals'' from having to register as a 
broker-dealer pursuant to Exchange Act Section 15(a)(1); \11\
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    \10\ 15 U.S.C. 78c(h).
    \11\ 15 U.S.C. 78o(a)(1).
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     mandates that the Commission establish disqualification 
provisions under which an issuer would not be able to avail itself of 
the Section 4(a)(6) exemption if the issuer or an intermediary was 
subject to a disqualifying event; and
     adds Exchange Act Section 12(g)(6),\12\ which requires the 
Commission to adopt rules to exempt from the registration requirements 
of Section 12(g),\13\ either conditionally or unconditionally, 
securities acquired pursuant to an offering made in reliance on Section 
4(a)(6).
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    \12\ 15 U.S.C. 78l(g)(6).
    \13\ 15 U.S.C. 78l(g).
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    On October 23, 2013, we proposed new rules and forms to implement 
Title III of the JOBS Act.\14\ We received over 485 comment letters on 
the Proposing Release, including from professional and trade 
associations, investor organizations, law firms, investment companies 
and investment advisers, broker-dealers, potential funding portals, 
members of Congress, the Commission's Investor Advisory Committee,\15\ 
state securities regulators, government agencies, potential issuers, 
accountants, individuals and other interested parties. We have reviewed 
and considered all of the comments that we received on the Proposing 
Release and on Title III of the JOBS Act.\16\ In this

[[Page 71390]]

release, we are adopting new rules and forms to implement Sections 
4(a)(6) and 4A and Exchange Act Sections 3(h) and 12(g)(6). The rules 
are described in detail below.
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    \14\ See Rel. No. 33-9470 (Oct. 23, 2013) [78 FR 66427 (Nov. 5, 
2013)] (the ``Proposing Release''), available at: http://www.sec.gov/rules/proposed/2013/33-9470.pdf.
    \15\ The SEC Investor Advisory Committee (``Investor Advisory 
Committee'') was established in April 2012 pursuant to Section 911 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
[Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (July 21, 2010)] 
(the ``Dodd-Frank Act'') to advise the Commission on regulatory 
priorities, the regulation of securities products, trading 
strategies, fee structures, the effectiveness of disclosure, 
initiatives to protect investor interests and to promote investor 
confidence and the integrity of the securities marketplace. The 
Dodd-Frank Act authorizes the Investor Advisory Committee to submit 
findings and recommendations for review and consideration by the 
Commission.
    \16\ To facilitate public input on JOBS Act rulemaking before 
the issuance of rule proposals, the Commission invited members of 
the public to make their views known on various JOBS Act initiatives 
in advance of any rulemaking by submitting comment letters to the 
Commission's Web site at http://www.sec.gov/spotlight/jobsactcomments.shtml. The comment letters relating to Title III of 
the JOBS Act submitted in response to this invitation are located at 
http://www.sec.gov/comments/jobs-title-ii/jobs-title-iii.shtml.
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II. Final Rules Implementing Regulation Crowdfunding

    Regulation Crowdfunding, among other things, permits individuals to 
invest in securities-based crowdfunding transactions subject to certain 
thresholds, limits the amount of money an issuer can raise under the 
crowdfunding exemption, requires issuers to disclose certain 
information about their offers, and creates a regulatory framework for 
the intermediaries that facilitate the crowdfunding transactions. As an 
overview, under the final rules:
     An issuer is permitted to raise a maximum aggregate amount 
of $1 million through crowdfunding offerings in a 12-month period;
     Individual investors, over the course of a 12-month 
period, are permitted to invest in the aggregate across all 
crowdfunding offerings up to:
    [cir] If either their annual income or net worth is less than 
$100,000, then the greater of:
    [ssquf] $2,000 or
    [ssquf] 5 percent of the lesser of their annual income or net 
worth.
    [cir] If both their annual income and net worth are equal to or 
more than $100,000, then 10 percent of the lesser of their annual 
income or net worth; and
     During the 12-month period, the aggregate amount of 
securities sold to an investor through all crowdfunding offerings may 
not exceed $100,000.
    Certain companies are not eligible to use the Regulation 
Crowdfunding exemption. Ineligible companies include non-U.S. 
companies, companies that already are Exchange Act reporting companies, 
certain investment companies, companies that are disqualified under 
Regulation Crowdfunding's disqualification rules, companies that have 
failed to comply with the annual reporting requirements under 
Regulation Crowdfunding during the two years immediately preceding the 
filing of the offering statement, and companies that have no specific 
business plan or have indicated their business plan is to engage in a 
merger or acquisition with an unidentified company or companies.
    Securities purchased in a crowdfunding transaction generally cannot 
be resold for a period of one year. Holders of these securities do not 
count toward the threshold that requires an issuer to register its 
securities with the Commission under Section 12(g) of the Exchange Act 
if the issuer is current in its annual reporting obligation, retains 
the services of a registered transfer agent and has less than $25 
million in assets.
    Disclosure by Issuers. The final rules require issuers conducting 
an offering pursuant to Regulation Crowdfunding to file certain 
information with the Commission and provide this information to 
investors and the relevant intermediary facilitating the crowdfunding 
offering. Among other things, in its offering documents, the issuer is 
required to disclose:
     Information about officers and directors as well as owners 
of 20 percent or more of the issuer;
     A description of the issuer's business and the use of 
proceeds from the offering;
     The price to the public of the securities or the method 
for determining the price, the target offering amount, the deadline to 
reach the target offering amount, and whether the issuer will accept 
investments in excess of the target offering amount;
     Certain related-party transactions;
     A discussion of the issuer's financial condition; and
     Financial statements of the issuer that are, depending on 
the amount offered and sold during a 12-month period, accompanied by 
information from the issuer's tax returns, reviewed by an independent 
public accountant, or audited by an independent auditor. An issuer 
relying on these rules for the first time would be permitted to provide 
reviewed rather than audited financial statements, unless financial 
statements of the issuer are available that have been audited by an 
independent auditor.
    Issuers are required to amend the offering document during the 
offering period to reflect material changes and provide updates on the 
issuer's progress toward reaching the target offering amount.
    In addition, issuers relying on the Regulation Crowdfunding 
exemption are required to file an annual report with the Commission and 
provide it to investors.
    Crowdfunding Platforms. One of the key investor protections of 
Title III of the JOBS Act is the requirement that Regulation 
Crowdfunding transactions take place through an SEC-registered 
intermediary, either a broker-dealer or a funding portal. Under 
Regulation Crowdfunding, offerings must be conducted exclusively 
through a platform operated by a registered broker or a funding portal, 
which is a new type of SEC registrant. The rules require these 
intermediaries to:
     Provide investors with educational materials;
     Take measures to reduce the risk of fraud;
     Make available information about the issuer and the 
offering;
     Provide communication channels to permit discussions about 
offerings on the platform; and
     Facilitate the offer and sale of crowdfunded securities.
    The rules prohibit funding portals from:
     Offering investment advice or making recommendations;
     Soliciting purchases, sales or offers to buy securities 
offered or displayed on its platform;
     Compensating promoters and others for solicitations or 
based on the sale of securities; and
     Holding, possessing, or handling investor funds or 
securities.
    The rules provide a safe harbor under which funding portals can 
engage in certain activities consistent with these restrictions.
    The staff will undertake to study and submit a report to the 
Commission no later than three years following the effective date of 
Regulation Crowdfunding on the impact of the regulation on capital 
formation and investor protection. The report will include, but not be 
limited to, a review of: (1) Issuer and intermediary compliance; (2) 
issuer offering limits and investor investment limits; (3) incidence of 
fraud, investor losses, and compliance with investor aggregates; (4) 
intermediary fee and compensation structures; (5) measures 
intermediaries have taken to reduce the risk of fraud, including 
reliance on issuer and investor representations; (6) the concept of a 
centralized database of investor contributions; (7) intermediary 
policies and procedures; (8) intermediary recordkeeping practices; and 
(9) secondary market trading practices.

A. Crowdfunding Exemption

    Section 4(a)(6) provides an exemption from the registration 
requirements of Securities Act Section 5 for certain crowdfunding 
transactions. To qualify for this exemption, crowdfunding transactions 
by an issuer must meet specified requirements, including limits on 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

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intermediary that complies with specified requirements.\17\ Title III 
also provides limitations on who may rely on the exemption and 
establishes specific liability provisions for material misstatements or 
omissions in connection with Section 4(a)(6) exempt transactions. As 
discussed below, the rules we are adopting are designed to aid issuers, 
investors and intermediaries in complying with these various 
limitations and requirements.
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    \17\ See Section II.C for a discussion of the intermediary 
requirements. See also Section II.D for a discussion of the 
additional funding portal requirements.
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1. Limit on Capital Raised
a. Proposed Rules
    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.'' Under Securities Act 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.''
    Consistent with the statute, we proposed in Rule 100(a) of 
Regulation Crowdfunding to limit the aggregate amount sold to all 
investors by the issuer in reliance on the new exemption to $1 million 
during a 12-month period. Capital raised through other exempt 
transactions would not be counted in determining the aggregate amount 
sold in reliance on Section 4(a)(6).
    We also provided guidance clarifying our view that offerings made 
in reliance on Section 4(a)(6) will not be integrated \18\ with other 
exempt offerings 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.
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    \18\ 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. See, e.g., Final Rule: Nonpublic Offering 
Exemption, Release No. 33-4552 (Nov. 6, 1962).
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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. Under 
the proposed rules, 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 the 
definition in Securities Act Rule 405.\19\ As proposed, 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.
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    \19\ 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 contains the same definition. 
See 17 CFR 240.12b-2.
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b. Comments on the Proposed Rules
    A few commenters supported a $1 million limit on capital raised by 
an issuer in reliance on Section 4(a)(6),\20\ while many other 
commenters believed that the proposed $1 million limit was too low and, 
in some instances, recommended higher limits.\21\ Several commenters 
urged that the $1 million limit be net of fees charged by the 
intermediary to host the offering on the intermediary's platform,\22\ 
while other commenters generally opposed this idea.\23\
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    \20\ See, e.g., Leverage PR Letter; StartEngine Letter 1; 
StartEngine Letter 2; Wilson Letter.
    \21\ See, e.g., Advanced Hydro Letter; Bushroe Letter; Cole D. 
Letter; Concerned Capital Letter; Hamman Letter; Harrison Letter; 
Hillside Letter; Jazz Letter; Kickstarter Coaching Letter; McCulley 
Letter; McGladrey Letter; Meling Letter; Miami Nation Enterprises 
Letter; Multistate Tax Service Letter; Peers Letter; Pioneer Realty 
Letter; Public Startup Letter 2; Qizilbash Letter; Rosenthal O. 
Letter; Sarles Letter; SBM Letter; Taylor R. Letter; Taylor T. 
Letter; Wales Capital Letter 1; Wales Capital Letter 3; WealthForge 
Letter; Wear Letter; Wilhelm Letter; Winters Letter; Yudek Letter.
    \22\ See, e.g., Benjamin Letter; FundHub Letter 1; Hackers/
Founders Letter; Joinvestor Letter; Odhner Letter; Omara Letter; 
Public Startup Letter 2; RFPIA Letter; RoC Letter; RocketHub Letter; 
Seed&Spark Letter; Thomas Letter 1; Wales Capital Letter 1; Whitaker 
Chalk Letter; Wilson Letter.
    \23\ See, e.g., Arctic Island Letter 4; ASSOB Letter; 
Commonwealth of Massachusetts Letter; MCS Letter; PeoplePowerFund 
Letter.
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    Commenters were divided on the proposed guidance that other exempt 
offerings should not be integrated when determining the amount sold 
during the preceding 12-month period for purposes of the $1 million 
limit, with some supporting this approach,\24\ and others opposing 
it.\25\
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    \24\ See, e.g., AngelList Letter; Arctic Island Letter 4; 
Campbell R. Letter; CFA Institute Letter; CFIRA Letter 11; 
EarlyShares Letter; EMKF Letter; Farnkoff Letter; Feinstein Letter; 
Growthfountain Letter; Hackers/Founders Letter; Heritage Letter; 
NSBA Letter; Parsont Letter; Perfect Circle Solutions Letter; Public 
Startup Letter 2; RoC Letter; RocketHub Letter; Wales Capital Letter 
1; Wefunder Letter; Whitaker Chalk Letter; Wilson Letter.
    \25\ See, e.g., AFL-CIO Letter (not integrating other exempt 
offerings will make crowdfunding available to larger companies and 
``crowd out'' smaller companies that lack other options for raising 
capital); AFR Letter; Brown J. Letter; Consumer Federation Letter 
(not integrating other exempt offerings will allow issuers to evade 
regulatory requirements); Fund Democracy Letter (not integrating 
other exempt offerings will give issuers an incentive to engage in 
advertising in concurrent private offerings to indirectly publicly 
advertise their crowdfunding offering); IAC Recommendation; MCS 
Letter; NASAA Letter.
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c. Final Rules
    We are adopting as proposed rules that limit to $1 million the 
aggregate amount that may be sold to all investors by the issuer in a 
12-month period in reliance on the new exemption.\26\ We continue to 
believe this approach is consistent with the statute and will provide 
for a meaningful addition to the existing capital formation options for 
smaller companies while maintaining important investor protections. 
Moreover, Regulation Crowdfunding is a novel method of raising capital 
for smaller companies, and we are concerned about expanding the 
offering limit of the exemption beyond the level specified in Section 
4(a)(6) at the outset of the adoption of final rules. Some commenters 
suggested that the $1 million limit be net of fees charged by the 
intermediary to host the offering on the intermediary's platform,\27\ 
which would be an indirect way of increasing the $1 million limit. We 
are concerned that expanding the offering limit in this way would 
provide less certainty and could raise interpretive questions, which 
would make the exemption more costly for issuers to comply with. If a 
funding portal's fees are not known in advance, for example, this may 
create uncertainty for issuers about how much capital they would be 
able to raise. Therefore, we are adopting as proposed the limit on the 
aggregate amount sold.
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    \26\ See Rule 100(a)(1) of Regulation Crowdfunding. There is a 
technical change to the rule text (``offer and sell securities'' is 
changed to ``offer or sell securities'') to clarify that an issuer 
does not have to complete a sale in order to rely on the Section 
4(a)(6) exemption for an offering.
    \27\ See, e.g., Benjamin Letter; FundHub Letter 1; Hackers/
Founders Letter; Joinvestor Letter; Odhner Letter; Omara Letter; 
Public Startup Letter 2; RFPIA Letter; RoC Letter; RocketHub Letter; 
Seed&Spark Letter; Thomas Letter 1; Wales Capital Letter 1; Whitaker 
Chalk Letter; Wilson Letter.

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[[Page 71392]]

    Title III provides that the $1 million limit 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)].'' Securities Act 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).'' 
Considered together, 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 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 that only the 
capital raised in reliance on the exemption provided by Section 4(a)(6) 
should be counted toward the limit. 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 for startups 
and small businesses because, by electing crowdfunding, such issuers 
would be placing a cap on the amount of capital they 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 sold in reliance on Section 
4(a)(6), an issuer should aggregate amounts it sold (including amounts 
sold by entities controlled by, 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 12-month period preceding the 
expected date of sale and the amount the issuer intends to raise in 
reliance on the exemption. An issuer should not include amounts sold in 
other exempt offerings during the preceding 12-month period.
    Further, in light of Section 4A(g) and for the reasons discussed 
above, we continue to 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. For example, an issuer conducting a concurrent 
exempt offering for which general solicitation is not permitted will 
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).\28\ As another example, an issuer conducting a concurrent 
exempt offering for which general solicitation is permitted, for 
example, under Securities Act Rule 506(c), could not include in any 
such general solicitation an advertisement of the terms of an offering 
made in reliance on Section 4(a)(6), unless that advertisement 
otherwise complied with Section 4(a)(6) and the final rules. As such, a 
concurrent offering would be bound by the more restrictive solicitation 
requirements of Regulation Crowdfunding, unless the issuer can conclude 
that the purchasers in the Regulation Crowdfunding offering were not 
solicited by means of the offering made in reliance on Rule 506(c).
---------------------------------------------------------------------------

    \28\ For a concurrent offering under Rule 506(b), an issuer will 
have to conclude that purchasers in the Rule 506(b) offering were 
not solicited by means of the offering made in reliance on Section 
4(a)(6). For example, the issuer may have had a preexisting 
substantive relationship with such purchasers. Otherwise, the 
solicitation conducted in connection with the crowdfunding offering 
may preclude reliance on Rule 506(b). See also Rel. No. 33-8828 
(Aug. 3, 2007) [72 FR 45116].
---------------------------------------------------------------------------

    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.\29\ Under the final rules, for purposes of determining whether an 
entity is ``controlled by or under common control with'' the issuer, an 
issuer will be required to consider whether it 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, consistent with the 
definition of ``control'' in Securities Act Rule 405.\30\
---------------------------------------------------------------------------

    \29\ See note 19.
    \30\ See Instruction to paragraph (c) of Rule 100 of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    Under the final rules, the amount of securities sold in reliance on 
Section 4(a)(6) also includes securities sold by any predecessor of the 
issuer in reliance on Section 4(a)(6) during the preceding 12-month 
period.\31\ We believe this approach is necessary to prevent an issuer 
from exceeding the $1 million limit by reorganizing into a new entity 
that would otherwise not be limited by previous sales made by its 
predecessor.
---------------------------------------------------------------------------

    \31\ See Rule 100(c) of Regulation Crowdfunding (defining 
issuer, in certain circumstances, to include all entities controlled 
by or under common control with the issuer and any predecessor of 
the issuer).
---------------------------------------------------------------------------

2. Investment Limits
a. Proposed Rules
    Under the exemption from registration set forth in Securities Act 
Section 4(a)(6)(B), the aggregate amount of securities 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.''
    In the Proposing Release, we noted that this statutory language may 
present ambiguity in some cases about which of the two investment 
limits governs, 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 a 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 
states when that percentage should be applied against the investor's

[[Page 71393]]

annual income and when it should be applied against the investor's net 
worth.
    Under proposed Rule 100(a) of Regulation Crowdfunding, the 
aggregate amount of securities sold to any investor by any issuer in 
reliance on Section 4(a)(6) during the 12-month period preceding the 
date of such transaction, including the securities sold to such 
investor in such transaction, could not exceed the greater of: (i) 
$2,000 or 5 percent of the annual income or net worth of the investor, 
whichever is greater, if both annual income and net worth are less than 
$100,000; or (ii) 10 percent of the annual income or net worth of the 
investor, whichever is greater, not to exceed an amount sold of 
$100,000, if either annual income or net worth is equal to or more than 
$100,000.
    We did not propose to alter these investment limits for any 
particular type of investor or create a different exemption based on 
different investment limits. Under the proposal, the annual income and 
net worth of a natural person would be calculated in accordance with 
the Commission's rules for the calculation of annual income and net 
worth of an accredited investor, and an investor's annual income or net 
worth could be calculated jointly with the annual income or net worth 
of the investor's spouse. An issuer would be able to rely on the 
efforts of an intermediary to determine that the aggregate amount of 
securities purchased by an investor will not cause the investor to 
exceed the investment limits, provided the issuer does not have 
knowledge to the contrary.
b. Comments on the Proposed Rules
    Commenters were divided on the proposed investment limits. Many 
commenters supported some type of investment limit without necessarily 
expressing a specific opinion on the proposed investment limits,\32\ 
while many others generally opposed any type of investment limit.\33\ A 
number of commenters recommended changes to the proposed limits.\34\
---------------------------------------------------------------------------

    \32\ See, e.g., Accredify Letter; Ahmad Letter; Crowley Letter; 
Farnkoff Letter; Merkley Letter; Milken Institute Letter; Patel 
Letter; Saunders Letter; StartEngine Letter 1; Wales Capital Letter 
1.
    \33\ See, e.g., ASSOB Letter; Crowdstockz Letter; Hamman Letter; 
Holland Letter; McCulley Letter; Meling Letter; Qizilbash Letter; 
Ramsey Letter; SBM Letter; Taylor R Letter.
    \34\ See, e.g., Crowdstockz Letter; Gill Letter; Johnston 
Letter; Morse Letter; Qizilbash Letter; Vossberg Letter; Winters 
Letter.
---------------------------------------------------------------------------

    While some commenters supported the proposal to apply the higher 
investment limit (10 percent, as set forth in Section 4(a)(6)(B)(ii)) 
if only one of the annual income or net worth of the investor is equal 
to or more than $100,000,\35\ some commenters also supported the lower 
investment limit ($2,000 or 5 percent, as set forth in Section 
4(a)(6)(B)(i)) unless both the annual income and net worth of the 
investor are equal to or more than $100,000.\36\
---------------------------------------------------------------------------

    \35\ See, e.g., ABA Letter; CFA Institute Letter; CFIRA Letter 
12; Craw Letter; Finkelstein Letter; RocketHub Letter; Wilson 
Letter.
    \36\ See, e.g., AFL-CIO Letter; BetterInvesting Letter; Consumer 
Federation Letter; Fund Democracy Letter; IAC Recommendation; 
Jacobson Letter; NASAA Letter; Schwartz Letter.
---------------------------------------------------------------------------

    A number of commenters supported the proposal that within each of 
the two levels of investment limits, the limits would be calculated 
based on the ``greater of'' an investor's annual income or net 
worth,\37\ while a number of other commenters preferred a ``lesser of'' 
approach.\38\ A few commenters suggested a combination of the 
approaches (e.g., if either annual income or net worth is below 
$100,000, the lower investment limit level ($2,000 or 5 percent) would 
apply, but within that level, the limit would be based on the greater 
of annual income or net worth).\39\
---------------------------------------------------------------------------

    \37\ See, e.g., ABA Letter; Anonymous Letter 6; CFIRA Letter 12; 
Craw Letter; EarlyShares Letter; Jacobson Letter; Omara Letter; 
RocketHub Letter; Wilson Letter.
    \38\ See, e.g., AFR Letter; BetterInvesting Letter; Consumer 
Federation Letter; Fund Democracy Letter; Fryer Letter; 
Growthfountain Letter; IAC Recommendation (stating that the 
``greater of'' approach would be appropriate for accredited 
investors); Merkley Letter; NASAA Letter; Schwartz Letter; Zhang 
Letter (recommending that net worth not be used to calculate the 
investment limit).
    \39\ See, e.g., Consumer Federation Letter; Fund Democracy 
Letter; Jacobson Letter.
---------------------------------------------------------------------------

    Many commenters supported the proposal that an issuer may rely on 
the efforts of an intermediary to determine that the aggregate amount 
of securities purchased by an investor will not cause the investor to 
exceed the investment limits, provided that the issuer does not have 
knowledge that the investor had exceeded, or would exceed, the 
investment limits as a result of purchasing securities in the issuer's 
offering.\40\ A few commenters recommended that an issuer be required 
to obtain a written representation from the investor that the investor 
has not and will not exceed the limits by purchasing from the 
issuer.\41\
---------------------------------------------------------------------------

    \40\ See, e.g., Arctic Island Letter 4; CFA Institute Letter; 
Consumer Federation Letter; CrowdBouncer Letter; EarlyShares Letter; 
EMKF Letter; Finkelstein Letter; Fund Democracy Letter; Heritage 
Letter; Joinvestor Letter; Public Startup Letter 2; RoC Letter; 
RocketHub Letter; Vann Letter; Wefunder Letter; Whitaker Chalk 
Letter.
    \41\ See, e.g., FundHub Letter 1; Public Startup Letter 2; 
RocketHub Letter.
---------------------------------------------------------------------------

    Commenters were divided about the joint calculation of annual 
income and net worth with the investor's spouse. Several commenters 
supported the proposal that an investor's annual income and net worth 
be calculated jointly with that of the investor's spouse,\42\ while 
other commenters generally opposed that aspect of the proposal.\43\ 
Several commenters recommended that if an investor's annual income and 
net worth are to be calculated jointly, the Commission should establish 
higher thresholds or an aggregate investment limit applicable to both 
spouses.\44\
---------------------------------------------------------------------------

    \42\ See, e.g., Arctic Island Letter 4; Heritage Letter; 
Joinvestor Letter; NSBA Letter; Omara Letter; RocketHub Letter; 
Wilson Letter.
    \43\ See, e.g., Brown J. Letter; Consumer Federation Letter; 
Fund Democracy Letter; Jacobson Letter; Projectheureka Letter; 
Public Startup Letter 2.
    \44\ See, e.g., Brown, J. Letter; Consumer Federation Letter; 
Fund Democracy Letter; Jacobson Letter.
---------------------------------------------------------------------------

    A number of commenters favored different or no investment limits 
for accredited and institutional investors. Many commenters supported 
exempting accredited and institutional investors from the investment 
limits,\45\ although a number of other commenters opposed such an 
exemption.\46\ A few commenters recommended allowing higher investment 
limits for accredited and institutional investors.\47\ One commenter 
stated that applying the investment limits to accredited and 
institutional investors would deter those investors from participating, 
but noted that allowing concurrent offerings under Securities Act Rule 
506(c) \48\ may mitigate this problem.\49\
---------------------------------------------------------------------------

    \45\ See, e.g., ASSOB Letter; Crowdstockz Letter; Crowley 
Letter; EMKF Letter; FundHub Letter 1; Gibb Letter; Heritage Letter; 
Joinvestor Letter; Public Startup Letter 2; RoC Letter; RocketHub 
Letter; Vann Letter; Wales Capital Letter 1; WealthForge Letter; 
Wefunder Letter.
    \46\ See, e.g., CFA Institute Letter; FundDemocracy Letter; 
Hackers/Founders Letter; Jacobson Letter; PeoplePowerFund Letter; 
Projectheureka Letter; Whitaker Chalk Letter; Wilson Letter.
    \47\ See, e.g., Growthfountain Letter; RFPIA Letter; WealthForge 
Letter.
    \48\ 17 CFR 230.506.
    \49\ See Arctic Island Letter 4.
---------------------------------------------------------------------------

c. Final Rules
    Consistent with the statute, we are adopting investment limits for 
securities-based crowdfunding transactions, but with some modifications 
from the proposed rules. We have modified the final rules from the 
proposal to clarify that the investment limit reflects the aggregate 
amount an investor may invest in all offerings under Section 4(a)(6) in 
a 12-month period across all issuers. In addition, as noted above, some 
commenters supported a ``greater of'' approach to implementing the two 
statutory investment limits, while others supported a ``lesser of'' 
approach. After

[[Page 71394]]

considering the comments received, we have decided to adopt a ``lesser 
of'' approach. Thus, under the final rules, an investor will be limited 
to investing: (1) The greater of: $2,000 or 5 percent of the lesser of 
the investor's annual income or net worth if either annual income or 
net worth is less than $100,000; or (2) 10 percent of the lesser of the 
investor's annual income or net worth, not to exceed an amount sold of 
$100,000, if both annual income and net worth are $100,000 or more.\50\
---------------------------------------------------------------------------

    \50\ See paragraph (a)(2) of Rule 100 of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    Under this approach, an investor with annual income of $50,000 a 
year and $105,000 in net worth would be subject to an investment limit 
of $2,500, in contrast to the proposed rules in which that same 
investor would have been eligible for an investment limit of 
$10,500.\51\ We recognize that this change from the proposed rules 
could place constraints on capital formation. Nevertheless, we believe 
that the investment limits in the final rules appropriately take into 
consideration the need to give issuers access to capital while 
minimizing an investor's exposure to risk in a crowdfunding 
transaction.
---------------------------------------------------------------------------

    \51\ See Instruction 2 to paragraph (a)(2) of Rule 100 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    The chart below illustrates a few examples:

------------------------------------------------------------------------
  Investor  annual     Investor  net                        Investment
       income              worth          Calculation       limit \52\
------------------------------------------------------------------------
$30,000.............        $105,000  Greater of $2,000           $2,000
                                       or 5% of $30,000
                                       ($1,500).
150,000.............          80,000  Greater of $2,000            4,000
                                       or 5% of $80,000
                                       ($4,000).
150,000.............         100,000  10% of $100,000             10,000
                                       ($10,000).
200,000.............         900,000  10% of $200,000             20,000
                                       ($20,000).
1,200,000...........       2,000,000  10% of $1,200,000          100,000
                                       ($120,000),
                                       subject to
                                       $100,000 cap.
------------------------------------------------------------------------

    A number of commenters expressed concerns about investors 
potentially incurring unaffordable losses under the proposed rule,\53\ 
and we find these comments persuasive given the risks involved. The 
startups and small businesses that we expect will rely on the 
crowdfunding exemption are likely to experience a higher failure rate 
than more seasoned companies.\54\ Applying the lower limit ($2,000 or 
5%, rather than 10%) for investors whose annual income or net worth is 
below $100,000 and applying that formula to the lesser of annual income 
or net worth will potentially limit investment losses in crowdfunding 
offerings for investors who may be less able to bear the risk of loss. 
We are concerned about the number of households where there is a 
sizeable gap between net worth and annual income, and the ability of 
these households to withstand the risk of loss. According to Commission 
staff analysis of the data in the 2013 Survey of Consumer Finances, 
approximately 20% of U.S. households with net worth over $100,000 have 
annual income under $50,000.
---------------------------------------------------------------------------

    \52\ This ``Investment Limit'' column reflects the aggregate 
investment limit across all offerings under Section 4(a)(6) within a 
12-month period.
    \53\ See, e.g., AFL-CIO Letter; BetterInvesting Letter; Consumer 
Federation Letter; Fund Democracy Letter; IAC Recommendation; 
Jacobson Letter; Merkley Letter; NASAA Letter; Schwartz Letter.
    \54\ For a more detailed discussion of survival rates for 
startups and small businesses see Section III.A, below.
---------------------------------------------------------------------------

    Consistent with the proposed rules, the final rules allow an issuer 
to rely on efforts that an intermediary is required to undertake in 
order to determine that the aggregate amount of securities purchased by 
an investor does not cause the investor to exceed the investment 
limits, provided that the issuer does not have knowledge that the 
investor had exceeded, or would exceed, the investment limits as a 
result of purchasing securities in the issuer's offering.\55\
---------------------------------------------------------------------------

    \55\ See Instruction 3 to paragraph (a)(2) of Rule 100 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    We are adopting, as proposed, final rules that allow an investor's 
annual income and net worth to be calculated as those values are 
calculated for purposes of determining accredited investor status.\56\ 
Securities Act Rule 501 specifies the manner in which annual income and 
net worth are calculated for purposes of determining accredited 
investor status.\57\ As in the proposal, the final rules allow spouses 
to calculate their net worth or annual income jointly. Although some 
commenters opposed permitting net worth or annual income to be 
calculated jointly, we believe this approach is appropriate in light of 
the stricter investment limits being adopted in the final rules. 
Several commenters recommended that, if the final rules permit net 
worth and annual income to be calculated jointly, we should establish 
an aggregate investment limit applicable to both spouses.\58\ 
Consistent with this recommendation, the final rules add an instruction 
to explain that when such a joint calculation is used, the aggregate 
investment of the spouses may not exceed the limit that would apply to 
an individual investor at that income and net worth level.\59\ We 
believe this approach is necessary to preserve the intended protections 
of the investment limits.
---------------------------------------------------------------------------

    \56\ See Instruction 1 to paragraph (a)(2) of Rule 100 of 
Regulation Crowdfunding.
    \57\ 17 CFR 230.501. Thus, for example, a natural person's 
primary residence shall not be included as an asset in the 
calculation of net worth. 17 CFR 230.501(a)(5)(i)(A).
    \58\ See Brown J. Letter; Consumer Federation Letter; Fund 
Democracy Letter; Jacobs Letter.
    \59\ For example, if each spouse's annual income is $30,000, the 
spouses jointly may invest up to an aggregate of 5% of their joint 
income of $60,000. If one spouse's annual income is $120,000 and the 
other's is $30,000, the spouses jointly may invest up to an 
aggregate of 10% of their joint income of $150,000, the same 
investment limit that would apply for an individual investor with 
income of $150,000. See Instruction 2 to paragraph (a)(2) of Rule 
100 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    While a number of commenters supported the creation of a different 
investment limit for accredited or institutional investors, or 
exempting them altogether, we are not making such a change. As noted 
above, crowdfunding is an innovative approach to raising capital in 
which the entity or individual raising capital typically seeks small 
individual contributions from a large number of people. As such, we 
believe that crowdfunding transactions were intended under Section 
4(a)(6) to be available equally to all types of investors.\60\ The 
statute provides specific investment limits, and the only reference in 
the statute to changing those investment limits is the requirement that 
we update the investment limits not less frequently than every five 
years based on the Consumer Price Index. Further, issuers can rely on 
other exemptions to offer

[[Page 71395]]

and sell securities to accredited investors and institutional 
investors. As discussed above, concurrent offerings to these types of 
investors are possible if the conditions of each applicable exemption 
are met.\61\ Therefore, we are not altering the investment limits for 
any particular type of investor or to create a different exemption 
based on different investment limits. Thus, as proposed, the investment 
limits will apply equally to all investors, including retail, 
institutional and accredited investors.
---------------------------------------------------------------------------

    \60\ 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.'').
    \61\ For a discussion of integration, see Section II.A.1.c.
---------------------------------------------------------------------------

3. Transaction Conducted Through an Intermediary
a. Proposed Rules
    Section 4(a)(6)(C) requires that a transaction in reliance on 
Section 4(a)(6) be conducted through a broker or funding portal that 
complies with the requirements of Securities Act Section 4A(a). To 
implement this provision, we proposed in Rule 100(a)(3) of Regulation 
Crowdfunding that for any transaction conducted in reliance on Section 
4(a)(6), an issuer use only one intermediary (that complies with the 
requirements of Section 4A(a) and the related requirements in 
Regulation Crowdfunding) and that the transaction be conducted 
exclusively on the intermediary's platform. We also proposed to permit 
the intermediary to engage in back office \62\ or other administrative 
functions other than on the intermediary's platform, and to define 
``platform'' as ``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).''
---------------------------------------------------------------------------

    \62\ Back office personnel typically perform functions such as, 
but not limited to, recordkeeping, trade confirmations, internal 
accounting, and account maintenance.
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Commenters were divided about the proposed prohibition on an issuer 
using more than one intermediary for any transaction conducted pursuant 
to Section 4(a)(6). Supporters of the proposed prohibition expressed 
the view that the prohibition would benefit communication between 
issuers and investors.\63\ One commenter stated that the prohibition 
also would assist in assessing whether investors are within their 
investment limits.\64\ Commenters who opposed the proposed prohibition 
noted that increasing the number of platforms used per transaction 
would both increase the likelihood of investors becoming informed that 
a transaction is taking place, as well as elicit information from a 
more diverse crowd.\65\
---------------------------------------------------------------------------

    \63\ See, e.g., CFA Institute Letter; Rockethub Letter.
    \64\ See CFA Institute Letter.
    \65\ See, e.g., Graves Letter.
---------------------------------------------------------------------------

    Commenters were generally divided about the proposed requirement 
that transactions made in reliance on Section 4(a)(6) be conducted 
exclusively through the intermediary's platform. Commenters who 
supported \66\ the proposed requirement cited concerns that allowing 
the transactions to be effected through means other than the 
intermediary's platform could increase the potential for fraudulent 
activity \67\ and prevent the leveraging of information sharing and 
crowdsourced review that are intended through crowdfunding.\68\ 
Commenters who opposed \69\ the proposed requirement expressed their 
view that permitting other means would allow persons who lack Internet 
access to invest through crowdfunding,\70\ and also would foster 
different types of in-person communication that are not possible to 
achieve online.\71\ One commenter expressed a preference for issuers to 
be able to host their own offerings subject to certain conditions.\72\ 
One commenter also suggested that intermediaries should be able to 
engage in certain activities other than on their platforms, such as 
physically meeting with representatives of issuers and investors, and 
hosting launch parties. \73\
---------------------------------------------------------------------------

    \66\ See, e.g., Joinvestor Letter; RoC Letter; RocketHub Letter; 
Wilson Letter.
    \67\ See, e.g., StartupValley Letter.
    \68\ See, e.g., RocketHub Letter.
    \69\ See, e.g., Benjamin Letter; Omara Letter; Public Startup 
Letter 2.
    \70\ See, e.g., Projecteureka Letter.
    \71\ See, e.g., Benjamin Letter (``Without doubt, the web 
fosters a crowd and a convenient forum to express ideas and learn 
about the Issuer. However, small community gatherings provide 
similar feedback loops and often times serve the community and some 
investors better by fostering nuanced forms of communication that 
can never be achieved. Further, some SEC concerns can be assuaged 
regarding the loss of creating a `crowd' online because some 
investors that may rely on the Web site to educate themselves may 
not be inclined to contribute to the `crowd intelligence' online, 
yet would be vocal in a community gathering.'').
    \72\ See Public Startup Letter 2. We note that Section 4(a)(6) 
of the Securities Act requires that, as a condition of the 
exemption, the transaction be ``conducted through a broker or 
funding portal that complies with the requirements of section 
4A(b).'' 15 U.S.C. 77d(a)(6).
    \73\ See Wilson Letter.
---------------------------------------------------------------------------

    A few commenters supported, but suggested technical revisions to, 
our proposed definition of ``platform.'' \74\ One commenter suggested 
deleting the phrase ``an Internet Web site or other similar electronic 
medium'' and replacing the phrase with ``a software program accessible 
via TCP/IP enabled applications'' or to more commonly define 
``platform'' as ``a software program accessible via the Internet.'' 
\75\
---------------------------------------------------------------------------

    \74\ See, e.g., Arctic Island Letter 1, Arctic Island Letter 3; 
Arctic Island Letter 4; and Startup Valley Letter (explaining that 
Web sites, application programmable interfaces (APIs) and other 
electronic media are generally only the means to access a platform, 
which itself is an Internet-accessible software program).
    \75\ See Arctic Island Letter 1; Arctic Island Letter 4 (noting 
that a ``platform'' is actually a software program that is 
accessible via the Internet and that a ``Web site or other 
electronic medium'' is merely a way to access the platform, not the 
platform itself).
---------------------------------------------------------------------------

c. Final Rules
    After considering the comments, we are adopting as proposed Rule 
100(a)(3). We also are adopting the definition of ``platform'' with one 
clarifying amendment and with a change in location to Rule 300(c).
    As stated in the Proposing Release, we believe that requiring an 
issuer to use only one intermediary 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. In order for a crowd to effectively share information, we 
believe it would be most beneficial to have one meeting place for the 
crowd to obtain and share information, thus avoiding dilution or 
dispersement of the ``crowd.'' We also believe that limiting a 
crowdfunding transaction to a single intermediary's online platform 
helps to minimize the risk that issuers and intermediaries would 
circumvent the requirements of Regulation Crowdfunding. For example, 
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.
    We continue to believe that crowdfunding transactions made in 
reliance on Section 4(a)(6) and activities associated with these 
transactions should occur over the Internet or other similar electronic 
medium that is accessible to the public. Such 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 
share their views on whether to participate in the offering and fund 
the business or idea. While we acknowledge, as one commenter observed, 
that there are forms of communication that cannot be achieved

[[Page 71396]]

online,\76\ we nevertheless believe that the requirement that the 
transaction be conducted exclusively through the intermediary's 
platform will help to ensure transparency, provide for ready 
availability of information in one place to all investors, and promote 
greater uniformity in the distribution of information among investors. 
We also do not believe that funding portals should be permitted to 
physically meet with investors to solicit investments and offerings on 
its platform, or host launch parties, as one commenter recommended, 
because these activities likely violate the statutory prohibition on 
funding portals soliciting and providing investment advice and 
recommendations. However, we continue to believe that intermediaries 
should be able to engage in back office and other administrative 
functions other than on their platforms.
---------------------------------------------------------------------------

    \76\ See Benjamin Letter (in-person gatherings may foster more 
``nuanced forms of communication'').
---------------------------------------------------------------------------

    In a change from the proposed rules, and consistent with the 
suggestions of commenters, the final rules define ``platform'' as ``a 
program or application accessible via the Internet or other similar 
electronic communication 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) of the Securities Act (15 U.S.C. 77d(a)(6))'' [emphasis 
added].\77\ We believe that this definition is more technically 
accurate and also will accommodate innovation in the event of 
technological advancements. We are moving the definition of 
``platform'' from Rule 100 to Rule 300(c) so that it will be located 
alongside the other Regulation Crowdfunding definitions related to 
intermediaries. Also, in a change from the proposed rule, we are moving 
to the definition of platform an instruction stating that an 
intermediary through which a crowdfunding transaction is conducted may 
engage in back office or other administrative functions other than on 
the intermediary's platform.\78\
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    \77\ Rule 300(c) of Regulation Crowdfunding.
    \78\ In the final rule, this is an instruction to Rule 
300(c)(4). The instruction was proposed under proposed Rule 
100(a)(3), but we believe it is more appropriate under the 
definition of platform because the instruction explains that back 
office activities can happen off the platform.
---------------------------------------------------------------------------

4. Exclusion of Certain Issuers From Eligibility Under Section 4(a)(6)
    Securities Act Section 4A(f) excludes certain categories of issuers 
from eligibility to rely on Section 4(a)(6) to engage in crowdfunding 
transactions. These 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; \79\ (3) investment companies as defined in the 
Investment Company Act of 1940 (the ``Investment Company Act'') \80\ or 
companies that are excluded from the definition of investment company 
under Section 3(b) or 3(c) of the Investment Company Act; \81\ and (4) 
any other issuer that the Commission, by rule or regulation, determines 
appropriate.
---------------------------------------------------------------------------

    \79\ 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)).
    \80\ 15 U.S.C 80a-1 et seq.
    \81\ 15 U.S.C. 80a-3(b) or (c).
---------------------------------------------------------------------------

a. Proposed Rules
    Rule 100(b) of Regulation Crowdfunding, as proposed, would exclude 
the categories of issuers specifically identified in Section 4A(f). In 
addition, the proposed rules would exclude: (1) Issuers that are 
disqualified from relying on Section 4(a)(6) pursuant to the 
disqualification provision in Rule 503(a) of Regulation Crowdfunding; 
(2) issuers that have sold securities in reliance on Section 4(a)(6) if 
they have not filed with the Commission and provided to investors, to 
the extent required, the ongoing annual reports required by Regulation 
Crowdfunding during the two years immediately preceding the filing of 
the required new offering statement; and (3) issuers that have no 
specific business plan or that have indicated that their business plan 
is to engage in a merger or acquisition with an unidentified company or 
companies.
b. Comments on the Proposed Rules
    Foreign Issuers, Exchange Act Reporting Companies, and Investment 
Companies. Several commenters opposed the exclusion of foreign issuers, 
Exchange Act reporting companies, and investment companies.\82\ Other 
commenters, however, supported the exclusion of investment companies or 
companies that are excluded from the definition of investment company 
under Section 3(b) or 3(c) of the Investment Company Act.\83\ Some 
commenters recommended that, despite the exclusion of investment 
companies, the Commission allow a single purpose fund, including LLCs 
and LPs, to conduct an offering in reliance on Section 4(a)(6) if such 
fund were organized to invest in, or lend money to, a single 
company.\84\
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    \82\ See, e.g., M.A.V. Letter (opposing the exclusion of public 
companies from eligibility to rely on Section 4(a)(6)); Ritter 
Letter (asking for clarification regarding companies that are 
excluded from the definition of investment company pursuant to 3(b) 
of the Investment Company Act); TAN Letter (opposing the exclusion 
of foreign issuers over concerns that investors would not have Title 
III protections when investing in foreign issuers and that 
investors' ability to invest in early opportunities would be 
reduced).
    \83\ See, e.g., Commonwealth of Massachusetts Letter; 
PeoplePowerFund Letter.
    \84\ See, e.g., EMKF Letter (stating that having hundreds of 
direct shareholders can give startups ``messy cap tables'' that 
deter follow-on financing and alternatively recommending the 
Commission permit an intermediary, including a funding portal, to 
act as a holder of record); Fryer Letter; Growthfountain Letter; 
Martin Letter (recommending that crowdfunding be operated through a 
trust fund mechanism that would own shares of the entity seeking 
capital); Propellr Letter 2; Ritter Letter; Wefunder Letter.
---------------------------------------------------------------------------

    Delinquent in Ongoing Reporting. A number of commenters supported 
the exclusion of issuers that are delinquent in their reporting 
obligations,\85\ although others opposed the exclusion of delinquent 
issuers.\86\ Some commenters suggested options such as disclosure of 
the issuer's reporting delinquency in its offering documents or on its 
Web site or a cure provision.\87\
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    \85\ See, e.g., ASSOB Letter; Commonwealth of Massachusetts 
Letter; Consumer Federation Letter; Fund Democracy Letter; Grassi 
Letter; Joinvestor Letter; NASAA Letter; Wefunder Letter.
    \86\ See, e.g., ABA Letter; Parsont Letter; Projectheureka 
Letter; Public Startup Letter 2; RocketHub Letter.
    \87\ See, e.g., ABA Letter (suggesting a reasonable cure period 
and limiting the ``look-back'' period to one year); Grassi Letter 
(recommending that a delinquent issuer be required to file a form 
with the Commission and publish on its Web site and the relevant 
intermediary's platform a notice to potential investors that it has 
not met its reporting obligations); Parsont Letter (recommending the 
Commission treat the ongoing reporting requirements as a condition 
to the Section 4(a)(6) exemption and create a notice and cure 
provision in the proposed insignificant deviation safe harbor); 
RocketHub Letter (suggesting delinquent issuers be required to 
disclose their delinquent status in their offering documents); Vann 
Letter (recommending a grace period for curing the deficiency).
---------------------------------------------------------------------------

    We also received comments about whether the exclusion should extend 
to issuers that are delinquent in other reporting requirements (e.g., 
updates on the progress of the issuer in meeting the target offering 
amount, issuers whose affiliates have failed to comply with the ongoing 
reporting requirements, and issuers with an officer, director, or 
controlling shareholder who served in a similar capacity with another 
issuer that failed to file its ongoing reports). Commenters generally 
opposed extending the exclusion beyond issuers delinquent in their 
ongoing annual reports during the two years immediately preceding the 
filing of the required new offering statement.\88\

[[Page 71397]]

Further, two commenters opposed the idea of excluding an issuer whose 
officer, director, or controlling shareholder served in a similar 
capacity with another issuer that failed to file its annual 
reports.\89\
---------------------------------------------------------------------------

    \88\ See, e.g., Grassi Letter (stating that further exclusions 
would impose a more onerous burden on issuers under Section 4(a)(6) 
than that placed on current registrants filing under Exchange Act 
Sections 13(a) or 15(d) or emerging growth companies); 
Projectheureka Letter.
    \89\ See Grassi Letter (stating that these persons may not have 
the authority or responsibility to file an annual report); Whitaker 
Chalk Letter.
---------------------------------------------------------------------------

    Business Plans. Commenters were divided on excluding issuers that 
have no specific business plan from eligibility to rely on Section 
4(a)(6).\90\ Commenters, however, supported the exclusion of issuers 
that have business plans to engage in a merger or acquisition with an 
unidentified company.\91\
---------------------------------------------------------------------------

    \90\ For commenters who expressed support, see, e.g., Anonymous 
Letter 2; CFA Institute Letter; CFIRA Letter 7; Commonwealth of 
Massachusetts Letter; Consumer Federation Letter; Hackers/Founders 
Letter; NASAA Letter; ODS Letter; Traklight Letter; Whitaker Chalk 
Letter. For commenters who expressed opposition, see, e.g., ABA 
Letter (expressing concern that a particular business idea disclosed 
by a crowdfunding issuer might be deemed after-the-fact to be too 
non-specific to have permitted reliance on Section 4(a)(6), thus 
exposing that issuer to a potential Section 5 violation); FundHub 
Letter 1; Projectheureka Letter; Public Startup Letter 2; RoC 
Letter; RocketHub Letter; SBM Letter; Wilson Letter.
    \91\ See, e.g., ABA Letter; CFA Institute Letter; Commonwealth 
of Massachusetts Letter; Consumer Federation Letter; Grassi Letter; 
ODS Letter; RFPIA Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting the issuer eligibility requirements as proposed, 
with the addition of two clarifications. As noted above, Section 4A(f) 
expressly excludes foreign issuers, Exchange Act reporting companies 
and companies that are investment companies as defined in the 
Investment Company Act or companies that are excluded from the 
definition of investment company under Section 3(b) or 3(c) of the 
Investment Company Act from the exemption for crowdfunding transactions 
provided by Section 4(a)(6). Although some commenters expressed 
concerns about these statutory exclusions, including that such 
exclusions could limit the investment choices of crowdfunding 
investors, we are not creating additional exemptions for these 
categories of issuers. In reaching this determination, we have 
considered that the primary purpose of Section 4(a)(6), as we 
understand it, is to facilitate capital formation by early stage 
companies that might not otherwise have access to capital.\92\ As a 
general matter, we do not believe that Exchange Act reporting 
companies, investment companies and foreign issuers accessing the U.S. 
capital markets constitute the types of issuers that Section 4(a)(6) 
and Regulation Crowdfunding are intended to benefit. Moreover, we 
believe that certain of these issuers, such as foreign issuers or 
investment companies, may present unique risks that would make them 
unsuitable for the scaled regulatory regime associated with securities-
based crowdfunding transactions. Accordingly, the final rules exclude 
these categories of issuers from Regulation Crowdfunding.\93\
---------------------------------------------------------------------------

    \92\ See, e.g., 158 Cong. Rec. S1765 (daily ed. Mar. 29, 2012) 
(statement of Sen. Jack Reed) (``[Crowdfunding] is the place where 
we envision the smallest entrepreneurs could obtain much needed seed 
capital for their good ideas.''); 158 Cong. Rec. H1581 (daily ed. 
Mar. 27, 2012) (statement of Rep. Patrick McHenry (``Crowdfunding is 
the best of microfinancing and crowdsourcing. You use a wide network 
of individuals and you can raise capital for your new business, your 
start-up, or your small business.'').
    \93\ See Rule 100(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We are not creating, as suggested by some commenters,\94\ an 
exception to this exclusion for a single purpose fund organized to 
invest in, or lend money to, a single company. The statute specifically 
excludes investment funds from eligibility to rely on Section 4(a)(6) 
and investment fund issuers present considerations different from those 
for non-fund issuers.
---------------------------------------------------------------------------

    \94\ See, e.g., EMKF Letter; Fryer Letter; Growthfountain 
Letter; Martin Letter; Propellr Letter 2; Wefunder Letter.
---------------------------------------------------------------------------

    In addition to these statutorily excluded categories of issuers, 
the final rules also exclude, as proposed, several additional 
categories of issuers. Below we discuss each of these additional 
categories:
    Disqualification Provisions. As discussed further in Section II.E.6 
below, the final rules also exclude issuers that are disqualified from 
relying on Section 4(a)(6).\95\
---------------------------------------------------------------------------

    \95\ See Rule 100(b)(4) of Regulation Crowdfunding. See also 
Rule 503 of Regulation Crowdfunding and Section II.E.6 for a 
discussion of the disqualification provisions.
---------------------------------------------------------------------------

    Delinquent in Ongoing Reporting. Consistent with the proposed rules 
and the views of a number of commenters,\96\ the final rules 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 \97\ during the two years immediately preceding the filing 
of the required new offering statement.\98\ As discussed further in 
Section II.B.2 below, we believe that the annual ongoing reporting 
requirement will benefit investors by enabling them to consider updated 
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.\99\ In 
addition, as discussed further in Section II.B.1 below, in a 
modification to the proposed rules, the final rules require an issuer 
to disclose in its offering statement and annual report if it, or any 
of its predecessors, previously failed to comply with the ongoing 
reporting requirements of Regulation Crowdfunding.
---------------------------------------------------------------------------

    \96\ See, e.g., ASSOB Letter; Commonwealth of Massachusetts 
Letter; Consumer Federation Letter; Fund Democracy Letter; Grassi 
Letter; Joinvestor Letter; NASAA Letter; Wefunder Letter.
    \97\ See Rules 202 and 203(b) of Regulation Crowdfunding and 
Section II.B.2 for a discussion of the ongoing reporting 
requirements.
    \98\ See Rule 100(b)(5) of Regulation Crowdfunding.
    \99\ We note that even if an issuer has regained eligibility to 
rely on Regulation Crowdfunding, the Commission could still bring an 
enforcement action under the federal securities laws based on the 
issuer's failure to make the required filings. In addition, as 
discussed in Section II.E.4., new Rule 12g-6 provides an exemption 
from Section 12(g) conditioned, among other things, on the issuer's 
compliance with the annual reporting requirements of Rule 202 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    We note that some commenters read the provision requiring issuers 
to have filed their two most recent annual reports to mean that the 
disqualification would be triggered only after the issuer was 
delinquent for two consecutive years or that an issuer would be 
disqualified for two years.\100\ Instead, the final rule requires that 
any ongoing annual report that was due during the two years immediately 
preceding the currently contemplated offering must be filed before an 
issuer may rely on the Section 4(a)(6) exemption. For example, if more 
than 120 days have passed since the issuer's fiscal year end and the 
issuer has not filed the required annual report for that most recently 
ended fiscal year, the issuer will not be able to conduct a new 
offering of securities in reliance on the Section 4(a)(6) exemption 
until the delinquent annual report has been filed. Similarly, if an 
issuer did file an annual report for the most recently ended fiscal 
year but did not file an annual report for the fiscal year prior to 
that, the issuer will not be able to rely on the Section 4(a)(6) 
exemption until the missing report has been filed. In both cases, as 
soon as the issuer has filed with the Commission and provided to 
investors both of the annual reports required during the two years 
immediately preceding the filing

[[Page 71398]]

of the required offering statement, the issuer will be able to rely on 
the Section 4(a)(6) exemption. The final rule text includes an 
instruction to clarify this requirement.\101\
---------------------------------------------------------------------------

    \100\ See, e.g., Consumer Federation Letter; Fund Democracy 
Letter; NASAA Letter.
    \101\ See instruction to paragraph (b)(5) of Rule 100 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    Consistent with the proposal and the recommendations of 
commenters,\102\ we are not extending the exclusion to issuers that are 
delinquent in the progress update or termination of reporting 
requirements, nor are we excluding issuers whose officer, director, or 
controlling shareholder served in a similar capacity with another 
issuer that failed to file its annual reports. Extending the exclusion 
to those issuers would impose more stringent requirements than those 
faced by current reporting companies and issuers under Regulation A.
---------------------------------------------------------------------------

    \102\ See, e.g., Grassi Letter; Projectheureka Letter; Whitaker 
Chalk Letter.
---------------------------------------------------------------------------

    Business Plans. The final rules also 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.\103\ 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 
investors. Those investors may then share information with each other 
about the opportunity and use that information to decide whether or not 
to invest. Thus, we believe that an issuer engaging in crowdfunding 
under the exemption should give the public sufficient information about 
a particular proposed project or business to allow investors to make an 
informed investment decision.\104\
---------------------------------------------------------------------------

    \103\ See Rule 101(b)(6) of Regulation Crowdfunding.
    \104\ 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).
---------------------------------------------------------------------------

    As discussed in the proposal, we are cognizant of the challenges 
noted by some commenters \105\ in distinguishing between early-stage 
proposals that have information sufficient to support the crowdfunding 
mechanism and those that cannot by their terms do so. After considering 
the comments received,\106\ we continue to believe that the rules 
should exclude issuers that have no specific business plan or whose 
business plan is to engage in a merger or acquisition with an 
unidentified company or companies. 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'' for such issuers could encompass a wide 
range of project descriptions, articulated ideas, and business models.
---------------------------------------------------------------------------

    \105\ See, e.g., ABA Letter; FundHub Letter 1; Projectheureka 
Letter; Public Startup Letter 2; RoC Letter; RocketHub Letter; SBM 
Letter; Wilson Letter.
    \106\ See, e.g., ABA Letter; Anonymous Letter 2; CFA Institute 
Letter; CFIRA Letter 7; Commonwealth of Massachusetts Letter; 
Consumer Federation Letter; FundHub Letter 1; Grassi Letter; 
Hackers/Founders Letter; NASAA Letter; ODS Letter; Projectheureka 
Letter; Public Startup Letter 2; RFPIA Letter; RoC Letter; RocketHub 
Letter; SBM Letter; Traklight Letter; Whitaker Chalk Letter; Wilson 
Letter.
---------------------------------------------------------------------------

    Overall, we believe that the exclusions in the final rules 
appropriately consider the need to limit the potential risks to 
investors that could result from extending issuer eligibility to 
certain types of entities without unduly limiting the benefits of the 
exemption as a tool for capital formation.

B. Issuer Requirements

1. Disclosure Requirements
    Securities Act Section 4A(b)(1) sets forth specific disclosures 
that an issuer offering or selling securities in reliance on Section 
4(a)(6) must ``file with the Commission and provide to investors and 
the relevant broker or funding portal, and make available to potential 
investors''. These disclosures include:
     The name, legal status, physical address and Web site 
address of the issuer; \107\
---------------------------------------------------------------------------

    \107\ Section 4A(b)(1)(A).
---------------------------------------------------------------------------

     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; \108\
---------------------------------------------------------------------------

    \108\ Section 4A(b)(1)(B).
---------------------------------------------------------------------------

     a description of the business of the issuer and the 
anticipated business plan of the issuer; \109\
---------------------------------------------------------------------------

    \109\ Section 4A(b)(1)(C).
---------------------------------------------------------------------------

     a description of the financial condition of the issuer; 
\110\
---------------------------------------------------------------------------

    \110\ Section 4A(b)(1)(D).
---------------------------------------------------------------------------

     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; \111\
---------------------------------------------------------------------------

    \111\ Section 4A(b)(1)(E).
---------------------------------------------------------------------------

     the target offering amount, the deadline to reach the 
target offering amount and regular updates about the progress of the 
issuer in meeting the target offering amount; \112\
---------------------------------------------------------------------------

    \112\ Section 4A(b)(1)(F).
---------------------------------------------------------------------------

     the price to the public of the securities or the method 
for determining the price; \113\ and
---------------------------------------------------------------------------

    \113\ Section 4A(b)(1)(G).
---------------------------------------------------------------------------

     a description of the ownership and capital structure of 
the issuer.\114\
---------------------------------------------------------------------------

    \114\ 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.''
---------------------------------------------------------------------------

    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.
    As discussed further in Section II.B.3 below, we are requiring 
issuers to file these disclosures with the Commission on Form C.\115\ 
Unless otherwise indicated in the form, Form C must be filed in the 
standard format of eXtensible Markup Language (XML). The XML-based 
fillable portion of Form C will enable issuers to provide information 
in a convenient medium without requiring the issuer to purchase or 
maintain additional software or technology. This will provide the 
Commission and the public with readily available data about offerings 
made in reliance on Section 4(a)(6). Other required disclosure that is 
not required to be provided in the XML-based text boxes will be filed 
as attachments to Form C. We are not mandating a specific presentation 
format for the attachments to Form C; however, the final Form C does 
include an optional Q&A format that crowdfunding issuers may use to 
provide disclosures that are not required to be filed in XML 
format.\116\ We believe that this optional format should help reduce 
the burden on crowdfunding issuers of preparing disclosures.
---------------------------------------------------------------------------

    \115\ Issuers will 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.
    \116\ See Item 1 of General Instruction III to Form C of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    By filing Form C with the Commission and providing it to the 
relevant intermediary, issuers will satisfy the requirement of 
Securities Act Section 4A(b) that issuers relying on Section 4(a)(6) 
must ``file with the Commission and provide to investors and the 
relevant broker of funding portal, and make available to potential 
investors'' certain information. In a clarifying change from the 
proposal, we have moved the definition of ``investor'' from proposed 
Rule 300(c)(4) to Rule

[[Page 71399]]

100(d) to clarify that for purposes of all of Regulation Crowdfunding, 
``investor'' includes any investor or any potential investor, as the 
context requires.\117\ In connection with this clarifying move we have 
deleted the phrase ``and make available to potential investors'' each 
time it appeared in the proposed Rules 201 and 203 to avoid 
redundancy.\118\
---------------------------------------------------------------------------

    \117\ See Rule 100(d) of Regulation Crowdfunding.
    \118\ See Rules 201 and 203(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Additionally, as we clarify in the final rules, to the extent that 
some of the required disclosures overlap, issuers are not required to 
duplicate disclosures.
a. Offering Statement Disclosure Requirements
(1) Information About the Issuer and the Offering
(a) General Information About the Issuer, Officers and Directors, and 
Certain Shareholders
(i) Proposed Rules
    To implement Sections 4A(b)(1)(A) and (B), we proposed in Rule 201 
of Regulation Crowdfunding 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, we 
proposed to require that an issuer disclose:
     Its name and legal status, including its form of 
organization, jurisdiction in which it is organized and date of 
organization;
     its physical address and its Web site address; and
     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 persons served in the positions or offices 
and their business experience during the past three years, including:
    [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.
    We proposed to define ``officer'' consistent with the definition in 
Securities Act Rule 405 and in Exchange Act Rule 3b-2. We further 
proposed to require disclosure of the business experience of directors 
and officers of the issuer during the past three years.
    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). We proposed in Rule 201(c) to 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 (``20 
Percent Beneficial Owners''). Neither Section 4A(b)(1)(B) nor Section 
4A(b)(1)(H)(iii) states as of what date the beneficial ownership should 
be calculated. We proposed in Rule 201(c) to require issuers to 
calculate beneficial ownership as of the most recent practicable date.
(ii) Comments on the Proposed Rules
    Of the commenters that addressed the proposed issuer, officer and 
director disclosure rules, some generally supported them,\119\ while 
others opposed specific disclosure requirements. For example, one 
commenter opposed requiring issuers to disclose a Web site 
address.\120\ Other commenters opposed requiring issuers to disclose 
the business experience of their officers and directors,\121\ while one 
commenter suggested narrowing the definition of the term ``officer.'' 
\122\ Some commenters expressed opposition to any revision to the 
proposed rules that would require disclosure of any court orders, 
judgments or civil litigation involving any directors and 
officers.\123\
---------------------------------------------------------------------------

    \119\ See, e.g., Angel Letter 1; CCI Letter; Denlinger Letter 1; 
Mollick Letter; Wefunder Letter; Wilson Letter.
    \120\ See Vann Letter (recommending that the disclosure 
requirement be optional or only required for businesses that have a 
Web site).
    \121\ See, e.g., Public Startup Letter 2; RocketHub Letter; 
Schwartz Letter; Zhang Letter.
    \122\ See RocketHub Letter (stating that only relevant officers 
for most companies using Regulation Crowdfunding would be the 
principal executive officer and the principal financial officer, 
which may be the same person.)
    \123\ See, e.g., FundHub Letter 1; RocketHub Letter; Wefunder 
Letter.
---------------------------------------------------------------------------

    Some commenters supported the proposed three-year time period to be 
covered by the officer and director disclosure rules,\124\ while others 
recommended that officer and director disclosure cover the previous 
five years.\125\ Some commenters recommended we require additional 
disclosures about an issuer's officers, directors and persons occupying 
a similar status or performing a similar function.\126\
---------------------------------------------------------------------------

    \124\ See, e.g., Denlinger Letter 1; Joinvestor Letter; Wefunder 
Letter.
    \125\ See, e.g., Commonwealth of Massachusetts Letter; NASAA 
Letter.
    \126\ See, e.g., Angel Letter 1 (qualifications of candidates 
for the board of directors); Denlinger Letter 1(educational 
background of the officers and directors); Mollick Letter (online 
identities of the officers and directors); ODS Letter (educational 
background of the officers and directors); Wilson Letter (technical 
and business skills of the officers and directors); Zeman Letter 
(any officer and director positions held by the officers and 
directors or their family members, as well as any 10 percent 
beneficial holdings they may have with other SEC registrants; and 
disputes the officers and directors had with other employers).
---------------------------------------------------------------------------

    A few commenters commented on the proposed 20 Percent Beneficial 
Owner rules. One commenter supported the requirement to disclose the 
names of persons who are the 20 Percent Beneficial Owners,\127\ while 
one commenter opposed the requirement.\128\ One commenter recommended 
that, to provide greater certainty for investors and more guidance for 
issuers, the beneficial ownership be calculated as of a specific date, 
rather than the most recent practicable date, and that the disclosure 
be updated when there are significant changes in beneficial 
ownership.\129\ Finally, one commenter recommended that the Commission 
keep the requirement as simple as possible.\130\
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    \127\ See RocketHub Letter.
    \128\ See Public Startup Letter 2.
    \129\ See NASAA Letter.
    \130\ See RocketHub Letter.
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(iii) Final Rules
    We are adopting the issuer, officer and director, and 20 Percent 
Beneficial Owners disclosure requirements largely as proposed.\131\ An 
issuer will be required to disclose information about its president, 
vice president, secretary, treasurer or principal financial officer, 
comptroller or principal accounting officer and any person routinely 
performing similar functions. As noted by at least one commenter,\132\ 
an issuer may not have officers serving in each of these roles. 
Accordingly, the final rules require the disclosure only to the extent 
an issuer has individuals serving in these capacities or performing 
similar functions.\133\ The required information includes all positions 
and offices held with the issuer, the period of time in which such 
persons served in the position or office and their prior business 
experience.\134\ Contrary to the views of some commenters,\135\ we

[[Page 71400]]

believe that additional disclosures about an issuer's officers, 
directors and persons occupying a similar status or performing a 
similar function would be unduly burdensome and generally not necessary 
for investors to be in a position to make an informed investment 
decision. Given the diverse nature of the startups and small businesses 
that we anticipate will seek to raise capital in reliance on Section 
4(a)(6), additional disclosures such as those recommended by some 
commenters may not be relevant in all instances.
---------------------------------------------------------------------------

    \131\ See Rule 201(a)-(c) of Regulation Crowdfunding.
    \132\ See RocketHub Letter.
    \133\ See Instruction to paragraph (b) of Rule 201 of Regulation 
Crowdfunding.
    \134\ See Rule 201(b) of Regulation Crowdfunding.
    \135\ See, e.g., Denlinger 1 Letter (educational background of 
officers); ODS Letter (educational background of officers, directors 
and similar persons); Zeman Letter (proposing that officers and 
directors of an issuer be required to disclose their (or family 
members) officer and director positions with other SEC registrants, 
and disclose material holdings of more than 10% with other SEC 
registrants).
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    The required disclosure about the business experience of the 
directors and officers (and any persons occupying a similar status or 
performing a similar function) must cover the past three years,\136\ 
which, as some commenters noted,\137\ is shorter than the five-year 
period that applies to issuers conducting registered offerings \138\ or 
exempt offerings pursuant to Regulation A.\139\ We believe that 
startups and small businesses that may seek to raise capital in 
reliance on Section 4(a)(6) generally will be smaller than the issuers 
conducting registered offerings or exempt offerings pursuant to 
Regulation A, and generally are likely to have a more limited operating 
history.\140\ Therefore, in comparison to registered offerings and 
Regulation A, we believe the three-year period is more relevant given 
the stage of development of these issuers and should help to reduce 
compliance costs for issuers conducting offerings pursuant to Section 
4(a)(6) while still providing investors with sufficient information 
about the business experience of directors and officers of the issuer 
to make an informed investment decision.
---------------------------------------------------------------------------

    \136\ See Rule 201(b) of Regulation Crowdfunding.
    \137\ See, e.g., Commonwealth of Massachusetts Letter; NASAA 
Letter.
    \138\ See Item 401(e) of Regulation S-K [17 CFR 229.401(e)].
    \139\ See Item 8(c) of Form 1-A [17 CFR 239.90].
    \140\ There is no limit on the amount of proceeds that may be 
raised in a registered offering, and Regulation A permits offerings 
of up to $50 million of securities annually.
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    Notwithstanding the suggestion of one commenter, and consistent 
with the statute, the final rules require disclosure of an issuer's Web 
site.\141\ Given the Internet-based nature of Crowdfunding, we 
anticipate that every issuer will have a Web site or be able to create 
one at a minimal cost.
---------------------------------------------------------------------------

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

    We also are adopting the 20 Percent Beneficial Owner disclosure 
requirement as proposed with one modification.\142\ Instead of 
requiring issuers to disclose the name of each 20 Percent Beneficial 
Owner as of the most recent practicable date, we are requiring such 
disclosure as of the most recent practicable date, but no earlier than 
120 days prior to the date the offering statement or report is filed. 
We believe that this change should address commenter concerns \143\ 
about the discretion afforded by the proposed ``most recent practicable 
date.'' While we are not adding to Rule 201(c) a specific requirement 
that the disclosure be updated when there are significant changes in 
beneficial ownership, as requested by one commenter,\144\ to the extent 
a material change in beneficial ownership takes place during the 
offering, an issuer would be required to file an amended offering 
statement on Form C/A: Amendment.
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    \142\ See Rule 201(c) of Regulation Crowdfunding.
    \143\ See NASAA Letter.
    \144\ Id.
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    As stated in the Proposing Release, we believe that the universe of 
20 Percent Beneficial Owners should be the same for the disclosure 
requirements and the disqualification provisions \145\ because this 
would ease the burden on issuers by requiring them to identify only one 
set of persons who would be the subject of these rules. We continue to 
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 is necessary to clarify how beneficial ownership should 
be calculated since issuers could potentially have multiple classes of 
securities with different voting powers.
---------------------------------------------------------------------------

    \145\ See Rule 503 of Regulation Crowdfunding and Section II.E.6 
for a discussion of the disqualification provisions.
---------------------------------------------------------------------------

(b) Description of the Business
(i) Proposed Rules
    Consistent with Section 4A(b)(1)(C), we proposed in Rule 201(d) of 
Regulation Crowdfunding to require an issuer to disclose information 
about its business and business plan. The proposed rules did not 
specify the disclosures that an issuer would need to include in the 
description of the business and the business plan.
(ii) Comments on the Proposed Rules
    While several commenters expressed concerns about requiring an 
issuer to disclose a description of its business and business 
plan,\146\ most commenters supported this proposed requirement.\147\ 
Some commenters recommended that the disclosure include specific items, 
such as disclosure of any material contracts of the issuer, any 
material litigation or any outstanding court order or judgment 
affecting the issuer or its property; \148\ the issuer's business value 
proposition, revenue model, team, regulatory issues and executive 
compensation; \149\ how the issuer will build value for the 
shareholders; \150\ and plans for implementation, concrete next steps, 
outside recommendations about the validity of the business, backgrounds 
of the individuals involved and prototypes or concept drawings.\151\ 
One commenter recommended that the disclosure requirement be scaled to 
match the size of the offering.\152\
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    \146\ See, e.g., ABA Letter; ASSOB Letter; Public Startup Letter 
2; Traklight Letter.
    \147\ See, e.g., Anonymous Letter 2; Arctic Island Letter 5; 
Benjamin Letter; CFIRA Letter 7; Consumer Federation Letter; EMKF 
Letter; Hackers/Founders Letter; Mollick Letter; NFIB Letter; 
RocketHub Letter; Saunders Letter; Wefunder Letter.
    \148\ See, e.g., Arctic Island Letter 4 (referencing only 
pending litigation); Arctic Island Letter 5 (referencing only 
threatened or pending litigation); FundHub Letter 1; Wilson Letter.
    \149\ See, e.g., Arctic Island Letter 5.
    \150\ See, e.g., Hackers/Founders Letter.
    \151\ See, e.g., Mollick Letter.
    \152\ See Consumer Federation Letter.
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    Some commenters recommended that the Commission provide a non-
exclusive list of the types of information an issuer should consider 
disclosing, templates, examples or other guidance to assist the issuer 
in complying with this disclosure requirement.\153\ One commenter 
recommended that the Commission not specify the information to be 
included in the description of the business or the business plan.\154\ 
Commenters also opposed revising the proposed business description 
requirement to require the description to include the information 
requirements of Items 101(a)(2) and 101(h) \155\ of Regulation S-
K.\156\
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    \153\ See, e.g., ABA Letter; Benjamin Letter; CFIRA Letter 7; 
Commonwealth of Massachusetts Letter; FundHub Letter 1 (recommending 
a safe harbor list of requirements); Traklight Letter; Wilson Letter 
(recommending a checklist or prescribed list of questions).
    \154\ See RocketHub Letter.
    \155\ 17 CFR 229.101.
    \156\ See, e.g., Hamilton Letter; Public Startup Letter 2; 
RocketHub Letter.
---------------------------------------------------------------------------

(iii) Final Rules
    Consistent with the proposal, Rule 201(d) requires an issuer to 
disclose information about its business and business plan. We are not 
modifying the proposed rule, as some commenters

[[Page 71401]]

recommended,\157\ to specify the disclosures that an issuer must 
include in the description of the business and the business plan or to 
provide a non-exclusive list of the types of information an issuer 
should consider disclosing. We anticipate that issuers engaging in 
crowdfunding transactions may have businesses at various stages of 
development in different industries, and therefore, we believe that the 
rules should provide flexibility for these issuers regarding what 
information they disclose about their businesses. This flexible 
approach is consistent with the suggestion of one commenter that the 
business plan requirements be scaled to match the size of the 
offering.\158\ We also are concerned that a non-exclusive list of the 
types of information an issuer should consider providing would be 
viewed as a de facto disclosure requirement that all issuers would feel 
compelled to meet and would, therefore, undermine the intended 
flexibility of the final rules.
---------------------------------------------------------------------------

    \157\ See, e.g., ABA Letter; Arctic Island Letter 4; Arctic 
Island Letter 5; Benjamin Letter; CFIRA Letter 7; Commonwealth of 
Massachusetts Letter; FundHub Letter 1; Hackers/Founders Letter; 
Mollick Letter; Traklight Letter; Wilson Letter.
    \158\ See Consumer Federation Letter.
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(c) Use of Proceeds
(i) Proposed Rules
    Consistent with Section 4A(b)(1)(E), we proposed in Rule 201(i) of 
Regulation Crowdfunding to require an issuer to provide a description 
of the purpose of the offering and intended use of the offering 
proceeds. We expected that such disclosure would provide a sufficiently 
detailed description of the intended use of proceeds to permit 
investors to evaluate the investment. Under the proposed rules, if an 
issuer did not have definitive plans for the proceeds, but instead had 
identified a range of possible uses, then the issuer would be required 
to identify and describe each probable use and factors affecting the 
selection of each particular use. In addition, if an issuer indicated 
that it would accept proceeds in excess of the target offering 
amount,\159\ 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.
---------------------------------------------------------------------------

    \159\ See Section II.B(1)(d) below for a description of the 
final rule's disclosure requirements with respect to target amounts.
---------------------------------------------------------------------------

(ii) Comments on the Proposed Rules
    Most commenters supported the requirement that issuers disclose the 
intended use of the offering proceeds.\160\ One commenter recommended 
that we prescribe the use of proceeds disclosure or provide a list of 
examples that issuers should consider when providing such 
disclosures.\161\ Others recommended a variety of circumstances under 
which an issuer should be required to update the use of proceeds 
disclosure.\162\
---------------------------------------------------------------------------

    \160\ See, e.g., ABA Letter; ASSOB Letter; Consumer Federation 
Letter; Joinvestor Letter; Saunders Letter; Traklight Letter; 
Whitaker Chalk Letter; Wilson Letter. But see, Public Startup Letter 
2.
    \161\ See Commonwealth of Massachusetts Letter.
    \162\ See, e.g., ASSOB Letter (five percent change); CFIRA 
Letter 7 (material deviations in the offering statement and any 
deviations in the annual report); Commonwealth of Massachusetts 
Letter (material change); Joinvestor Letter (substantial change); 
RocketHub Letter (significant change); Traklight Letter (material 
deviations); Whitaker Chalk Letter (material change); Wilson Letter 
(any deviation). See also Section II.B.3 for discussion of when an 
amendment to the offering statement may be required.
---------------------------------------------------------------------------

(iii) Final Rules
    We are adopting the use of proceeds disclosure requirement 
substantially as proposed in Rule 201(i). An issuer will be required to 
provide a reasonably detailed description of the purpose of the 
offering, such that investors are provided with enough information to 
understand how the offering proceeds will be used.\163\ While one 
commenter \164\ recommended that we prescribe this disclosure or 
provide a list of examples, we believe a more prescriptive rule would 
not best accommodate a diverse range of issuers. Instead, below we 
provide several examples of the disclosures issuers should consider 
making with respect to various uses of proceeds.
---------------------------------------------------------------------------

    \163\ See Instruction to paragraph (i) of Rule 201 of Regulation 
Crowdfunding.
    \164\ See Commonwealth of Massachusetts Letter.
---------------------------------------------------------------------------

    The disclosure requirement is designed to provide investors with 
sufficient information to evaluate the investment. For example, an 
issuer may 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 providing its 
description, an issuer would need to consider the appropriate level of 
detail to provide investors about the assets or businesses that the 
issuer anticipates acquiring, based on its particular facts and 
circumstances, so that the investors could make informed decisions. If 
the proceeds will be used to compensate existing employees 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 the factors 
the issuer may consider in allocating proceeds among the potential 
uses.\165\ If an issuer indicates that it will accept proceeds in 
excess of the target offering amount, the issuer must provide a 
reasonably detailed description of the purpose, method for allocating 
oversubscriptions, and intended use of any excess proceeds with similar 
specificity.\166\
---------------------------------------------------------------------------

    \165\ See Instruction to paragraph (i) of Rule 201 of Regulation 
Crowdfunding.
    \166\ See Instruction to paragraph (i) of Rule 201 of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

(d) Target Offering Amount and Deadline
(i) Proposed Rules
    Consistent with Section 4A(b)(1)(F), we proposed in Rule 201(g) of 
Regulation Crowdfunding to require issuers to disclose the target 
offering amount and the deadline to reach the target offering amount. 
In addition, we proposed in Rule 201(h) to require an issuer to 
disclose whether it would accept investments in excess of the target 
offering amount, and, if it would, we proposed to require the issuer to 
disclose, at the commencement of the offering, the maximum amount it 
would accept. The issuer also, under proposed Rule 201(h), would be 
required to disclose, at the commencement of the offering, how shares 
in oversubscribed offerings would be allocated. We further proposed in 
Rule 201(j) to require issuers to describe the process to cancel an 
investment commitment or to complete the transaction once the target 
amount is met, including a statement that:
     Investors may cancel an investment commitment until 48 
hours prior to the deadline identified in the issuer's offering 
materials; \167\
---------------------------------------------------------------------------

    \167\ Section II.C.6 further discusses the cancellation 
provisions.
---------------------------------------------------------------------------

     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 at least five business days'

[[Page 71402]]

notice prior to that new deadline (absent a material change that would 
require an extension of the offering and reconfirmation of the 
investment commitment); \168\ and
---------------------------------------------------------------------------

    \168\ 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.
    In addition, proposed Rule 201(k) would 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. Proposed Rule 201(g) 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.\169\
---------------------------------------------------------------------------

    \169\ See 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.
---------------------------------------------------------------------------

(ii) Final Rules
    Commenters were supportive of the proposed rules, and we are 
adopting the target offering amount and deadline disclosure rules as 
proposed.\170\ As an example of how the final rules will apply, if an 
issuer sets a target offering amount of $80,000 but is willing to 
accept up to $650,000, the issuer will be required to disclose both the 
$80,000 target offering amount and the $650,000 maximum offering amount 
that it will accept.\171\ In an instance where 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 at least five 
business days' notice about the new offering deadline as set forth in 
Rules 201(j) and 302(d) of Regulation Crowdfunding. Accelerating the 
deadline would not require an extension of the offering and 
reconfirmation of the investment commitment; however, issuers would 
need to consider whether any material change occurred that would 
require an extension and reconfirmation from investors.\172\
---------------------------------------------------------------------------

    \170\ See Rules 201(g), 201(h), 201(j) and 201(k) of Regulation 
Crowdfunding.
    \171\ The issuer in this case also will need to disclose the 
intended use of the additional proceeds. See Instruction to 
paragraph (i) of Rule 201 of Regulation Crowdfunding. See also 
Section II.B.1.a.i(c) above. In addition, the issuer in this case 
will be required to provide financial statements reviewed by an 
independent public accountant (rather than certain tax return 
information for the most recently completed fiscal year and 
financial statements certified by the principal executive officer). 
See Section II.B.1.a.ii for a discussion of the financial statement 
requirements.
    \172\ Section II.B.1.c discusses the amendment and 
reconfirmation requirements.
---------------------------------------------------------------------------

    We do not believe it is necessary for us to prescribe how 
oversubscribed offerings must be allocated if the issuer is required to 
disclose, at the commencement of the offering, how shares in 
oversubscribed offerings will be allocated. Commenters were supportive 
of this approach,\173\ and we believe this disclosure should provide 
investors with important information while maintaining flexibility for 
issuers to structure the offering as they believe appropriate.
---------------------------------------------------------------------------

    \173\ See, e.g., CFA Institute Letter; RoC Letter; RocketHub 
Letter; Wilson Letter.
---------------------------------------------------------------------------

    We believe that investors in a crowdfunding transaction will 
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, as they will be more aware of their rights to rescind an 
investment commitment. Therefore, we are adopting disclosure 
requirements covering these points, as proposed.
(e) Offering Price
    Consistent with Section 4A(b)(1)(G), we proposed in Rule 201(l) of 
Regulation Crowdfunding to require an issuer to disclose the offering 
price of the securities or, in the alternative, the method for 
determining the price, so long as before the sale each investor is 
provided in writing the final price and all required disclosures.
    Commenters were supportive of the proposed disclosure \174\ and we 
are adopting the offering price disclosure rules as proposed.\175\ We 
believe that disclosure of the price or the methods used for 
determining the price, coupled with investors' rights to cancel their 
investment upon determination of the final price, provide sufficient 
opportunity for investors to evaluate the price.
---------------------------------------------------------------------------

    \174\ See, e.g., CFA Institute Letter; Wilson Letter. As 
discussed below, however, a few commenters recommended that the 
Commission require a fixed price at the commencement of an offering. 
See, e.g., Joinvestor Letter; RocketHub Letter. We address those 
comments in Section II.B.6.
    \175\ See Rule 201(l) of Regulation Crowdfunding.
---------------------------------------------------------------------------

(f) Ownership and Capital Structure
(i) Proposed Rules
    Consistent with Section 4A(b)(1)(H), we proposed in Rule 201(m) of 
Regulation Crowdfunding to require an issuer to provide a description 
of its ownership and capital structure. This disclosure would include:
     The terms of the securities being offered and each other 
class of security of the issuer, including the number of securities 
being offered and those 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.
    As proposed, the rules would require disclosure of the number of 
securities being offered and those outstanding, 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.
(ii) Comments on the Proposed Rules
    A number of commenters supported the proposed ownership and capital 
structure disclosure rules,\176\ while two commenters opposed them as 
burdensome.\177\ One of these

[[Page 71403]]

commenters suggested that issuers should only be required to disclose 
the price of a share and the percentage ownership represented by a 
share, and noted that the principals of an issuer conducting a 
crowdfunding offering may not consider the issuer's capital structure 
or whether its shareholders will have voting rights.\178\
---------------------------------------------------------------------------

    \176\ See, e.g., CFA Institute Letter; Commonwealth of 
Massachusetts Letter; Hackers/Founders Letter; Joinvestor Letter; 
NASAA Letter; RocketHub (supporting only to the extent that such 
disclosures do not require additional form submission or accountant 
or legal work); Saunders Letter; Wilson Letter.
    \177\ See Campbell R. Letter; Schatz Letter.
    \178\ Schatz Letter.
---------------------------------------------------------------------------

(iii) Final Rules
    We are adopting the ownership and capital structure disclosure 
rules as proposed, with the addition of language specifying that 
beneficial ownership must be calculated no earlier than 120 days prior 
to the date of the filing of the offering statement or report,\179\ 
consistent with the treatment of beneficial ownership elsewhere in the 
rule.\180\ Investors in crowdfunding transactions will benefit from 
clear disclosure about the terms of the securities being offered and 
each other class of security of the issuer. The final rules require 
disclosure of the number of securities being offered and those 
outstanding, whether or not such securities have voting rights, any 
limitations on such voting rights \181\ and a description of the 
restrictions on the transfer of securities.\182\ Although Section 
4A(b)(1)(H) does not specifically call for all aspects of this 
disclosure, we believe that such disclosure is 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. This should help investors better evaluate the terms of 
the offer before making an investment decision.
---------------------------------------------------------------------------

    \179\ See Rule 201(m) of Regulation Crowdfunding.
    \180\ See Rule 201(c) of Regulation Crowdfunding.
    \181\ Id.
    \182\ See Rule 501 of Regulation Crowdfunding and Section II.E.2 
for a discussion of restrictions on resales.
---------------------------------------------------------------------------

(g) Additional Disclosure Requirements
(i) Proposed Rules
    We also proposed to require the following additional disclosures: 
\183\
---------------------------------------------------------------------------

    \183\ 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, SEC file number and Central 
Registration Depository number (``CRD number'') (as applicable) \184\ 
of the intermediary through which the offering is being conducted;
---------------------------------------------------------------------------

    \184\ The Financial Industry Regulatory Authority, Inc. 
(``FINRA'') issues CRD numbers to registered broker-dealers.
---------------------------------------------------------------------------

     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;
     certain legends in the offering statement;
     disclosure of the current number of employees of the 
issuer;
     a discussion of the material factors that make an 
investment in the issuer speculative or risky;
     a description of the material terms of any indebtedness of 
the issuer, including the amount, interest rate, maturity date and any 
other material terms;
     disclosure of any exempt offerings conducted within the 
past three years; and
     disclosure of related-party transactions since the 
beginning of the issuer's last fiscal year 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.
(ii) Comments on the Proposed Rules
    Identity of the Intermediary. Several commenters supported the 
proposed requirement that issuers identify the intermediary through 
which the offering is being conducted.\185\ Two commenters opposed such 
a requirement as unnecessary.\186\
---------------------------------------------------------------------------

    \185\ See, e.g., Commonwealth of Massachusetts Letter; 
Joinvestor Letter; Schwartz Letter; Wilson Letter (recommending that 
issuers also disclose whether the intermediary specializes in 
offerings based on criteria such as industry size or type).
    \186\ See Public Startup Letter 2; RocketHub.
---------------------------------------------------------------------------

    Compensation Paid to the Intermediary. Some commenters supported 
the proposed requirement that issuers disclose 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.\187\ One commenter noted that to the extent components of the 
intermediary's fee are percentage based, the exact amount of the 
compensation may not be calculable at the onset of an offering.\188\ A 
few commenters recommended that issuers also should disclose all 
payments and fees, if any, they make to the intermediary.\189\
---------------------------------------------------------------------------

    \187\ See, e.g., ASSOB Letter; Commonwealth of Massachusetts 
Letter; RocketHub Letter; Startup Valley Letter; Wilson Letter. But 
see, e.g., Grassi Letter (opposing the requirement unless offering 
proceeds will be used to compensate the intermediary); Public 
Startup Letter 2; Schwartz Letter.
    \188\ See RocketHub Letter.
    \189\ See, e.g., ASSOB Letter (recommending disclosure of all 
payments); RocketHub Letter (recommending disclosure of fees paid 
for compliance and overhead to enhance transparency for investors).
---------------------------------------------------------------------------

    Legends. Comments were mixed as to the proposed requirement that 
issuers include specified legends in the offering statement about the 
risks of investing in a crowdfunding transaction and the required 
ongoing reports. Some commenters supported such a requirement,\190\ 
while others opposed the requirement.\191\
---------------------------------------------------------------------------

    \190\ See, e.g., ABA Letter; CFA Institute Letter; Commonwealth 
of Massachusetts Letter; Jacobson Letter; Schwartz Letter; Wilson 
Letter.
    \191\ See, e.g., Grassi Letter (recommending that general risks 
be disclosed on the intermediaries' platforms rather than in each 
issuer's offering statement); Hackers/Founders Letter (noting that 
crowdfunding issuers will tend to be smaller and lack the resources 
of large companies, and intermediaries should be required to provide 
examples of risks associated with crowdfunding offerings); Public 
Startup Letter 2; Startup Valley Letter (stating that a legend by 
the issuer about the risks of investing in a crowdfunding 
transaction is not needed because it is the responsibility of the 
intermediary to educate the public about this information).
---------------------------------------------------------------------------

    Current Number of Employees. While several commenters supported the 
proposed requirement that issuers disclose their current number of 
employees,\192\ two commenters opposed such a requirement.\193\ One 
commenter opposed this requirement, noting that the number of employees 
is not useful for investors in evaluating early-stage startups, and is 
likely to increase during the course of a crowdfunding offering 
conducted concurrently with an offering pursuant to Rule 506(c).\194\ 
This commenter also noted that many early-stage startups spend the 
majority of their initial funds on consultants.\195\ Another commenter 
noted that it may be unreasonably costly, relative to the benefit 
gained, to accurately count the number of employees in instances where 
businesses engage many contract workers, or have workers on 
arrangements such as ``flex-time'' or ``half-time.'' \196\
---------------------------------------------------------------------------

    \192\ See, e.g., NASAA Letter; Wilson Letter; Zhang Letter.
    \193\ See Schwartz Letter; Wefunder Letter.
    \194\ See Wefunder Letter.
    \195\ Id.
    \196\ See Schwartz Letter.
---------------------------------------------------------------------------

    Risk Factors. Commenters were divided as to the proposed 
requirement that issuers discuss the material factors that make an 
investment in the issuer speculative or risky. A number of commenters 
supported this proposed requirement,\197\ while a number of others 
opposed it.\198\ Some commenters

[[Page 71404]]

recommended that we provide examples of, or develop standard 
disclosures for, issuer risk factor discussions.\199\
---------------------------------------------------------------------------

    \197\ See, e.g., ASSOB Letter; CFA Institute Letter; 
Commonwealth of Massachusetts Letter; Consumer Federation Letter; 
EMKF Letter; Jacobson Letter; McGladrey Letter; STA Letter; 
StartupValley Letter; Wilson Letter.
    \198\ See, e.g., ABA Letter; Campbell R. Letter; Cole A. Letter; 
Grassi Letter; Hackers/Founders Letter; RocketHub Letter 
(recommending that a generic 500-word statement suffice); Schwartz 
Letter; Scruggs Letter.
    \199\ See, e.g., Commonwealth of Massachusetts Letter; EMKF 
Letter; Heritage Letter (recommending also that the Commission 
define ``material''); Jacobson Letter; SBA Office of Advocacy 
Letter. But see, StartupValley Letter (opposing such a 
recommendation).
---------------------------------------------------------------------------

    Indebtedness. Commenters supported the proposed requirement that 
issuers describe the material terms of any indebtedness of the 
issuer.\200\ Two commenters recommended that we clarify that this 
disclosure requirement could be satisfied if the issuer includes such 
disclosure in its financial statements.\201\ Another recommended that 
we require issuers to disclose the identities of their creditors.\202\
---------------------------------------------------------------------------

    \200\ See, e.g., Consumer Federation Letter; ODS Letter; 
Schwartz Letter; Wilson Letter.
    \201\ See Grassi Letter; EY Letter.
    \202\ See ODS Letter.
---------------------------------------------------------------------------

    Prior Exempt Offerings. Commenters supported the proposed 
requirement that issuers disclose their prior exempt offerings.\203\ 
One commenter recommended that we require additional disclosure to help 
non-accredited investors understand how well aligned their interests 
are with earlier accredited investors,\204\ while other commenters 
suggested scaling back this disclosure in order to contain costs.\205\
---------------------------------------------------------------------------

    \203\ See, e.g., CFA Institute Letter (recommending a brief 
statement about prior capital raising transactions); Commonwealth of 
Massachusetts Letter; Grassi Letter; Joinvestor Letter; ODS Letter; 
Parsont Letter; RoC Letter (supporting the disclosure covering the 
past three years); RocketHub Letter (recommending disclosure of 
successful prior offerings only); Whitaker Chalk Letter 
(recommending that the disclosure exclude the target amount of any 
offerings made in reliance on Section 4(a)(6) and whether such 
target was reached); Wilson Letter. But see, e.g., Heritage Letter; 
Public Startup Letter 2; Schwartz Letter; Wefunder Letter.
    \204\ See Parsont Letter.
    \205\ See, e.g., Grassi Letter (recommending disclosure of only 
the date, amount raised, type of securities sold and a link to a Web 
site where more information on such prior offerings can be found); 
Wefunder Letter (recommending disclosure of only the aggregate 
capital raised in all prior exempt transactions, as well as the 
date, terms, valuation of and types of securities issued in the most 
recent exempt offering).
---------------------------------------------------------------------------

    Related-Party Transactions. Commenters generally supported our 
proposal to 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.\206\ 
Rather than using the definition of ``immediate family member'' 
contained in Item 404 of Regulation S-K,\207\ one commenter recommended 
that we use a common definition for ``immediate family member'' in the 
related-party transactions context and ``member of the family of the 
purchaser or the equivalent'' in the resale restrictions context.\208\
---------------------------------------------------------------------------

    \206\ See, e.g., AICPA Letter (recommending disclosure of 
transactions between the issuer and 10 percent beneficial owners); 
Commonwealth of Massachusetts Letter; Grassi Letter (also 
recommending disclosure of transactions between the issuer and 
employees or affiliated entities with common ownership or control); 
NASAA Letter; RocketHub Letter; Wilson Letter. But see, Public 
Startup Letter 2; Schwartz Letter.
    \207\ 17 CFR 229.404.
    \208\ See Brown J. Letter. See also, Section II.E.2 for a 
discussion of the restrictions on resales.
---------------------------------------------------------------------------

    One commenter supported the proposal to limit the disclosure of 
related-party transactions to transactions since the beginning of the 
issuer's last fiscal year.\209\ Other commenters recommended that the 
related-party transaction disclosure cover the period for which 
financial statements are required.\210\ In addition, one commenter 
supported the proposal to limit disclosure of related-party 
transactions based on the size of the offering,\211\ while a few 
commenters suggested alternatives to such proposal.\212\
---------------------------------------------------------------------------

    \209\ See RocketHub Letter.
    \210\ See AICPA Letter; Grassi Letter.
    \211\ See AICPA Letter.
    \212\ See, e.g., Grassi Letter (recommending disclosure of all 
related-party transactions not deemed de minimis); NASAA Letter 
(recommending a lower percentage threshold); RocketHub Letter 
(recommending a fixed threshold).
---------------------------------------------------------------------------

    Other Disclosures. Several commenters specifically recommended that 
we not require any additional disclosures.\213\ One commenter pointed 
out that there was no ``catch-all'' clause requiring any other material 
information not specifically enumerated in Rule 201 of Regulation 
Crowdfunding.\214\
---------------------------------------------------------------------------

    \213\ See, e.g., ABA Letter; Public Startup Letter 2; RocketHub 
Letter; Schwartz Letter.
    \214\ See CrowdCheck Letter 1.
---------------------------------------------------------------------------

    Other commenters recommended that we require issuers to disclose 
general information; \215\ executive compensation; \216\ zoning issues 
and issues with the Environmental Protection Agency or Food and Drug 
Administration; \217\ a copy of their articles of incorporation; \218\ 
the extent to which they are affected by market risk, material 
contracts, business backlogs and the names of, and number of shares 
being sold by, existing shareholders; \219\ and the credit history of 
the business and the business owners.\220\
---------------------------------------------------------------------------

    \215\ See, e.g., ODS Letter; STA Letter; Tiny Cat Letter. Such 
general information may include the issuer's contact information; 
agent for service; information about the manner in which ownership 
interests will be evidenced; who will be providing record keeping 
services; where records of ownership will be maintained; and/or 
statements that the issuer may not provide account statements and 
that investors will have the responsibility of monitoring their 
investments, communicating with the record keeper and updating their 
information with the record keeper.
    \216\ See, e.g., Arctic Island Letter 4; Denlinger Letter 1 
(recommending disclosure of deferred compensation, stock options or 
warrants, contingent payments for services, shareholder and other 
related-party loans and contingent liabilities); Grassi Letter 
(recommending separate amounts for base salary, bonus and an 
``other'' category for the three highest paid individuals and the 
number and type of equity instruments granted); NASAA Letter; RFPIA 
Letter (recommending inclusion of owners' compensation).
    \217\ See, e.g., Arctic Island Letter 4.
    \218\ See, e.g., Hackers/Founders Letter.
    \219\ See, e.g., CFA Institute Letter.
    \220\ See, e.g., SBM Letter.
---------------------------------------------------------------------------

    As discussed in Section II.B.2 below in connection with ongoing 
annual reports, a number of commenters recommended ways to make it 
easier for investors to locate an issuer's annual reports.\221\
---------------------------------------------------------------------------

    \221\ See, e.g., Arctic Island Letter 5; CFA Institute Letter 
(recommending advance notice as to when and where annual reports 
will be available); RocketHub Letter.
---------------------------------------------------------------------------

(iii) Final Rules
    We are adopting the additional disclosure requirements as proposed 
in Rule 201 with several modifications. As discussed below, we have 
added a requirement to disclose any material information necessary in 
order to make the statements made, in light of the circumstances under 
which they were made, not misleading.\222\ We also have modified the 
rule to require disclosure of the compensation to be paid to the 
intermediary so that it could be disclosed either as a dollar amount or 
percentage of the offering amount or as a good faith estimate if the 
exact amount is not available at the time of the filing.\223\ We also 
have added a requirement to disclose the location on the issuer's Web 
site where investors will be able to find the issuer's annual report 
and the date by which such report will be available on the issuer's Web 
site.\224\ In addition, we have added a requirement to disclose whether 
the issuer or any of its predecessors previously has failed to comply 
with the ongoing reporting requirements of Regulation 
Crowdfunding.\225\
---------------------------------------------------------------------------

    \222\ See Rule 201(y) of Regulation Crowdfunding.
    \223\ See Rule 201(o) of Regulation Crowdfunding.
    \224\ See Rule 201(w) of Regulation Crowdfunding.
    \225\ See Rule 201(x) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We agree with the suggestion by some commenters that issuers should 
not be required to disclose in multiple places the information required 
to be provided

[[Page 71405]]

to investors.\226\ As a result, to avoid duplicative disclosure, an 
issuer will not be required to repeat what is already provided 
elsewhere in the issuer's disclosure, including the financial 
statements.\227\ Issuers may cross-reference within the offering 
statement or report, including to the location of the information in 
the financial statements.\228\
---------------------------------------------------------------------------

    \226\ See, e.g., EY Letter (noting that certain required 
disclosure would be included in an issuer's financial statements); 
Grassi Letter (same).
    \227\ See Instruction to Item 201 of Regulation Crowdfunding.
    \228\ Id.
---------------------------------------------------------------------------

    Identity of the Intermediary. Despite the suggestion of one 
commenter that this disclosure is unnecessary,\229\ we believe 
requiring an issuer to identify the name, SEC 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 use of the exemption.\230\ 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 broker-dealers \231\ or 
a similar system, if created, for funding portals.
---------------------------------------------------------------------------

    \229\ See RocketHub Letter.
    \230\ See Rule 201(n) of Regulation Crowdfunding.
    \231\ See FINRA, FINRA BrokerCheck, available at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/P015175.
---------------------------------------------------------------------------

    Compensation Paid to the Intermediary. Requiring an issuer to 
disclose 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, will permit investors and regulators 
to determine how much of the proceeds of the offering is used to 
compensate the intermediary. Based on a comment received,\232\ we 
understand that in some instances the exact amount of compensation and 
fees to be paid to the intermediary will not be known at the time the 
Form C is filed, and we have modified the rule from the proposal to 
address this issue. Consistent with this understanding, and to avoid 
suggesting that only amounts certain and paid to date must be 
disclosed, the final rules require disclosure of all compensation paid 
or to be paid to the intermediary for conducting the offering, which 
may be disclosed as a dollar amount or as a percentage of the offering 
amount. If the exact amount of the compensation paid or to be paid is 
not available at the time of the filing, issuers are permitted to 
provide a good faith estimate.\233\
---------------------------------------------------------------------------

    \232\ See RocketHub Letter.
    \233\ See Rule 201(o)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In addition, we are modifying the rule text from the proposal to 
require issuers to disclose any other direct or indirect interest in 
the issuer held by the intermediary, or any arrangement for the 
intermediary to acquire such an interest.\234\ The proposed rules would 
have prohibited an intermediary from holding any financial interest in 
the issuers conducting offerings on its platforms. However, as 
discussed in Section II.C.2.b below, the final rules permit 
intermediaries to hold such interests. We believe that, similar to the 
amount of compensation paid to the intermediary, an intermediary's 
interests in an issuer and the issuer's transaction could be material 
to an investment decision in the issuer. Therefore, we believe that 
issuers should disclose such interests to investors.
---------------------------------------------------------------------------

    \234\ See Rule 201(o)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Legends. We are adopting this requirement as proposed.\235\ The 
requirement for an issuer to include in the offering statement 
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. We continue to believe, 
despite the suggestions of some commenters,\236\ that requiring legends 
in each issuer's offering statement, regardless of any general warnings 
available on an intermediary's platform, will provide additional 
investor protection with minimal costs. For example, the requirement 
that an issuer include in the offering statement certain legends about 
the required ongoing reports, including how those reports will be made 
available to investors and how an issuer may terminate its ongoing 
reporting obligations, will help investors understand an issuer's 
ongoing reporting obligations and how they will be able to access those 
reports.
---------------------------------------------------------------------------

    \235\ See Item 2 of General Instruction III to Form C.
    \236\ See, e.g., Grassi Letter; Hackers/Founders Letter; Public 
Startup Letter 2; Startup Valley Letter.
---------------------------------------------------------------------------

    Current Number of Employees. Consistent with the proposal and the 
recommendation of several commenters,\237\ the final rules require 
disclosure of the current number of employees.\238\ We believe this 
disclosure is important to investors in evaluating a crowdfunding 
transaction because it will give investors a sense of the size of the 
issuers using the exemption. We expect that the early-stage issuers who 
are likely to use securities-based crowdfunding will not have many 
employees, so we do not believe this requirement will be unreasonably 
burdensome.
---------------------------------------------------------------------------

    \237\ See, e.g., NASAA Letter; Wilson Letter; Zhang Letter.
    \238\ See Rule 201(e) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Risk Factors. We are adopting this disclosure requirement as 
proposed.\239\ While some commenters expressed concerns about potential 
expenses or confusion associated with risk disclosure,\240\ we agree 
with those commenters who indicated that disclosure of the material 
factors that make an investment in the issuer speculative or risky is 
important to help investors understand the risks of investing in a 
specific issuer's offering.\241\ To help investors to better understand 
these risks, we believe that risk factor disclosure should be tailored 
to the issuer's business and the offering and should not repeat the 
factors addressed in the required legends.\242\ For similar reasons, we 
are not providing examples of, or developing standard disclosure for, 
issuer risk factor discussions, as we believe issuers will be in the 
best positions to articulate the risks associated with their business 
and offerings in light of their particular facts and circumstances.
---------------------------------------------------------------------------

    \239\ See Rule 201(f) of Regulation Crowdfunding.
    \240\ See, e.g., Campbell R. Letter; Cole A. Letter; Grassi 
Letter; Hackers/Founders Letter; RocketHub Letter; Schwartz Letter; 
Scruggs Letter.
    \241\ See, e.g., ASSOB Letter; CFA Institute Letter; 
Commonwealth of Massachusetts Letter; Consumer Federation Letter; 
EMKF Letter; Jacobson Letter; McGladrey Letter; STA Letter; 
StartupValley Letter; Wilson Letter.
    \242\ See Item 2 of General Instruction III to Form C.
---------------------------------------------------------------------------

    Indebtedness. Consistent with the proposal, we are adopting the 
requirement to provide a description of the material terms of any 
indebtedness of the issuer.\243\ We believe disclosure of the material 
terms of any indebtedness of the issuer, including, among other items, 
the amount, interest rate and maturity date of the indebtedness, is 
important to investors because servicing debt could place additional 
pressures on an issuer in the early stages of development. We expect 
that for many issuers this information will be included in the 
financial statements, which will satisfy this reporting 
requirement.\244\
---------------------------------------------------------------------------

    \243\ See Rule 201(p) of Regulation Crowdfunding.
    \244\ See Instruction to Rule 201 of Regulation Crowdfunding; 
Items 1 and 3 of General Instruction III to Form C.
---------------------------------------------------------------------------

    While one commenter recommended that we require issuers to disclose 
the

[[Page 71406]]

identities of their creditors,\245\ we do not believe, as a general 
matter, that such disclosure would provide meaningful information to 
investors. Accordingly, under the final rules, such disclosure is 
required only to the extent the creditor's identity is a material 
aspect of the indebtedness.\246\
---------------------------------------------------------------------------

    \245\ See ODS Letter.
    \246\ See Rule 201(y) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Prior Exempt Offerings. Consistent with the proposal and with 
commenters' recommendations, we are requiring issuers to provide 
disclosure about the exempt offerings that they conducted within the 
past three years.\247\ For each exempt offering within the past three 
years, issuers must describe 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.\248\ We believe that 
information about prior offerings will better inform investors about 
the capital structure of the issuer and will provide information about 
how prior offerings were valued.
---------------------------------------------------------------------------

    \247\ See Rule 201(q) of Regulation Crowdfunding.
    \248\ See Instruction to paragraph (q) of Rule 201 of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    Related-Party Transactions. We are adopting this disclosure 
requirement substantially as proposed.\249\ Related-party transactions 
create potential conflicts of interest that may result in actions that 
benefit the related parties at the expense of the issuer or the 
investors. After considering the comments received, we continue to 
believe the related-party transactions disclosure will assist investors 
in obtaining a more complete picture of the financial relationships 
between certain related parties and the issuer and provide additional 
insight as to potential uses of the issuer's resources, including the 
proceeds of the offering. The final rule differs from the proposal in 
that an issuer is required to disclose transactions with any person who 
is, as of the most recent practicable date but no earlier than 120 days 
prior to the date the offering statement or report is filed, the 
beneficial owner of 20 percent or more of the issuer's outstanding 
voting equity securities. Limiting the relevant period to 120 days 
prior to the date of the offering statement or report is consistent 
with the treatment of beneficial ownership elsewhere in Regulation 
Crowdfunding.\250\ We also believe this limitation and the consistency 
it provides will help limit compliance costs for issuers.
---------------------------------------------------------------------------

    \249\ See Rule 201(r) of Regulation Crowdfunding.
    \250\ See, e.g., Rules 201(c) and 201(m) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    The final rule also includes an instruction to clarify that, for 
purposes of Rule 201(r), a transaction includes, but is not limited to, 
any financial transaction, arrangement or relationship (including any 
indebtedness or guarantee of indebtedness) or any series of similar 
transactions, arrangements or relationships.\251\ This instruction is 
consistent with Item 404 of Regulation S-K.\252\
---------------------------------------------------------------------------

    \251\ See Instruction 2 to Rule 201(r) of Regulation 
Crowdfunding.
    \252\ See Instruction 2 to Item 404(a) of Regulation S-K [17 CFR 
229.404(a)].
---------------------------------------------------------------------------

    Given the early stage of development of the small businesses and 
startups that we expect will seek to raise capital pursuant to Section 
4(a)(6), as well as the investment limits prescribed by the rules, we 
believe that limiting the disclosure of related-party transactions to 
transactions occurring since the beginning of the issuer's last fiscal 
year, as proposed, will help to limit compliance costs for issuers 
while still providing investors with sufficient information to evaluate 
the relationship between related parties and the issuer.\253\ In 
addition, we are requiring issuers to disclose only related-party 
transactions that, in the aggregate, are 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). We also have added an instruction to clarify that any series 
of similar transactions, arrangements or relationships should be 
aggregated for purposes of determining whether related-party 
transactions should be disclosed.\254\ For example, an issuer seeking 
to raise $1 million will be required to disclose related-party 
transactions that, in the aggregate, are in excess of $50,000, which is 
the same dollar threshold required in Form 1-A \255\ for offerings of 
any size made pursuant to Tier 1 of Regulation A,\256\ and an issuer 
that raises $250,000 will be required to disclose such transactions in 
excess of $12,500. We believe that, in light of the sizes and varieties 
of issuers that may make offerings in reliance on Section 4(a)(6), this 
approach could mitigate the potential for the requirement to be 
disproportionate to the size of certain offerings and issuers. While 
one commenter suggested we use a percentage threshold less than five 
percent, we believe this threshold appropriately takes into 
consideration the need to provide investors with relevant information 
about the issuer's activities involving related parties during this 
crucial early stage of development.
---------------------------------------------------------------------------

    \253\ We note, however, that financial statements covering the 
two most recently completed fiscal years will include disclosure of 
related-party transactions, as required by U.S. GAAP, for each of 
the years presented.
    \254\ See Instruction 1 to Rule 201(r) of Regulation 
Crowdfunding.
    \255\ 17 CFR 239.900
    \256\ 17 CFR 230.251 through 230.263
---------------------------------------------------------------------------

    As suggested by one commenter,\257\ in a change from the proposal, 
we are adopting a definition for ``member of the family'' in the 
related-party transactions context that is consistent with the 
definition of ``member of the family of the purchaser or the 
equivalent'' in the resale restrictions context.\258\ The final rule 
defines ``member of the family'' as 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, [including] adoptive relationships'' of any of 
the persons identified in Rules 201(r)(1), (r)(2) or (r)(3).\259\ This 
definition tracks the definition of ``immediate family'' in Exchange 
Act Rule 16a-1(e),\260\ but with the addition of ``spousal 
equivalent,'' which the final rule defines to mean ``a cohabitant 
occupying a relationship generally equivalent to that of a spouse.'' 
\261\ We believe a common definition of ``member of the family'' that 
is consistent with our disclosure rules in other contexts \262\ will 
provide certainty for issuers in identifying the persons covered by the 
rule.
---------------------------------------------------------------------------

    \257\ See Brown J. Letter.
    \258\ See Rule 501(a) of Regulation Crowdfunding;
    \259\ See Rule 201(r)(4) of Regulation Crowdfunding.
    \260\ 17 CFR 240.16a-1(e).
    \261\ See Rule 201(r)(4) of Regulation Crowdfunding.
    \262\ See, e.g., Exchange Act Rule 16a-1(e).
---------------------------------------------------------------------------

    Other Disclosures. We are adopting this provision as proposed but 
with the addition of three issuer disclosure requirements in response 
to comments received.
    The first is a requirement that an issuer disclose the location on 
its Web site where investors will be able to find the issuer's annual 
report and the date by which such report will be available on its Web 
site.\263\ We believe this requirement addresses the concern expressed 
by commenters that investors may not know where to find an issuer's 
annual report. We do not believe physical delivery of the annual report 
is necessary due to the electronic nature of the crowdfunding 
marketplace, nor do we believe that email delivery of the annual report 
is practical because the

[[Page 71407]]

issuer may not have access to email addresses of its investors. 
Instead, we are requiring issuers to disclose this information in the 
offering statement, which will assist investors in locating the 
information while limiting the compliance costs for issuers.
---------------------------------------------------------------------------

    \263\ See Rule 201(w) of Regulation Crowdfunding. See also, 
Section II.B.2 for a discussion of the requirement on issuers to 
post their annual reports on their Web sites.
---------------------------------------------------------------------------

    The second additional disclosure requirement, as suggested by a 
commenter,\264\ is a requirement that the disclosure include any 
material information necessary in order to make the statements made, in 
light of the circumstances under which they were made, not 
misleading.\265\ This provision should help ensure that investors have 
all of the material information they need on which to base their 
investment decisions.
---------------------------------------------------------------------------

    \264\ See CrowdCheck Letter 1.
    \265\ See Rule 201(y) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The third additional requirement, similar to suggestions from some 
commenters,\266\ requires the issuer to disclose whether it or any of 
its predecessors previously failed to comply with the ongoing reporting 
requirements of Regulation Crowdfunding.\267\ While we continue to 
believe, and the final rules provide, that only those issuers that have 
failed to file their two most recent annual reports should be 
prohibited from relying on the exemption available under Section 4A(6), 
we also believe that any history of non-compliance with ongoing 
reporting obligations would provide important information to investors 
about the issuer.
---------------------------------------------------------------------------

    \266\ See Grassi Letter; RocketHub Letter.
    \267\ See Rule 201(x) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Although we appreciate that commenters made various suggestions for 
additional issuer disclosure requirements, such as those relating to 
executive compensation, market risk and material contracts, we are not 
mandating further disclosures. In adopting issuer requirements for 
Regulation Crowdfunding, we have been mindful of the limited resources 
and start-up operations of issuers likely to use security-based 
crowdfunding and have sought to consider the need to provide investors 
with relevant information to make an informed investment decision while 
limiting the compliance costs for issuers. We believe the issuer 
disclosure requirements we are adopting along with other protections, 
such as investment limits, achieve this goal.
(2) 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.
(a) Financial Condition Discussion
(i) Proposed Rules
    Consistent with Section 4A(b)(1)(D), we proposed in Rule 201(s) of 
Regulation Crowdfunding to require an issuer to provide a narrative 
discussion of its financial condition.
(ii) Comments on the Proposed Rules
    Commenters generally supported the proposed requirement that 
issuers provide a narrative discussion of their financial 
condition.\268\ One commenter expressed concern that the requirement 
could be challenging for issuers at an early stage of development and 
result in duplicative disclosure.\269\ The same commenter suggested 
that issuers be encouraged, rather than mandated, to discuss material 
historical operating results.\270\
---------------------------------------------------------------------------

    \268\ See, e.g., ABA Letter; CFA Institute Letter; CFIRA Letter 
5; Commonwealth of Massachusetts Letter; Grassi Letter; Jacobson 
Letter; Joinvestor Letter; Saunders Letter. But see, e.g., EY 
Letter; Public Startup Letter 2; RocketHub Letter.
    \269\ See EY Letter.
    \270\ Id.
---------------------------------------------------------------------------

(iii) Final Rules
    We are adopting this requirement as proposed, with a few technical 
modifications.\271\ Rule 201(s) clarifies that the description must 
include, to the extent material, a discussion of liquidity, capital 
resources and historical results of operations. Rule 201(s) also 
includes an instruction noting that issuers will be required to include 
a discussion of each period for which financial statements are provided 
and a discussion of any material changes or trends known to management 
in the financial condition and results of operations of the issuer 
subsequent to the period for which financial statements are 
provided.\272\ In connection with this instruction, an issuer will need 
to consider whether more recent financial information is necessary to 
make the disclosure in the offering document not misleading. The 
instruction in final Rule 201(s) was included in proposed Rule 201(t) 
as an instruction to the financial statement requirements, but we have 
moved this instruction to Rule 201(s) because it elicits narrative 
disclosure that we believe is more appropriately presented as part of 
the discussion of the issuer's financial condition. In addition, 
another instruction clarifies that references to the issuer in Rule 
201(s) refer to the issuer and its predecessors, if any.\273\
---------------------------------------------------------------------------

    \271\ See Rule 201(s) of Regulation Crowdfunding.
    \272\ See Instruction 1 to Rule 201(s) of Regulation 
Crowdfunding.
    \273\ See Instruction 4 to Rule 201(s) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    We expect that the discussion required by the final rule and 
instructions will inform investors about the financial condition and 
results of operations of the issuer by providing management's 
perspective on the issuer's operations and financial results, including 
information about the issuer's liquidity and capital resources and any 
known trends or uncertainties that could materially affect the 
company's results. Because issuers seeking to engage in crowdfunding 
transactions will likely be smaller, less complex and at an earlier 
stage of development than issuers conducting registered offerings or 
Exchange Act reporting companies, we expect that the discussion 
generally will not, contrary to the concern of at least one 
commenter,\274\ need to be as lengthy or detailed as the management's 
discussion and analysis of financial condition and results of 
operations of those issuers. Accordingly, we are not prescribing a 
specific content or format for this information, but instead set forth 
general principles for making this disclosure.\275\ The 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, whether these funds and any other 
additional funds are necessary to the viability of the business and how 
quickly the issuer anticipates using its available cash. 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. 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

[[Page 71408]]

duplicate disclosures.\276\ While we are not mandating a specific 
presentation, we expect issuers to present the required disclosures, 
including any other information that is material to an investor, in a 
clear and understandable manner.
---------------------------------------------------------------------------

    \274\ See EY Letter.
    \275\ See Instructions 1 and 2 to Rule 201(s) of Regulation 
Crowdfunding.
    \276\ See Instruction to Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

(b) Financial Disclosures
(i) Proposed Rules
    Proposed Rule 201(t) of Regulation Crowdfunding would have 
established financial statement disclosure requirements that are based 
on aggregate target offering amounts within the preceding 12-month 
period:
     Issuers offering $100,000 or less would be required to 
file with the Commission and provide to investors and the relevant 
intermediary 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, would be required to file with the Commission and provide to 
investors and the relevant intermediary financial statements reviewed 
by a public accountant that is independent of the issuer; and
     issuers offering more than $500,000 would be required to 
file with the Commission and provide to investors and the relevant 
intermediary financial statements audited by a public accountant that 
is independent of the issuer.
    Under proposed Rule 201(t), issuers would be permitted to 
voluntarily provide financial statements that meet the requirements for 
a higher aggregate target offering amount.
    The proposed rules also would have set forth the following 
requirements for the financial statements:
     Basis of Accounting. All issuers would be required to file 
with the Commission and provide to investors and the relevant 
intermediary a complete set of their financial statements (balance 
sheets, income statements, statements of cash flows and statements of 
changes in owners' equity), prepared in accordance with U.S. generally 
accepted accounting principles (``U.S. GAAP'').
     Public Accountant Requirements. To qualify as independent 
of the issuer, a public accountant would be required to comply with the 
Commission's independence rules, which are set forth in Rule 2-01 of 
Regulation S-X.\277\
---------------------------------------------------------------------------

    \277\ 17 CFR 210.2-01.
---------------------------------------------------------------------------

     Periods Covered in the Financial Statements. The financial 
statements would be required to cover the shorter of the two most 
recently completed fiscal years or the period since inception of the 
business.
     Age of Financial Statements. 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.
     Review and Audit Standards. Reviewed financial statements 
would be required to be reviewed in accordance with the Statements on 
Standards for Accounting and Review Services (``SSARS'') issued by the 
American Institute of Certified Public Accountants (``AICPA''). Audited 
financial statements would be required to be audited in accordance with 
the auditing standards issued by either the AICPA or the Public Company 
Accounting Oversight Board (``PCAOB'').
     Review and Audit Reports. Issuers would be required to 
file with the Commission and provide to investors and the relevant 
intermediary a copy of the public accountant's review or audit report. 
An issuer that received an adverse opinion or disclaimer of opinion in 
its audit report would not be in compliance with the audited financial 
statement requirements.
     Exemptions from the Financial Statement Requirements. The 
proposed rules would not exempt any issuers from the financial 
statement requirements.
(ii) Comments on the Proposed Rules
    Commenters were divided on the proposed financial statement 
requirements,\278\ although commenters generally supported allowing 
issuers to voluntarily provide financial statements that meet the 
requirements for a higher aggregate target offering amount.\279\
---------------------------------------------------------------------------

    \278\ For an example of those who generally supported the 
proposed financial disclosure requirements, see, e.g., ABA Letter 
(recommending some modifications); CFA Institute Letter; 
Commonwealth of Massachusetts Letter; Consumer Federation Letter 
(the financial information is critical to an informed evaluation of 
the investment opportunity); Denlinger Letter 1; Funderbuddies 
Letter; NASAA Letter.
    For an example of those who generally opposed, see, e.g., AEO 
Letter; Joinvestor Letter (recommending that only issuer-generated 
documents produced in good faith be required); Marsala Letter; 
RocketHub (stating that ``requirements are excessive in cost and 
misguided in intent''); Traklight Letter (recommending that instead 
of pre-raise and ongoing financial statement reviews or audits, 
issuers only be required to have a limited review engagement on the 
use of proceeds after the raise); Zhang Letter.
    \279\ See, e.g., AICPA Letter; Denlinger Letter 1; Grassi 
Letter; Heritage Letter; RocketHub Letter; Wilson Letter. But see 
Public Startup Letter 2.
---------------------------------------------------------------------------

    Offerings of $100,000 or less. In general, commenters supported 
requiring issuers to provide financial statements certified by the 
principal executive officer to be true and complete in all material 
respects.\280\ Further, several recommended that all issuers relying on 
the Section 4(a)(6) exemption be required to provide such 
certification.\281\
---------------------------------------------------------------------------

    \280\ See, e.g., AICPA Letter; Zeman Letter.
    \281\ See, e.g., AICPA Letter; Denlinger Letter 1; Grassi 
Letter; Jacobson Letter. But see Public Startup Letter 2.
---------------------------------------------------------------------------

    Commenters were divided on the requirement that issuers offering 
$100,000 or less file and provide to investors their federal income tax 
returns. Supporters of the tax return requirement noted that income tax 
returns would be a source of credible information for investors that 
should be readily available without requiring issuers to bear 
significant additional preparation expenses.\282\ On the other hand, 
opponents of the tax return requirement raised concerns about 
privacy,\283\ identity theft and tax fraud.\284\ One commenter 
expressed concern that small issuers may not be adequately prepared to 
consider the patchwork of state and federal privacy laws that might 
apply to the disclosure of tax returns.\285\
---------------------------------------------------------------------------

    \282\ See, e.g., Angel Letter 1 (``tax returns are even more 
credible than audited financial statements, as companies are highly 
unlikely to exaggerate profitability to the IRS.''); Fund Democracy 
Letter; NPCM Letter; Zeman Letter (``the small risk for these 
investors does not meet the consideration of audited financial 
statements.'').
    \283\ See, e.g., AICPA Letter (disclosing an issuer's tax return 
``. . . has the potential to cause serious problems. Tax returns are 
intended to be confidential and should remain so.''); Public Startup 
Letter 2; RocketHub Letter; SBM Letter; Wilson Letter (personal 
income tax information should be on a voluntary basis only); Zhang 
Letter.
    \284\ See AICPA Letter.
    \285\ See AICPA Letter.
---------------------------------------------------------------------------

    Several commenters suggested approaches to allow access by 
investors to the information available from a tax return,\286\ 
including permitting issuers to digitally submit the data from their

[[Page 71409]]

tax return in a standardized format.\287\ Supporters of digital 
submission suggested that approach would provide a standardized format 
and protect issuers from accidental disclosure of confidential 
information. Commenters generally supported the proposal to require 
issuers to redact personally identifiable information from their tax 
returns,\288\ although some requested clarifications.\289\
---------------------------------------------------------------------------

    \286\ See, e.g., Arctic Island Letter 5 (recommending that only 
the two primary pages and not the schedules be made public); 
CrowdBouncer Letter (recommending the Commission allow issuers to 
disclose electronic transcripts of filed tax returns to investors 
through the intermediary platforms); NPCM (expressing concern that 
unless tax returns are filed as a PDF stamped by the IRS, there is 
no way to know if the posted document is a true reflection of the 
tax return); RocketHub Letter.
    \287\ See, e.g., RocketHub Letter (suggesting digital submission 
``will protect the issuers from accidental disclosure of 
confidential information, and will allow investors to view the 
information in a structured and consistent manner. For example, if 
each issuer were to upload their version of a financial statement, 
the responsibility of learning to understand each format would fall 
to the investor. Standardized formats for financial projections, 
financial statements, and business plans will allow investors to 
quickly compare issuances and more readily evaluate investment 
opportunities.''); Zhang Letter.
    \288\ See, e.g., ABA Letter; AICPA Letter; Fund Democracy 
Letter; Whitaker Chalk Letter.
    \289\ See, e.g., ABA Letter (recommending the Commission provide 
a non-exhaustive list of the specific types of information that may 
be redacted); AICPA Letter (recommending that if the tax return 
requirement is adopted, the Commission define ``personally 
identifiable information'' and clarify that the redaction includes 
third-party information).
---------------------------------------------------------------------------

    Two commenters recommended that the timing of financial statement 
disclosures correspond to any extended tax filing deadlines,\290\ while 
two other commenters opposed such application.\291\ Further, a few 
commenters supported the proposal to permit an issuer that has not yet 
filed its tax return for the most recently completed fiscal year to use 
the tax return filed for the prior year and update the information 
after filing the tax return for the most recently completed fiscal 
year.\292\ One commenter recommended that at least one tax return be 
available,\293\ and another recommended that the Commission provide 
guidance for issuers who have not filed a U.S. tax return.\294\ One 
commenter supported requiring issuers to describe any material changes 
that are expected in the tax returns for the most recently completed 
fiscal year,\295\ while another recommended that such disclosure be 
permitted, but not required.\296\
---------------------------------------------------------------------------

    \290\ See EY Letter; Grassi Letter.
    \291\ See, e.g., ASSOB Letter (recommending that issuers should 
provide their tax accounts within three months of the end of the 
reporting period); Fund Democracy Letter.
    \292\ See, e.g., Grassi Letter; RocketHub Letter.
    \293\ See Fund Democracy Letter.
    \294\ See AICPA Letter.
    \295\ See Grassi Letter.
    \296\ See RocketHub Letter (also recommending that the 
Commission define what qualifies as a material change).
---------------------------------------------------------------------------

    A number of commenters recommended raising the maximum offering 
amount for issuers that provide this level of financial 
information.\297\
---------------------------------------------------------------------------

    \297\ See, e.g., Hackers/Founders Letter ($500,000); Kickstarter 
Coaching Letter ($250,000); RocketHub Letter ($500,000); Zeman 
Letter (recommending that offerings under $500,000 require two years 
of tax returns and unaudited balance sheets).
---------------------------------------------------------------------------

    Offerings of more than $100,000 but not more than $500,000. Some 
commenters supported the requirement in the proposed rules that 
offerings of more than $100,000 but not more than $500,000 include 
financial statements reviewed by an independent public accountant,\298\ 
while other commenters opposed such requirement.\299\ A number of 
commenters recommended a different range of offering amounts or methods 
for determining when an issuer is required to file and provide reviewed 
financial statements.\300\
---------------------------------------------------------------------------

    \298\ See, e.g., Denlinger Letter 1; Leverage PR Letter (stating 
that the industry will evolve to provide lower cost reviews); 
StartEngine Letter 1 (stating that the industry will evolve to 
provide lower cost reviews, such as in the $1,500-$10,000 range for 
smaller, newer companies).
    \299\ See, e.g., Angel Letter 1 (recommending requiring audited 
financial statements if they are available and tax returns if they 
are not); Arctic Island Letter 5 (recommending only for issuers that 
have greater than $15 million in annual revenue); Johnston Letter; 
McGladrey Letter (recommending only after the issuer meets certain 
revenue and operational thresholds); NACVA Letter; Public Startup 
Letter 2; Zeman Letter.
    \300\ See, e.g., ABA Letter; CIFRA Letter 5 (noting the 
financial disclosure standards of the SBA's Section 8(a) program 
require reviewed financial statements for companies with gross 
annual receipts for $2 million to $10 million); Grassi Letter 
($300,000 to $700,000); Kickstarter Coaching Letter ($250,000 to $1 
million).
---------------------------------------------------------------------------

    Offerings of more than $500,000. We received extensive comments on 
our proposal that issuers offering more than $500,000 be required to 
file with the Commission and provide to investors and the relevant 
intermediary financial statements audited by an independent public 
accountant. A significant number of those commenters opposed the 
proposed requirement,\301\ although some commenters expressed 
support.\302\ Some commenters recommended the elimination of the audit 
requirement,\303\ and others recommended that we consider additional 
criteria for determining when an issuer would be required to provide 
audited financial statements.\304\ A number of commenters opposed the 
proposed $500,000 threshold as being too low,\305\ and a number 
recommended alternative thresholds.\306\ A number of commenters stated 
that funding the upfront cost of an audit would be particularly 
difficult for issuers raising capital for the first time.\307\
---------------------------------------------------------------------------

    \301\ See, e.g., AEO Letter; Angel Letter 1; AWBC Letter; CFIRA 
Letter 5; CfPA Letter; CrowdFundConnect Letter; EarlyShares Letter; 
EMKF Letter; EY Letter; Finkelstein Letter; FundHub Letter 1; 
Generation Enterprise Letter; Fryer Letter; Grassi Letter; Graves 
Letter; Guzik Letter 1; Hakanson Letter; Holland Letter; Johnston 
Letter; Kickstarter Coaching Letter; McGladrey Letter; Milken 
Institute Letter; NACVA Letter; NFIB Letter; NPCM Letter; NSBA 
Letter; PBA Letter; Reed Letter; RocketHub Letter; Saunders Letter; 
SBA Office of Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth 
Letter; WealthForge Letter; Wefunder Letter; Woods Letter; Zeman 
Letter.
    \302\ See, e.g., AICPA Letter; Consumer Federation Letter; CSTTC 
Letter; Denlinger Letter 2; FundDemocracy Letter; Leverage PR; NASAA 
Letter; StartEngine Letter 1.
    \303\ See, e.g., CrowdFundConnect Letter; FundHub Letter 1; 
Johnston Letter; SBEC Letter; StartupValley Letter (for issuers less 
than two years old); Woods Letter.
    \304\ See, e.g., Angel Letter 1 (only if such financial 
statements are available); Arctic Island Letter 5 (only apply to 
issuers that have greater than $15 million in revenue); EY Letter 
(only if issuer has raised $5 million in equity securities in 
crowdfunding transactions unless audited financial statements are 
otherwise available); McGladrey Letter (eliminate the audit 
requirements until the issuer meets certain revenue and operational 
thresholds); Reed Letter (if an audit is required, the requirement 
only apply to issuers that reach a certain size in investment or 
investors); RocketHub Letter ($5 million offering amount and the 
issuer has been in operation for more than two years). But see AICPA 
Letter (additional criteria would add complexity without any 
additional benefit).
    \305\ See, e.g., ABA Letter; CCA Letter; CFIRA Letter 5; CfPA 
Letter; CrowdFundConnect Letter; EarlyShares Letter; EMKF Letter; EY 
Letter; FundHub Letter 1; Generation Enterprise Letter; Grassi 
Letter; Graves Letter; Guzik Letter 1; Kickstarter Coaching Letter; 
Milken Institute Letter; NFIB Letter; PBA Letter; RocketHub Letter; 
SBA Office of Advocacy Letter; SBM Letter; Seyfarth Letter; 
WealthForge Letter; Wefunder Letter; Woods Letter. But see AICPA 
Letter; Denlinger Letter 1; Fund Democracy Letter; Zeman Letter.
    \306\ See, e.g., ABA Letter ($750,000); EarlyShares Letter ($1 
million); EMKF Letter ($800,000); EY Letter ($5 million, unless 
audited financial statements are otherwise available); Grassi Letter 
($700,000); Graves Letter ($900,000); Guzik Letter 1 ($700,000); 
Kickstarter Coaching Letter ($1 million); PBA Letter ($1 million); 
RocketHub Letter ($5 million and the issuer has been in operation 
for more than two years); Seyfarth Letter ($1 million); WealthForge 
Letter ($1 million).
    \307\ See, e.g., AEO Letter (expressing concern that start-up 
businesses with no revenue to date, and raising capital for the 
first time, would find it difficult or impossible to fund the cost 
of an audit); AWBC Letter; CFIRA Letter 5 (stating that the proposed 
level of financial disclosure for capital raises over $500,000 would 
be an impediment for small business when many will have limited 
financial resources to absorb the expense prior to raising capital 
using crowdfunding); CfPA Letter (suggesting the Commission 
determine an alternate audit threshold because ``the costs of an 
audit must necessarily be incurred prior to an offering, and in the 
numerous expected cases of unsuccessful offerings, would lead to 
substantial net losses to the businesses that Crowdfunding is 
supposed to help''); EMKF Letter (stating that many of the issuers 
looking to raise capital through crowdfunding will be startups with 
little or no revenue to afford audited financial statements); 
Generation Enterprise Letter; Grassi Letter; Graves Letter; Holland 
Letter; McGladrey Letter; NSBA Letter; Reed Letter (noting that few 
start-ups could afford auditing fees); RocketHub Letter (stating 
that the filing and audit requirements establish an upfront cost 
that is too high for small businesses to accept); SBM Letter (noting 
that many startups do not have the resources to obtain audited 
financials); Seyfarth Letter (stating that the audit requirement 
will deny access to issuers who do not have the necessary upfront 
capital); WealthForge Letter; Wefunder Letter.

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

[[Page 71410]]

    We received a number of comments expressing concern about the 
anticipated costs associated with audited financial statements.\308\ 
Other commenters noted that costs would be lower than those estimated 
in the Proposing Release or in other comment letters.\309\
---------------------------------------------------------------------------

    \308\ See, e.g., AEO Letter; CfPA Letter; CFIRA Letter 5; 
CrowdCheck Letter 4; ErrandRunner Letter; Finkelstein Letter; 
FundHub Letter 1 (stating that the difference in cost for reviewed 
versus audited financial statements could easily run into tens of 
thousands of dollars); Graves Letter (stating that a partner from a 
leading accounting firm predicted the cost to small businesses of 
providing audited financial statements could be upwards of $18,000 
to $25,000); Grassi Letter (stating that audits take more time than 
companies seeking capital may have); NFIB Letter; RocketHub Letter; 
SBA Office of Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth 
Letter; StartupValley Letter (stating that audits for small startups 
with no financials can cost $10,000 and that GAAP audits typically 
cost 25-50% more than other comprehensive basis of accounting 
audits); Stephenson Letter; Traklight Letter (stating that audit 
costs have been cited as low as $5,000 and as high as $20,000 for a 
startup; also stating that review costs are estimated at about 60% 
of the cost of an audit); WealthForge Letter.
    \309\ See, e.g., CCA Letter (analyzing regulatory costs borne by 
Title II issuers); CrowdFranchise Letter 1; CrowdFunding Network 
(stating that projected costs are already decreasing through market 
forces); D'Amore Letter; ddbmckennon Letter (noting that the 
majority of issuers will be newly formed with limited historical 
operations and that an audit for such companies may range from 
$4,000-$9,000 in year one); Denlinger Letter 1 (citing a study that 
found that about half of the cost of an audit is made up for in 
interest rate savings on bank loans); Denlinger Letter 2 (the market 
will evolve for small issuers such that audit costs may be in the 
range of $2,000-$4,000); FundHub Letter 2 (noting the emergence of 
CPA firms willing to do a complete audit for a startup business for 
$2,500 or less); Holm Letter (stating that new providers are 
offering compliance services at much lower costs than anticipated); 
JumperCard Letter; Kemp Letter; Leverage PR Letter; Sfinarolakis 
Letter; StartEngine Letter 1 (noting that reviews and audits will be 
in the range of $1,500-$10,000 for smaller, newer companies); 
StartEngine Letter 2 (noting the emergence of third-party service 
providers); tempCFO Letter; Upchurch Letter (stating that the market 
will adjust for costs).
---------------------------------------------------------------------------

    Basis of Accounting. Commenters generally were divided on whether 
issuers relying on Section 4(a)(6) should be required to prepare 
financial statements in accordance with U.S. GAAP.\310\ Commenters in 
support of requiring U.S. GAAP noted the benefit to investors of having 
a single standard to facilitate comparison of different issuers,\311\ 
and also that U.S. GAAP would be more likely to provide investors with 
a fair representation of an issuer's financial position and results of 
operations than financial statements using a comprehensive basis of 
accounting other than U.S. GAAP.\312\
---------------------------------------------------------------------------

    \310\ For supporters, see, e.g., AICPA Letter (for offerings 
over $100,000); CFA Institute Letter; EY Letter (for offerings over 
$100,000 for only the most recent year); Hackers/Founders Letter; 
Heritage Letter (recommending for issuers with assets over $100,000, 
that if financial statements are not prepared in accordance with 
U.S. GAAP, the issuer be required to note any variance from U.S. 
GAAP and state the reason for such variance); NASAA Letter; 
RocketHub Letter; Whitaker Chalk Letter (for offerings over $500,000 
until such time as the Commission accepts IFRS for U.S. domestic 
issuers).
    For opponents, see, e.g., ABA Letter (noting that the benefits 
associated with GAAP-compliant financial statements do not outweigh 
the burdens that mandatory application of GAAP would impose); 
CrowdCheck Letter 4; EarlyShares Letter; Graves Letter (recommending 
that U.S. GAAP only be required for issuers with $5 million in 
revenue); Milken Institute Letter (recommending that U.S. GAAP only 
be required for issuers with $5 million in revenue, the threshold at 
which the IRS requires a switch to accrual accounting); Public 
Startup Letter 2; SBEC Letter (noting the AICPA's release of new 
guidelines in June 2013 for small and mid-size businesses); Tiny Cat 
Letter; U.S. Chamber of Commerce Letter; Wilson Letter (recommending 
that the Commission consider the stage of the business in 
determining whether to require compliance with U.S. GAAP); Zhang 
Letter.
    \311\ See, e.g., NASAA Letter.
    \312\ See, e.g., EY Letter.
---------------------------------------------------------------------------

    A number of commenters recommended that, as a less expensive 
alternative to requiring U.S. GAAP, the Commission allow financial 
statements prepared in accordance with a comprehensive basis of 
accounting other than U.S. GAAP.\313\ Other commenters recommended that 
if financial statements prepared in accordance with U.S. GAAP are 
required, they only be required in certain circumstances.\314\
---------------------------------------------------------------------------

    \313\ See, e.g., ABA Letter (for offerings of $100,000 or less, 
but stating that the Commission could require providing U.S. GAAP 
financial statements if available); AICPA Letter; CFIRA Letter 5; 
CFIRA Letter 7; CrowdCheck Letter 4; EarlyShares Letter; EY Letter 
(for offerings of $100,000 or less, unless U.S. GAAP financial 
statements are available); Grassi Letter; Graves Letter (for issuers 
with less than $5 million in revenue); Mahurin Letter (stating that 
simple Excel spreadsheets accompanied by bank records should meet 
the financial statement requirements); Milken Institute Letter (for 
early-stage issuers); NFIB Letter; SBEC Letter; StartupValley 
Letter; Tiny Cat Letter (for offerings of less than $500,000); 
Whitaker Chalk Letter (for offerings of less than $500,000 if the 
issuer has an asset or income level below a certain level).
    \314\ See, e.g., ABA Letter (suggesting that: (i) In offerings 
of $100,000 or less, the certifying principal executive officer 
could be required to represent that the issuer is unable to prepare 
financial statements in accordance with U.S. GAAP without 
unreasonable effort or expense; (ii) in offerings of more than 
$100,000, but not more than $500,000, the exception could also 
require the principal executive officer representation and be 
limited to issuers that have not prepared U.S. GAAP-compliant 
financial statements for any other purpose and who have no operating 
history, no revenues and/or a minimal amount of assets (e.g., 
$500,000); and (iii) in offerings of more than $500,000, the 
exception could require the principal executive officer 
representation, including a representation that the other 
comprehensive basis of accounting methodology selected is acceptable 
under AICPA standards, and be limited to issuers with no operating 
history or revenue and minimal assets).
---------------------------------------------------------------------------

    A few commenters recommended that issuers relying on Section 
4(a)(6) be permitted to take advantage of the extended transition 
period applicable to private companies for complying with new or 
revised accounting standards.\315\ A few commenters expressed concern 
that Section 4(a)(6) issuers may be viewed as ``public business 
entities'' by FASB.\316\ One commenter recommended that the Commission 
provide an exemption from this definition for such issuers.\317\
---------------------------------------------------------------------------

    \315\ See, e.g., EY Letter; U.S. Chamber of Commerce Letter.
    \316\ See, e.g., ABA Letter; EY Letter (noting also the 
definition of ``public entity'' under the Accounting Standards 
Codification).
    \317\ See EY Letter.
---------------------------------------------------------------------------

    Periods Covered in the Financial Statements. While two commenters 
generally supported requiring two years of financial statements,\318\ a 
number of commenters generally opposed the proposal, recommending one 
year of financial statements instead.\319\ Many commenters opposed 
requiring interim financial statements,\320\ while several supported 
such a requirement.\321\ Several commenters recommended that if interim 
financial statements are required, they not be subject to audit or 
review,\322\ while another commenter recommended that they not be filed 
with the Commission, but only be provided to investors.\323\
---------------------------------------------------------------------------

    \318\ See ASSOB Letter; Zeman Letter.
    \319\ See, e.g., Denlinger Letter 1; EY Letter; Grassi Letter; 
Joinvestor Letter; Public Startup Letter 2; RFPIA Letter (as it 
relates to audited financial statements); RocketHub Letter; Verrill 
Dana Letter.
    \320\ See, e.g., CFIRA Letter 7; EMKF Letter; EY Letter; FundHub 
Letter 1; Grassi Letter; Public Startup Letter 2; RocketHub Letter; 
Traklight Letter; Wefunder Letter; Whitaker Chalk Letter.
    \321\ See, e.g., AICPA Letter; Consumer Federation Letter 
(recommending supplementing the proposed financial statement 
requirements with unaudited CEO-certified financial statements 
through the end of the month ending no more than two months before 
the offering begins); Denlinger Letter 1 (recommending quarterly 
basic financial reporting, including a balance sheet, income 
statement and statement of cash flows); Fund Democracy Letter.
    \322\ See, e.g., CFIRA Letter 7; Consumer Federation Letter; 
Denlinger Letter 1; Fund Democracy Letter; Traklight Letter.
    \323\ See, RocketHub Letter.
---------------------------------------------------------------------------

    Age of Financial Statements. Several commenters opposed our 
proposal that financial statements be dated within 120 days of the 
start of the offering,\324\ while one commenter supported it.\325\ Some 
commenters opposed our proposal to permit an issuer, during the first 
120 days of the issuer's fiscal year, to conduct an offering in 
reliance on Section 4(a)(6) using financial statements for the fiscal 
year prior to the

[[Page 71411]]

most recently completed fiscal year,\326\ while two others supported 
such accommodation.\327\ One commenter recommended that, to provide 
``truly current financials'' for large offerings, the Commission could 
require unaudited financial statements through the end of the month 
that ends no more than two months before the month in which the 
offering begins (e.g., an offering any day in March would require 
financials up to January 31); for smaller offerings, the commenter 
indicated a modified standard for providing current information might 
be appropriate.\328\
---------------------------------------------------------------------------

    \324\ See, e.g., Grassi Letter; Public Startup Letter 2; 
RocketHub Letter.
    \325\ See Denlinger Letter 1.
    \326\ See, e.g., Consumer Federation Letter (stating that the 
proposal allows for the provision of stale and limited financial 
information because it ``would allow issuers to submit financial 
statements that are more than a year out of date and that cover only 
a very limited portion of the issuer's existence.''); EY Letter 
(recommending this time period be extended to 180 days if an issuer 
presents interim financial statements certified by the principal 
executive officer that cover the first six months of the issuer's 
most recently completed fiscal year); Fund Democracy Letter (noting 
that financial statements could be 16-months stale); Merkley Letter 
(recommending that the Commission not permit financial statements 
``to be so thoroughly out of date''); Public Startup Letter 2.
    \327\ See, e.g., Grassi Letter (noting that the material change 
disclosure requirements should be sufficient to keep investors 
updated); RocketHub Letter.
    \328\ See Fund Democracy Letter.
---------------------------------------------------------------------------

    Public Accountant Requirements. We received several comments on 
standards for audit firms.\329\ Commenters supported not requiring 
audits to be conducted by a PCAOB-registered firm.\330\ Some commenters 
supported our proposal to require the public accountant reviewing or 
auditing an issuer's financial statements to comply with the 
independence requirements set forth in Rule 2-01 of Regulation S-
X,\331\ while other commenters recommended allowing the public 
accountant to comply by meeting the independence requirements of the 
AICPA.\332\ Some commenters noted that many startups and early-stage 
small businesses require assistance in the preparation of financial 
statements, and that complying with the independence standards of 
Regulation S-X would require such issuers to engage two external 
accountants--one to assist in preparing the financial statements and 
another to audit or review them.\333\ One commenter asked the 
Commission not to create new independence standards.\334\
---------------------------------------------------------------------------

    \329\ See, e.g., Grassi Letter (recommending no audit be 
accepted that has been performed by a firm that is not subject to, 
or that has received a fail report under, the AICPA peer review 
standards); ASSOB Letter (recommending the rules not place 
restrictions on the type of accountant an issuer is required to use 
to review or audit its financial statements); Multistate Tax Letter 
(an issuer should not be required to obtain accounting services).
    \330\ See, e.g., AICPA Letter; ASSOB Letter (recommending the 
rules not place restrictions on the type of accountant an issuer is 
required to use to review or audit its financial statements); 
Denlinger Letter 1; Funderbuddies Letter; EY Letter; Grassi Letter; 
Heritage Letter; Multistate Tax Letter (an issuer should not be 
required to obtain accounting services); Public Startup Letter 2; 
RocketHub Letter; Traklight Letter. See also RFPIA Letter 
(recommending the public accountants conducting an audit be required 
to be members of the AICPA or the PCAOB for one year.).
    \331\ See, e.g., ABA Letter; Commonwealth of Massachusetts 
Letter; RocketHub Letter.
    \332\ See, e.g., AICPA Letter; Denlinger Letter 1; EY Letter; 
Grassi Letter; McGladrey Letter.
    \333\ See, e.g., AICPA Letter; EY Letter; Grassi Letter.
    \334\ See AICPA Letter (recommending that the Commission not 
create new independence, review, or auditing standards or that the 
definition of ``a complete set of financial statements'' be 
different than under U.S. GAAP because doing so would result in 
confusion, further complexity and increased costs).
---------------------------------------------------------------------------

    Review and Audit Standards. With respect to review standards, 
commenters supported requiring reviewed financial statements to be 
reviewed in accordance with the SSARS issued by the AICPA.\335\ 
Commenters also opposed creating a new set of review standards.\336\
---------------------------------------------------------------------------

    \335\ See, e.g., ABA Letter; AICPA Letter; Denlinger Letter 1; 
EY Letter; Fund Democracy Letter; Grassi Letter. But see Public 
Startup Letter 2.
    \336\ See, e.g., AICPA Letter; Denlinger Letter 1; Grassi 
Letter; Traklight Letter.
---------------------------------------------------------------------------

    With respect to audit standards, several commenters supported our 
proposal to require that financial statements be audited in accordance 
with the auditing standards issued by either the AICPA or the 
PCAOB,\337\ while several others opposed it.\338\ Two commenters 
recommended that audits be required to be conducted in accordance with 
the auditing standards issued by the PCAOB.\339\ Commenters generally 
opposed creating a new set of audit standards,\340\ although one 
commenter recommended that if the Commission were to create a new set 
of audit standards, it ``should be designed as an ultra-low-cost 
procedure.'' \341\
---------------------------------------------------------------------------

    \337\ See, e.g. AICPA Letter; Denlinger Letter 1; EY Letter; 
Grassi Letter.
    \338\ See, e.g., Consumer Federation Letter; Fund Democracy 
Letter; Public Startup Letter 2; RocketHub Letter; Rucker Letter 
(stating that GAAS fit poorly with the kinds of businesses Title III 
is intended to accommodate).
    \339\ See Consumer Federation Letter; Fund Democracy Letter.
    \340\ See, e.g., AICPA Letter; Grassi Letter (recommending that 
the Commission require issuers to use the same standards used in the 
offering or higher standards, with the PCAOB standards deemed to be 
the higher standard, when complying with the ongoing reporting 
requirements); Heritage Letter; Traklight Letter.
    \341\ RocketHub Letter.
---------------------------------------------------------------------------

    Review and Audit Reports. With respect to review reports, two 
commenters supported our proposal that a review report that includes 
modifications would satisfy the reviewed financial statement 
requirement,\342\ while one commenter opposed it.\343\ With respect to 
audit reports, commenters supported our proposal that a qualified audit 
opinion would satisfy the audited financial statement 
requirements,\344\ although one commenter opposed it.\345\ One 
commenter requested clarification as to the requirements that may be 
applicable to the issuer and the public accountant when an issuer 
intends to include a previously issued audit or review report in an 
offering statement.\346\
---------------------------------------------------------------------------

    \342\ See AICPA Letter; Heritage Letter (for going concern 
opinions).
    \343\ See Grassi Letter.
    \344\ See, e.g., AICPA Letter; Arctic Island Letter 5 (noting 
that most small business audit opinions are likely to include a 
going concern clause); Denlinger Letter 1 (noting, however, that a 
going concern opinion is not a qualified opinion); EY Letter; 
Heritage Letter (noting that a majority of crowdfunding issuers 
should receive going concern opinions but should not be 
disqualified); RocketHub Letter; Traklight Letter (recommending that 
going concern opinions and noncompliance with U.S. GAAP should be 
allowed); Whitaker Chalk Letter.
    \345\ See Grassi Letter.
    \346\ See EY Letter.
---------------------------------------------------------------------------

    Exemptions from Financial Statement Requirements. While the 
proposed rules did not exempt any issuers from the financial statement 
requirements, a number of commenters recommended exempting issuers with 
no operating history or issuers that have been in existence for fewer 
than 12 months from the requirement to provide financial 
statements,\347\ although a few commenters opposed such a concept.\348\ 
A number of commenters recommended that if an exemption for such 
issuers is allowed, the exempted issuers should provide certain basic 
disclosures,\349\ and two commenters specifically recommended that if 
an exemption for such issuers is allowed, the exempted issuers should 
still provide a balance sheet.\350\
---------------------------------------------------------------------------

    \347\ See, e.g., Arctic Island Letter 5 (supporting only an 
exemption from the audit requirement); CFIRA Letter 5; CFIRA Letter 
7; CrowdFundConnect Letter; Crowdpassage Letter 2; EY Letter; Grassi 
Letter; Hackers/Founders Letter; Joinvestor Letter; McGladrey 
Letter; PBA Letter; PeoplePowerFund Letter; RocketHub Letter 
(recommending that the audit requirements should only apply to 
issuers that have been in operation for more than two years and are 
raising more than $5 million); StartupValley Letter (supporting an 
exemption from the audit requirements); Wefunder Letter; Whitaker 
Chalk Letter.
    \348\ See, e.g., AICPA Letter; Denlinger Letter 1; Wilson 
Letter.
    \349\ See, e.g., ASSOB Letter; CFIRA Letter 5; Denlinger Letter 
1; Grassi Letter; McGladrey Letter; PBA Letter; PeoplePowerFund 
Letter; RocketHub Letter; Wefunder Letter; Whitaker Chalk Letter; 
Zhang Letter.
    \350\ See EY Letter; PBA Letter.
---------------------------------------------------------------------------

(iii) Final Rules
    We are adopting financial disclosure requirements for Title III 
issuers in Rule

[[Page 71412]]

201(t) with a number of changes from the proposal. As described in more 
detail below, the final requirements are based on the amount offered 
and sold in reliance on Section 4(a)(6) within the preceding 12-month 
period, as follows:
     For issuers offering $100,000 or less: Disclosure of the 
amount of total income, taxable income and total tax as reflected in 
the issuer's federal income tax returns certified by the principal 
executive officer to reflect accurately the information in the issuer's 
federal income tax returns (in lieu of filing a copy of the tax 
returns), and financial statements certified by the principal executive 
officer to be true and complete in all material respects.\351\ If, 
however, financial statements of the issuer are available that have 
either been reviewed or audited by a public accountant that is 
independent of the issuer, the issuer must provide those financial 
statements instead and need not include the information reported on the 
federal income tax returns or the certification of the principal 
executive officer.
---------------------------------------------------------------------------

    \351\ See Rule 201(t)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     Issuers offering more than $100,000 but not more than 
$500,000: Financial statements reviewed by a public accountant that is 
independent of the issuer.\352\ If, however, financial statements of 
the issuer are available that have been audited by a public accountant 
that is independent of the issuer, the issuer must provide those 
financial statements instead and need not include the reviewed 
financial statements.
---------------------------------------------------------------------------

    \352\ See Rule 201(t)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     Issuers offering more than $500,000:
    [cir] For issuers offering more than $500,000 but not more than $1 
million of securities in reliance on Regulation Crowdfunding for the 
first time: Financial statements reviewed by a public accountant that 
is independent of the issuer. If, however, financial statements of the 
issuer are available that have been audited by a public accountant that 
is independent of the issuer, the issuer must provide those financial 
statements instead and need not include the reviewed financial 
statements.
    [cir] For issuers that have previously sold securities in reliance 
on Regulation Crowdfunding: Financial statements audited by a public 
accountant that is independent of the issuer.\353\
---------------------------------------------------------------------------

    \353\ See Rule 201(t)(3) of Regulation Crowdfunding. See also 
discussion below under ``Offerings of more than $500,000.''
---------------------------------------------------------------------------

    Content of Financial Statements. We are adopting substantially as 
proposed the requirement that all issuers file with the Commission and 
provide to investors and the relevant intermediary a complete set of 
their financial statements, which includes balance sheets, statements 
of comprehensive income, statements of cash flows, statements of 
changes in stockholders' equity and notes to the financial 
statements.\354\ In order to avoid potential confusion as to the 
presentation of financial statements, and consistent with Tier 1 
offerings under Regulation A,\355\ the final rule adds an instruction 
that financial statements that are not audited must be labeled as 
unaudited.\356\ Consistent with the proposal, the final rules do not 
exempt any issuers from the financial statement requirements. Although 
some commenters expressed concerns about the costs of the financial 
statement requirements for issuers with no operating history or issuers 
that have been in existence for fewer than 12 months,\357\ we believe 
that financial statements are important information for investors and 
that the changes from the proposed rules described below will help 
reduce the costs associated with preparing financial statements for 
many of those issuers.
---------------------------------------------------------------------------

    \354\ See Instruction 3 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \355\ See Paragraph (b) of Part F/S of Form 1-A.
    \356\ See Instruction 3 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \357\ See, e.g., Arctic Island Letter 5; CFIRA Letter 5; CFIRA 
Letter 7; CrowdFundConnect Letter; Crowdpassage Letter 2; EY Letter; 
Grassi Letter; Hackers/Founders Letter; Joinvestor Letter; McGladrey 
Letter; PBA Letter; PeoplePowerFund Letter; RocketHub Letter; 
StartupValley Letter; Wefunder Letter; Whitaker Chalk Letter. But 
see AICPA Letter; Denlinger Letter 1; Wilson Letter.
---------------------------------------------------------------------------

    The final rule also includes an instruction to clarify that 
references to the issuer in Rule 201(t) refer to the issuer and its 
predecessors, if any.
    Offerings of $100,000 or less. Consistent with Securities Act 
Section 4A(b)(1)(D)(i), we are adopting as proposed the requirement in 
Rule 201(t)(1) that an issuer offering $100,000 or less provide 
financial statements of the issuer that are certified by the principal 
executive officer of the issuer to be true and complete in all material 
respects.\358\ While we believe it will be beneficial for investors to 
have an independent accountant review financial statements in offerings 
over $100,000, we believe that for offerings of $100,000 or less this 
certification is sufficient and will contribute to the integrity of the 
issuer's financial reporting process. It will affirm for investors 
that, although the financial statements have not been reviewed or 
audited by an independent public accountant, there has been senior 
executive attention paid to the financial statements. We are not 
requiring this certification for reviewed or audited financial 
statements, as some commenters suggested, because we believe the 
certification is intended as an added measure of assurance that is not 
needed in offerings of this size when an independent accountant reviews 
or audits the financial statements. We also are adopting the form of 
the certification that must be provided by the issuer's principal 
executive officer as proposed with one change relating to the 
information from the issuer's tax return.\359\
---------------------------------------------------------------------------

    \358\ See Rule 201(t)(1) of Regulation Crowdfunding.
    \359\ See Instruction 7 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    Instead of mandating that issuers offering $100,000 or less provide 
copies of their federal income tax returns as proposed, the final rules 
require an issuer to disclose the amount of total income, taxable 
income and total tax, or the equivalent line items from the applicable 
form, exactly as reflected in its filed federal income tax returns, and 
to have the principal executive officer certify that those amounts 
reflect accurately the information in the issuer's federal income tax 
returns.\360\ As noted by commenters,\361\ requiring that issuers 
provide tax returns may present a significant risk of disclosure of 
private information. While the proposed rule would require personally 
identifiable information to be redacted, we are persuaded by commenters 
that such a requirement might not provide an adequate safeguard against 
inadvertent disclosure of this type of information in some instances. 
The consequences for an issuer and an intermediary of such disclosure, 
including the potential violation of applicable privacy laws, could be 
severe. Specifying the information from the tax return that is required 
without requiring submission of the tax return itself will provide 
standardized disclosure for investors and help protect against the 
accidental disclosure of personally identifiable or confidential 
information. Requiring that these amounts be certified by the principal 
executive officer will provide investors additional assurance of the 
accuracy of those amounts in lieu of providing the underlying tax 
returns.\362\ At the same

[[Page 71413]]

time, because the principal executive officer will be certifying only 
that the amounts are as reported on the applicable income tax return, 
we do not expect this requirement to impose any significant new burdens 
on principal executive officers, who will already be certifying as to 
the truth and completeness of the financial statements themselves. We 
believe the alternative approach we are adopting provides a similar 
benefit to investors as the proposal while addressing the privacy 
concerns raised by commenters.
---------------------------------------------------------------------------

    \360\ See Rule 201(t)(1) of Regulation Crowdfunding.
    \361\ See, e.g., AICPA Letter; Public Startup Letter 2; 
RocketHub Letter; SBM Letter; Wilson Letter; Zhang Letter.
    \362\ We note that any intentional misstatements or omissions of 
facts may constitute federal criminal violations by the certifying 
principal executive officer. See 18 U.S.C. 1001.
---------------------------------------------------------------------------

    As we stated in the Proposing Release, it remains unclear to us to 
what extent all of the information presented in a tax return would be 
useful for an investor evaluating whether to purchase securities from 
the issuer. We believe, however, that certain information such as total 
income, taxable income and total tax could be informative and would 
likely be available to the issuer in tax documentation. The final 
rules, therefore, provide that an issuer must disclose its total 
income, taxable income and total tax, or the equivalent line items from 
its federal income tax documentation and have the principal executive 
officer certify that those amounts reflect accurately the information 
in the issuer's federal income tax returns.\363\
---------------------------------------------------------------------------

    \363\ See Rule 201(t)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Under the final rules, an issuer that offers securities in reliance 
on Section 4(a)(6) before filing its tax return for the most recently 
completed fiscal year will be allowed to use information from the tax 
return filed for the prior year. An issuer that uses information from 
the prior year's tax return will be required to provide tax return 
information for the most recently completed fiscal year when filed with 
the U.S. Internal Revenue Service (if the tax return is filed during 
the offering period). An issuer that has requested an extension from 
the U.S. Internal Revenue Service would not be required to provide the 
information until the date when the return is filed, which is 
consistent with the concept of not requiring tax information until that 
information has been filed with the U.S. Internal Revenue Service. If 
an issuer has not yet filed a tax return and is not required to file a 
tax return before the end of the offering period, then the tax return 
information does not need to be provided.\364\
---------------------------------------------------------------------------

    \364\ See Instruction 6 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    We are adding to Rule 201(t)(1) a requirement that if financial 
statements of the issuer are available that have either been reviewed 
or audited by a public accountant that is independent of the issuer, 
the issuer must provide those financial statements instead, and need 
not include the information reported on the federal income tax returns 
or the certification of the principal executive officer.\365\ This 
approach was suggested by two commenters,\366\ and we believe it will 
benefit investors by providing access to audited or reviewed financial 
statements that were already prepared for other purposes. Unlike audit 
reports in a registered offering,\367\ we are not requiring that review 
or audit reports be accompanied by a formal consent or acknowledgment 
letter. Rather, the final rules clarify that review and audit reports 
must be signed and that the issuers must notify the public accountants 
of their intended use in an offering in reliance on Section 
4(a)(6).\368\
---------------------------------------------------------------------------

    \365\ See Rule 201(t)(1) of Regulation Crowdfunding.
    \366\ See Angel Letter 1; EY letter.
    \367\ See Securities Act Rule 436; Item 601 of Regulation S-K.
    \368\ See Instructions 8 and 9 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    Offerings of more than $100,000 but not more than $500,000. 
Consistent with Section 4A(b)(1)(D)(iii) and the proposed rules, 
issuers must file and provide reviewed financial statements when 
offering more than $100,000 but not more than $500,000.\369\ Similar to 
the addition to Rule 201(t)(1) discussed above, we have added to Rule 
201(t)(2) a requirement that if financial statements of the issuer are 
available that have been audited by a public accountant that is 
independent of the issuer, the issuer must provide those financial 
statements instead.\370\ The approach of providing audited financial 
statements that are otherwise available is consistent with what the 
Commission adopted for issuers undertaking Tier 1 offerings under 
Regulation A.\371\ We believe the benefits to investors of having 
access to these audited financial statements justify any additional 
burden imposed on issuers to provide these statements, which were 
already prepared for other purposes.
---------------------------------------------------------------------------

    \369\ See Rule 201(t)(2) of Regulation Crowdfunding.
    \370\ Id.
    \371\ See Paragraph (b) of Part F/S of Form 1-A. While 
Regulation Crowdfunding incorporates a number of requirements that 
are consistent with Regulation A, it is important to note that 
Regulation Crowdfunding and Regulation A are different exemptions 
with distinct requirements. For example, unlike offerings under 
Regulation Crowdfunding, Tier 1 offerings under Regulation A are 
subject to state registration requirements and are required to be 
``qualified'' by Commission staff.
---------------------------------------------------------------------------

    Offerings of more than $500,000. As proposed, Rule 201(t)(3) 
provides that issuers offering more than $500,000 are required to 
provide audited financial statements. In a change from the proposal, 
the final rule includes an accommodation for issuers offering more than 
$500,000 but not more than $1 million that have not previously sold 
securities in reliance on Section 4(a)(6).\372\ Under Rule 201(t)(3), 
those first-time issuers are permitted to provide reviewed rather than 
audited financial statements, unless audited financial statements are 
otherwise available.
---------------------------------------------------------------------------

    \372\ For purposes of determining whether an issuer has 
previously sold securities in reliance on Section 4(a)(6), 
``issuer'' includes all entities controlled by or under common 
control with the issuer and any predecessors of the issuer. See Rule 
100(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We are adding this accommodation for first-time issuers in response 
to commenters' concerns about the expense of obtaining audited 
financial statements. While some commenters expressed support for the 
proposed audit requirement,\373\ many others noted that the proposed 
audit requirement would be too costly and burdensome for issuers in 
comparison to the size of the offering proceeds.\374\ A number of 
commenters expressed particular concern that issuers would need to 
incur the expense of an audit before having proceeds or even an 
assurance of proceeds from the offering.\375\ After considering the 
comments, we are persuaded that for issuers undertaking a first-time 
crowdfunding offering of more than $500,000 but not more than $1 
million, the benefits of requiring audited financial statements are not 
likely to justify the costs. Accordingly, consistent with applicable 
standards,\376\ for these first-time issuers, we are adopting instead a 
requirement that those selling securities in reliance on Section 
4(a)(6) in these circumstances

[[Page 71414]]

provide reviewed financial statements. Commenters stated that reviewed 
financial statements would cost less than audited financial 
statements,\377\ and one commenter noted that the cost of an accounting 
review is approximately 60% of the cost of an audit.\378\
---------------------------------------------------------------------------

    \373\ See, e.g., AICPA Letter; Consumer Federation Letter; CSTTC 
Letter; Denlinger Letter 2; FundDemocracy Letter; Leverage PR; NASAA 
Letter; StartEngine Letter 1.
    \374\ See, e.g., AEO Letter; Angel Letter 1; AWBC Letter; CFIRA 
Letter 5; CfPA Letter; CrowdFundConnect Letter; EarlyShares Letter; 
EMKF Letter; EY Letter; Finkelstein Letter; FundHub Letter 1; 
Generation Enterprise Letter; Grassi Letter; Graves Letter; Guzik 
Letter 1; Hakanson Letter; Holland Letter; Johnston Letter; 
Kickstarter Coaching Letter; McGladrey Letter; Milken Institute 
Letter; NACVA Letter; NFIB Letter; NPCM Letter; NSBA Letter; PBA 
Letter; Reed Letter; RocketHub Letter; Saunders Letter; SBA Office 
of Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth Letter; 
Verrill Dana Letter; WealthForge Letter; Wefunder Letter; Woods 
Letter; Zeman Letter.
    \375\ See, e.g., AEO Letter; AWBC Letter; CFIRA Letter 5; CfPA 
Letter; EMKF Letter; Generation Enterprise Letter; Grassi Letter; 
Graves Letter; Holland Letter; McGladrey Letter; NSBA Letter; Reed 
Letter; RocketHub Letter; SBM Letter; Seyfarth Letter; WealthForge 
Letter; Wefunder Letter.
    \376\ See Securities Act Section 28 [15 U.S.C. 77z-3].
    \377\ See, e.g., Crowdcheck Letter 4; CfPA Letter (noting that 
many offerings made in reliance on Rule 506 that involve companies 
further along in their business development include reviewed but not 
audited financial statements); Graves Letter (discussing the 
``thorough'' nature of a CPA review and the cost differential 
between reviewed and audited financial statements); NFIB Letter; 
Traklight Letter.
    \378\ See Traklight Letter.
---------------------------------------------------------------------------

    Basis of Accounting. We are adopting as proposed the requirement 
that all issuers provide financial statements prepared in accordance 
with U.S. GAAP.\379\ As discussed in the Proposing Release, financial 
statements prepared in accordance with U.S. GAAP are generally self-
scaling to the size and complexity of the issuer, which we believe can 
reduce the costs 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. Although we acknowledge, as some 
commenters observed, that other bases of accounting may be less 
expensive than U.S. GAAP, we believe the benefit of a single standard 
that will facilitate comparison among issuers relying on Section 
4(a)(6) justifies any incremental expenses associated with U.S. GAAP. 
In addition, we are concerned that it may be difficult for investors to 
determine whether the issuer complied with another comprehensive basis 
of accounting. For these reasons, we continue to believe that financial 
statements prepared in accordance with U.S. GAAP will be the most 
useful for investors in securities-based crowdfunding transactions, 
particularly when presented along with the required description of the 
issuer's financial condition.\380\
---------------------------------------------------------------------------

    \379\ See Instruction 3 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \380\ See Rule 201(s) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Additionally, as suggested by one commenter,\381\ in order to be 
consistent with the treatment of emerging growth companies \382\ and 
offerings relying on Regulation A,\383\ Rule 201(t) permits issuers, 
where applicable, to delay the implementation of new accounting 
standards to the extent such standards provide for delayed 
implementation by non-public business entities.\384\ In this regard, if 
the issuer chooses to take advantage of this extended transition 
period, the issuer:
---------------------------------------------------------------------------

    \381\ See EY Letter.
    \382\ See Securities Act of 1933 Section 7(a)(2)(B) [15 U.S.C. 
77g(a)(2)(B)].
    \383\ See paragraph (a)(3) of Part F/S of Form 1-A.
    \384\ See Instruction 5 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

     Must disclose such choice at the time the issuer files the 
offering statement; and
     May not take advantage of the extended transition period 
for some standards and not others, but must apply the same choice to 
all standards.
    However, consistent with the treatment of emerging growth companies 
and offerings relying on Regulation A,\385\ issuers electing not to use 
this accommodation must forgo this accommodation for all financial 
accounting standards and may not elect to rely on this accommodation in 
any future filings.\386\
---------------------------------------------------------------------------

    \385\ See paragraph (a)(3) of Part F/S of Form 1-A. See also 
JOBS Act, Section 107(b)(1) and (3).
    \386\ See Instruction 5 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    On December 23, 2013, after we proposed rules for Regulation 
Crowdfunding, the Financial Accounting Standards Board (FASB) and 
Private Company Council (PCC) issued a guide for evaluating financial 
accounting and reporting for non-public business entities.\387\ The PCC 
was created in 2012 by the FASB and the Financial Accounting Foundation 
to improve the standard-setting process, and provide for accounting and 
reporting alternatives, for non-public business entities under U.S. 
GAAP.\388\ As the standards for non-public business entities are new, 
there are currently very few distinctions between U.S. GAAP for public 
and non-public business entities. Over time, however, more distinctions 
between non-public business entity and public company accounting 
standards could develop.
---------------------------------------------------------------------------

    \387\ The Private Company Decision-Making Framework: A Guide for 
Evaluating Financial Accounting and Reporting for Private Companies 
(the ``PCC Guide''), available at: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176163703583.
    \388\ For a brief history behind the creation of the PCC, see: 
http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1351027243391.
---------------------------------------------------------------------------

    Issuers that offer securities pursuant to Regulation Crowdfunding 
will be considered ``public business entities'' as defined by the FASB 
\389\ and, therefore, ineligible to rely on any alternative accounting 
or reporting standards for non-public business entities.\390\ Even 
though issuers of securities in a Regulation Crowdfunding offering fit 
within the definition of ``public business entity,'' the Commission 
retains the authority to determine whether or not such issuers would be 
permitted to rely on the developing non-public business entity 
standards.\391\ Commenters generally expressed concern about the costs 
associated with requiring issuers relying on Section 4(a)(6) to follow 
public company U.S. GAAP accounting standards.\392\
---------------------------------------------------------------------------

    \389\ Criterion (a) of FASB's Accounting Standards Update 2013-
12, Definition of a Public Business Entity, states that an entity 
that ``is required by the U.S. Securities and Exchange Commission 
(SEC) to file or furnish financial statements, or does file or 
furnish financial statements (including voluntary filers), with the 
SEC (including other entities whose financial statements or 
financial information are required to be or are included in a 
filing)'' is a Public Business Entity.
    \390\ See numbered paragraph 12 of the PCC Guide, p. 3.
    \391\ Id.
    \392\ See, e.g., ABA Letter; CFIRA Letter 5; Grassi; EY Letter; 
U.S. Chamber of Commerce Letter.
---------------------------------------------------------------------------

    The final rules do not allow Regulation Crowdfunding issuers to use 
the alternatives available to non-public business entities under U.S. 
GAAP in the preparation of their financial statements. One of the 
significant factors considered by the FASB in developing its definition 
of ``public business entity'' was the number of primary users of the 
financial statements and their access to management.\393\ As the FASB 
noted, ``users of private company financial statements have continuous 
access to management and the ability to obtain financial information 
throughout the year.'' \394\ As the number of investors increases and 
their ability individually to influence management decreases, it is 
important that all investors receive or have timely access to 
comprehensive financial information. As a result, although commenters 
generally expressed concern about the costs associated with requiring 
issuers relying on Section 4(a)(6) to follow public company U.S. GAAP 
accounting standards,\395\ because crowdfunding investors will likely 
not have the access to management that the FASB envisions, the 
Commission believes that investor protection will be enhanced by 
requiring Regulation Crowdfunding issuers to provide financial 
statements prepared in the same manner as other entities meeting the 
FASB's definition of ``public business entity.''
---------------------------------------------------------------------------

    \393\ See PCC Guide, p. 6.
    \394\ Id.
    \395\ See, e.g., ABA Letter; CFIRA Letter 5; Grassi; EY Letter; 
U.S. Chamber of Commerce Letter.
---------------------------------------------------------------------------

    Periods Covered in the Financial Statements. We are adopting 
substantially as proposed the requirement that financial statements 
cover the shorter of the two most recently completed fiscal years or 
the

[[Page 71415]]

period since the issuer's inception.\396\ While a number of commenters 
recommended only one year of financial statements,\397\ 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 costs for the issuer.
---------------------------------------------------------------------------

    \396\ See Instruction 3 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \397\ See, e.g., Denlinger Letter 1; EY Letter; Fryer Letter; 
Grassi Letter; Joinvestor Letter; Public Startup Letter 2; RFPIA 
Letter; RocketHub Letter. But see, e.g., ASSOB Letter; Zeman Letter.
---------------------------------------------------------------------------

    In addition, consistent with the proposal and with the views of 
many commenters,\398\ the final rules do not require interim financial 
statements. While we recognize the needs of investors for current 
financial information, we are also cognizant of the anticipated costs 
of obtaining interim financial statements. We believe that the required 
discussion of any material changes or trends known to management in the 
financial condition and results of operations of the issuer since the 
period for which financial statements are provided will help provide 
investors with the necessary information.\399\
---------------------------------------------------------------------------

    \398\ See, e.g., CFIRA Letter 7; EMKF Letter; EY Letter; FundHub 
Letter 1; Grassi Letter; Public Startup Letter 2; RocketHub Letter; 
Traklight Letter; Wefunder Letter; Whitaker Chalk Letter.
    \399\ See Instruction 1 to paragraph (s) of Rule 201 of 
Regulation Crowdfunding.
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    Age of Financial Statements. We are adopting substantially as 
proposed rules providing that during the first 120 days of the issuer's 
fiscal year, an issuer may 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 if the financial statements for the 
most recently completed fiscal year are not otherwise available.\400\ 
For example, if an issuer that has a calendar fiscal year end conducts 
an offering in April 2016, it would be permitted to include financial 
statements for the fiscal year ended December 31, 2014 if the financial 
statements for the fiscal year ended December 31, 2015 are not yet 
available. Once more than 120 days have passed since the end of the 
issuer's most recently completed fiscal year, the issuer would be 
required to include financial statements for its most recently 
completed fiscal year.\401\ Regardless of the age of the financial 
statements, an issuer would be required to include in the narrative 
discussion of its financial condition a discussion of any material 
changes or trends known to management in the financial condition and 
results of operations of the issuer during any time period subsequent 
to the period for which financial statements are provided to inform 
investors of more recent developments.\402\
---------------------------------------------------------------------------

    \400\ See Instruction 4 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding. The final rule incorporates instructions 
consistent with other SEC rules explaining that if the 120th day 
falls on a Saturday, Sunday, or holiday, the next business day shall 
be considered the 120th day.
    \401\ Id.
    \402\ See Rule 201(s) of Regulation Crowdfunding and Instruction 
1 to paragraph (s) of Rule 201.
---------------------------------------------------------------------------

    While some commenters expressed concern that this accommodation 
would not provide investors with sufficiently current financial 
information,\403\ we believe that this risk will be mitigated by the 
requirement that the issuer include a narrative discussion of any 
material changes or trends known to management in the financial 
condition and results of operations during any time period subsequent 
to the period for which financial statements are provided.\404\ 
Further, we believe this accommodation is needed because otherwise 
issuers would not be able to conduct offerings for a period of time 
between the end of their fiscal year and the date when the financial 
statements for that period are available.
---------------------------------------------------------------------------

    \403\ See, e.g., Consumer Federation Letter; Fund Democracy 
Letter; Merkley Letter.
    \404\ See Rule 201(s) of Regulation Crowdfunding and instruction 
1 to paragraph(s) of Rule 201.
---------------------------------------------------------------------------

    We are not adopting the alternative proposed by one commenter to 
require unaudited financial statements through the end of the month 
that ends no more than two months before the month in which the 
offering began.\405\ Such a requirement would require an issuer to 
prepare a set of financial statements at a time when it would not 
otherwise be doing so and would be a more onerous requirement than 
applies to registered or Regulation A offerings.\406\
---------------------------------------------------------------------------

    \405\ See Fund Democracy Letter.
    \406\ See Rule 3-12(a) of Regulation S-X [17 CFR 210.3-12(a)] 
(requires that the latest balance sheet be as of a date no more than 
134 days for non-accelerated filers (or 129 days for accelerated and 
large accelerated filers) before the effective date of a 
registration statement (or date a proxy statement is mailed)); 
Paragraph (b) of Part F/S of Form 1-A (Tier 1 and Tier 2 issuers are 
required to include financial statements in Form 1-A that are dated 
not more than nine months before the date of non-public submission, 
filing, or qualification, with the most recent annual or interim 
balance sheet not older than nine months).
---------------------------------------------------------------------------

    Public Accountant Requirements. In a change from proposed Rule 
201(t), in response to commenters' suggestions, the final rules provide 
that to qualify as independent of the issuer, a public accountant would 
be required to either: (1) Comply with the Commission's independence 
rules, which are set forth in Rule 2-01 of Regulation S-X,\407\ or (2) 
comply with the independence standards of the AICPA.\408\ Allowing the 
AICPA independence standards as an alternative to the Commission's 
independence standards is consistent with the recommendations of a 
number of commenters \409\ and the treatment of Tier 1 issuers under 
Regulation A.\410\ We believe that providing issuers with this 
flexibility is appropriate in light of the potential costs to issuers 
that would otherwise be required to engage an accountant who was 
independent under Rule 2-01 of Regulation S-X.
---------------------------------------------------------------------------

    \407\ 17 CFR 210.2-01.
    \408\ See Instruction 9 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \409\ See, e.g., AICPA Letter; Denlinger Letter 1; EY Letter; 
Grassi Letter; McGladrey Letter.
    \410\ See Paragraph (b)(2) of Part F/S of Form 1-A. See also, 
supra, note 371.
---------------------------------------------------------------------------

    Consistent with the recommendation of one commenter,\411\ in 
addition to meeting the independence standards of Rule 2-01 of 
Regulation S-X or the AICPA, we are requiring that a public accountant 
that audits or reviews the financial statements provided by an issuer 
must meet the standards for public accountants of Rule 2-01(a) of 
Regulation S-X. The Commission will 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.\412\ We believe these 
standards will promote 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).
---------------------------------------------------------------------------

    \411\ See AICPA Letter.
    \412\ See 17 CFR 210.2-01(a).
---------------------------------------------------------------------------

    Consistent with the proposal and recommendations in response to our 
request for comments, we are not requiring audits to be conducted by a 
PCAOB-registered firm. We believe the final rules will result in a 
greater number of public accountants being eligible to audit the 
issuers' financial statements, which may reduce issuers' costs.
    Review and Audit Standards. In line with the general support 
received from commenters,\413\ we are adopting as proposed the 
requirement that reviewed financial statements be reviewed in 
accordance with the SSARS issued by

[[Page 71416]]

the AICPA.\414\ We also are adopting as proposed the requirement that 
audited financial statements, to the extent they are otherwise 
available, be audited in accordance with either the auditing standards 
of the AICPA (referred to as U.S. Generally Accepted Auditing Standards 
or GAAS) or the standards of the PCAOB.\415\ We expect that this 
provision will provide issuers with more flexibility to file audited 
financial statements that may have been prepared for other purposes.
---------------------------------------------------------------------------

    \413\ See, e.g., ABA Letter; AICPA Letter; Denlinger Letter 1; 
EY Letter; Fund Democracy Letter; Grassi Letter.
    \414\ See Instruction 8 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \415\ See Instruction 9 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that audits conducted in accordance with U.S. GAAS will 
provide sufficient protection for investors in these offerings, 
especially in light of the requirement that auditors must be 
independent under Rule 2-01 of Regulation S-X or AICPA independence 
standards. Moreover, we believe that the flexibility adopted in the 
final rules is appropriately tailored for the different types of 
issuers that are likely to conduct offerings under Regulation 
Crowdfunding.
    Because issuers under Regulation Crowdfunding are not ``issuers'' 
as defined by Section 2(a)(7) of the Sarbanes-Oxley Act of 2002 nor 
broker-dealers registered with the Commission under Section 15(b) of 
the Securities Exchange Act of 1934, AICPA rules would require the 
audit to be compliant with U.S. GAAS even if the auditor has conducted 
the audit in accordance with PCAOB standards. Staff of the Commission 
consulted with the AICPA on this issue and has been advised that an 
audit performed by its members of an issuer conducting an offering 
under Regulation Crowdfunding would be required to comply with U.S. 
GAAS in accordance with the AICPA's Code of Professional Conduct.\416\ 
As a result, an auditor for such an issuer who is conducting its audit 
in accordance with PCAOB standards also will be required to comply with 
U.S. GAAS, and the auditor will be required to comply with the 
reporting requirements of both the AICPA standards and the PCAOB 
standards. Commission staff also consulted with the AICPA on whether an 
auditor can currently comply with both sets of standards when issuing 
its auditor's report. In August 2015, the Auditing Standards Board of 
the AICPA proposed an amendment \417\ to its auditing standards for 
situations when the auditor plans to refer to the standards of the 
PCAOB in addition to U.S. GAAS in the auditor's report. To comply with 
the reporting requirements of both sets of standards in those 
situations, the proposed amendment would require the auditor to use the 
report layout and wording specified by the auditing standards of the 
PCAOB, amended to indicate that the audit was also conducted in 
accordance with U.S. GAAS.
---------------------------------------------------------------------------

    \416\ The AICPA Code of Professional Conduct is available at: 
http://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf.
    \417\ Proposed Statement on Auditing Standards, Amendment to 
Statement on Auditing Standards No. 122, Statement on Auditing 
Standards: Clarification and Recodification, section 700, Forming an 
Opinion and Reporting on Financial Statements. The proposed 
amendment would be effective for audits of financial statements for 
periods ending on or after December 15, 2015.
---------------------------------------------------------------------------

    Review and Audit Reports. We are adopting, with changes from the 
proposal, the requirement that issuers file with the Commission and 
provide to investors and the relevant intermediary a signed review or 
audit report on the issuer's financial statements by an independent 
public accountant.\418\ The issuer must notify the public accountant of 
the issuer's intended use of the report in the offering.\419\
---------------------------------------------------------------------------

    \418\ See Instructions 8 and 9 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \419\ Id.
---------------------------------------------------------------------------

    We are adopting as proposed the provision that an audit report that 
includes an adverse opinion or disclaimer of opinion will not be in 
compliance with the audited financial statement requirements.\420\ In a 
change from the proposal, as suggested by one commenter,\421\ the final 
rules do not permit a qualified audit report.\422\ As noted above, 
under the final rules an issuer is not required to provide audited 
financial statements for first-time crowdfunding offerings of more than 
$500,000 but not more than $1 million unless otherwise available. We 
believe that this change reduces the cost and burden for issuers 
generally of providing audited financial statements, and that an 
accommodation to permit qualified audit reports is not necessary.
---------------------------------------------------------------------------

    \420\ See Instruction 9 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \421\ See Grassi Letter.
    \422\ See Instruction 9 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding. Accordingly, a qualified audit opinion 
would not be considered an audit opinion that is ``available'' for 
purposes of Rule 201(t) and 202(a).
---------------------------------------------------------------------------

    The final rules also provide that a review report that includes 
modifications will not satisfy the requirement for reviewed financial 
statements.\423\ Although two commenters expressed that a review report 
with modifications should be sufficient to satisfy the reviewed 
financial statement requirement,\424\ one commenter opposed permitting 
modifications to review reports, noting that it considers certain 
departures from U.S. GAAP to be ``unacceptable'' and that it would not 
be feasible to develop a model of all allowable and disallowable 
modifications.\425\ After considering the comments, we are persuaded 
that permitting modifications could result in financial statements that 
depart materially from U.S. GAAP, and, therefore, are not permitting 
modifications to review reports under the final rules. In response to 
concerns expressed by some commenters, however, we note that a review 
report or audit opinion that includes explanatory language pertaining 
to the entity's ability to continue as a going concern is not, under 
current auditing standards, a modified report or a qualified 
opinion.\426\
---------------------------------------------------------------------------

    \423\ See Instruction 8 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding. Accordingly, a modified review report would 
not be considered an audit opinion that is ``available'' for 
purposes of Rule 201(t) and 202(a).
    \424\ See AICPA Letter; Heritage Letter.
    \425\ See Grassi Letter.
    \426\ See, e.g., Public Company Accounting Oversight Board AU 
sec. 508, Reports on Audited Financial Statements.
---------------------------------------------------------------------------

    Exemptions from Financial Statement Requirements. Consistent with 
the proposal, the final rules do not exempt any issuers from the 
financial statement requirements. While we appreciate the concerns 
identified by commenters about the costs of the financial statement 
requirements for issuers with no operating history or issuers that have 
been in existence for fewer than 12 months,\427\ we believe that 
financial statements are important information for all issuers and that 
other changes from the proposed rules such as raising the threshold at 
which audited financial statements are required will help reduce those 
costs.
---------------------------------------------------------------------------

    \427\ See, e.g., Arctic Island Letter 5; CFIRA Letter 5; CFIRA 
Letter 7; CrowdFundConnect Letter; Crowdpassage Letter 2; EY Letter; 
Grassi Letter; Hackers/Founders Letter; Joinvestor Letter; McGladrey 
Letter; PBA Letter; PeoplePowerFund Letter; RocketHub Letter; 
StartupValley Letter; Wefunder Letter; Whitaker Chalk Letter.
---------------------------------------------------------------------------

b. Progress Updates
(1) Proposed Rules
    Consistent with Securities Act Section 4A(b)(1)(F), proposed Rule 
201(v) and Rule 203(a)(3) of Regulation Crowdfunding would require an 
issuer to file with the Commission and provide investors and the 
relevant intermediary regular updates on the issuer's progress in 
meeting the target offering amount no later than five business days 
after each of the dates that the issuer reaches particular intervals--
i.e., 50 percent and 100 percent--of the target offering

[[Page 71417]]

amount. 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. If, however, multiple progress updates are triggered within 
the same five business-day period (e.g., the issuer reaches 50 percent 
of the target offering amount on November 5, 100 percent of the target 
offering amount on November 7, and the maximum amount of proceeds it 
will accept in excess of the target offering amount on November 9), 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. The proposed rules also would require the 
intermediary to make these updates available to investors through the 
intermediary's platform.
(2) Comments on the Proposed Rules
    Commenters were generally opposed to the progress update 
requirements, noting that progress updates filed with the Commission 
would be duplicative of what is available from the intermediary's Web 
site and generate unnecessary costs.\428\ Based on that same rationale, 
a number of commenters supported the concept of exempting issuers from 
the requirement to file progress updates with the Commission so long as 
the intermediary publicly displays the progress of the issuer in 
meeting the target offering amount.\429\
---------------------------------------------------------------------------

    \428\ See, e.g., ASSOB Letter; EarlyShares Letter; Public 
Startup Letter 2; RFPIA Letter; RocketHub Letter. But see CFIRA 
Letter 7.
    \429\ See, e.g., Arctic Island Letter 5 (stating that 
intermediaries can display both text (e.g. ``$125,000 of $500,000 
raised thus far'') and graphics (e.g. a status bar graph) of the 
offering progress); ASSOB Letter; PeoplePowerFund Letter; RFPIA 
Letter; RocketHub Letter (noting that portals already list progress 
for perks-based crowdfunding); Wefunder Letter. But see CFIRA Letter 
7 (stating that the issuer should file progress updates with the 
Commission on a regular basis to allow for consistency across all 
issuers and intermediaries.).
---------------------------------------------------------------------------

(3) Final Rules
    The final rules maintain the proposed progress update requirements, 
with a significant modification. Based on concerns expressed by 
commenters, the final rules permit issuers to satisfy the progress 
update requirement by relying on the relevant intermediary to make 
publicly available on the intermediary's platform frequent updates 
about the issuer's progress toward meeting the target offering 
amount.\430\ However, if the intermediary does not provide such an 
update, the issuer would be required to file the interim progress 
updates. In addition, as described in more detail below, an issuer 
relying on the intermediary's reports of progress must still file a 
Form C-U at the end of the offering to disclose the total amount of 
securities sold in the offering.\431\
---------------------------------------------------------------------------

    \430\ See Rules 201(v) and 203(a)(3) of Regulation Crowdfunding.
    \431\ See Rule 203(a)(3)(iii) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    As stated in the proposal, we continue to believe that the 
information available in progress updates will 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. We believe that these same benefits 
can be achieved through information available on the intermediary's 
platform about the progress toward the target offering amount. Whether 
an issuer provides the required progress update report or relies on the 
intermediary's reporting, we believe investors will benefit by being 
able to stay informed during the offering of an issuer's progress.
    Under the final rules, all issuers must file a Form C-U to report 
the total amount of securities sold in the offering. For issuers that 
are offering only up to a certain target offering amount, this 
requirement will be triggered five business days from the date they 
reach the target offering amount.\432\ For issuers accepting proceeds 
in excess of the target offering amount, this requirement will be 
triggered five days after the offering deadline.\433\ We believe that 
requiring a report of the total amount of securities sold in the 
offering is necessary to inform investors about the ultimate size of 
the offering, especially in cases where an issuer may have sold more 
than the target offering amount. Further, this requirement will result 
in a central repository of this information at the Commission--
information that otherwise might no longer be available on the 
intermediary's platform after the offering terminated. Finally, we note 
that requiring a final report will make data available to the 
Commission and the general public that could be used to evaluate the 
effects of the Section 4(a)(6) exemption on capital formation.
---------------------------------------------------------------------------

    \432\ See Rule 203(a)(3)(i) of Regulation Crowdfunding.
    \433\ See Rule 203(a)(3)(ii) of Regulation Crowdfunding.
---------------------------------------------------------------------------

c. Amendments to the Offering Statement
(1) Proposed Rules
    Proposed Rule 203(a)(2) of Regulation Crowdfunding would 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-A: Amendment 
and provided to investors and the relevant intermediary. Material 
changes would require reconfirmation by investors of their investment 
commitments within five business days. In addition, an issuer would be 
permitted, but not required, to file amendments for changes that are 
not material.
(2) Comments Received on Proposed Rules
    Commenters were mixed on the proposed rules relating to amendments 
to the offering statement, with those opposed citing the burden on 
issuers.\434\ Some commenters recommended that the Commission specify a 
filing deadline for amendments reflecting a material change,\435\ and 
some recommended we require that investors be notified of the 
amendment.\436\ Two commenters supported our view that the 
establishment of the final price should be considered a material change 
that would always require an amendment to Form C,\437\ while one 
commenter opposed such an approach.\438\ One commenter recommended that 
the Commission define ``material change'' in this context.\439\
---------------------------------------------------------------------------

    \434\ For commenters generally in support, see, e.g., CFA 
Institute Letter; CrowdCheck Letter 1 (recommending that only a 
final amendment prior to the offering deadline be required, provided 
there is a five day reconfirmation period between filing and the 
sale of securities); EMKF Letter; Wefunder Letter.
    For commenters generally opposed, see, e.g., ASSOB Letter 
(suggesting a supplement could suffice in certain instances); Public 
Startup Letter 2; RocketHub Letter (suggesting that not all 
amendments be filed with the Commission so long as the information 
was made available through the intermediary).
    \435\ See, e.g., Commonwealth of Massachusetts Letter; Grassi 
Letter; Hackers/Founders Letter; RocketHub Letter.
    \436\ See, e.g., Arctic Island Letter 5; CFA Institute Letter; 
Grassi Letter; Joinvestor Letter; RoC Letter; RocketHub Letter. But 
see Public Startup Letter 2.
    \437\ See Grassi Letter (recommending that reconfirmation not be 
required if the initial price is established in the offering 
documents and does not vary more than within a reasonable range 
established in such documents); Joinvestor Letter.
    \438\ See Public Startup Letter 2.
    \439\ See ODS Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting requirements for the amendment to the offering 
statement as

[[Page 71418]]

proposed. The final rules require that an issuer amend its disclosure 
for any material change in the offer terms or disclosure previously 
provided to investors.\440\ While we recognize commenters' concerns 
about the costs that requiring one or more additional filings may 
impose on issuers, we note that an amendment will be required only in 
instances in which there was a material change. In such circumstances, 
we believe the additional efforts required of an issuer to file an 
amendment will be justified in order to provide investors with the 
information they need to make an informed investment decision.
---------------------------------------------------------------------------

    \440\ See Rule 203(a)(2) of Regulation Crowdfunding. See also 
Section II.C.6 for discussion of the requirement that investors 
reconfirm their investment commitments following a material change.
---------------------------------------------------------------------------

    The amended disclosure must be filed with the Commission on Form C 
and provided to investors and the relevant intermediary. Under the 
final rules, the issuer is required to 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.\441\
---------------------------------------------------------------------------

    \441\ See Form C.
---------------------------------------------------------------------------

    With respect to what constitutes a ``material change,'' as we 
stated in the Proposing Release, 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.\442\ 
For example, we believe that a material change in the financial 
condition or the intended use of proceeds requires 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 is a material change to the terms of 
the offer and must be disclosed. These are not, however, the only 
possible material changes that require amended disclosure. We are not 
providing additional guidance on what constitutes a ``material 
change,'' as requested by one commenter,\443\ because, consistent with 
our historical approach to materiality determinations, we believe that 
an issuer should determine whether changes in the offer terms or 
disclosure are material based on the facts and circumstances.
---------------------------------------------------------------------------

    \442\ See Basic Inc. v. Levinson, 485 U.S. 224 (1988) (quoting 
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)).
    \443\ See ODS Letter.
---------------------------------------------------------------------------

    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 must check the box on the cover of 
Form C indicating that investors must reconfirm their investment 
commitments.
    A number of commenters recommended that we specify a filing 
deadline for amendments reflecting a material change,\444\ and that we 
require investors be notified in some manner of the amendment.\445\ We 
are not, however, amending the requirement as suggested by those 
commenters. We appreciate the need for investors to know this 
information in a timely fashion, but we believe that with the 
requirement that investors reconfirm their commitments, it will be in 
an issuer's interest to file an amendment as soon as practicable and to 
notify investors so that it will be in a position to close the 
offering. Therefore, we do not believe further procedural requirements 
are necessary.
---------------------------------------------------------------------------

    \444\ See, e.g., Commonwealth of Massachusetts Letter; Grassi 
Letter; Hackers/Founders Letter; RocketHub Letter.
    \445\ See, e.g., Arctic Island Letter 5; CFA Institute Letter; 
Grassi Letter; Joinvestor Letter; RoC Letter; RocketHub Letter. But 
see Public Startup Letter 2.
---------------------------------------------------------------------------

    Issuers will 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.\446\ If an issuer amends the Form C to provide such 
information, it is not required to check the box indicating that 
investors must reconfirm their investment commitments.
---------------------------------------------------------------------------

    \446\ See Instruction to paragraph (a)(2) of Rule 203 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

2. Ongoing Reporting Requirements
a. Proposed Rules
    Securities Act 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.''
    To implement the ongoing reporting requirement in Section 4A(b)(4), 
we proposed in Rules 202 and 203 of Regulation Crowdfunding to require 
an issuer that sold securities in reliance on Section 4(a)(6) to file a 
report annually, no later than 120 days after the end of the most 
recently completed fiscal year covered by the report. To implement the 
requirement that issuers provide the report to investors, we proposed 
in Rule 202(a) to require issuers to post the annual report on their 
Web sites. Under proposed Rule 202(a), the issuer would be required to 
disclose information similar to that required in the offering 
statement, including disclosure about its financial condition that 
meets the highest financial statement requirements that were applicable 
to its offering statement.
    We also proposed in Rule 202(b) 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 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 in accordance with state law.
b. Comments on the Proposed Rules
    Commenters expressed a range of views on the proposed ongoing 
reporting requirements.\447\
---------------------------------------------------------------------------

    \447\ For commenters generally supporting the proposed ongoing 
reporting requirements, see, e.g., CfPA Letter; Commonwealth of 
Massachusetts Letter; Grassi Letter; Jacobson Letter; Leverage PR 
Letter; StartEngine Letter 1.
    For commenters generally opposing the proposed ongoing reporting 
requirements, see, e.g., ABA Letter; Campbell R. Letter; EMKF 
Letter; Guzik Letter 1; NFIB Letter; Public Startup Letter 2; 
RocketHub Letter; SeedInvest Letter 1; Stephenson, et al. Letter.; 
Traklight Letter; WealthForge Letter; Winters Letter.
---------------------------------------------------------------------------

    Frequency. With respect to frequency, a number of commenters 
supported the proposed requirement of annual reporting,\448\ while a 
few recommended quarterly reporting.\449\ Some commenters supported 
requiring issuers to file reports to disclose the occurrence of 
material events on an ongoing basis,\450\ and several recommended that 
the Commission provide a list of events that would trigger such 
disclosure.\451\

[[Page 71419]]

Two other commenters opposed such a requirement.\452\
---------------------------------------------------------------------------

    \448\ See, e.g., AICPA Letter; CFIRA Letter 7; EY Letter; Grassi 
Letter; RoC Letter; RocketHub Letter; Traklight Letter.
    \449\ See, e.g., ASSOB Letter; CCI Letter; Denlinger Letter 1 
(recommending quarterly reporting to provide investors and the 
secondary market timely information).
    \450\ See, e.g., ABA Letter (recommending amending Form C-AR 
within 15 calendar days of the material event); Angel Letter 1 
(recommending prompt disclosure through postings on the issuer's Web 
site or social media); Denlinger Letter 1; EY Letter (recommending 
disclosure within 30 days of the end of the month in which the 
material event occurred, with such disclosure scaled for different 
tiers of issuers); Hackers/Founders Letter (recommending quarterly 
updates); RocketHub Letter (recommending quarterly updates).
    \451\ See, e.g., Denlinger Letter 1; EY Letter; Grassi Letter; 
RocketHub Letter.
    \452\ See Heritage Letter; Public Startup Letter 2.
---------------------------------------------------------------------------

    Provision of Reports. Generally, commenters supported requiring 
issuers to post the annual report on their Web sites,\453\ although 
some commenters favored a more limited distribution.\454\ Similarly, a 
number of commenters supported requiring issuers to file the annual 
report on EDGAR,\455\ while two commenters opposed such 
requirement.\456\ In addition, most commenters opposed requiring 
physical delivery of the report directly to investors,\457\ although 
some commenters supported requiring direct delivery in some form\458\ 
or directly notifying investors of the availability of the annual 
report.\459\
---------------------------------------------------------------------------

    \453\ See, e.g., ABA Letter; Angel Letter 1; CFA Institute 
Letter; Commonwealth of Massachusetts Letter; Grassi Letter; 
Jacobson Letter; Joinvestor Letter; RFPIA Letter; Traklight Letter.
    \454\ See, e.g., Crowdpassage Letter 3 (opposing the public 
availability of ongoing financial statements and recommending they 
be distributed through a password protected Web site accessible to 
investors); Frutkin Letter (recommending the annual report be 
provided to investors via email, on a password-protected Web site 
accessible to investors or by mailing the report first-class to 
investors); Public Startup Letter 2.
    \455\ See, e.g., Commonwealth of Massachusetts Letter; Frutkin 
Letter; Grassi Letter; RocketHub Letter; Traklight Letter.
    \456\ See Crowdpassage Letter 3 (opposing public availability of 
ongoing financial statements); Public Startup Letter 2.
    \457\ See, e.g., CFIRA Letter 7; CFIRA Letter 8; CfPA Letter; 
Crowdpassage Letter 3; Grassi Letter; Jacobson Letter; Public 
Startup Letter 2; Traklight Letter.
    \458\ See, e.g., Arctic Island Letter 5; CCI Letter; RocketHub 
Letter.
    \459\ See, e.g., Arctic Island Letter 5; CFA Institute Letter 
(recommending advance notice as to when and where annual reports 
will be available); RocketHub Letter.
---------------------------------------------------------------------------

    Financial Statements. Commenters expressed differing views about 
the proposed ongoing financial statements requirements, particularly 
the level of public accountant involvement required. While a few 
supported requiring certain issuers to provide audited or reviewed 
financial statements on an ongoing basis,\460\ a substantial number 
opposed an ongoing audit or review requirement.\461\ Further, a number 
of commenters recommended that if ongoing financial statements are to 
be required for some issuers, the level of review be based on a higher 
offering amount threshold than the threshold used to determine the 
level of involvement of the accountant in the offering.\462\
---------------------------------------------------------------------------

    \460\ See, e.g., ABA Letter; Denlinger Letter 1; Grassi Letter.
    \461\ See, e.g., AEO Letter; Arctic Island Letter 5; AWBC 
Letter; CrowdCheck Letter 4; EarlyShares Letter; EMKF Letter; 
Frutkin Letter; Graves Letter; Guzik Letter 1; iCrowd Letter; 
McGladrey Letter; Milken Institute Letter; NFIB Letter; PBA Letter; 
Peers Letter; RocketHub Letter; SeedInvest Letter 1; Seyfarth 
Letter; StartupValley Letter; Stephenson, et al. Letter; Traklight 
Letter; WealthForge Letter.
    \462\ See, e.g., Arctic Island Letter 5; CrowdCheck Letter 4; 
EarlyShares Letter; EY Letter; Grassi Letter; Graves Letter; iCrowd 
Letter; Milken Institute Letter; PBA Letter; Seyfarth Letter; 
Traklight Letter.
---------------------------------------------------------------------------

    Other Content. A number of commenters recommended that the ongoing 
annual reports require a more limited set of disclosure than the 
information required in the offering statement.\463\
---------------------------------------------------------------------------

    \463\ See, e.g., EarlyShares Letter; EMKF Letter; McGladrey 
Letter; Milken Institute Letter; PBA Letter; RocketHub Letter.
---------------------------------------------------------------------------

    Exceptions/Termination of Ongoing Reporting Requirement. A number 
of commenters recommended that there be exceptions to the ongoing 
reporting requirements for certain issuers,\464\ expressing concern 
that the ongoing reporting obligations were too costly and could 
potentially extend indefinitely.\465\ Others were opposed to such 
exceptions.\466\
---------------------------------------------------------------------------

    \464\ See, e.g., Heritage Letter (issuers raising $100,000 or 
less); RocketHub Letter (issuers raising $250,000 or less, although 
recommending that intermediaries be permitted to require ongoing 
reports on their platform even if exempted by the Commission); 
SeedInvest Letter 1 (recommending excepting issuers from ongoing 
reporting when: (1) Raising less than $350,000; (2) securities are 
structured such that there can be no investment decisions; (3) an 
institutional investor, venture capitalist, or angel investor is 
leading the deal for investors; or (4) all investors have 
contractually waived the right to receive ongoing reports with 
informed consent); SeedInvest Letter 4. See also form letters 
designated as Type A (supporting SeedInvest Letter 1).
    \465\ See SeedInvest Letter 1 (noting that the ongoing reporting 
obligations were an ``obstacle to making crowdfunding a viable 
option for startups and small businesses'' as the cost structure 
would be ``out of proportion with the amounts proposed to be 
raised.'')
    \466\ See, e.g., Commonwealth of Massachusetts Letter; Denlinger 
Letter 1; Grassi Letter; Public Startup Letter 2.
---------------------------------------------------------------------------

    We also received a range of comments about when the ongoing 
reporting requirements should terminate, with two supporting requiring 
issuers to file an annual report until one of the enumerated events 
occurs,\467\ and others suggesting alternatives to such 
requirement.\468\
---------------------------------------------------------------------------

    \467\ See, e.g., Grassi Letter; Whitaker Chalk Letter.
    \468\ See, e.g., ABA Letter; EY Letter (recommending the ongoing 
reporting obligations terminate after a certain amount of time if 
the issuer has 300 or fewer security holders); Grassi Letter; PBA 
Letter (recommending the reporting obligations terminate after three 
consecutive annual reports or after an issuer repurchases two-thirds 
of the outstanding securities issued in reliance on Section 4(a)(6), 
so long as the issuer made a bona fide offer to repurchase all of 
such securities); Public Startup Letter 2; RocketHub Letter 
(recommending the reporting obligations terminate after three annual 
reports).
---------------------------------------------------------------------------

    Some commenters recommended that the ongoing reporting requirements 
be a condition to the Section 4(a)(6) exemption \469\ while several 
others generally opposed such concept.\470\
---------------------------------------------------------------------------

    \469\ See, e.g., Parsont Letter (with a notice and cure 
provision); RocketHub Letter (recommending the ongoing reporting 
requirements be a condition for a minimum of three years).
    \470\ See, e.g., Public Startup Letter 2; Wefunder Letter; 
Whitaker Chalk Letter (recommending that (i) a condition, if any, 
apply only to the first annual report; (ii) that the failure to file 
the annual report restrict an issuer's ability to raise capital in 
the future; or (iii) issuers, certain officers, directors and 
shareholders have the option to escrow their shares for up to 24 
months, with certain penalties for failure to file the annual 
report).
---------------------------------------------------------------------------

c. Final Rules
    After considering the comments received, we are adopting the 
ongoing reporting requirements generally as proposed, with a 
substantial modification to the level of public accountant involvement 
required and another modification to provide for termination of the 
ongoing reporting obligation in two additional circumstances.
    Frequency. The final rules require an issuer that sold securities 
in reliance on Section 4(a)(6) to file an annual report with the 
Commission, no later than 120 days after the end of the fiscal year 
covered by the report.\471\ We believe that this ongoing reporting 
requirement should benefit investors by enabling them to consider 
updated information about the issuer, thereby allowing them to make 
more informed investment decisions.
---------------------------------------------------------------------------

    \471\ See Rule 202(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We recognize the view of some commenters \472\ that there may be 
major events that occur between annual reports about which investors 
would want to be updated, and we note that some commenters also 
recommended quarterly reporting.\473\ However, we agree with those 
commenters \474\ who said an annual requirement is sufficient. We 
believe a more frequent filing requirement would require an allocation 
of resources to the reporting function of Regulation Crowdfunding 
issuers that we do not believe is justified in light of the smaller 
amounts that will be raised pursuant to the exemption. We note that 
under Tier 1 of Regulation A, issuers can raise significantly more 
money--up to $20 million--without any ongoing reporting requirement 
other than to file a Form 1-Z exit report upon completion or 
termination of the offering. While not required, nothing in the rules 
prevents an issuer from updating investors when

[[Page 71420]]

major events occur. Nor do our rules prevent intermediaries from 
requiring more frequent reporting. However, we do not believe that it 
is necessary in the final rules to require reporting on a more frequent 
basis than the annual ongoing reporting directly contemplated by the 
statute.
---------------------------------------------------------------------------

    \472\ See, e.g., ABA Letter; Angel Letter 1; Denlinger Letter 1; 
EY Letter; Grassi Letter; Hackers/Founders Letter; RocketHub Letter.
    \473\ See, e.g., ASSOB Letter; CCI Letter; Denlinger Letter 1.
    \474\ See, e.g., AICPA Letter; CFIRA Letter 7; EY Letter; Grassi 
Letter; RoC Letter; RocketHub Letter; Traklight Letter.
---------------------------------------------------------------------------

    Provision of Reports. We also are adopting as proposed the 
requirement that an issuer post the annual report on its Web site.\475\ 
Consistent with the proposal, the final rules do not require delivery 
of a physical copy of the annual report. As discussed in the Proposing 
Release and as supported by a number of commenters, we believe that 
investors in this type of Internet-based offering will be familiar with 
obtaining information on the Internet and that providing information in 
this manner will be cost efficient. While some commenters \476\ 
suggested that limiting distribution of the annual report to investors 
through use of a password-protected Web site would help protect an 
issuer's commercially-sensitive information, we believe such a 
requirement would add complexity for issuers and investors without 
providing significant protection of commercially-sensitive information 
since the reports could still be accessed by the public on EDGAR.
---------------------------------------------------------------------------

    \475\ See Rule 202(a) of Regulation Crowdfunding.
    \476\ See, e.g., Crowdpassage Letter 3; Frutkin Letter.
---------------------------------------------------------------------------

    Consistent with the proposal, the final rule does not require an 
issuer to provide direct notification via email or otherwise of the 
posting of the report, as was suggested by some commenters.\477\ As 
discussed above in Section II.B.1.a.(i)(g), however, we are revising 
the final rules to require an issuer to disclose in the offering 
statement where on the issuer's Web site investors will be able to find 
the issuer's annual report and the date by which the annual report will 
be available on the issuer's Web site.\478\ We believe these changes 
will help investors to locate the annual report. As discussed in the 
Proposing Release, we believe that many issuers may not have email 
addresses for investors, especially after the shares issued pursuant to 
Section 4(a)(6) are traded by the original purchasers. Nonetheless, to 
the extent email addresses for investors are available, an issuer could 
refer investors to the posted report via email.
---------------------------------------------------------------------------

    \477\ See, e.g., Arctic Island Letter 5 (intermediary should 
notify); Frutkin Letter; RocketHub Letter.
    \478\ See Rule 201(w) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Financial Statements. After considering the comments, we are 
persuaded by the commenters that opposed requiring that an audit or 
review of the financial statements be included in the annual 
report.\479\ Therefore, instead of requiring financial statements in 
the annual report that meet the highest standard previously provided, 
the final rules require financial statements of the issuer certified by 
the principal executive officer of the issuer to be true and complete 
in all material respects.\480\ However, issuers that have available 
financial statements that have been reviewed or audited by an 
independent certified public accountant because they prepare them for 
other purposes must provide them and will not be required to have the 
principal executive officer certification.\481\
---------------------------------------------------------------------------

    \479\ See, e.g., AEO Letter; Arctic Island Letter 5; AWBC 
Letter; CrowdCheck Letter 4 (``ongoing audit requirement will create 
an unpredictable on-going burden''); EarlyShares Letter; EMKF Letter 
(``audited financial statements, particularly for ongoing reporting 
requirements, are so cost-prohibitive for startups that they make 
absolutely no sense as an appropriate use of funds.''); Frutkin 
Letter; Graves Letter; Guzik Letter 1; iCrowd Letter; McGladrey 
Letter; Milken Institute Letter; NFIB Letter; PBA Letter; Peers 
Letter; RocketHub Letter; SeedInvest Letter 1; Seyfarth Letter; 
StartupValley Letter; Stephenson, et al. Letter; Traklight Letter; 
WealthForge Letter.
    \480\ See Rule 202(a) of Regulation Crowdfunding.
    \481\ Id.
---------------------------------------------------------------------------

    Many commenters expressed concerns with the costs associated with 
preparing reviewed and audited financial statements on an ongoing 
basis. Commenters also noted the absence of comparable ongoing 
reporting requirements under Tier 1 of Regulation A and other offering 
exemptions.\482\ While we recognize that Regulation Crowdfunding is 
different in many respects from Regulation A, we believe that 
crowdfunding issuers should not have more onerous ongoing reporting 
compliance costs than issuers that use another public offering 
exemption that permits higher maximum offering amounts. The changes to 
the ongoing reporting requirements in the rules we are adopting today 
will alleviate some of the costs on crowdfunding issuers. At the same 
time, we also believe, consistent with the views of at least one 
commenter,\483\ that investors still will be provided with sufficient 
ongoing financial information about the issuer under the final rules.
---------------------------------------------------------------------------

    \482\ See, e.g., CrowdCheck Letter 4; EMKF Letter; EY Letter.
    \483\ See CrowdCheck Letter 4 (``While the on-going audit 
requirement is designed to provide investors and potential secondary 
purchasers of the company's securities with updated information 
about the company, it is unnecessary given the other, less 
burdensome, on-going disclosure requirements contained in the 
statute and proposed regulation.'').
---------------------------------------------------------------------------

    Other Content. With the exception of the financial statement 
requirement described above, the final rule adopts as proposed the 
requirement that the annual report include the information required in 
the offering statement. Although an issuer will 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),\484\ it will be required to disclose information about the 
company and its financial condition, as required in connection with the 
offer and sale of the securities.\485\ While we appreciate the 
recommendations of commenters for a more limited set of disclosure in 
the annual report, we believe that the disclosure costs of ongoing 
reporting for issuers will be less than in the initial offering 
statement, because they will be able to use the offering materials as a 
basis to prepare the annual reports. We believe investors will benefit 
from the availability of annual updates to the information they 
received when making the decision to invest in the issuer's securities, 
since these updates will allow them to be informed about issuer 
developments as they decide whether to continue to hold or sell, or how 
to vote, the securities. Under the statute and the final rules, the 
securities will be freely tradable after one year. Therefore, this 
information also will benefit potential future holders of the issuer's 
securities and help them to make more informed investment decisions.
---------------------------------------------------------------------------

    \484\ See Rule 202(a) of Regulation Crowdfunding. An issuer will 
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, SEC 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.
    \485\ See Rule 202(a) of Regulation Crowdfunding. Issuers will 
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.
---------------------------------------------------------------------------

    Exceptions/Termination of Ongoing Reporting Requirement. After 
considering the comments, we are providing for termination of the 
ongoing reporting obligation in the three

[[Page 71421]]

circumstances that we proposed as well as the following two additional 
circumstances: (1) When the issuer has filed at least one annual report 
and has fewer than 300 holders of record; and (2) when the issuer has 
filed at least three annual reports and has total assets that do not 
exceed $10 million. Accordingly, under Rule 202(b), issuers will be 
required to file the annual report until the earliest of the following 
events occurs:
    (1) The issuer is required to file reports under Exchange Act 
Sections 13(a) or 15(d);
    (2) the issuer has filed at least one annual report and has fewer 
than 300 holders of record;
    (3) the issuer has filed at least three annual reports and has 
total assets that do not exceed $10 million;
    (4) the issuer or another party purchases or repurchases all of the 
securities issued pursuant to Section 4(a)(6), including any payment in 
full of debt securities or any complete redemption of redeemable 
securities; or
    (5) the issuer liquidates or dissolves in accordance with state 
law.
    We believe the addition of the two termination events, which are 
generally consistent with the suggestions of commenters,\486\ should 
help alleviate commenters' concerns about related costs for certain 
issuers that may not have achieved a level of financial success that 
would sustain an ongoing reporting obligation. The 300 shareholder 
threshold reflected in Rule 202(b)(2) is consistent with the threshold 
used to determine whether an Exchange Act reporting company is eligible 
to suspend its Section 15(d) \487\ or terminate its Section 13 \488\ 
reporting obligations. The option for an issuer to conclude ongoing 
reporting after three annual reports as reflected in Rule 202(b)(3) 
should help address concerns raised by some commenters that the 
reporting obligation could potentially extend indefinitely, while still 
requiring larger issuers with more than $10 million in total assets to 
continue reporting. We chose the $10 million threshold in order to be 
consistent with the total asset threshold in Section 12(g)(1) of the 
Exchange Act.\489\ Under that provision, a company that has total 
assets exceeding $10 million and a class of securities held of record 
by a certain number of persons must register that class of securities 
with the Commission.
---------------------------------------------------------------------------

    \486\ See, e.g., ABA Letter; EY Letter (recommending the 
reporting obligations terminate after a certain amount of time if 
the issuer has 300 or fewer security holders); PBA Letter; RocketHub 
Letter (recommending the reporting obligations terminate after three 
consecutive annual reports).
    \487\ See 17 CFR 240.12h-3.
    \488\ 15 U.S.C. 78m.
    \489\ 15 U.S.C. 78l(g)(1).
---------------------------------------------------------------------------

    As proposed, Rule 203(b)(3) provides that any issuer terminating 
its annual reporting obligations will be required to file with the 
Commission, within five business days from the date on which the issuer 
becomes eligible to terminate its reporting obligation, a notice that 
it will no longer file and provide annual reports pursuant to the 
requirements of Regulation Crowdfunding. The issuer also must check the 
box for ``Form C-TR: Termination of Reporting'' on the cover of Form 
C.\490\
---------------------------------------------------------------------------

    \490\ See cover page of Form C.
---------------------------------------------------------------------------

    We are not persuaded by the suggestion of one commenter \491\ that 
ongoing reports should be a condition to the Section 4(a)(6) exemption. 
As two commenters noted at the pre-proposal stage, under such an 
approach, compliance with the exemption would not be known at the time 
of the transaction.\492\ This, in turn, would create substantial 
uncertainty for issuers because there would be an indefinite 
possibility of a potential future violation of the exemption. We have 
modified the final rules from the proposal to clarify that the 
availability of the crowdfunding exemption is not conditioned on 
compliance with the annual reporting, progress update or termination of 
reporting obligations.\493\ Nevertheless, issuers offering and selling 
securities in reliance on Section 4(a)(6) remain obligated to comply 
with these reporting requirements. Moreover, as discussed in Section 
II.A.4 above, the final rules deny issuers the benefit of relying on 
the exemption under Section 4(a)(6) for future offerings until they 
file, to the extent required, the two most recently required annual 
reports.\494\ In addition, the final rules require the issuer to 
disclose in its offering statement and annual report if it, or any of 
its predecessors, previously failed to comply with the ongoing 
reporting requirements of Regulation Crowdfunding.
---------------------------------------------------------------------------

    \491\ See Parsont Letter.
    \492\ See Letter from Andrea L. Seidt, Comm'r, Ohio Div. of Sec. 
available at http://www.sec.gov/comments/jobs-title-iii/jobstitleiii-199.pdf; Letter from John R. Fahy, Partner, Whitaker 
Chalk Swindle Schwartz, available at http://www.sec.gov/comments/jobs-title-iii/jobstitleiii-175.htm.
    \493\ See Rule 100(b)(4) of Regulation Crowdfunding.
    \494\ See Rule 100(b)(5) of Regulation Crowdfunding.
---------------------------------------------------------------------------

3. Form C and Filing Requirements
a. Proposed Rules
    Securities Act Section 4A(b)(1) requires issuers who offer or sell 
securities in reliance on Section 4(a)(6) to ``file with the Commission 
and provide to investors and the relevant broker or funding portal, and 
make available to potential investors'' certain disclosures. The 
statute does not specify a format that issuers must use to present the 
required disclosures and file these disclosures with the Commission. We 
proposed in Rule 203 of Regulation Crowdfunding to require issuers to 
file the mandated disclosure using new Form C, which 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.
    We proposed to require issuers to use an XML-based fillable form to 
input certain information. Information not required to be provided in 
text boxes in the XML-based fillable form would be filed as attachments 
to Form C.
    Under the proposed rules, Form C would be used for all of an 
issuer's filings with the Commission related to the offering made in 
reliance on Section 4(a)(6). 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:
     ``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.
    EDGAR would automatically provide each filing with an appropriate 
tag depending on which box the issuer checks so that investors could 
distinguish among the different filings.\495\
---------------------------------------------------------------------------

    \495\ 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.\496\

[[Page 71422]]

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 proposed that issuers provide to the relevant 
intermediary a copy of the disclosures filed with the Commission. To 
satisfy the requirement to provide the disclosures, or make them 
available, as applicable, to investors, we proposed that issuers 
provide the information to investors electronically by referring 
investors, such as through a posting on the issuer's Web site or by 
email, to the information on the intermediary's platform. The proposed 
rules would not require issuers to provide physical copies of the 
information to investors.
---------------------------------------------------------------------------

    \496\ 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 rules require an issuer to post the annual report on its Web 
site and file it with the Commission.
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Commenters generally supported the proposed Form C 
requirement.\497\ Two commenters supported the proposal to use one form 
with different EDGAR tags for each type of filing,\498\ while another 
commenter recommended creating multiple forms in order to minimize the 
length of the form.\499\ Two commenters recommended that the Commission 
modify Form C and its variants to require an issuer to indicate the 
jurisdictions in which the securities will be or are sold, with one of 
those commenters recommending ongoing disclosure of the amount sold in 
each state.\500\
---------------------------------------------------------------------------

    \497\ See, e.g., Angel Letter 1 (specifically supporting the XML 
requirements); CFIRA Letter 7; Consumer Federation Letter; Grassi 
Letter; Hackers/Founders Letter; Traklight Letter; RocketHub Letter.
    \498\ See Grassi Letter; RocketHub Letter.
    \499\ See CFIRA Letter 7.
    \500\ See, Commonwealth of Massachusetts Letter (recommending 
Form C require an issuer to check boxes indicating the jurisdictions 
in which securities will be sold); NASAA Letter (recommending Form 
C-U (offering update form) and Form C-AR (annual report form) 
require disclosure of the states where interests in the offering 
have been sold and the amount sold in each state).
---------------------------------------------------------------------------

    Commenters were divided on the EDGAR filing requirement. Some 
commenters supported the filing requirement, with a few of those 
specifically supporting the proposal that issuers file the Form C in 
electronic format only.\501\ Some commenters generally opposed the 
filing requirements or opposed specific aspects of the 
requirements.\502\
---------------------------------------------------------------------------

    \501\ For commenters supporting the EDGAR filings requirement 
generally, see, e.g., CFIRA Letter 7; Traklight Letter. For those 
specifically supporting the electronic filing proposal, see, e.g., 
Arctic Island Letter 5; CFIRA Letter 7; RocketHub Letter; Wilson 
Letter.
    \502\ See, e.g., Angel Letter 1; CFIRA Letter 1; CrowdCheck 
Letter 1; Mollick Letter; Public Startup Letter 2; RocketHub Letter; 
WealthForge Letter (recommending that the Commission require the 
filing of a Form C within 15 days of the offering first receiving an 
investment and at the completion of the offering).
---------------------------------------------------------------------------

    A few commenters requested clarification whether all offering 
material made available on the intermediary's platform must be filed on 
Form C.\503\ Two commenters recommended that not all materials be 
required to be filed as exhibits.\504\ A number of commenters noted 
that issuers would likely use various types of media for their 
offerings, some of which cannot be filed on EDGAR.\505\ A number of 
commenters recommended that the Commission adopt other disclosure 
formats, such as a question-and-answer format.\506\
---------------------------------------------------------------------------

    \503\ See, e.g., CrowdCheck Letter 1; Grassi Letter; Stephenson 
Letter.
    \504\ See, e.g., CFIRA Letter 1 (recommending that only ``those 
documents most suited to police against fraud'' be filed with the 
Commission because the intermediary serves as the primary repository 
of the offering materials); CrowdCheck Letter 1 (recommending the 
Commission permit issuers to use ``free writing'' disclosure 
materials in certain circumstances without having to file them with 
the Commission).
    \505\ See, e.g., CFIRA Letter 6; CFIRA Letter 7; CrowdCheck 
Letter 1; Grassi Letter; Hackers/Founders Letter; RocketHub Letter; 
Wefunder Letter; Wilson Letter.
    \506\ See, e.g., Guzik Letter 1; Guzik Letter 2; Guzik Letter 3 
(encouraging the Commission to provide an optional simplified 
disclosure format, perhaps in a question and answer format); 
Hackers/Founders Letter (encouraging the Commission to require a 
standard format and to allow issuers to provide additional 
information); Hamilton Letter (suggesting the Commission provide 
prototypes of Form C and sample disclosures); RocketHub (seeking a 
simple, standardized general form other than U-7 or A-1 to provide 
legal certainty); Saunders Letter (proposing that Form C be 
completed by selecting from a database of stock responses); SBA 
Office of Advocacy Letter (describing recommendations from its 
roundtable attendees to adopt a simple question and answer format 
similar to that previously used in Regulation A or to provide 
``standard boilerplate disclosures for some of the more complicated 
nonfinancial disclosures, such as risk factors,'' that are not 
required by the JOBS Act).
    We also received several comments prior to the Proposing Release 
on whether the Commission should require a specific format for the 
required disclosure. Several commenters recommended that the 
Commission require the disclosure on a form modeled after, or 
require the use of NASAA's Small Company Offering Registration Form 
(U-7). See, e.g., Coan Letter; Liles Letter 1; Vim Funding Letter; 
NASAA Letter. One commenter suggested modeling the required 
disclosure format after then-current Form 1-A, which is used for 
securities offerings made pursuant to Regulation A, but which has 
since been modified as a result of recently adopted amendments to 
Regulation A. See 17 CFR 230.251 et seq.; Amendments to Regulation 
A, Release No. 33-9741 (March 25, 2015) [80 FR 21805 (April 20, 
2015)] Regulation A Adopting Release''); Commonwealth of 
Massachusetts Letter.
---------------------------------------------------------------------------

    A number of commenters generally supported the proposal to refer 
investors to information on the intermediary's platform.\507\ With 
respect to the proposed methods (Web site posting or email), one 
commenter stated that issuers would not have investors' email 
addresses,\508\ and another commenter noted that maintaining investors' 
email addresses would require significant resources.\509\
---------------------------------------------------------------------------

    \507\ See, e.g., Grassi Letter; Joinvestor Letter; 
PeoplePowerFund Letter; Public Startup Letter 2; Wefunder Letter; 
Wilson Letter.
    \508\ See Wefunder Letter.
    \509\ See Grassi Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting Form C and the related filing requirements \510\ 
with a few modifications from the proposed rules.\511\
---------------------------------------------------------------------------

    \510\ 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, will 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 will be 
required to submit a notarized authenticating document as a Portable 
Document Format (PDF) attachment to the electronic filing. The 
authenticating document will need to be manually signed by the 
applicant over the applicant's typed signature, to include the 
information contained in the Form ID and to confirm the authenticity 
of the Form ID. See 17 CFR 232.10(b)(2).
    \511\ See Rule 203 of Regulation Crowdfunding. We have made some 
technical changes in the final rules that do not affect their 
substantive requirements. To maintain consistency with other 
Commission rules and to keep electronic filing requirements 
consolidated in Regulation S-T, we have deleted from proposed Rules 
201, 202 and 203 the phrase ``on EDGAR'' where it appeared after 
``file with the Commission.'' We also have deleted the instruction 
to proposed Rule 203(a)(1) as the list of information set forth in 
that instruction was duplicative of the XML-based portion of Form C 
itself.
---------------------------------------------------------------------------

    First, the final rules will amend Regulation S-T to permit an 
issuer to submit exhibits to Form C in Portable Document Format 
(``PDF'') as official filings.\512\ We appreciate the views of 
commenters that issuers would likely use various types of media for 
their offerings,\513\ and believe that permitting these materials to be 
filed in PDF format will allow for more diverse presentations of 
information to be reasonably available to investors through a 
standardized, commonly available media. Under the final rules, issuers 
may customize the presentation

[[Page 71423]]

of their non-XML disclosures and file those disclosures as exhibits to 
the Form C. For example, an issuer may provide the required disclosures 
by uploading to EDGAR, as an exhibit to Form C, a PDF version of the 
relevant information presented on the intermediary's platform, 
including charts, graphs, and a transcript or description of any video 
presentation or any other media not reflected in the PDF. 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 offerings in reliance on Section 4(a)(6) 
would encompass a wide variety of industries at different stages of 
business development.
---------------------------------------------------------------------------

    \512\ See Rule 101(a)(1)(xvii) of Regulation S-T. Regulation S-T 
generally allows PDF documents to be filed only as unofficial 
copies. See Rule 104 of Regulation S-T. However, Rule 101 provides 
for certain exceptions to this restriction. See, e.g., Rule 101(ix) 
(allowing a PDF attachment to Form ID); Rule 101(a)(xiv) (requiring 
the filing of Form NRSRO and related exhibits in PDF as official 
filings).
    \513\ See, e.g., CFIRA Letter 6; CFIRA Letter 7; CrowdCheck 
Letter 1; Grassi Letter; Hackers/Founders Letter; RocketHub Letter; 
Wefunder Letter; Wilson Letter.
---------------------------------------------------------------------------

    We are adopting the XML-based fillable form as proposed with a few 
modifications.\514\ As suggested by some commenters,\515\ the XML-based 
portion of Form C will require issuers to indicate by checkbox the 
jurisdictions in which securities are intended to be offered. We also 
are changing the name of proposed Form C-A to Form C/A to be consistent 
with the naming convention of our other amendment forms and adding Form 
C-AR/A to allow, and facilitate identification of, the amendment of an 
issuer's Form C-AR annual report. In addition, we are adding an 
instruction to clarify that the issuer should mark the appropriate box 
on the cover of Form C to indicate which form it is filing. We also are 
splitting the ``Form, jurisdiction and date of organization'' field 
into three fields to facilitate more accurate tracking of this data. We 
also inserted the statement required by paragraph (g) of Rule 201 
immediately following the data required by that paragraph, so that 
statement appears together with the relevant data. Finally, we are 
modifying certain other field names and the General Instructions to 
Form C to clarify them or to reflect applicable changes to the 
disclosure requirements discussed above.
---------------------------------------------------------------------------

    \514\ As discussed in Section II.B.1, issuers will input in the 
proposed XML-based filing the following information: Name, legal 
status and contact information of the issuer; name, SEC 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; any other 
direct or indirect interest in the issuer held by the intermediary, 
or any arrangement for the intermediary to acquire such an interest; 
number of securities offered; offering price; target offering 
amount; whether oversubscriptions will be accepted and, if so, how 
they will be allocated; maximum offering amount (if different from 
the target offering amount); deadline to reach the target offering 
amount; current number of employees of the issuer; selected 
financial data for the prior two fiscal years; and the jurisdictions 
in which the issuer intends to offer the securities.
    \515\ See, e.g., Commonwealth of Massachusetts Letter; NASAA 
Letter.
---------------------------------------------------------------------------

    We believe that requiring certain information to be submitted in 
XML format will support the assembly and transmission of those required 
disclosures to EDGAR on Form C.\516\ It also will make certain key 
information about each offering available to investors and market 
observers in electronic format and allow the Commission to observe the 
implementation of the crowdfunding exemption under Section 4(a)(6). 
Information will be available about 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. We believe the addition of the requirement to 
indicate the jurisdictions in which the issuer intends to offer the 
securities, as suggested by several commenters, will facilitate 
oversight by state regulators, who retain antifraud authority over 
crowdfunding transactions, while imposing only minimal costs on 
issuers.
---------------------------------------------------------------------------

    \516\ The Commission will make the information available via 
EDGAR both in a traditional text-based format for reading and as 
downloadable XML-tagged data for analysis.
---------------------------------------------------------------------------

    In addition, in a change from the proposed rules, the final Form C 
includes an optional Question and Answer (``Q&A'') format that issuers 
may elect to use to provide the disclosures that are not required to be 
filed in XML format.\517\ Issuers opting to use this format would 
prepare their disclosures by answering the questions provided and 
filing that disclosure as an exhibit to the Form C. A number of 
commenters noted that an optional format such as this would be less 
burdensome for small issuers while still providing the Commission and 
investors with the required information.\518\ We believe that this 
option may help to facilitate compliance and ease burdens on by 
providing a mechanism by which issuers can easily confirm that they 
have provided all required information.
---------------------------------------------------------------------------

    \517\ See Item 1 of General Instruction III to Form C of 
Regulation Crowdfunding.
    \518\ See, e.g., Guzik Letter 1; Guzik Letter 2; Guzik Letter 3; 
Hackers/Founders Letter; Hamilton Letter; RocketHub Letter; Saunders 
Letter; SBA Office of Advocacy Letter.
---------------------------------------------------------------------------

    Consistent with the proposal, we are adopting a single Form C for 
all filings under Regulation Crowdfunding.\519\ We believe that the use 
of one form will be more efficient than requiring multiple forms, will 
not result in unduly lengthy forms, and will simplify the filing 
process for issuers and their preparers. EDGAR will automatically 
provide each filing with an appropriate tag depending on which box the 
issuer checks so that investors can distinguish among the different 
filings.
---------------------------------------------------------------------------

    \519\ See Rule 203 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We also are adopting, largely as proposed, the requirements to 
provide the offering information to investors and the relevant 
intermediary and make it available to potential investors under Section 
4A(b)(1).\520\ In addition, as discussed above in Section II.B., we 
moved the definition of ``investor'' from proposed Rule 300(c)(4) to 
Rule 100(d) to clarify that for purposes of all of Regulation 
Crowdfunding, ``investor'' includes any investor or any potential 
investor, as the context requires.\521\ In connection with this 
clarifying change, we have deleted the phrase ``and make available to 
potential investors'' each time it appeared in the rule text to avoid 
redundancy.\522\
---------------------------------------------------------------------------

    \520\ See Rule 203(a) of Regulation Crowdfunding.
    \521\ See Rule 100(d) of Regulation Crowdfunding.
    \522\ See Rule 203(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The final rules provide that issuers will satisfy the requirement 
to file the offering information with the Commission and provide it to 
the relevant intermediary by filing the Form C: Offering Statement and 
any amendments and progress updates and providing to the relevant 
intermediary a copy of the disclosures filed with the Commission.\523\ 
The initial offering statement should include all of the information 
that is provided on the intermediary's Web site.\524\ We also are 
adopting as proposed the requirements to file with the Commission and 
provide, or make available, as applicable, to investors and the 
relevant intermediary an amendment to the offering statement to 
disclose any material changes, additions or updates to information 
provided to investors through the intermediary's platform.\525\ Issuers 
may, but are not required to, file an amendment to reflect other 
changes, additions or updates to information provided to investors 
through the

[[Page 71424]]

intermediary's platform that it considers not material.
---------------------------------------------------------------------------

    \523\ See Instructions 1 and 2 to paragraph (a) of 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 with the 
Commission. In some cases, intermediaries may offer, as part of 
their service, to file the disclosure with the Commission on behalf 
of the issuer.
    \524\ See Rule 203(a)(1) of Regulation Crowdfunding.
    \525\ See Rule 203(a)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    To satisfy the requirement to provide the disclosures, or make them 
available, as applicable, to investors, the final rules allow issuers 
to provide the information to investors electronically by referring 
investors to the information on the intermediary's platform through a 
posting on the issuer's Web site or by email.\526\ As discussed in the 
proposal and noted by commenters, many issuers may not have email 
addresses for investors. Accordingly, the final rules permit issuers to 
provide this information to investors through a Web site posting.\527\ 
However, to the extent email addresses for investors are available to 
issuers, issuers may contact investors via email to direct them to the 
posted information. We continue to believe that investors in this type 
of Internet-based offering will be familiar with obtaining information 
on the Internet and that providing the information in this manner will 
be cost-effective for issuers. As discussed in the Proposing Release, 
we believe Congress contemplated that crowdfunding would, by its very 
nature, occur over the Internet or other similar electronic media that 
is accessible to the public.\528\ Therefore, consistent with the 
proposed rules, the final rules do not require issuers to provide 
physical copies of the information to investors.
---------------------------------------------------------------------------

    \526\ See Instruction 2 to Rule 203(a) of Regulation 
Crowdfunding.
    \527\ See, e.g., Grassi Letter; Wefunder Letter.
    \528\ 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 S-1717 (Statement of 
Sen. Mary Landrieu) (``this crowdfunding bill--which is, in essence, 
a way for the Internet to be used to raise capital . . .'').
---------------------------------------------------------------------------

4. Prohibition on Advertising Terms of the Offering
a. Proposed Rules
    Securities Act 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.'' Consistent with the 
statute, proposed Rule 204 of Regulation Crowdfunding would allow an 
issuer to publish a notice advertising the terms of an offering in 
reliance on Section 4(a)(6) so long as the notice includes the address 
of the intermediary's platform on which additional information about 
the issuer and the offering may be found. The proposal did not impose 
limitations on how the issuer distributes the notices. As proposed, the 
notice could include no more than: (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 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. 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. The proposed rules would not, however, restrict 
an issuer's ability to communicate other information that does not 
refer to the terms of the offering.
    The proposed rules also would allow an issuer to communicate with 
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.
b. Comments Received
    Commenters were mostly supportive of these provisions. Several 
commenters expressed support for the proposed content of advertising 
notices \529\ and the definition of ``terms of the offering.'' \530\ A 
number of commenters also supported the proposal's absence of a 
restriction on an issuer's ability to communicate information that does 
not refer to the terms of the offering.\531\ Several commenters 
requested clarification on various aspects of the proposal.\532\
---------------------------------------------------------------------------

    \529\ See, e.g., CFIRA Letter 6; Commonwealth of Massachusetts 
Letter; RocketHub Letter.
    \530\ See, e.g., Arctic Island Letter 5; CFIRA Letter 6; 
Heritage Letter; Joinvestor Letter; RocketHub Letter.
    \531\ See, e.g., ABA Letter; CFIRA Letter 6; Consumer Federation 
Letter; Hackers/Founders Letter; Public Startup Letter 2; RocketHub 
Letter.
    \532\ See, e.g., ABA Letter (recommending the rule text include 
a safe harbor for regularly released factual business information so 
long as it does not refer to the terms of the offering); CIFRA 
Letter 6 (requesting more guidance on advertising formats and 
content and the definition of ``terms of the offering'').
---------------------------------------------------------------------------

    Several commenters recommended that, consistent with the proposal, 
the Commission not restrict the media or format that may be used for 
advertising notices,\533\ with some pointing to the changing nature of 
social media and potential new user interfaces.\534\ Two commenters, 
however, stated that communications about the offering should always be 
conducted through the intermediary.\535\ A number of commenters also 
supported allowing an issuer to communicate with 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 in all communications.\536\
---------------------------------------------------------------------------

    \533\ See, e.g., Arctic Island Letter 5; Joinvestor Letter; 
Public Startup Letter 2; RoC Letter; RocketHub Letter.
    \534\ See, e.g., Arctic Island Letter 5; Public Startup Letter 
2; RocketHub Letter.
    \535\ See Hackers/Founders Letter (supporting the issuer being 
able to repost the communications elsewhere so long as it first 
appeared through the intermediary); Joinvestor Letter.
    \536\ See, e.g., ASSOB Letter; CFIRA Letter 6; Commonwealth of 
Massachusetts Letter; Consumer Federation Letter; Hackers/Founders 
Letter; Odhner Letter; Public Startup Letter 2; RoC Letter; 
RocketHub Letter; Wefunder Letter. Some of these commenters also 
recommended that all interested persons, such as officers, directors 
and other agents, should identify themselves in all communications 
on the intermediary's platform. See CIFRA Letter 6; Hackers/Founders 
Letter.
---------------------------------------------------------------------------

    Some commenters opposed the proposed advertising rules, with some 
stating that the advertising restrictions are unnecessary because sales 
must occur through an intermediary's platform, which would contain all 
of the relevant disclosures and investor acknowledgments.\537\ One 
commenter asked that an issuer be given broader leeway to publicize its 
business or offering on its own Web site or social media platform so 
long as the specific terms of the offering can be found only through 
the intermediary's platform.\538\ One commenter recommended allowing 
advertising notices to have a section for supplemental information 
highlighting certain intangible purposes such as a particular social 
cause.\539\
---------------------------------------------------------------------------

    \537\ See, e.g., FundHub Letter 1; Seed&Spark Letter (noting the 
proposed advertising restrictions will restrict the ability of 
filmmakers to market and raise money for their films); Arctic Island 
Letter 5; PeoplePowerFund Letter.
    \538\ See Fryer Letter.
    \539\ See RocketHub Letter.
---------------------------------------------------------------------------

    Two other commenters recommended that any advertising notices be 
filed with the Commission and/or the relevant intermediary.\540\ 
Several other commenters supported the proposed approach of not having 
advertising notices filed with the Commission or the intermediary, 
citing concerns about various formats of the communications, inability 
to capture all third-party communications, and the costs

[[Page 71425]]

associated with trying to capture the data.\541\
---------------------------------------------------------------------------

    \540\ See, e.g., Commonwealth of Massachusetts Letter; CFIRA 
Letter 6.
    \541\ See, e.g., Arctic Island Letter 5; ASSOB Letter; Public 
Startup Letter 2; RocketHub Letter.
---------------------------------------------------------------------------

    c. Final Rules
    We are adopting the prohibition on advertising terms of the 
offering substantially as proposed, with minor changes to the rule text 
for clarity.\542\ Under the final rules, an advertising notice that 
includes the terms of the offering can include no more than: (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 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. Consistent with the proposal, the final 
rules 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.\543\
---------------------------------------------------------------------------

    \542\ See Rule 204 of Regulation Crowdfunding.
    \543\ See Instruction to Rule 204 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The permitted notices will be similar to ``tombstone ads'' under 
Securities Act Rule 134,\544\ except that the notices will be required 
to direct an investor to the intermediary's platform through which the 
offering is being conducted, such as through a link directing the 
investor to the platform.
---------------------------------------------------------------------------

    \544\ 17 CFR 230.134.
---------------------------------------------------------------------------

    Although at least one commenter recommended allowing advertising 
notices to have a section for supplemental information highlighting 
certain intangible purposes such as a particular social cause,\545\ we 
do not believe a separate section is necessary. Instead, this type of 
information may be included as part of the ``brief description of the 
business.''
---------------------------------------------------------------------------

    \545\ See RocketHub Letter.
---------------------------------------------------------------------------

    Two commenters \546\ expressed concern that the proposed rule would 
not allow enough flexibility for brief, informal social media 
communications, but we disagree. A notice cannot include more than the 
enumerated matters, but an issuer has the flexibility not to include 
each of the enumerated matters in the notice, which may facilitate 
certain types of social media communications. For example, an issuer 
would be able to note on its own Web site or on social media that it is 
conducting an offering and direct readers to the materials on the 
intermediary's platform. There is no requirement for legends on these 
notices because the issuer will be directing investors to the materials 
on the intermediary's platform that will include those required 
legends.
---------------------------------------------------------------------------

    \546\ See FundHub Letter 1; Fryer Letter (``a rigid tombstone 
approach is inconsistent with the structure and informality of 
modern social media communication tools.'')
---------------------------------------------------------------------------

    We believe that this approach will provide flexibility for issuers 
while protecting investors by limiting the advertising of the terms of 
the offering to the information permitted in the notice and directing 
them to the intermediary's platform where they can access the 
disclosures necessary for them to make informed investment decisions.
    Consistent with the recommendation of several commenters,\547\ the 
final rules do not impose limitations on how the issuer distributes the 
notices. For example, an issuer could place notices in newspapers or 
post notices on social media sites or the issuer's own Web site. We 
believe the final rules will allow issuers to leverage social media to 
attract investors, while at the same time protecting investors by 
limiting the ability of issuers to advertise the terms of the offering 
without directing them to the required disclosure. We are not adopting 
a requirement that all notices be filed with the Commission or relevant 
intermediary, as requested by some commenters.\548\ Other commenters 
expressed concerns about the costs that would be associated with such a 
requirement, and given that investors will be directed to the required 
disclosure on the intermediary's platform, we believe the final rules 
appropriately take these factors into account.\549\
---------------------------------------------------------------------------

    \547\ See, e.g., Arctic Island Letter 5; Joinvestor Letter; 
Public Startup Letter 2; RoC Letter; RocketHub Letter.
    \548\ See, e.g., Hackers/Founders Letter; Joinvestor Letter.
    \549\ See, e.g., ASSOB Letter; RocketHub Letter.
---------------------------------------------------------------------------

    Further, the final rules allow an issuer to communicate with 
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, the 
final rules do not restrict issuers from participating in those 
communications so long as the issuer identifies itself as the issuer in 
all communications.
    Based on the suggestion of a few commenters,\550\ we are clarifying 
in the final rules that the prohibition on advertising the terms of the 
offering and related requirements apply to persons acting on behalf of 
the issuer.\551\ For example, persons acting on behalf of the issuer 
are required under Rule 204(c) to identify their affiliation with the 
issuer in all communications on the intermediary's platform.\552\
---------------------------------------------------------------------------

    \550\ See, e.g., CIFRA Letter 6; Hackers/Founders Letter.
    \551\ See Rule 204 of Regulation Crowdfunding.
    \552\ See also Section II.B.5 for disclosures required by 
persons promoting the offering.
---------------------------------------------------------------------------

    In addition, the final rules do not restrict an issuer's ability to 
communicate other information that might occur in the ordinary course 
of its operations and that does not refer to the terms of the offering. 
As stated in the Proposing Release, we believe that this is consistent 
with the statute because Section 4A(b)(2) restricts the advertising of 
the terms of the offer. The Commission has interpreted the term 
``offer'' broadly, however, and has explained that ``the publication of 
information and publicity efforts, made in advance of a proposed 
financing which have the effect of conditioning the public mind or 
arousing public interest in the issuer or in its securities constitutes 
an offer. . .'' \553\ In this regard, we also note that Securities Act 
Rule 169 \554\ 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.
---------------------------------------------------------------------------

    \553\ Securities Offering Reform, Release No. 33-8591 (July 19, 
2005) [70 FR 44722 (Aug. 3, 2005)] at 44731. The term ``offer'' has 
been interpreted broadly and goes beyond the common law concept of 
an offer. See, e.g., Diskin v. Lomasney & Co., 452 F.2d 871 (2d. 
Cir. 1971).
    \554\ 17 CFR 230.169.
---------------------------------------------------------------------------

    While one commenter requested a safe harbor for regularly released 
factual business information so long as it does not refer to the terms 
of the offering,\555\ we do not believe that a safe harbor is 
necessary. Ultimately, whether or not a communication is limited to 
factual business information depends on the facts and circumstances of 
that particular communication. However,

[[Page 71426]]

issuers may generally look to the provisions of Rule 169 for guidance 
in making this determination in the Regulation Crowdfunding context.
---------------------------------------------------------------------------

    \555\ See ABA Letter.
---------------------------------------------------------------------------

5. Compensation of Persons Promoting the Offering
a. Proposed Rules
    Consistent with Securities Act Section 4A(b)(3), proposed Rule 205 
of Regulation Crowdfunding 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. Further, a founder or an employee of the issuer that 
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.
    Under the proposed rules, an issuer would not be able to 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 proposed advertising rules.
b. Comments Received
    Commenters were generally supportive of promoter disclosure and the 
proposed rule.\556\ A number of commenters supported the broad 
applicability of the proposed rules to persons acting on behalf of the 
issuer.\557\ Some commenters recommended that the issuer or 
intermediary bear more responsibility for ensuring that the identity of 
the promoters be prominently disclosed.\558\
---------------------------------------------------------------------------

    \556\ See, e.g., CFA Institute Letter; Consumer Federation 
Letter (supporting proposal but generally questioning the wisdom of 
allowing paid promoters to participate in the communication channels 
at all); NASAA Letter; NFIB Letter; Public Startup Letter 2.
    \557\ See, e.g., CFA Institute Letter; CFIRA Letter 6; 
Commonwealth of Massachusetts Letter; Consumer Federation Letter; 
Hackers/Founders Letter; Joinvestor Letter; RocketHub Letter; MCS 
Letter.
    \558\ See, e.g., ASSOB Letter; Commonwealth of Massachusetts 
Letter; Joinvestor Letter; MCS Letter; RoC Letter; RocketHub Letter.
---------------------------------------------------------------------------

    A number of commenters also supported the requirement in the 
proposal that an issuer 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 proposed 
advertising rules.\559\
---------------------------------------------------------------------------

    \559\ See, e.g., ASSOB Letter; Consumer Federation Letter; 
Joinvestor Letter; Public Startup Letter 2; RoC Letter; RocketHub 
Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting, as proposed, final rules about the compensation of 
persons promoting the offering, with one clarifying change.\560\ We 
anticipate that communication channels provided by the intermediary 
will provide a forum through which investors could share information to 
help the members of the crowd decide whether or not to fund the issuer. 
We believe that it will be important for investors to know whether 
persons using those communication channels are persons acting on behalf 
of the issuer or persons receiving compensation from the issuer (or 
from persons acting on behalf of the issuer), to promote the issuer's 
offering because of the potential for self-interest or bias in 
communications by these persons.
---------------------------------------------------------------------------

    \560\ See Rule 205 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    A number of commenters supported the broad applicability of the 
proposed rules to persons acting on behalf of the issuer.\561\ The text 
of the proposed rule included a sentence stating that the disclosure 
obligation would apply to ``a founder or an employee of the issuer that 
engages in promotional activities on behalf of the issuer through the 
communication channels.'' Based on comments received, we are removing 
that sentence and adding an instruction to clarify that the requirement 
applies broadly to all persons acting on behalf of the issuer, 
regardless of whether or not the compensation they receive is 
specifically for the promotional activities. The change is intended to 
clarify that the disclosure requirement applies to persons hired 
specifically to promote the offering as well as to persons (including, 
but not limited to, founders, employees and directors) who are 
otherwise employed by the issuer or who undertake promotional 
activities on behalf of the issuer.
---------------------------------------------------------------------------

    \561\ See, e.g., CFA Institute Letter; CFIRA Letter 6; 
Commonwealth of Massachusetts Letter; Consumer Federation Letter; 
Hackers/Founders Letter; Joinvestor Letter; RocketHub Letter; MCS 
Letter.
---------------------------------------------------------------------------

    While we appreciate the views of commenters who suggested that we 
impose additional requirements on issuers or intermediaries to ensure 
that the identity of promoters is prominently disclosed, we believe the 
requirement that the issuer take reasonable steps to ensure that 
promoters clearly disclose the receipt of compensation for 
communications is sufficient to achieve the objectives of this 
provision without being overly prescriptive. There are a number of 
reasonable steps the issuer can take to ensure compliance. 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.
    As proposed, the final rules also 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.\562\ This prohibition should prevent issuers from circumventing 
the restrictions on advertising by compensating a third party to do 
what the issuer cannot do directly.
---------------------------------------------------------------------------

    \562\ See Rule 205(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

6. Other Issuer Requirements
a. Oversubscriptions
    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 limit.\563\ Issuers would be required to disclose how 
much they would be willing to accept in oversubscriptions, how the 
oversubscriptions would be allocated, and the intended purpose of those 
additional funds.
---------------------------------------------------------------------------

    \563\ See proposed Rule 201(h) and Instruction to paragraph (i) 
of Rule 201 of Regulation Crowdfunding, and cover page of Form C.
---------------------------------------------------------------------------

    Commenters were generally supportive of this approach to 
oversubscriptions.\564\ Some commenters supported the proposed 
flexibility to allow issuers to determine how to allocate 
oversubscribed offerings,\565\ while other commenters recommended that 
the Commission require issuers to allocate oversubscriptions using a 
prescribed method.\566\ Two commenters

[[Page 71427]]

recommended that the Commission limit the maximum oversubscription 
amount to a certain percentage of the target offering amount,\567\ 
while two other commenters opposed such a limit.\568\ One commenter 
recommended that the Commission revise the proposed rules to clarify 
that issuers would be required to disclose the ``other'' basis upon 
which oversubscriptions would be allocated.\569\
---------------------------------------------------------------------------

    \564\ See, e.g., CFA Institute letter; EMKF letter; Jacobson 
letter; Wefunder letter.
    \565\ See, e.g., ASSOB Letter; CFA Institute Letter; EMKF 
Letter; Public Startup Letter 2; RocketHub Letter; Wefunder letter.
    \566\ See, e.g., Fund Democracy Letter (pro-rata); Consumer 
Federation Letter (same as Fund Democracy); Joinvestor letter 
(first-come, first-served or algorithmic random selection); 
PeoplePowerFund Letter (first-come, first-served).
    \567\ See Joinvestor Letter (10%); RFPIA Letter (20%).
    \568\ See Jacobson Letter; Public Startup Letter 2.
    \569\ See Fund Democracy Letter.
---------------------------------------------------------------------------

    We are adopting the rule relating to oversubscriptions as proposed, 
with one clarifying change.\570\ We do not believe, as some commenters 
suggested, that it is necessary to limit the maximum oversubscription 
amount. Nor do we believe it is necessary to prescribe how to allocate 
oversubscribed offerings so long as the issuer discloses, at the 
commencement of the offering, how securities in such offerings will be 
allocated, and the intended purpose of those additional funds. This 
disclosure should provide investors with information they need to make 
informed investment decisions while providing issuers flexibility to 
structure the offering as they believe appropriate. In response to a 
comment received,\571\ we are clarifying in the final rules that, 
regardless of the structure, the issuer must describe how securities in 
oversubscribed offerings will be allocated.
---------------------------------------------------------------------------

    \570\ See Rule 201(h) to Regulation Crowdfunding.
    \571\ See Fund Democracy Letter.
---------------------------------------------------------------------------

b. Offering Price
    As discussed above in Section II.B.1.a.i.(e), proposed Rule 201(l) 
would require an issuer to disclose the offering price of the 
securities or, in the alternative, the method for determining the 
price, provided that prior to any sale of securities, each investor is 
provided in writing the final price and all required disclosure. The 
proposed rules would not require issuers to set a fixed price or 
prohibit dynamic pricing.
    We received a few comments supporting the proposed approach or 
expressing opposition to requiring a fixed price,\572\ while another 
commenter suggested the Commission require issuers to set a fixed 
price.\573\
---------------------------------------------------------------------------

    \572\ See, e.g., CFA Institute Letter (stating that disclosure 
of changes and methods used to determine share prices, along with 
investors' rights to cancel their investment commitments, provide 
reasonable safeguards); Wilson Letter; Public Startup Letter 2.
    \573\ See RocketHub Letter.
---------------------------------------------------------------------------

    We are adopting the final rules as proposed.\574\ While we 
appreciate the view of at least one commenter \575\ that a fixed price 
may be simpler for investors to understand, 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 any sales. 
We also believe the cancellation rights in the final rules \576\ will 
provide investors a reasonable opportunity to cancel their investment 
commitment if they wish to do so after the price is fixed.
---------------------------------------------------------------------------

    \574\ See Rule 201(l) of Regulation Crowdfunding. See also 
Section II.C.6 for a discussion of cancellation provisions.
    \575\ See RocketHub Letter.
    \576\ See Rules 201(j) and 201(k) of Regulation Crowdfunding.
---------------------------------------------------------------------------

c. Types of Securities Offered and Valuation
    The proposed rules would not limit the type of securities that may 
be offered in reliance on Section 4(a)(6) nor prescribe a method for 
valuing the securities. Issuers would be required to describe the terms 
of the securities and the valuation method in their offering materials.
    A number of commenters generally supported not limiting the types 
of securities that may be offered and sold in reliance of Section 
4(a)(6).\577\ Comments were more varied on valuation methodology. Some 
commenters recommended that the Commission neither require nor prohibit 
a specific valuation methodology,\578\ while others recommended that 
the Commission prescribe a set of valuation standards that have 
universal application for startups.\579\ Two commenters recommended 
that the Commission require issuers to base the valuation of their 
securities on the price at which the issuer previously sold 
securities,\580\ and another commenter recommended that the Commission 
consider whether additional standards are needed to ensure that 
securities are fairly valued and that approaches to valuation that put 
investors at a disadvantage be prohibited.\581\ One commenter generally 
supported requiring issuers to describe how securities being offered 
are being valued,\582\ while another commenter generally opposed such 
requirement.\583\
---------------------------------------------------------------------------

    \577\ See, e.g., CFA Institute Letter; Concerned Capital Letter; 
Crowdstockz Letter; Hackers/Founders Letter; Joinvestor Letter; 
Public Startup Letter 2; RocketHub Letter; Tiny Cat Letter; Wilson 
Letter.
    \578\ See, e.g., Hackers/Founders Letter; Heritage Letter; 
PeoplePowerFund Letter; Public Startup Letter 2; RocketHub Letter; 
Wilson Letter.
    \579\ See, e.g., 11 Wells Letter; Active Agenda Letter; Borrell 
Letter; Ellenbogen Letter; Greer Letter; Mountain Hardwear Letter; 
Moyer Letter; NaviGantt Letter; Vidal Letter.
    \580\ See, e.g., Public Startup Letter 3; Wefunder Letter.
    \581\ See Consumer Federation Letter.
    \582\ See CFIRA Letter 7.
    \583\ See Thomas Letter 2 (recommending that if issuers are 
required to describe the valuation method in their offering 
materials, the rule should provide ``safe harbor'' language that 
issuers can use in providing such description.)
---------------------------------------------------------------------------

    We are adopting, as proposed, final rules that 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.\584\ We noted in the 
proposal that the statute refers to ``securities'' and does not limit 
the type of securities that could be offered pursuant to the exemption. 
Issuers are required to describe the terms of the securities and the 
valuation method in their offering materials.\585\ 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 need to make an informed investment 
decision.
---------------------------------------------------------------------------

    \584\ See Rule 201(m) of Regulation Crowdfunding.
    \585\ See Rule 201(m)(1) and (4) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    While some commenters suggested that the Commission should provide 
specific valuation methods or standards for securities-based 
crowdfunding transactions, we are not persuaded that there would be 
sufficient benefits to being prescriptive in this regard. Methods and 
valuations of early stage companies vary significantly, and any attempt 
to choose a particular valuation methodology could limit flexibility 
and have the result of endorsing one approach over another without 
necessarily having a sound basis for doing so. We believe the 
requirement that issuers describe the methods they use to value their 
securities in their offering materials, including the requirement that 
they describe examples of methods for how such securities may be valued 
by the issuer in the future, will provide investors with the 
information they need to make an informed investment decision.
    The final 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. As we stated in the 
Proposing Release, in general, the issuance of a debt security

[[Page 71428]]

raises questions about the applicability of the Trust Indenture Act of 
1939 (``Trust Indenture Act'').\586\ Although 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, Trust Indenture Act 
Section 304(b) provides an exemption for any transaction that is 
exempted by Securities Act Section 4 from the provisions of Section 5 
of the Act.\587\ An issuer offering debt securities in reliance on 
Section 4(a)(6), therefore, would be able to rely on this 
exemption.\588\ Based on the availability of this exemption, we are not 
adopting a specific exemption from the requirements of the Trust 
Indenture Act for offerings of debt securities made in reliance on 
Section 4(a)(6).
---------------------------------------------------------------------------

    \586\ 15 U.S.C. 77aaa et seq.
    \587\ 15 U.S.C. 77ddd(b).
    \588\ 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.
---------------------------------------------------------------------------

C. Intermediary Requirements

1. Definitions of Funding Portals and Associated Persons
a. Proposed Rules
    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) 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 Web 
site or portal; (3) compensate employees, agents or other persons for 
such solicitation or based on the sale of securities displayed or 
referenced on its Web site 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.\589\
---------------------------------------------------------------------------

    \589\ Congress in 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).
---------------------------------------------------------------------------

    In the Proposing Release, we explained that because a funding 
portal would be engaged in the business of effecting securities 
transactions for the accounts of others through crowdfunding, it would 
be a ``broker'' within the meaning of Section 3(a)(4) of the Exchange 
Act.\590\ Accordingly, proposed Rule 300(c)(2) of Regulation 
Crowdfunding would define ``funding portal'' consistent with the 
statutory definition of ``funding portal,'' with the substitution of 
the word ``broker'' for the word ``person.''
---------------------------------------------------------------------------

    \590\ See Proposing Release at 78 FR 66458. See also discussion 
in Section II.D.2.
---------------------------------------------------------------------------

    We also stated in the Proposing Release that the proposed rules 
would apply not only to funding portals, but also to their associated 
persons in many instances. The terms ``person associated with a broker 
or dealer'' and ``associated person of a broker or dealer'' are defined 
in Exchange Act Section 3(a)(18).\591\ Proposed Rule 300(c)(1) of 
Regulation Crowdfunding would similarly 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, other than 
persons whose functions are solely clerical or ministerial. The 
proposed rules would provide, however, that persons who are excluded 
from the definition of associated person of a funding portal because 
their functions are solely clerical or ministerial would remain subject 
to our sanctioning authority under Exchange Act Sections 15(b)(4) and 
15(b)(6).\592\ This definition is consistent with, and modeled on, the 
language of Exchange Act Section 3(a)(18).\593\
---------------------------------------------------------------------------

    \591\ 15 U.S.C. 78c(a)(18).
    \592\ Section 15(b)(4) (15 U.S.C. 78o(b)(4)) authorizes the 
Commission to bring administrative proceedings for the imposition of 
sanctions, up to and including the revocation of a broker's 
registration, when the broker violates the federal securities laws 
(and for other misconduct). Section 15(b)(6) (15 U.S.C. 78o(b)(6)) 
provides similar sanctioning authority with respect to persons 
associated with a broker, including the ability to bar such persons 
from associating with any Commission registrant.
    \593\ We note, however, that the definition in proposed Rule 
300(c)(1) does not include persons under common control with the 
funding portal, unlike the definition in Exchange Act Section 
3(a)(18) which includes such persons as associated persons of 
broker-dealers.
---------------------------------------------------------------------------

    In proposed Rule 300(c)(4), we also defined ``investor'' as any 
investor or any potential investor, as the context requires.
b. Comments on the Proposed Rules
    The Proposing Release requested comments on whether there were 
funding portal activities, other than those in Exchange Act Section 
3(a)(80), that we should prohibit, and whether any prohibitions should 
be modified or removed. We also requested comments about whether 
further guidance was necessary on the provisions of the Exchange Act 
and the rules and regulations thereunder that would apply to funding 
portals.
    Some commenters stated that the Commission should not provide any 
further guidance or prohibitions on funding portal activity in addition 
to those required by statute.\594\ One of these commenters stated that 
the proposed regulations for funding portal activities are ``sufficient 
for investor protection and proper regulatory oversight.'' \595\ 
Another commenter opposed removing or modifying the statutory 
limitations on funding portal activities, stating that if funding 
portals wish to engage in the prohibited activities, they could do so 
by registering, and being appropriately regulated as, broker-
dealers.\596\
---------------------------------------------------------------------------

    \594\ See, e.g., RocketHub Letter; Tiny Cat Letter (stating that 
the proposed regulations provide a ``healthy level of investor 
protection, but are not overly burdensome and we wholeheartedly 
appreciate the [C]ommission's general attitude of restraint''). 
Another commenter also opposed additional prohibitions, stating that 
``to add prohibitions would be an illegal Rule not authorized by the 
JOBS Act legislation.'' See Public Startup Letter 2. This commenter 
made a similar argument with respect to various aspects of the rule. 
We note, however, that the JOBS Act provides the Commission the 
authority to provide other requirements for the protection of 
investors and in the public interest. See, e.g., Securities Act 
Section 4A(a)(12); 4A(b)(5).
    \595\ See Tiny Cat Letter.
    \596\ See Consumer Federation Letter.
---------------------------------------------------------------------------

c. Final Rules
    After considering the comments, we are adopting, as proposed, the 
definitions of ``associated person of a funding portal or person 
associated with a funding portal'' and ``funding portal'' in Rules 
300(c)(1) and(2), respectively. In particular, we believe that, at the 
present time, the statutory prohibitions on a funding portal in 
Exchange Act Section 3(a)(80), as reflected in the final rule 
definition of a funding portal, provide appropriate investor 
protections.
    We also are adopting the definition of ``investor'' from the 
proposed rules but have moved the definition to Rule 100(d), and made a 
modification to clarify that the definition applies to all of 
Regulation Crowdfunding.\597\ Although commenters did not address

[[Page 71429]]

the definition of ``investor,'' we are making this change to address 
any potential confusion about whether the definition is applicable to 
all of Regulation Crowdfunding.
---------------------------------------------------------------------------

    \597\ See Section II.B.1.
---------------------------------------------------------------------------

2. General Requirements for Intermediaries
a. Registration and SRO Membership
(1) Proposed Rules
    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.\598\ Proposed Rule 300(a)(1) of 
Regulation Crowdfunding 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 Section 4A(a)(1) and proposed 
Rule 400 of Regulation Crowdfunding. As discussed below, we also 
proposed to make the information that a funding portal provides on the 
proposed registration form (i.e., Form Funding Portal), other than 
personally identifiable information or other information with a 
significant potential for misuse, accessible to the public.\599\
---------------------------------------------------------------------------

    \598\ As we noted in the Proposing Release, facilitating 
crowdfunded transactions (which involve the offer or sale of 
securities by an issuer and not secondary market activity) 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). See Proposing Release at 78 FR 66459 
(discussing secondary market activity and exchange or ATS 
registration).
    \599\ See Section II.D.1 (discussing registration requirements).
---------------------------------------------------------------------------

    Securities 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).\600\ Exchange Act Section 
3(h)(1)(B) separately requires, as a condition of the exemption from 
broker registration, that a funding portal be a member of a national 
securities association that is registered with the Commission under 
Exchange Act Section 15A. Proposed Rule 300(a)(2) 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. Currently, FINRA is the only registered 
national securities association.
---------------------------------------------------------------------------

    \600\ 15 U.S.C. 78c(a)(26). Exchange Act Section 3(a)(26) 
defines an ``SRO'' to include, among other things, a ``registered 
securities association.'' Id.
---------------------------------------------------------------------------

    We also proposed definitions for the terms ``intermediary'' and 
``SRO'' in proposed Rules 300(c)(3) and 300(c)(5) of Regulation 
Crowdfunding, respectively. As proposed, intermediary would mean a 
broker registered under Section 15(b) of the Exchange Act or a funding 
portal registered under proposed Rule 400 of Regulation Crowdfunding 
and would include, where relevant, an associated person of the 
registered broker or registered funding portal. SRO was proposed to 
have the same meaning as in Section 3(a)(26) of the Exchange Act.
(2) Comments on the Proposed Rules
    Commenters generally supported FINRA being the appropriate SRO and 
national securities association for intermediaries.\601\ In the 
Proposing Release, we asked if we were to approve the registration of 
another national securities association under Exchange Act Section 15A 
in the future, in addition to FINRA, whether it would it be appropriate 
for us to require membership in both the existing and new association. 
Commenters urged that intermediaries be required to register with only 
one such national securities association.\602\
---------------------------------------------------------------------------

    \601\ See, e.g., Joinvestor Letter; RocketHub Letter. One 
commenter stated that funding portals should not be required to 
register with the Commission or become FINRA members because, unlike 
brokers, they serve only as an ``information delivery service.'' See 
Perfect Circle Letter. We note, however, that registration is a 
statutory requirement under Securities Act Section 4A(a)(1).
    \602\ See, e.g., Joinvestor Letter; Public Startup Letter 2; 
RocketHub Letter; Vann Letter.
---------------------------------------------------------------------------

    Certain commenters expressed concern about potential competitive 
advantages of registered broker-dealers over funding portals, 
suggesting that the Commission should prohibit brokers from engaging in 
transactions conducted pursuant to Section 4(a)(6) until funding 
portals can become registered,\603\ or provide funding portals a grace 
period so they may be able to operate before their registration becomes 
effective.\604\ Another commenter, however, suggested that licensed 
broker-dealers should be immediately authorized to provide services 
associated with a ``registered crowdfunding portal'' to any issuer 
looking to self-host or to an issuer that has ``an offline mechanism 
available for crowdfunding.'' \605\
---------------------------------------------------------------------------

    \603\ See, e.g., RocketHub Letter.
    \604\ See, e.g., Joinvestor Letter.
    \605\ Public Startup Letter 2.
---------------------------------------------------------------------------

    In response to our requests for comment in the Proposing Release, 
commenters were also divided on whether the Commission should require 
minimum qualification, testing and licensure requirements for funding 
portals and their associated persons.\606\
---------------------------------------------------------------------------

    \606\ Comments in support included Hakanson Letter; Reichman 
Letter; RocketHub Letter. See also CrowdCorp Letter (stating that 
the Commission should establish a separate licensing scheme for 
persons who help prepare issuer disclosure documents and advise 
issuers, but who are not brokers or funding portals). Comments 
opposed included Public Startup Letter 2; Startup Valley Letter.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting Rule 300(a) 
generally as proposed but deleting specific references to FINRA in the 
final rule, as well as the rest of Regulation Crowdfunding and Form 
Funding Portal, when referring to a registered national securities 
association. Although we recognize that FINRA is currently the only 
registered national securities, we believe it is redundant to 
specifically include its name when referring to registered national 
securities associations in the rule text and Form Funding Portal.
    We are cognizant of the fact that funding portals must register 
with the Commission and become compliant with an entirely new set of 
rules. The effective date for the final rules (which is 180 days after 
publication in the Federal Register, except for Sec.  227.400, Form 
Funding Portal, and the amendments to Form ID, which are effective 
January 29, 2016) is designed to provide a sufficient amount of time 
for funding portals to register and establish the necessary 
infrastructure to comply with other requirements being imposed in 
Regulation Crowdfunding before any intermediaries--either broker-
dealers or funding portals--may engage in crowdfunding activities. We 
believe this should address commenters' concerns that broker-dealers 
otherwise may gain a competitive advantage if they were able to engage 
in crowdfunding activities before funding portals are able to comply 
with the requirements needed to begin operation.\607\
---------------------------------------------------------------------------

    \607\ We note that broker-dealers may nonetheless have a 
competitive advantage to the extent that they are able to provide a 
wider range of services than those permitted funding portals under 
the statute. However, we believe this competitive advantage is 
balanced to a significant degree by a strong regulatory regime 
tailored to that wider range of services.
---------------------------------------------------------------------------

    While FINRA is the only registered national securities association 
at present, we recognize that a new national securities association or 
associations could register with us in the future. At that time, a 
funding portal could choose to become a member of the new 
association(s) instead of, or in

[[Page 71430]]

addition to, its FINRA membership. As we noted above, we requested 
comment on whether we should require membership in both the existing 
national securities association (FINRA) and a new national securities 
association, if we were to approve another national securities 
association in the future. We have considered commenters' views and 
have determined not to require that funding portals be members of 
multiple securities associations (should new associations be registered 
in the future). Because all registered national securities associations 
must satisfy the same statutory standards set forth in Exchange Act 
Section 15A, we do not believe at this time that requiring membership 
in additional associations would add significant investor protections.
    After considering comments, we have determined not to impose any 
licensing, testing or qualification requirements for associated persons 
of funding portals. We believe that a registered national securities 
association is well-positioned, given the requirements for registration 
as a national securities association, as well as the statutory and 
regulatory requirements that apply to such a registered entity, to 
determine whether to propose additional requirements such as licensing, 
testing or qualification requirements for associated persons of funding 
portals.\608\
---------------------------------------------------------------------------

    \608\ All SROs are required to file proposed rules and rule 
changes with us under Exchange Act Section 19(b) and Rule 19b-4. In 
general, the Commission reviews proposed SRO rules and rule changes 
and publishes them for comment. The Commission then approves or 
disapproves them, or the rules become effective immediately or by 
operation of law.
---------------------------------------------------------------------------

    We also are adopting as proposed the definitions for the terms 
``intermediary'' in Rule 300(c)(3). However, we are removing the 
definition of ``self-regulatory organization'' and ``SRO'' from the 
final rules because the term is already defined in Exchange Act Section 
3(a)(26).
b. Financial Interests
(1) Proposed Rules
    Securities 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. In the Proposing 
Release, we proposed to use our discretion to extend the prohibition to 
the intermediary itself. Thus, proposed Rule 300(b) of Regulation 
Crowdfunding would prohibit the intermediary, as well as its directors, 
officers or partners (or any person occupying a similar status or 
performing a similar function), from having: (1) A financial interest 
in an issuer using its services; and (2) 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. Proposed Rule 300(b) defined ``a financial interest in 
an issuer'' to mean a direct or indirect ownership of, or economic 
interest in, any class of the issuer's securities.
(2) Comments on the Proposed Rules
    In general, commenters supported the Commission's proposed 
financial interest prohibition as it applies to an intermediary's 
directors, officers or partners (or any person occupying a similar 
status or performing a similar function),\609\ as well as the proposed 
definition of financial interest.\610\ In contrast, however, many 
commenters opposed the Commission's proposed prohibition on an 
intermediary itself having or receiving a financial interest in the 
issuer,\611\ while some supported this proposed prohibition.\612\
---------------------------------------------------------------------------

    \609\ See, e.g., CFA Institute Letter; Consumer Federation 
Letter; Jacobson Letter.
    \610\ See, e.g., Hackers/Founders Letter; Joinvestor Letter; 
Tiny Cat Letter. See also Consumer Federation Letter (stating that 
the Commission should ``monitor practices in this area once rules 
are adopted to ensure that the intended limits appropriate to 
intermediaries' gatekeeper functions are not being circumvented 
through the use of other types of payments or financial 
arrangements'').
    \611\ See, e.g., AngelList Letter; Anonymous Letter 3; Arctic 
Island Letter 6; EMKF Letter; Growthfountain Letter; Guzik Letter 1; 
Hackers/Founders Letter; Heritage Letter; Milken Institute Letter; 
Propellr Letter 1; Public Startup Letter 2; RoC Letter; RocketHub 
Letter; Seyfarth Letter; Thomas Letter 1.
    \612\ See, e.g., CFA Institute Letter; Clapman Letter; Consumer 
Federation Letter; Jacobson Letter; Joinvestor Letter.
---------------------------------------------------------------------------

    Commenters who supported our proposal to extend the prohibition on 
financial interests to the intermediary suggested that such 
prohibitions may help to mitigate conflicts of interests.\613\ One 
commenter stated that an intermediary having a financial interest in 
the issuer would skew the incentives of the intermediary toward its own 
interests rather than the integrity of the transaction, and also stated 
its view that disclosure of this interest could not cure this 
problem.\614\
---------------------------------------------------------------------------

    \613\ See, e.g., CFA Institute Letter; Consumer Federation 
Letter (``An intermediary that is compensated through receipt of a 
financial interest in an issuer may have an incentive to take steps 
to ensure that the issuer reaches its funding target so that the 
offering can move forward or engage in other practices designed to 
artificially inflate the value of its securities.''); Jacobson 
Letter.
    \614\ See Jacobson Letter.
---------------------------------------------------------------------------

    Several commenters who opposed the prohibition on an intermediary 
having a financial interest in the issuer suggested that the 
prohibition would reduce the number and types of intermediaries that 
might otherwise participate in crowdfunding activities.\615\ These 
commenters asserted that allowing an intermediary to take this 
financial interest would provide an option through which issuers could 
provide payment to the intermediary for its services, and also permit 
co-investments, which would ultimately benefit investors.\616\ These 
commenters also asserted that such a financial interest could align the 
interests of intermediaries with those of investors.\617\ One commenter 
suggested that ``by removing an upfront cost and incentivizing an 
ongoing relationship between the intermediary and the issuer, equity 
compensation for intermediaries fulfils the Commission's twin aims of 
efficient capital markets and investor protection.'' \618\ Another 
commenter noted that permitting the intermediary to take a financial 
interest in the issuer would encourage the development of funding 
portals that are sponsored by or affiliated with Community Development 
Financial Institutions (``CDFIs'').\619\ Yet another

[[Page 71431]]

commenter suggested that permitting the intermediary to take a 
financial interest in the issuer would incentivize intermediaries to 
screen potential issuers for possible fraud or wrongdoing.\620\ Other 
commenters supported permitting the intermediary to take a financial 
interest in the issuer so long as the terms of the financial interests 
taken by the intermediary are the same as or not more favorable than 
those taken by investors in the offering.\621\ Commenters suggested 
additional measures, such as adequate disclosure,\622\ a five percent 
interest limitation,\623\ and restrictions on the ability of an 
intermediary to transfer its interests in the issuer, could help to 
address any conflicts of interest concerns.\624\
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    \615\ See, e.g., Hackers/Founders Letter (``Furthermore, rules 
that preclude the [i]ntermediary from holding any financial interest 
would overly restrict the [i]ntermediary environment; for example, 
such restrictions might prevent a diverse set of platforms from 
developing that serve the specific needs of different communities. 
The impact of which might disproportionately impact certain 
communities, such as the not[hyphen]for[hyphen]profit community.'').
    \616\ See, e.g., EMKF Letter (``The current proposed rules with 
a fee-based system is a recipe for disaster. No credible startups 
that have viable alternatives would choose to pay 5-15% of their 
fundraising round in cash to an intermediary.'').
    \617\ See, e.g., AngelList Letter (``So long as the program was 
consistently applied without judgment by the intermediary, the net 
effect would purely be to align the interests of the intermediary 
with the investor.''). See also EMKF Letter; Hackers/Founders 
Letter; Heritage Letter; Milken Institute Letter; RoC Letter; Thomas 
Letter 1.
    \618\ Seyfarth Letter.
    \619\ See Concerned Capital Letter (suggesting the Commission 
broaden the definition of intermediaries to encourage portals 
sponsored by and/or affiliated with U.S. Treasury-recognized CDFIs 
and exempt such portals from the prohibitions against having a 
financial interest in issuers). See also City First Letter 
(suggesting that the Commission allow CDFIs to act as co-lenders).
     The Community Development Financial Institutions Fund, which 
was established by the Riegle Community Development and Regulatory 
Improvement Act of 1994, is a government program that promoted 
access to capital and local economic growth by, among other things, 
investing in, supporting and training CDFIs that provide loans, 
investments, financial services and technical assistance to 
underserved populations and communities. See generally http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=9. A certified 
Community Development Financial Institution (``CDFI'') is a 
specialized financial institution that works in market niches that 
are underserved by traditional financial institutions. CDFIs provide 
a unique range of financial products and services in economically 
distressed target markets, such as mortgage financing for low-income 
and first-time homebuyers and not-for-profit developers, flexible 
underwriting and risk capital for needed community facilities, and 
technical assistance, commercial loans and investments to small 
start-up or expanding businesses in low-income areas. CDFIs include 
regulated institutions such as community development banks and 
credit unions, and non-regulated institutions such as loan and 
venture capital funds.
    \620\ See Anonymous Letter 3.
    \621\ See, e.g., Hackers/Founders Letter; Propellr 1 Letter; 
Public Startup Letter 2; RocketHub Letter.
    \622\ See, e.g., Growthfountain Letter; Hackers/Founders Letter; 
Propellr Letter 1; RoC Letter; RocketHub Letter.
    \623\ See RocketHub Letter.
    \624\ See Hackers/Founders Letter.
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(3) Final Rules
    After considering the comments, we are adopting Rule 300(b), as 
proposed, with respect to an intermediary's directors, officers or 
partners (or any person occupying a similar status or performing a 
similar function). Rule 300(b), as adopted, prohibits an intermediary's 
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. Rule 300(b) also specifically 
prohibits these persons 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. 
Consistent with the proposal, Rule 300(b), as adopted, defines ``a 
financial interest in an issuer'' to mean a direct or indirect 
ownership of, or economic interest in, any class of the issuer's 
securities.\625\
---------------------------------------------------------------------------

    \625\ As we explained in the Proposing Release, the prohibition 
is intended 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. 78 FR at 66461. The 
prohibition extends to ``any person occupying a similar status or 
performing a similar function,'' and applies with respect to both 
direct or indirect ownership of, or economic interest in, any class 
of the issuer's securities. In addition, we note that Section 15(b) 
of the Securities Act creates liability for persons who aid and abet 
violations of the Securities Act or the rules and regulations 
thereunder, such as would occur if a third person knowingly or 
recklessly provided substantial assistance to a director, officer or 
partner (or any person occupying a similar status or position), for 
example, by accepting and holding, on the officer's behalf, a 
financial interest in the issuer in circumvention of the 
prohibition.
---------------------------------------------------------------------------

    We are not adopting, however, the proposed complete prohibition on 
the intermediary itself having or receiving a financial interest in an 
issuer using its services. Although intermediaries are generally 
prohibited under the rule as adopted from having such a financial 
interest, as discussed below, in response to comments, we have amended 
the rule to permit an intermediary to have a financial interest in an 
issuer that is offering or selling securities in reliance on Section 
4(a)(6) through the intermediary's platform, provided that: (1) The 
intermediary receives the financial interest from the issuer as 
compensation for the services provided to, or for the benefit of, the 
issuer in connection with the offer or sale of such securities being 
offered or sold in reliance on Section 4(a)(6) through the 
intermediary's platform; and (2) the financial interest consists of 
securities of the same class and having the same terms, conditions and 
rights as the securities being offered or sold in reliance on Section 
4(a)(6) through the intermediary's platform.
    We are mindful of concerns raised by commenters that a prohibition 
could have a chilling effect on the ability of small issuers to use the 
crowdfunding exemption. These issuers may be small businesses or 
neighborhood establishments that may not have the liquid capital to 
compensate intermediaries for services. As commenters noted, allowing 
an intermediary to have or receive a financial interest in the issuer 
could provide a method for the issuer to pay an intermediary for its 
services, which may facilitate capital formation. This may, in turn, 
encourage the development of funding portals that are, for example, 
affiliated with CDFIs, as one commenter suggested.\626\ As commenters 
further noted, permitting such a financial interest may also help to 
align the interests of intermediaries and investors, and provide an 
additional incentive to screen for fraud. We believe at this time the 
interest of promoting capital formation for small businesses, and 
developing a workable framework for securities-based crowdfunding, 
counsels against extending the prohibition on financial interests to 
the intermediary itself.
---------------------------------------------------------------------------

    \626\ See Concerned Capital Letter.
---------------------------------------------------------------------------

    However, we are cognizant of the potential conflicts of interest 
that may arise, and therefore we are placing certain conditions on the 
ability of intermediaries to have a financial interest in an issuer 
that is offering or selling securities in reliance on Section 4(a)(6) 
through the intermediary's platform.\627\ First, the intermediary must 
receive the financial interest from the issuer as compensation for the 
services provided to, or for the benefit of, the issuer in connection 
with the offer or sale of such securities being offered or sold in 
reliance on Section 4(a)(6).\628\ We believe that this limitation, 
which will allow intermediaries to receive securities as payment for 
services but not otherwise permit them to invest in the offering, 
addresses commenters' concerns that a prohibition could have a 
``chilling effect'' on the ability of small issuers to use the 
crowdfunding exemption, while serving to mitigate concerns relating to 
intermediaries taking steps to ``artificially inflate'' the value of 
securities in the offerings.\629\ Second, we have considered the 
comments in support of limiting an intermediary's financial interest by 
requiring that such interest be the same as or not more favorable than 
those taken by investors in the offering,\630\ and have determined to 
prohibit intermediaries from receiving a financial interest unless it 
is in securities that are of the same class, and that have the same 
terms, conditions and rights as the securities in the offering. We 
believe that this limitation will further serve to mitigate any 
potential conflicts by helping to align

[[Page 71432]]

the interests of the intermediary with those of the investors in the 
offering.\631\
---------------------------------------------------------------------------

    \627\ See notes 613-614 and accompanying text.
    \628\ As noted above in Section II.C.2, an intermediary must be 
either a registered funding portal or a registered broker-dealer, 
and must be a member of a registered national securities 
association. FINRA rules currently require that its broker-dealer 
members charge reasonable fees for their services and observe just 
and equitable principles of trade in the conduct of their business. 
FINRA has also filed a proposed rule change with the Commission to 
apply certain rules to funding portals, including requiring them to 
observe high standards of commercial honor and just and equitable 
principles of trade in the conduct of their businesses. See Proposed 
Rule Change to Adopt the Funding Portal Rules and Related Forms and 
FINRA Rule 4518, SR-FINRA-2015-040 (Oct. 9, 2015).
    \629\ See Consumer Federation Letter.
    \630\ See note 621.
    \631\ The rule does not preclude an intermediary from receiving 
securities as compensation for services from the same issuer for a 
subsequent offering conducted by the issuer in reliance on Section 
4(a)(6) as long as the securities received are compensation for 
services provided during the subsequent offering and are of the same 
class and have the same terms, conditions and rights as the 
securities being offered in the subsequent offering.
---------------------------------------------------------------------------

    We are persuaded that the disclosures otherwise required by 
Regulation Crowdfunding also will help to address any potential 
conflicts of interest arising from an intermediary having or receiving 
a financial interest in an issuer. Among other things, Rule 302(d) 
requires an intermediary 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) at account opening and 
Rule 303(f) requires disclosure of remuneration received by an 
intermediary (including securities received as remuneration) on 
confirmations.\632\ We believe that these disclosures will provide 
investors with relevant information concerning any intermediary's 
financial interests (including whether such interest was acquired on 
the same terms that are available to investors), which, in turn, will 
help investors to make better informed investment decisions. In 
addition, the intermediary must comply with all other applicable 
requirements of Regulation Crowdfunding, including the statutory 
limitations on a funding portal's activities.\633\
---------------------------------------------------------------------------

    \632\ See Sections II.C.4.d and II.C.5.f. See also Rule 302(c) 
of Regulation Crowdfunding (requiring intermediaries to inform 
investors, at the time of account opening, that promoters must 
clearly disclose in all communications on the platform the receipt 
of compensation and the fact that he or she is engaging in 
promotional activities on behalf of the issuer).
    \633\ See Exchange Act Section 3(a)(80) (defining ``funding 
portal'' and establishing certain limitations on their activities 
consistent with the statute, such as prohibiting a funding portal 
from offering investment advice or recommendation; soliciting 
purchases, sales or offers to buy securities offered or displayed on 
its Web site or portal; or holding, managing, possessing, or 
otherwise handling investor funds or securities). In this regard, 
compliance with disclosures required by Regulation Crowdfunding 
generally would not cause a funding portal to provide investment 
advice or recommendations. Nonetheless, a funding portal should seek 
to ensure that disclosure of its financial interest(s) in an issuer 
is not inconsistent with the statutory prohibition on providing 
investment advice or recommendations. For example, a funding portal 
must not present its financial interest in an issuer as a 
recommendation or endorsement of that issuer. See Section II.D.3. We 
also note that if a funding portal holds, owns or proposes to 
acquire securities issued by an issuer, or multiple issuers, that 
individually or in aggregate exceed more than 40% of the value of 
the funding portal's total assets (excluding government securities 
and cash items) on an unconsolidated basis, the funding portal may 
fall within the definition of investment company under Section 
3(a)(1)(C) of the Investment Company Act. We generally would expect, 
however, that such funding portal would seek to rely on the 
exclusion from the definition of investment company in Section 
3(c)(2) of the Investment Company Act for (among other things) a 
person primarily engaged in the business of acting as a broker.
---------------------------------------------------------------------------

    Commission staff expects to review the compensation structure of 
intermediaries during the study of the federal crowdfunding exemption 
it plans to undertake no later than three years following the effective 
date of Regulation Crowdfunding.\634\
---------------------------------------------------------------------------

    \634\ See Section II.
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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.'' As discussed below, after 
considering the comments, we are adopting Rule 301 of Regulation 
Crowdfunding substantially as proposed, with a few changes to Rule 
301(c)(2).
a. Issuer Compliance
(1) Proposed Rule
    We proposed in Rule 301(a) of Regulation Crowdfunding to require 
that an intermediary have a reasonable basis for believing that an 
issuer seeking to offer or sell securities though the intermediary's 
platform complies with the requirements of Section 4(a)(6) and the 
related requirements of Regulation Crowdfunding. For this requirement, 
we proposed that an intermediary may reasonably rely on an issuer's 
representations about compliance unless the intermediary has reason to 
question the reliability of those representations.
(2) Comments on Proposed Rule
    Commenters generally agreed that intermediaries play a significant 
role in preventing and detecting fraud and should take measures to 
reduce potential fraud. Some commenters, however, expressed concerns 
about the proposed ``reasonable basis'' standard for an intermediary's 
belief about an issuer's compliance with applicable laws stating that 
the standard should be higher.\635\ Others commenters supported the 
standard.\636\
---------------------------------------------------------------------------

    \635\ See, e.g., AFR Letter; ASTTC Letter; Computershare Letter; 
Consumer Federation Letter; CSTTC Letter; Grassi Letter; Merkley 
Letter; NYSSCPA Letter.
    \636\ See, e.g., RocketHub Letter; STA Letter.
---------------------------------------------------------------------------

    A number of commenters expressed concern about the proposed 
reliance on issuer representations.\637\ Some commenters suggested an 
intermediary should be required to conduct some type of due diligence 
on the issuer, as opposed to relying on issuer representations.\638\ 
Another commenter went further by suggesting that an intermediary 
should also have an ongoing obligation to monitor communications by 
issuers during the course of the offering to detect and prevent 
violations of the securities laws and the regulations thereunder.\639\ 
Another commenter stated that an issuer's representation should not 
suffice unless it is detailed enough to evidence a reasonable awareness 
by the issuer of its key obligations and the ability to comply with 
those obligations.\640\
---------------------------------------------------------------------------

    \637\ See, e.g., AFR Letter; Computershare Letter; Consumer 
Federation Letter; Merkley Letter.
    \638\ See, e.g., CSTTC Letter; Grassi Letter; NYSSCPA Letter; 
Consumer Federation Letter (stating that an intermediary's 
responsibility is rendered meaningless without establishing specific 
standards that require due diligence in order to reasonably conclude 
the issuer is in compliance).
    \639\ See AFR Letter (``[T]he Commission's proposal to allow 
intermediaries to rely on self-certification by issuers makes a 
mockery of its proposed requirement that intermediaries 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 Crowdfunding.' '').
    \640\ See STA Letter.
---------------------------------------------------------------------------

    One commenter argued that the language of the proposed rule was 
contradictory because relying on representations made by the issuer is 
not the same as establishing a reasonable basis for believing the 
issuer is in compliance.\641\
---------------------------------------------------------------------------

    \641\ See ABA Letter.
---------------------------------------------------------------------------

    One commenter recommended that the Commission ``consider a tiered 
approach to compliance obligations'' where, as the size of the offering 
or other risk factors increased, intermediaries would be required to 
conduct more rigorous compliance reviews.\642\ Under such an approach, 
this commenter stated that for small offerings that cap investments at 
a low level, $500 for example, and where there is no participation by 
individuals with a history of security law violations, the intermediary 
would be permitted to

[[Page 71433]]

rely on representations by issuers to satisfy its obligation to ensure 
compliance. As the size of the offering, the size of permitted 
investments, or other risk factors increase, the commenter stated that 
the Commission should consider requiring intermediaries to conduct more 
rigorous compliance reviews.
---------------------------------------------------------------------------

    \642\ See IAC Recommendation; see also BetterInvesting Letter.
---------------------------------------------------------------------------

(3) Final Rule
    Rule 301(a), as adopted, requires 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 Securities Act Section 4A(b) 
and the related requirements in Regulation Crowdfunding. While some 
commenters argued for higher or different standards, such as requiring 
intermediaries to conduct due diligence on issuers or monitor 
communications by issuers during the course of the offering, we believe 
that a reasonable basis standard is appropriate, particularly in view 
of the issuer's own obligation to comply with the requirements in 
Section 4A(b) and the related requirements in Regulation Crowdfunding. 
We are mindful as well of the associated costs of a potentially higher 
standard. Consistent with the proposal, Rule 301(a) also permits 
intermediaries to reasonably rely on representations of the issuer, 
unless the intermediary has reason to question the reliability of those 
representations.
    In satisfying the requirements of Rule 301(a), we emphasize that an 
intermediary has a responsibility to assess whether it may reasonably 
rely on an issuer's representation of compliance through the course of 
its interactions with potential issuers.\643\ We agree with comments 
that an intermediary seeking to rely on an issuer representation should 
consider whether the representation is detailed enough to evidence a 
reasonable awareness by the issuer of its obligations and its ability 
to comply with those obligations. The specific steps an intermediary 
should take to determine whether it can rely on an issuer 
representation may vary, but should be influenced by and tailored 
according to the intermediary's knowledge and comfort with each 
particular issuer. We believe this approach is generally consistent 
with the view of one commenter that suggested a tiered approach to 
compliance obligations where intermediaries should conduct more 
rigorous compliance reviews and background checks as risk factors 
increase.\644\
---------------------------------------------------------------------------

    \643\ In addition, an intermediary's potential liability under 
Securities Act Section 4A(c), as added by the JOBS Act, may 
encourage intermediaries to develop adequate procedures to fully 
assess whether reliance on an issuer's representation is reasonable. 
We also note that Congress provided a defense to any such liability 
if an intermediary did not know, and in the exercise of reasonable 
care could not have known, of the untruth or omission. Therefore, 
and as identified in the Proposing Release, we continue to believe 
that there are appropriate steps that intermediaries might take in 
exercising reasonable care in light of this liability provision. See 
Section II.E.5 (discussing scope of statutory liability).
    \644\ We also emphasize that when an intermediary seeks to rely 
on the representations of others to form a reasonable basis, the 
intermediary should have policies and procedures regarding under 
what circumstances it can reasonably rely on such representations 
and when additional investigative steps may be appropriate. See 
Section II.D.4.
---------------------------------------------------------------------------

b. Records of Securities Holders
(1) Proposed Rule
    We proposed in Rule 301(b) of Regulation Crowdfunding a requirement 
that an intermediary 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. We proposed that an intermediary may reasonably rely on an 
issuer's representations about compliance unless the intermediary has 
reason to question the reliability of those representations. We did not 
propose a particular form or method of recordkeeping of securities, nor 
did we propose to require that an issuer use a transfer agent or other 
third party.\645\ We noted, however, that requiring a registered 
transfer agent to be involved after the offering could introduce a 
regulated entity with experience in maintaining accurate shareholder 
records,\646\ and we asked in the Proposing Release whether we should 
require an issuer to use a regulated transfer agent to keep such 
records and whether there were less costly means by which an issuer 
could rely on a third party to assist with the recordkeeping.\647\
---------------------------------------------------------------------------

    \645\ Proposing Release, 78 FR at 66462.
    \646\ Id.
    \647\ Id. at 66464.
---------------------------------------------------------------------------

(2) Comments on Proposed Rule
    Commenters agreed that an intermediary should have a basis for 
believing that an issuer has established a means to keep accurate 
records.\648\ Commenters were divided, however, between those who 
supported \649\ and those who opposed \650\ any requirement mandating 
the use of a registered transfer agent. Commenters supporting the 
required use of registered transfer agents cited potential benefits, 
including reducing internal costs and providing corporate transparency; 
\651\ having the transfer agent serve as the issuer's paying agent, 
proxy agent, exchange agent, tender agent and mailing agent for ongoing 
reports; \652\ providing a back-up and recovery system for records; 
\653\ and conducting internal audits to protect against theft.\654\ 
Some commenters also highlighted potential problems when non-registered 
transfer agents or the issuer maintains records, including improper 
registration of multiple owners, duplicate records, missing certificate 
numbers, inability to trace ownership, and inability to maintain 
records; \655\ and incorrect handling of corporate actions, failure to 
observe restrictions on transfers, and failure to follow abandoned 
property reporting requirements.\656\ One commenter suggested that the 
Commission should identify specific areas for an intermediary to 
consider about an issuer's recordkeeping capabilities when determining 
whether or not to provide access to that issuer.\657\ This commenter 
also urged the Commission to create a safe harbor whereby an 
intermediary would be deemed to have met the recordkeeping requirement 
if the issuer has retained a registered transfer agent or registered 
broker-dealer.\658\
---------------------------------------------------------------------------

    \648\ See, e.g., Arctic Island Letter 5; ASTTC Letter; CFIRA 
Letter 8; Computershare Letter; CST Letter; CSTTC Letter; FAST 
Letter; Grassi Letter; Joinvestor Letter; Public Startup Letter 2; 
RocketHub Letter; STA Letter; Tiny Cat Letter.
    \649\ See, e.g., ASTTC Letter; ClearTrust Letter; CST Letter; 
CSTTC Letter; Empire Stock Letter; Equity Stock Letter; FAST Letter; 
Sharewave Letter; Stalt Letter.
    \650\ See, e.g., Arctic Island Letter 5; CapSchedule Letter; 
CFIRA Letter 8; Computershare Letter; Grassi Letter; Joinvestor 
Letter; NYSSCPA Letter; Public Startup Letter 2; RocketHub Letter; 
Tiny Cat Letter.
    \651\ See CST Letter.
    \652\ See Empire Stock Letter.
    \653\ See FAST Letter.
    \654\ Id.
    \655\ See, e.g., ClearTrust Letter; STA Letter; Stalt Letter.
    \656\ See STA Letter.
    \657\ Id.
    \658\ Id. The commenter also stated that such a safe harbor 
would encourage third-party recordkeepers to register as transfer 
agents and thereby enhance protection to investors. The commenter 
further stated that the safe harbor should not apply if a community 
bank is utilized because it would not have similar recordkeeping 
experience. See also Computershare Letter (stating that a safe 
harbor should apply if another regulated entity, such as a broker-
dealer or a bank, is engaged to perform the services, which in turn 
may encourage the use of professional regulated recordkeepers, thus 
enhancing overall protection in the crowdfunding market).
---------------------------------------------------------------------------

    Commenters that opposed the mandatory use of a registered transfer

[[Page 71434]]

agent pointed to cost concerns.\659\ Some of these commenters stated 
that alternatives to transfer agents will develop, including CPA 
firms,\660\ registered broker-dealers \661\ and software applications 
or other potential low-cost alternatives.\662\ Some commenters stated 
that intermediaries should be permitted to provide the relevant 
recording services to issuers.\663\ One commenter suggested funding 
portals should only be permitted to do so with respect to securities 
purchased on their platform or transferred among platforms, such that 
they would not be permitted to act as ``full-fledged [b]rokerage firms 
or transfer agents.'' \664\
---------------------------------------------------------------------------

    \659\ See, e.g., AICPA Letter; Arctic Island Letter 5; 
CapSchedule Letter; CFIRA Letter 8; Computershare Letter; Grassi 
Letter; Joinvestor Letter; RocketHub Letter; STA Letter; Tiny Cat 
Letter.
    \660\ See, e.g., Grassi Letter; NYSSCPA Letter.
    \661\ See Public Startup Letter 2.
    \662\ See Arctic Island Letter 5.
    \663\ See, e.g., Joinvestor Letter; RocketHub Letter.
    \664\ See RocketHub Letter.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting Rule 301(b), as 
proposed, with one modification. Rule 301(b) as adopted requires 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, 
and provides that in satisfying this requirement, an intermediary may 
rely on the representations of the issuer concerning its means of 
recordkeeping unless the intermediary has reason to question the 
reliability of those representations. We also are adding a provision to 
Rule 301(b) as adopted stating that an intermediary will be deemed to 
have satisfied this requirement if the issuer has engaged the services 
of a transfer agent that is registered under Section 17A of the 
Exchange Act.\665\ As we noted in the Proposing Release, we believe 
that the recordkeeping function may be provided by the issuer, a 
broker, a transfer agent or some other (registered or unregistered) 
person. We recognize that, as a commenter explained, recordkeeping 
functions can be extensive and could include, for example, the ability 
to (1) monitor the issuance of the securities the issuer offers and 
sells 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. While the use of a 
registered transfer agent could introduce a regulated entity with 
experience in maintaining accurate shareholder records, as noted in the 
Proposing Release, we believe the issuer should have flexibility in 
establishing such means, and that such flexibility may allow for 
competition among service providers that could reduce operating costs 
for funding portals. We continue to believe that accurate recordkeeping 
can be accomplished by diligent issuers or through a variety of third 
parties. We note also that, for investors to have confidence in 
crowdfunding, issuers and intermediaries must have a shared interest in 
ensuring stability and accuracy of records. Therefore, intermediaries 
should consider the numerous obligations required of a record holder 
when determining whether an issuer has established a reasonable means 
to keep accurate records of the security holders being offered and sold 
securities through the intermediary's platform.
---------------------------------------------------------------------------

    \665\ 15 U.S.C. 78q-1(c). We also note that an issuer's 
exemption from Section 12(g) is conditioned on, among other things, 
that issuer engaging a registered transfer agent. See Section 
II.E.4.
---------------------------------------------------------------------------

    At the same time, mindful of the role that may be played by 
registered transfer agents in maintaining accurate shareholder records, 
we are providing a safe harbor for compliance with Rule 301(b) for 
those issuers that use a registered transfer agent. While we do not 
intend to provide regulated entities with a competitive advantage over 
other recordkeeping options that comply with the rule's requirements, 
we believe it is appropriate to provide certainty as to Rule 301(b) 
compliance in instances in which an issuer has engaged the services of 
a transfer agent that is registered under Section 17A of the Exchange 
Act.
c. Denial of Platform Access
(1) Proposed Rule
    We also proposed in Rule 301(c)(1) of Regulation Crowdfunding a 
requirement that an intermediary deny access by an issuer to its 
platform if it 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 any 20 Percent Beneficial Owner is 
subject to a disqualification under proposed Rule 503.\666\ In 
satisfying this requirement, we proposed to require an intermediary to, 
at a minimum, conduct a background and securities enforcement 
regulatory history check on each issuer whose securities are to be 
offered by the intermediary and on each officer, director or 20 Percent 
Beneficial Owner.
---------------------------------------------------------------------------

    \666\ See Section II.E.6 (discussing Rule 503 of Regulation 
Crowdfunding, which describes disqualification).
---------------------------------------------------------------------------

    We further proposed in Rule 301(c)(2) to require an intermediary to 
deny access to its platform if the intermediary believes the issuer or 
offering presents the potential for fraud or otherwise raises concerns 
about investor protection. In satisfying this requirement, the proposed 
rule would require that an intermediary deny access if it believes that 
it is unable to adequately or effectively assess the risk of fraud of 
the issuer or its potential offering. In addition, we proposed in Rule 
301(c)(2) that if an intermediary becomes aware of information after it 
has granted access that causes it to believe the issuer or the offering 
presents the potential for fraud or otherwise raises concerns about 
investor protection, the intermediary would be required to promptly 
remove the offering from its platform, cancel the offering, and return 
(or, for funding portals, direct the return of) any funds that have 
been committed by investors in the offering.
(2) Comments on Proposed Rule
    Commenters generally supported proposed Rule 301(c).\667\ 
Commenters noted with approval the discretion the proposed rules would 
provide intermediaries.\668\ The ``reasonable basis'' standard in 
proposed Rule 301(c)(1) also garnered comments. One commenter suggested 
that the reasonable basis standard was not strong enough.\669\ One 
commenter stated that having a reasonable basis standard in the 
disqualification determination would be ``difficult to imagine'' unless 
the Commission maintains a database for intermediaries to search.\670\
---------------------------------------------------------------------------

    \667\ See, e.g., CFA Institute Letter; StartupValley Letter.
    \668\ Id.
    \669\ See NYSSCPA Letter (opposing the use of two different 
standards within Rule 301(c) as it could lead to confusion and 
presents vulnerability for fraud to occur through the ``weakest 
link,'' and suggesting instead that a ``prudent care'' standard 
should be used for both requirements).
    \670\ See Public Startup Letter 2.
---------------------------------------------------------------------------

    Commenters had varied views on the proposed requirement in Rule 
301(c)(1) for an intermediary to perform a background check on the 
issuer and certain of its affiliated persons. Several commenters 
supported the requirement,

[[Page 71435]]

but a few commenters suggested ways to decrease costs.\671\ One 
commenter stated that only low-cost, minimum requirements should be 
implemented,\672\ while another commenter suggested that the background 
checks be required only after an issuer has met its target offering 
amount so as to prevent unnecessary expense to the intermediary.\673\ 
Representing a different view, one commenter opposed a requirement for 
background checks to be conducted on all persons related to an 
issuer.\674\ Another commenter noted that the checks would be 
appropriate, but did not support the requirement.\675\
---------------------------------------------------------------------------

    \671\ See, e.g., AFR Letter; CFA Institute Letter; Grassi 
Letter; Joinvestor Letter; NYSSCPA Letter.
    \672\ See RocketHub Letter.
    \673\ See Anonymous Letter 4.
    \674\ See Zhang Letter.
    \675\ See Public Startup Letter 2.
---------------------------------------------------------------------------

    Commenters were divided as to whether we should set specific 
requirements for background checks. One commenter stated that the 
proposal ``fails to set even the most general of standards for these 
checks'' and ``instead relies on intermediaries to use their experience 
and judgment to reduce the risk of fraud.'' \676\ The same commenter 
stated that the proposed approach is flawed and as such the checks are 
likely to be ineffective, especially because many intermediaries are 
likely to be inexperienced.\677\ Several commenters requested further 
clarification and specification about required checks.\678\ However, 
other commenters stated that the Commission should not specify steps 
for an intermediary to take in conducting checks.\679\
---------------------------------------------------------------------------

    \676\ See Consumer Federation Letter.
    \677\ Id.
    \678\ See, e.g., BetterInvesting Letter; Heritage Letter; IAC 
Recommendation; Jacobson Letter; NSBA Letter. See also RocketHub 
Letter (stating that intermediaries ``should be allowed to satisfy 
their obligations by checking commonly used databases for criminal 
background, bankruptcy filings, and tax liens, as well as cross 
check against the Office of Foreign Assets Control (OFAC) sanctions 
lists, and Specially Designated Nationals (SDN) and Blocked Persons 
lists''); Bullock Letter (recommending fingerprinting for key issuer 
personnel and noting that most sheriff's departments in most U.S. 
counties can take fingerprints for a small fee).
    \679\ See, e.g., StartupValley Letter; Vann Letter.
---------------------------------------------------------------------------

    With respect to our request for comment on whether intermediaries 
should be required to make the results of background checks public, 
several commenters opposed the requirement,\680\ while some supported 
it.\681\ Another commenter stated its view that the results should not 
be made public unless a regulator called them into question.\682\ 
Another commenter explained that issuers should be able to publish the 
results if they choose, but no such requirement should be placed on 
intermediaries.\683\ One commenter urged us to ``require that a summary 
of the sources consulted as part of the background check be posted on 
the [portal's] Web site.'' \684\
---------------------------------------------------------------------------

    \680\ See, e.g., Grassi Letter; Joinvestor Letter; NYSSCPA 
Letter; Public Startup Letter 2; StartupValley Letter.
    \681\ See, e.g., AFR Letter; Consumer Federation Letter.
    \682\ See Joinvestor Letter.
    \683\ See Public Startup Letter 2.
    \684\ IAC Recommendation (suggesting that ``[r]equiring posting 
of information about the sources consulted in compiling the reports 
would better enable investors to evaluate the thoroughness of the 
background check, thus creating an incentive for intermediaries to 
conduct thorough reviews in the absence of clear Commission 
guidelines''); see also BetterInvesting Letter.
---------------------------------------------------------------------------

    As to proposed Rule 301(c)(2) requiring a funding portal to deny 
access if the intermediary believes the issuer or offering presents the 
potential for fraud or otherwise raises concerns regarding investor 
protection, one commenter stated that the proposed requirement 
conflicts with the restrictions on a funding portal's ability to limit 
the offerings on its platform in proposed Rule 402(b)(1).\685\
---------------------------------------------------------------------------

    \685\ See Guzik Letter 1 (noting that under the proposed rules, 
an intermediary which is not a broker-dealer is prohibited from, at 
least in that commenter's view, ``curating,'' that is, ``excluding 
companies from its platform based upon qualitative factors, such as 
quality of management, valuation of the company, market size, need 
for additional capital, pending litigation, or other qualitative 
factors which increase the risk to an investor'').
---------------------------------------------------------------------------

    Regarding the standard for denial based on potential fraud or 
investor protection concerns in the proposed rule, one commenter 
suggested a stronger standard,\686\ while another suggested a weaker 
standard.\687\ Other commenters suggested that the standard for an 
intermediary to deny access to its platform is unclear.\688\ One 
commenter urged the Commission to require that a funding portal post on 
its Web site a description of its standards for determining which 
offerings present a risk of fraud.'' \689\
---------------------------------------------------------------------------

    \686\ See note 669 (discussing the NYSSCPA Letter, which 
suggested a ``prudent care'' standard for denying issuers under Rule 
301(c)).
    \687\ See Grassi Letter (stating that an intermediary ``should 
not be required to vet issuers for potential fraud other than would 
be done through the normal course of assessing whether they wish to 
do business with a particular issuer'').
    \688\ See, e.g., BetterInvesting Letter; Heritage Letter; IAC 
Recommendation; Jacobson Letter; NSBA Letter.
    \689\ See IAC Recommendation; see also BetterInvesting Letter.
---------------------------------------------------------------------------

    One commenter stated the intermediaries should be required to 
report denied issuers, noting that it would not only help prevent fraud 
but also assist other intermediaries in excluding issuers already 
discovered to be disqualified.\690\ Other commenters disagreed with 
this suggestion,\691\ while one commenter stated that reporting should 
be required only if the Commission or another agency created a database 
for such information.\692\ One of these commenters suggested that 
intermediaries should be required to notify a potential issuer when the 
intermediary uses information from a third party to deny the 
issuer.\693\
---------------------------------------------------------------------------

    \690\ See Joinvestor Letter. See also ASSOB Letter and Vann 
Letter.
    \691\ See, e.g., Public Startup Letter 2 (opposing the 
requirement but suggesting that the Commission maintain a database 
of known bad actors).
    \692\ See StartupValley Letter.
    \693\ See Vann Letter.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting Rule 301(c)(1) as 
proposed. Rule 301(c)(1) requires 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 any 20 Percent 
Beneficial Owner is subject to a disqualification under Rule 503 of 
Regulation Crowdfunding. We believe that a ``reasonable basis'' 
standard for denying access is an appropriate standard for Rule 
301(c)(1), in part because this requirement on an intermediary is 
buttressed by the fact that an issuer independently is subject to the 
disqualification provisions under Rule 503, as discussed below.\694\ In 
addition, Rule 301(c)(1) implements the requirement of Section 4A(a)(5) 
that an intermediary 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.
---------------------------------------------------------------------------

    \694\ See Section II.E.6 (discussing issuer disqualification).
---------------------------------------------------------------------------

    While we understand commenters' concerns about the cost of the 
requirement that intermediaries conduct background checks on issuers 
and certain affiliated persons, we are not eliminating or limiting the 
requirement as suggested by commenters because we believe the 
requirement is an important tool for intermediaries to employ when 
determining whether or not they have a reasonable basis to allow 
issuers on their platforms. Even though a number of commenters 
requested that the

[[Page 71436]]

Commission provide specific requirements for background and securities 
enforcement regulatory history checks, we are not establishing specific 
procedures in the final rules. As we indicated in the Proposing 
Release, we believe that the better approach is to allow an 
intermediary to be guided by its experience and judgment to design 
systems and processes to help reduce the risk of fraud in securities-
based crowdfunding.\695\ We also believe that such flexibility could 
mitigate cost concerns related to conducting the background and 
securities enforcement regulatory history checks.
---------------------------------------------------------------------------

    \695\ We disagree with the commenter that suggested that this 
method is ineffective because intermediaries lack experience. See 
Consumer Federation Letter. Crowdfunding is a new form of capital 
formation. We believe broker-dealers and funding portals will gain 
the relevant experience that will appropriately position them to 
develop requirements for conducting background checks required by 
the rule. In addition, we believe that an intermediary's interest in 
developing a successful platform will motivate it to conduct 
rigorous background checks.
---------------------------------------------------------------------------

    We are not developing a database of denied issuers as suggested by 
some commenters because we do not believe it would significantly 
increase investor protection. The requirement to deny an issuer access 
to a crowdfunding platform under the final rules based on fraud or 
other investor protection concerns is important to the viability of 
crowdfunding, and the legitimacy of the intermediary. This obligation 
is the responsibility of each intermediary, which must make a 
determination about whether to deny access to an issuer. While a third 
party may decide to create a database of denied issuers at some point 
and an intermediary could use such a database to help make its 
determination as to whether it was required to deny access to an 
issuer, such a database could not be used as a substitute for an 
intermediary making its own determination.
    We also are not requiring an intermediary to make publicly 
available the results of the background checks or the sources 
consulted. We believe that the goal of the background check is 
sufficiently served by the exclusion of an issuer from the 
intermediary's platform. We do not believe that making the results or 
sources publicly available adds a significant degree of investor 
protection under these circumstances, given the potential problems that 
could arise from such public disclosure of the results, such as the 
risk of disclosing personally identifiable information or other 
information with significant potential for misuse. In addition, we are 
concerned that such requirements could add to the cost of 
administration and could expose the individuals at the issuer that are 
subject to a background check to harm, for example, if there were 
errors in the information made publicly available.
    We are adopting Rule 301(c)(2) substantially as proposed, but with 
certain revisions. As adopted, Rule 301(c)(2) now contains a 
``reasonable basis'' standard as opposed to the initially proposed 
``believes'' standard. Rule 301(c)(2) requires denial of access to its 
platform when the intermediary has a reasonable basis for believing 
that the issuer or offering presents the potential for fraud or 
otherwise raises concerns about investor protection.\696\ In a 
conforming change, Rule 301(c)(2) also requires (i) an intermediary 
deny access to an issuer if it reasonably believes that it is unable to 
adequately or effectively assess the risk of fraud of the issuer or its 
potential offering, and (ii) if the intermediary becomes aware of 
information after it has granted the issuer access to its platform that 
causes it to reasonably believe that the issuer or the offering 
presents the potential for fraud or otherwise raises concerns regarding 
investor protection, the intermediary must promptly remove the offering 
from its platform, cancel the offering and return to investors any 
funds they may have committed.
---------------------------------------------------------------------------

    \696\ See Section II.D.2. (discussing modified Rule 402(b)(1), 
which relates to a funding portal's ability to deny access to an 
issuer).
---------------------------------------------------------------------------

    We believe that a ``reasonable basis'' standard is appropriate for 
Rule 301(c)(2) because it is a more objective standard.\697\ Under this 
standard, an intermediary may not ignore facts about an issuer that 
indicate fraud or investor protection concerns such that a reasonable 
person would have denied access to the platform or cancelled the 
offering. Rule 301(c)(2) is intended to give an intermediary an 
objective standard regarding the circumstances in which it must act to 
protect its investors from potentially fraudulent issuers or ones that 
otherwise present red flags concerning investor protection. This 
objective standard also will make it easier for an intermediary to 
assess whether it would be compliant with Rule 301(c)(2) when deciding 
if it should deny an issuer access or cancel its offering.\698\ Thus, 
we believe these measures likely will promote compliance and help to 
reduce the risk of fraud with respect to crowdfunding transactions, as 
required by Section 4A(a)(5). This standard also will provide the 
Commission with a clear basis to review whether an intermediary's 
decision not to deny access to its platform or cancel an offering was 
reasonable given the facts and circumstances.
---------------------------------------------------------------------------

    \697\ Adding the reasonable basis standard to Rule 301(c)(2) 
also provides a consistent standard across Rule 301, including Rules 
301(a), (b) and (c)(1).
    \698\ Aside from the requirement to deny access to issuers under 
Rule 302(c)(2), it is important to note that intermediaries are 
permitted to determine whether and under what terms to allow an 
issuer to offer and sell securities in reliance on Section 4(a)(6) 
of the Securities Act (15 U.S.C. 77d(a)(6)) through their platforms. 
See Rule 402(b)(1) and Section II.D.3. The objective standard under 
Rule 301(c)(2) also helps to clarify that a funding portal would not 
be providing investment advice or recommendations, if it denies 
access to or cancels an offering because it has a reasonable basis 
for believing that there is a potential for fraud or other investor 
protection concerns. See Rule 402(b)(10) of Regulation Crowdfunding 
and Section II.D.3.i.
---------------------------------------------------------------------------

    We are not requiring that an intermediary report the issuers that 
have been denied access to its platforms, as some commenters suggested, 
or that the intermediary post a summary of the sources consulted as 
part of the background check on its platform along with a description 
of the intermediary's standards for determining which offerings present 
a risk of fraud. We also are not adopting a requirement, as suggested 
by a commenter, that an intermediary notify a potential issuer when the 
intermediary utilizes third-party information to deny access to the 
issuer. As with background checks, discussed above, we believe that the 
investor protection goal is sufficiently served by the exclusion of an 
issuer from the intermediary's platform. In addition, we are concerned 
that such requirements could add to the cost of administration and 
could expose the issuers in question to harm, for example, if there 
were errors in the information made publicly available. Likewise, we do 
not believe that requiring an intermediary to post to its Web site a 
summary of the sources consulted as part of the background check and a 
description of the intermediary's standards for determining which 
offerings present a risk of fraud would sufficiently increase investor 
protection to justify the burdens, such as those outlined above, that 
would be associated with imposing such requirements. We also note that 
providing this information on an intermediary's Web site may give 
potentially fraudulent issuers or those that otherwise present investor 
protection concerns a roadmap to an intermediary's proprietary 
procedures for screening for fraud that could assist such issuers with 
impeding or obstructing intermediaries from detecting offerings that 
present a risk of fraud.

[[Page 71437]]

4. Account Opening
a. Accounts and Electronic Delivery
(1) Proposed Rule
    Proposed Rule 302(a)(1) of Regulation Crowdfunding would prohibit 
an intermediary or its associated persons from accepting an investment 
commitment in a transaction involving the offer or sale of securities 
in reliance on Section 4(a)(6) unless the investor has opened an 
account with the intermediary, and the intermediary has obtained from 
the investor consent to electronic delivery of materials. Proposed Rule 
302(a)(2) would require an intermediary to provide all information 
required by Subpart C of Regulation Crowdfunding, including, but not 
limited to, educational materials, notices and confirmations, through 
electronic means.
    Proposed Rule 302(a)(2) also would require an intermediary to 
provide such information through an electronic message that either 
contains the information, includes a specific link to the information 
as posted on the intermediary's platform, or provides notice of what 
the information is and that it is located on the intermediary's 
platform or the issuer's Web site. As proposed, Rule 302(a)(2) stated 
that electronic messages would include, but not be limited to, messages 
sent via email.
(2) Comments on the Proposed Rule
    One commenter suggested that intermediaries who are brokers should 
not be required to open new accounts for persons who are existing 
customers of the broker.\699\ In response to our request for comments 
on whether an intermediary should be required to obtain specific 
information from investors, and if so what type of information should 
be required, some commenters generally supported requiring an 
intermediary to gather specific information from investors, 
particularly identifying information that could help prevent duplicate 
or fraudulent accounts and information about other intermediary 
accounts and investments.\700\ A few of these commenters supported the 
Commission requiring intermediaries to collect investors' social 
security numbers.\701\ One commenter opposed the Commission requiring 
intermediaries to obtain particular information from investors.\702\
---------------------------------------------------------------------------

    \699\ See Arctic Island Letter 2.
    \700\ See, e.g., Consumer Federation Letter; Jacobson Letter; 
RocketHub Letter.
    \701\ See, e.g., Consumer Federation Letter; RocketHub Letter.
    \702\ See Public Startup Letter 3.
---------------------------------------------------------------------------

    With respect to electronic delivery, some commenters urged that it 
should be sufficient for the intermediary simply to make Subpart C 
materials, such as educational materials, notices and confirmations, 
available on the intermediary's platform for investors to access.\703\ 
Other commenters broadly opposed permitting intermediaries to satisfy 
their information delivery requirement by providing an electronic 
message that informs an investor that information can be found on the 
intermediary's platform or an issuer's Web site.\704\ One commenter 
suggested that investors may not actually receive required disclosures 
because they will not spend the time to find the information.\705\ 
Another commenter suggested that the Commission should ``continue to 
rely instead on the strong and effective policy for electronic delivery 
of disclosure adopted by the Commission in the mid-1990s.'' \706\ The 
same commenter noted that it would be ``a simple matter to require that 
any electronic message through which disclosures are delivered include, 
at a minimum, the specific URL where the required disclosures can be 
found.'' \707\
---------------------------------------------------------------------------

    \703\ See, e.g., ASSOB Letter; CrowdCheck Letter 1; RocketHub 
Letter; Wefunder Letter; Vann Letter.
    \704\ See, e.g., BetterInvesting Letter; AFR Letter; IAC 
Recommendation; Consumer Federation Letter (``The definition of 
electronic delivery must be revised to ensure the disclosures 
themselves, and not just notices of the availability of disclosures, 
are delivered to investors.'').
    \705\ See Consumer Federation Letter. See also Clapman Letter 
(suggesting that all issuers and their materials must be ``publicly 
accessible for all investors to have the same opportunity to 
invest'' and stating that ``no clubs, or paid to view investment 
style platforms would therefore be allowed'').
    \706\ IAC Recommendation; see also BetterInvesting Letter.
    \707\ IAC Recommendation; see also BetterInvesting Letter.
---------------------------------------------------------------------------

    One commenter stated it was concerned that earlier Commission 
policies on electronic delivery might be read as implying that paper 
delivery might be permitted in certain circumstances.\708\ This 
commenter did agree, however, that any electronic message through which 
disclosures are delivered include, at a minimum, the specific URL where 
the required disclosures can be found.\709\
---------------------------------------------------------------------------

    \708\ See CFIRA Letter 12.
    \709\ Id.
---------------------------------------------------------------------------

    In response to our request for comments on whether exceptions to 
the consent to electronic delivery should be allowed, one commenter 
stated that account creation and delivery of communication should be 
completed digitally and that there should be no exemption to allow 
paper delivery as a substitute.\710\ Another commenter stated that 
investors should be allowed to waive these delivery requirements 
entirely.\711\
---------------------------------------------------------------------------

    \710\ See RocketHub Letter.
    \711\ See Public Startup Letter 3.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting as proposed the 
account opening and electronic delivery requirements in Rule 302(a). We 
are not prescribing particular requirements for account opening. 
Rather, we believe that the final rule provides flexibility to 
intermediaries given that intermediaries are better positioned than the 
Commission to determine what information and processes it will require, 
both as a business decision and to ensure compliance with all 
applicable regulatory requirements. Therefore, for example, an 
intermediary can decide whether or not to open a new account for an 
existing customer. We also are not prescribing under the final rule, as 
a commenter suggested, that an intermediary be required to collect 
identifying information that could help prevent duplicative or 
fraudulent accounts. We believe that even without prescribing 
particular account opening requirements intermediaries should be able 
to identify, by collecting basic account opening information, those 
accounts that appear to be duplicative or present red flags of 
potential fraud.
    However, the final rules do not permit investors to waive the 
electronic delivery requirements entirely, as one commenter 
suggested.\712\ We believe that electronic delivery of materials in 
connection with crowdfunding offerings serves an important and basic 
investor protection function by conveying information, such as offering 
materials, that will help investors to make better informed investment 
decisions and by a method that is appropriately suited to the 
electronic and Internet-based nature of crowdfunding transactions.
---------------------------------------------------------------------------

    \712\ Id.
---------------------------------------------------------------------------

    As explained in Section II.A.3, Rule 100(a)(3) of Regulation 
Crowdfunding requires that crowdfunding transactions be conducted 
exclusively through an intermediary's platform. Rule 302(a) implements 
this requirement by requiring that investors consent to electronic 
delivery of materials in connection with crowdfunding offerings.\713\ 
This requirement applies to

[[Page 71438]]

all investors, including an existing customer of a registered broker 
that has not already consented to electronic delivery of materials. 
Therefore, this requirement will prohibit intermediaries from accepting 
an investment commitment in a Section 4(a)(6) offering from any 
investor that has not consented to electronic delivery.
---------------------------------------------------------------------------

    \713\ Certain requirements of Regulation Crowdfunding that 
require timely actions by issuers and investors will be facilitated 
by requiring consent to electronic delivery of documents. See, e.g., 
Section II.C.6 (discussing the five-day periods for investor 
reconfirmations based on material changes and issuer cancellation 
notices).
---------------------------------------------------------------------------

    We are adopting substantially as proposed Rule 302(a)(2), which 
requires that all information required to be provided by an 
intermediary under Subpart C be provided through electronic means. We 
have considered the comments but do not believe that it would be 
sufficient--or consistent with our previous statements about electronic 
media--for the intermediary simply to make Subpart C materials, such as 
educational materials, notices and confirmations, available on the 
intermediary's platform for investors to access.\714\ Rather, unless 
otherwise indicated in the relevant rules of Subpart C,\715\ the 
intermediary must provide the information either through (1) an 
electronic message that contains the information, (2) an electronic 
message that includes a specific link to the information as posted on 
the intermediary's platform, or (3) an electronic message that provides 
notice of what the information is and notifies investors that this 
information is located on the intermediary's platform or on the 
issuer's Web site.\716\ We have added to the rule text other examples 
of electronic messages that are permissible in addition to email 
messages--specifically text, instant messages, and messages sent using 
social media.
---------------------------------------------------------------------------

    \714\ See Use of Electronic Media, Release No. 34-42728 (Apr. 
28, 2000) [65 FR 25843, 25853 (May 4, 2000)] (discussing the 
``access equals delivery'' concept and citing Use of Electronic 
Media for Delivery Purposes, Release No. 34-36345 (Oct. 6, 1995) [60 
FR 53548, 53454 (Oct. 13, 1995)]).
    \715\ For example, Rule 303(a) separately requires that an 
intermediary must make issuer information publicly available on its 
platform, and so we do not believe that it is necessary to further 
require intermediaries to send an electronic message regarding the 
posting of issuer materials.
    \716\ As noted above, this electronic message could include a 
specific link to the information as posted on the intermediary's 
platform. However, we are not requiring intermediaries to provide a 
link to direct investors to the intermediary's platform or the 
issuer's Web site where the information is located. We believe that 
the final rule provides some flexibility to intermediaries when 
providing required information through electronic messages given 
that intermediaries are well-positioned to determine how best to 
ensure compliance with all applicable regulatory requirements. We 
also believe that, because of the widespread use of the Internet, as 
well as advances in technology that allow funding portals to send 
various electronic messages, our final rule requires sufficient 
notice to investors.
---------------------------------------------------------------------------

b. Educational Materials
(1) Proposed Rules
    Securities Act 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 this 
requirement. As described in further detail below, proposed Rule 
302(b)(1) of Regulation Crowdfunding would require intermediaries to 
deliver to investors, at account opening, educational materials that 
are in plain language and otherwise designed to communicate effectively 
and accurately certain specified information. Proposed Rules 
302(b)(1)(i)-(viii) 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 limits 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.
    Proposed Rule 302(b)(2) would further require intermediaries 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).

(2) Comments on Proposed Rules

    Commenters generally supported distribution of educational 
materials through intermediaries.\717\ Some stated that intermediaries 
should be required to submit educational materials to the Commission or 
to FINRA because oversight and review is needed for materials that will 
be used by unsophisticated investors,\718\ while others stated that 
intermediaries should not be required to submit educational materials 
to the Commission or to FINRA because it would be cumbersome and 
expensive.\719\ One commenter stated that the proposed requirements 
should be modified to state that education must be done prior to an 
investor's first investment in a Section 4(a)(6) offering, not at 
account opening.\720\
---------------------------------------------------------------------------

    \717\ See, e.g., Arctic Island Letter 6; CFA Institute Letter; 
Cole Letter; Consumer Federation Letter; Gimpelson Letter 2; 
Heritage Letter; Jacobson Letter; NSBA Letter; Patel Letter; 
RocketHub Letter; STA Letter; StartupValley Letter; Wefunder Letter.
    \718\ See, e.g., Consumer Federation Letter; Gimpelson Letter 2; 
Jacobson Letter. See also RocketHub Letter (stating that ``if 
educational materials are submitted to the Commission for approval, 
such approval should act to limit liability of the Portal under the 
Act'').
    \719\ See, e.g., Arctic Island Letter 6; Joinvestor Letter; 
StartupValley Letter; Wefunder Letter.
    \720\ See Arctic Island Letter 6. The commenter also stated that 
the educational material requirements should only apply to 
unaccredited investors, but we note that the requirement under 
Section 4A(a)(4) runs to ``each investor.'' As discussed above, we 
believe that Congress intended for crowdfunding transactions under 
Section 4(a)(6) to be available equally to all types of investors. 
Consistent with that approach, we do not believe at this time it 
would be appropriate to tailor the educational requirements for any 
particular type of investor or to create an exemption for accredited 
investors. Further, issuers can rely on other exemptions to offer 
and sell securities to accredited investors or institutional 
investors.
---------------------------------------------------------------------------

    Some commenters suggested that additions be made to the scope of 
information proposed to be required in an intermediary's educational 
materials,\721\ to include information about exit strategies; \722\ 
principles of investing in crowdfunding and how to evaluate investment 
opportunities in privately held companies; \723\ the risks associated 
with crowdfunding investments; \724\ and reasons for investors to 
maintain their own personal records concerning crowdfunding 
investments.\725\ One commenter

[[Page 71439]]

suggested that educational materials ``should include an industry 
standard disclosure document on the benefits and risks of crowdfunding 
investments.'' \726\ This commenter indicated that ``having these 
generic risk factors in the industry standard educational materials 
will help focus the company specific disclosure on the factors that are 
most important.'' \727\
---------------------------------------------------------------------------

    \721\ See, e.g., Anonymous Letter 1; Gimpelson Letter 2; 
RocketHub Letter; STA Letter; Angel Letter 1.
    \722\ See Anonymous Letter 1.
    \723\ See Gimpelson Letter 2.
    \724\ See RocketHub Letter.
    \725\ See STA Letter.
    \726\ See Angel Letter 1.
    \727\ Id. (suggesting an issuer-specific disclosure document).
---------------------------------------------------------------------------

    Some commenters suggested that intermediaries should be required to 
design questionnaires to increase investor knowledge and to monitor 
whether investors actually access materials.\728\ One commenter 
suggested that in addition to an ``interactive questionnaire,'' the 
Commission should also ``require that investors reaffirm each time they 
invest that they understand the risks associated with crowdfunding, can 
afford to lose their entire investment, and do not expect to need the 
funds being invested in the near term.'' \729\
---------------------------------------------------------------------------

    \728\ See, e.g., AFR Letter; BetterInvesting Letter; Consumer 
Federation Letter; IAC Recommendation. One commenter also suggested 
requiring intermediaries to post a list of previous offerings on 
their Web sites with information about the offerings. See Angel 
Letter 1.
    \729\ IAC Recommendation; see also BetterInvesting Letter.
---------------------------------------------------------------------------

    Some commenters stated that we should develop model educational 
materials for investors or specify the content for intermediaries.\730\ 
One commenter suggested that the Commission, state securities 
regulators, and FINRA, together, should develop ``a sample guide'' 
designed to alert investors to the risks of crowdfunding including, 
among other things, ``the high failure rate of small startup companies, 
the fact that shares will not be set based on market data and may 
therefore be mispriced, the lack of liquidity, and the risk that, 
absent appropriate protections, the value of their shares could be 
diluted.'' \731\ This commenter also suggested that the guide ``should 
include explicit warnings that investors should not invest in 
crowdfunding unless they can afford to lose the entire amount of their 
investment or if they expect to have an immediate need for the funds.'' 
\732\ This commenter also stated that regulators should test the 
materials with investors to ensure their effectiveness.\733\
---------------------------------------------------------------------------

    \730\ See, e.g., CFA Institute Letter; Guzik Letter 1; Heritage 
Letter; Jacobson Letter; Joinvestor Letter; NSBA Letter; STA Letter. 
See also CfPA Letter (stating that guidance on the requirements for 
educational materials and certification of compliance should be 
created and administered by an industry-related body with approval 
and oversight by the Commission).
    \731\ IAC Recommendation; see also BetterInvesting Letter.
    \732\ Id.
    \733\ Id. (suggesting that the Commission should take additional 
steps ``to strengthen requirements with regard to content and 
delivery of educational materials in order to increase the 
likelihood both that they will be read and that they will clearly 
convey the essential information''); see also CFIRA Letter 12 
(agreeing with IAC's suggestion that the Commission ``could 
establish a set of standard educational requirements for the 
industry that could be adopted by intermediaries'').
---------------------------------------------------------------------------

    One commenter stated that we should not limit or specify the type 
of electronic media being used to communicate educational 
material.\734\ Finally, one commenter opposed all the educational 
requirements for intermediaries, and suggested instead that the 
Commission itself, rather than intermediaries, should provide investor 
educational materials to both investors and issuers with funding 
portals linking to, for example, the SEC Web page or an open source Web 
site containing any Commission drafted educational materials.\735\
---------------------------------------------------------------------------

    \734\ See Gimpelson Letter 2.
    \735\ See Public Startup Letter 3.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting Rule 302(b) 
relating to educational materials substantially as proposed, but adding 
one further requirement as to the content of the materials. We believe 
that, consistent with Section 4A(a)(3) it is appropriate that 
intermediaries, rather than the Commission (as a commenter suggested), 
be required to provide such disclosures, including disclosures related 
to risks and other investor education materials as the Commission 
determines to be appropriate. We believe that intermediaries are better 
equipped and positioned, as compared to the Commission, to provide 
educational materials to investors that are reasonably tailored to an 
intermediary's offerings and investors, particularly in light of their 
access to and interactions with investors.
    We further believe that the scope of information that we are 
requiring to be included in an intermediary's educational materials is 
appropriate. In the Proposing Release we discussed our rationales for 
requiring the different types of disclosures in the educational 
materials. As we noted in the Proposing Release, we generally drew upon 
the statutory provisions when including disclosures required in the 
educational materials 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.\736\ 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 and may affect an 
investor's decision to consider any offerings made pursuant to Section 
4(a)(6). The items required to be included, pursuant to Rule 
302(b)(1)(i) through (viii), in the educational materials 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. Furthermore, information on the various types of 
securities that can be available for purchase on the intermediary's 
platform, any applicable resale restrictions, and the risks associated 
with each type of security, including the risk of having limited voting 
power as a result of dilution can affect an investor's decision to 
consider any offerings made pursuant to Section 4(a)(6). In addition, 
we are adding Rule 302(b)(1)(ix) to require the educational materials 
to indicate that under certain circumstances an issuer may cease to 
publish annual reports and, therefore, an investor may not continually 
have current financial information about the issuer. We are adding this 
requirement because we believe that it is important for investors to be 
able to consider the ongoing availability of information about an 
issuer's financial condition when they assess whether to invest in that 
issuer.
---------------------------------------------------------------------------

    \736\ See Securities Act Sections 4A(a)(4), 4A(a)(7), 4A(e), and 
4A(b)(4).
---------------------------------------------------------------------------

    The final rule provides each intermediary with sufficient 
flexibility to determine: (1) The content of the educational materials, 
outside of the minimum specified information required to be included 
under Rule 302(b)(1)(i)-(viii), and (2) the overall format and manner 
of presentation of the materials. We believe this flexibility will 
allow the intermediary to prepare and present educational materials in 
a manner reasonably tailored to the types of offerings on the 
intermediary's platform and the types of investors accessing its 
platform. While we have determined not to provide model educational 
materials, impose additional content (beyond those proposed) or format 
requirements, mandate particular language or manner of presentation, or 
require that an intermediary design an investor questionnaire, as 
suggested by commenters, the final rules do not prohibit an 
intermediary from providing additional educational materials if they

[[Page 71440]]

choose. For example, because the final rules do not require an 
intermediary to design a questionnaire, intermediaries maintain the 
flexibility in meeting the rule's requirements to determine whether 
such a disclosure format would be cost effective and appropriate 
particularly in light of that intermediary's particular business model. 
We further note the suggestion by some commenters that we require 
additional information in the educational materials, including, for 
example, requiring an intermediary to discuss exit strategies, how to 
evaluate investment opportunities in privately held companies, and the 
reasons for investors to maintain their own personal records concerning 
crowdfunding investments. Although these suggestions may provide 
investors with some useful information, we are not persuaded that 
imposing such additional requirements in the final rule is necessary at 
this time as it is unclear that those suggestions would significantly 
strengthen the investor protections that will result from Rule 302(b) 
as adopted. We also believe that adding such requirements may overly 
complicate these educational materials and increase the costs 
associated with preparing them. Therefore, we have determined to allow 
intermediaries the flexibility to prepare educational materials 
reasonably tailored to their offerings and investors, provided the 
materials meet the standards and include the information required to be 
provided under Rule 302(b).\737\
---------------------------------------------------------------------------

    \737\ We note that educational materials may be subject to 
examination and inspection. See Section II.D.5. (describing the 
recordkeeping obligations of funding portals).
---------------------------------------------------------------------------

    We also recognize that FINRA or any other registered national 
securities association may implement additional educational materials 
requirements. We are not, however, as one commenter suggested,\738\ 
requiring at this time that intermediaries submit their educational 
materials to the Commission or to a registered national securities 
association for review and approval. We note, however, that a 
registered national securities association could propose such a 
requirement as its oversight of intermediaries in this new market 
evolves. Any such proposed requirement would be considered by the 
Commission, and subject to public notice and opportunity for comment, 
pursuant to Exchange Act Section 19(b) and Rule 19b-4.
---------------------------------------------------------------------------

    \738\ See RocketHub Letter (stating that ``if educational 
materials are submitted to the Commission for approval, such 
approval should act to limit liability of the Portal under the 
Act'').
---------------------------------------------------------------------------

    Rule 302(b)(2) requires an intermediary to keep its educational 
materials accurate. Accordingly, an intermediary must update the 
materials as needed to keep them current. In addition, if an 
intermediary makes a material revision to its educational materials, 
the rule requires that the intermediary make the revised educational 
materials available to all investors before accepting any additional 
investment commitments or effecting any further crowdfunding 
transactions. An intermediary will also be required to obtain a 
representation that an investor has reviewed the intermediary's most 
recent educational materials before accepting an investment commitment 
from the investor.\739\
---------------------------------------------------------------------------

    \739\ See Rule 303(b)(2)(i) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that these requirements will benefit investors by 
helping to ensure that they receive information about key aspects of 
investing through the intermediary's platform, including aspects that 
may have changed since the last time they received the materials, prior 
to making investment commitments, as that information can influence 
their investment decisions. We also believe that requiring 
intermediaries to update materials on an ongoing basis, rather than at 
certain specified intervals, will help to ensure that those materials 
are updated as circumstances warrant, which, in turn, will provide 
investors with more current information and increase investor 
protection.
c. Promoters
(1) Proposed Rule
    Securities Act 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.'' Under Rule 205 of 
Regulation Crowdfunding, as discussed above, an issuer can compensate 
persons to promote its offerings through communications channels 
provided by the intermediary on its platform, where certain conditions 
are met.\740\
---------------------------------------------------------------------------

    \740\ See Rule 205 of Regulation Crowdfunding and the discussion 
in Section II.B.5.
---------------------------------------------------------------------------

    We separately proposed in Rule 302(c) of Regulation Crowdfunding 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 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.
(2) Comments on Proposed Rules
    Some commenters suggested that the promoter disclosures should not 
be made at account opening where they may be ignored.\741\ One 
commenter proposed that the disclosures should be made ``prior to any 
participant on the platform being able to post comments, reviews, 
ratings, or other promotional activities.'' \742\
---------------------------------------------------------------------------

    \741\ See, e.g., Arctic Island Letter 6; Wefunder Letter.
    \742\ See Arctic Island Letter 6.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting, as proposed, Rule 302(c) requiring intermediaries 
to inform investors, at the time of account opening, that promoters 
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. As noted in the 
Proposing Release, in addition to the information required under Rule 
302(c), promoters will also be required to comply with Section 17(b) of 
the Securities Act, which requires promoters to fully disclose to 
investors the receipt, whether past or prospective, of consideration 
and the amount of that compensation.\743\ We believe that the 
disclosures required by Rule 302(c) will help alert investors at the 
outset, rather than after the account is opened, of the fact that 
information about the promotional activities of issuers or 
representatives of issuers will be disclosed at a later time on the 
platform, pursuant to Rule 303(c)(4). We believe that the account 
opening is the appropriate time for this disclosure because it gives 
investors notice of potential promotional activities by issuers and 
their representatives prior to making investment commitments. As 
discussed below, Rule 303(c)(4) separately mandates that intermediaries 
require any person, when posting a comment in the communication 
channels, to clearly disclose with each

[[Page 71441]]

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 believe that the disclosure requirements of Rule 
302(c), when coupled with the additional disclosure requirements in 
Rule 303(c)(4), will promote a transparent information sharing process 
whereby investors are able to discern the sources of information that 
they are receiving and any potential conflicts of interest by those 
sources.
---------------------------------------------------------------------------

    \743\ See Proposing Release at 78 FR 66467-68. See also Section 
17(b) of the Securities Act (15 U.S.C. 77q(b)).
---------------------------------------------------------------------------

d. Compensation Disclosure
(1) Proposed Rule
    Proposed Rule 302(d) of Regulation Crowdfunding would require that 
intermediaries, when establishing an account for an investor, clearly 
disclose the manner in which they will be compensated in connection 
with offerings and sales of securities made in reliance on Section 
4(a)(6). This requirement would help to ensure investors are aware of 
any potential conflicts of interest that may arise from the manner in 
which the intermediary is compensated. Rule 201(o) of Regulation 
Crowdfunding, which is discussed in Section II.B.1, separately requires 
an issuer to disclose in its offering materials, among other things, 
the amount of compensation paid to the intermediary for conducting a 
particular offering, including the amount of referral and any other 
fees associated with the offering.
(2) Comments on Proposed Rule
    Several commenters supported the disclosure of intermediary 
compensation.\744\ One commenter stated that the account opening is not 
an appropriate time to mention compensation, asserting that the account 
opening stage should be dedicated to discussing the risk of startup 
investing.\745\ One commenter suggested that the best way for an 
intermediary to disclose compensation is through a ``Costs and Fees'' 
page on its Web site.\746\ Another commenter requested that the 
Commission define compensation as any fees or compensation collected by 
the intermediary in connection with a Section 4(a)(6) transaction, 
subject to Commission and FINRA rules.\747\
---------------------------------------------------------------------------

    \744\ See, e.g., Arctic Island Letter 6; ASSOB Letter; CFA 
Institute Letter; Commonwealth of Massachusetts Letter; Joinvestor 
Letter; StartupValley Letter; Wefunder Letter.
    \745\ See Wefunder Letter.
    \746\ See StartupValley Letter.
    \747\ See CFIRA Letter 4.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 302(d) as proposed. We believe that requiring 
intermediaries to provide information to investors about the manner in 
which they will be compensated at account opening, rather than at a 
subsequent time, will provide investors with notice of how the 
intermediary is being compensated at a threshold stage in the 
relationship (i.e., account opening), which, in turn, will help 
investors make better-informed decisions. We note that the final 
rules--unlike the proposed rules--allow intermediaries to receive a 
financial interest in the issuer as compensation, subject to certain 
limitations.\748\ Therefore, an intermediary that receives or may 
receive a financial interest in an issuer in the future as compensation 
for its services is required to disclose that compensation at account 
opening. We also note that Rule 201(o), which is discussed in Section 
II.B.1 and separately requires an issuer to disclose in its offering 
materials a description of the intermediary's interests in the issuer's 
transaction, including the amount of compensation paid or to be paid to 
the intermediary for conducting a particular offering, the amount of 
referral and any other fees associated with the offering. We are not 
defining compensation as one commenter suggested, as we believe the 
final rule's requirement to clearly disclose the manner in which an 
intermediary will be compensated in connection with offerings and sales 
of securities made in reliance on Section 4(a)(6) is sufficiently 
clear, and because we are also concerned that a definition of 
compensation could be both under- and over-inclusive in a new and 
evolving crowdfunding market.
---------------------------------------------------------------------------

    \748\ See Section II.C.2.b.
---------------------------------------------------------------------------

5. Requirements With Respect to Transactions
a. Issuer Information
(1) Proposed Rule
    Securities Act Section 4A(a)(6) requires each intermediary to make 
available to the Commission and 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).\749\ Accordingly, we proposed 
Rule 303(a) of Regulation Crowdfunding to implement this 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 investors any information required to be provided 
by the issuer under Rules 201 and 203(a) of proposed Regulation 
Crowdfunding. As proposed, Rule 303(a) would require that this 
information: (1) Be 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; (2) 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; and (3) remain publicly 
available on the intermediary's platform until the offer and sale of 
securities is completed or cancelled (including any additional 
information provided by the issuer). In addition, under Proposed Rule 
303(a)(4), an intermediary would be prohibited from requiring any 
person to establish an account with the intermediary in order to access 
this information.
---------------------------------------------------------------------------

    \749\ As discussed in Section II.B, Securities Act Section 4A(b) 
establishes the requirements for an issuer that offers or sells 
securities in reliance on Section 4(a)(6).
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    Several commenters suggested that so long as issuer information is 
made available on the intermediary's platform, the rules should not 
mandate the delivery of this information, in addition to or in lieu of, 
making the information available on the intermediary's platform.\750\
---------------------------------------------------------------------------

    \750\ See, e.g., Arctic Island Letter 6 (suggesting that an 
electronic copy of the signed subscription agreement and risk 
disclosures should be sent to the investor via email, and that 
``[e]verything else can be referenced by the investor online at any 
time''); ASSOB Letter; CrowdCheck Letter (suggesting that the 
Commission remove the requirement in the proposed rules that would 
effectively limit the presentation of information to only formats 
that can be saved and downloaded by prospective investors); 
RocketHub Letter; Wefunder Letter; Vann Letter (stating that no 
particular means of delivery to investors should be required because 
``technologies may change'' and intermediaries should be allowed to 
use whatever means ``appropriate'').
---------------------------------------------------------------------------

    One commenter stated that having information about a deal publicly 
available on the intermediary's Web site will increase the potential 
for fraud--specifically, potential fraud involving ``data scraping'' 
from Web sites (i.e., copying data from these Web sites in order to use 
that data for fraudulent purposes).\751\ This same commenter suggested 
that that there should be two levels of disclosure: The first, would be 
available to all and would contain certain general information about 
the

[[Page 71442]]

issuer and the terms of deal, and the second would be made available 
only after investors proceed through a membership registration process 
and would contain disclosure documents, financial information, legal 
disclosures and further information.\752\
---------------------------------------------------------------------------

    \751\ See StartupValley Letter.
    \752\ Id. See also Early Shares Letter (suggesting a permission-
based system for the disclosure of certain ``sensitive'' information 
about the offering).
---------------------------------------------------------------------------

    As to the amount of time that an intermediary should display issuer 
materials prior to the first day on which securities are sold to any 
investor, some commenters supported the 21-day time frame as a 
sufficient minimum period that offering information should be made 
available through the intermediary's platform.\753\
---------------------------------------------------------------------------

    \753\ See, e.g., ASSOB Letter; RocketHub Letter.
---------------------------------------------------------------------------

    Although one commenter objected to intermediaries displaying any 
issuer materials,\754\ several commenters supported requiring 
intermediaries to continue to display issuer materials for some period 
of time after completion of the offering.\755\ One commenter, however, 
stated that intermediaries should not be required to display issuer 
materials for closed offerings.\756\ Another commenter stated that 
``[o]nce an offering is complete, an issuer should have the right to 
limit publicly available information.'' \757\
---------------------------------------------------------------------------

    \754\ See Public Startup Letter 3.
    \755\ See, e.g., Arctic Island Letter 6 (stating that an 
issuer's offering materials should be permanently displayed so it 
can easily be referenced in the future); ASSOB Letter (suggesting a 
period of at least two years after receiving funding from the 
offering); Jacobson Letter (suggesting a period of at least six 
years after an offering closes); RocketHub Letter (recommending that 
issuer materials should remain displayed for an additional 30 days 
after completion of the offering and further suggesting that 
``[i]ntermediaries should have the right, at their own discretion, 
to continue to display the entire offering, or parts of it, for as 
long as they see fit'').
    \756\ See Whitaker Chalk Letter (stating that removing such 
materials from the intermediary's platform would prevent the public 
from relying on ``stale'' information and opposing the requirement 
that intermediaries keep public any such ``stale'' information so 
long as the information remain subject to the intermediary's 
recordkeeping requirements).
    \757\ See RocketHub Letter.
---------------------------------------------------------------------------

    We also requested comments as to whether an intermediary should 
make efforts to ensure that an investor has actually reviewed the 
relevant issuer information. A few commenters expressed concern with 
requiring intermediaries to ensure that an investor has reviewed the 
relevant issuer information.\758\ Another commenter suggested that an 
investor ``should demonstrate, through a representation of 
acknowledgment, that they have reviewed all relevant issuer 
information.'' \759\
---------------------------------------------------------------------------

    \758\ See, e.g., Arctic Island Letter 6 (stating that such a 
requirement ``could make things incredibly messy and expensive''); 
Wefunder Letter.
    \759\ RocketHub Letter.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting, as proposed, Rule 
303(a). As stated in the Proposing Release, we believe that the 
requirement in Rule 303(a) that the information must be made publicly 
available on the intermediary's Web site satisfies 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. Moreover, 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. Therefore, we believe that this rule is not only consistent 
with the statute but that it also enhances investor protection by 
having issuer information about a crowdfunding security publicly 
available on the intermediary's Web site. While we considered the 
concern expressed by one commenter that having such information 
available on the intermediary's Web site would increase the potential 
for ``data scraping,'' \760\ we believe the expected benefits of the 
requirement to investors and other interested persons, as discussed 
above, justifies the risk of potential harm from such potential 
activities.
---------------------------------------------------------------------------

    \760\ See StartupValley Letter.
---------------------------------------------------------------------------

    We note that commenters who addressed the issue generally supported 
a 21-day time frame as the minimum period that offering information 
should be made available through the intermediary's platform prior to 
the first day on which securities are sold to any investor. Under the 
final rules, the information must remain available on the platform 
until the offering is completed or canceled. While some commenters 
suggested that the rule should require intermediaries to continue to 
display issuer materials for some period of time after completion of 
the offering, we are not prescribing such a requirement nor are we 
prohibiting intermediaries from doing so if they so choose. Although we 
appreciate that historical issuer information may provide helpful 
background for investors generally, we are concerned that imposing such 
a requirement could potentially result in persons relying on 
potentially stale issuer information particularly given the nature of 
the crowdfunding market (i.e., we assume that each issuer generally 
will conduct only one offering per year).\761\ We note that 
intermediaries nonetheless are required to retain the information in 
accordance with their obligation to make and preserve for a period of 
time records with respect to any written materials that are used as 
part of an intermediary's business, including issuer materials made 
available on their platforms.\762\
---------------------------------------------------------------------------

    \761\ As discussed in Section IV.B.1, we assume, for purposes of 
the Paperwork Reduction Act, that each issuer will conduct one 
offering per year.
    \762\ Registered brokers would have to maintain records pursuant 
to Exchange Act Section 17 and the rules thereunder. See e.g., 15 
U.S.C. 78q and 17 CFR 240a-3 and 17a-4. Funding portals would be 
subject to the recordkeeping requirements of proposed Rule 404 of 
Regulation Crowdfunding. See Section II.D.5 (discussing the 
recordkeeping requirements we are adopting for funding portals).
---------------------------------------------------------------------------

    While the intermediary plays an important gatekeeper function, the 
investor has responsibility for his or her actions as well. To that 
end, we are not requiring that an intermediary ensure that an investor 
has actually reviewed the relevant issuer information. We believe that 
the requirements of Rule 303(a) provide an investor with the relevant 
issuer information and an adequate period of time in which to evaluate 
the investment opportunity before investing. We are not at this time 
imposing additional requirements on the intermediary in this regard.
b. Investor Qualification
(1) Compliance With Investment Limits
(a) Proposed Rule
    Securities Act Section 4(a)(6)(B) limits the aggregate amount of 
securities that can be sold by an issuer to an investor in reliance on 
Section 4(a)(6) during a 12-month period. Securities Act Section 
4A(a)(8) requires that intermediaries ``make such efforts as the 
Commission determines appropriate, by rule'' to ensure that no investor 
has made purchases in the aggregate, from all issuers, that exceed the 
limits in Section 4(a)(6).
    Proposed Rule 303(b)(1) of Regulation Crowdfunding would implement 
this latter provision by requiring that, each time before accepting an 
investment commitment on its platform (including any additional 
investment commitment from the same person), an intermediary must have 
a reasonable basis for believing that the investor satisfies the 
investment limits established by Section 4(a)(6)(B). The proposed rule 
would allow an intermediary to rely on an investor's representations 
concerning

[[Page 71443]]

annual income, net worth and the amount of the investor's other 
investments in securities sold in reliance on Section 4(a)(6) through 
other intermediaries unless the intermediary has a reasonable basis to 
question the reliability of the representation.
(b) Comments on the Proposed Rule
    A number of commenters supported the proposed requirements for 
enforcing investment limits and intermediary responsibility for 
investor compliance,\763\ while a few commenters opposed the 
requirements.\764\ Several commenters suggested ways to strengthen the 
requirements, such as by: Requiring that an intermediary conduct more 
stringent checks,\765\ having the Commission maintain a registry of 
those who have purchased crowdfunding securities,\766\ requiring that 
investors electronically upload financial documents for verification of 
income or net worth,\767\ requiring notices detailing investment limits 
and highlighting their importance,\768\ and precluding an investor who 
violates the investment limits from bringing a cause of action against 
an issuer.\769\ Some commenters suggested that the Commission require 
intermediaries to create a tool for investors to use, such as a 
questionnaire, to assemble the underlying data on which investment 
limits are calculated and to perform those calculations 
electronically.\770\ However, another commenter disagreed with this 
suggestion.\771\ One commenter suggested intermediaries' platforms be 
required to provide to investors prior to accepting an investment 
commitment a detailed statement of the investment limits that are 
applicable to investors that also includes a penalty of perjury 
certification by the investor.\772\ A few commenters emphasized a need 
to warn investors that the value of their primary residence should be 
excluded for purposes of the net worth calculation.\773\ Commenters 
also suggested that the Commission adopt an approach similar to that 
under the capital gains tax rules that would limit benefits and loss 
recovery for investors who invest outside of their limits.\774\
---------------------------------------------------------------------------

    \763\ See, e.g., BetterInvesting Letter; CFA Institute Letter; 
CFIRA Letter 12; Finkelstein Letter; IAC Recommendation; Milken 
Institute Letter. See also NAAC Letter (stating that unsophisticated 
investors might not comply with the investment limits or be targets 
for fraudulent schemes, and recommending ``verified and stringent 
determinations as to the income and net worth qualifications of any 
potential investors.'').
    \764\ See, e.g., Moskowitz Letter (stating that select investors 
on the secondary market could purchase shares in excess of the 
investment limit and suggesting that the limits be removed 
altogether); Phillips Letter.
    \765\ See, e.g., Moskowitz Letter; NAAC Letter.
    \766\ See Clapman Letter. See also CFA Institute Letter 
(suggesting that the Commission require intermediaries to ``cross 
check each investor's information against other files on record with 
the Commission to ensure compliance with the law's limitations'').
    \767\ See, e.g., Consumer Federation Letter; Finkelstein Letter.
    \768\ See Milken Institute Letter.
    \769\ Id.
    \770\ See, e.g., CFA Institute Letter (suggesting that 
``investors be required to complete online questionnaires denoting 
the different classes of asset holdings permitted by the law, with a 
specific and prominent notification that the value of one's primary 
residence is excluded''); IAC Recommendation (stating that the tool, 
such as an electronic work sheet, would assist investors in 
identifying categories of assets and liabilities such as bank 
accounts, investment accounts, and house value, for purposes of the 
net worth calculation, and prompt them to deduct outstanding 
liabilities and exclude the value of principle residence). See also 
BetterInvesting Letter.
    \771\ See CFIRA Letter 12 (disagreeing with IAC's suggestion 
``that portals create a `tool' to walk investors through the 
creation of what is essentially a personal balance sheet'').
    \772\ See Milken Institute Letter (``This would underscore the 
importance of the investor caps . . . and properly place the burden 
of compliance on the actor who can verify income or wealth at the 
lowest cost--the investor.'').
    \773\ See, e.g., Brown J. Letter; CFA Institute Letter; Consumer 
Federation Letter.
    \774\ See, e.g., Milken Institute Letter (supporting the 
proposed investment caps, but agreeing with precluding loss 
recovery); Phillips Letter.
---------------------------------------------------------------------------

    Several commenters opposed the proposal to allow an intermediary to 
rely on the representations of an investor.\775\ Some urged the 
Commission to provide for verification through either a third-party 
service or through the intermediaries themselves in lieu of reliance on 
investor representations.\776\ Other commenters suggested that 
intermediaries should be required to take certain affirmative steps to 
verify investor representations.\777\ One commenter stated that the 
strongest possible approach to a verification requirement should be 
imposed for investments beyond $2,000.\778\ Another commenter suggested 
that the Commission create penalties for intermediaries who fail to 
meet their duties regarding investment limits.\779\ One commenter 
suggested the Commission should require crowdfunding portals to collect 
enough data from investors to avoid the most likely errors in 
calculating the investment limit and to prevent evasion of those 
limits. This commenter also suggested that the Commission should 
require portals to collect social security numbers to help prevent 
individuals from evading limits by opening multiple accounts under 
false names.\780\
---------------------------------------------------------------------------

    \775\ See, e.g., Accredify Letter (stating that self-
certifications are not an effective way to implement the investment 
limit requirements and suggesting that intermediaries be required to 
use existing services to check individuals' investment limits); AFL-
CIO Letter; AFR Letter; Brown J. Letter; Commonwealth of 
Massachusetts Letter; Consumer Federation Letter; Farnkoff Letter; 
Letter Finkelstein Letter; Jacobson Letter; Merkley Letter (noting 
that permitting self-certification would expose investors to 
precisely the risks that the statute aimed to prevent, and should 
not be permitted for investments over $2,000); Saunders Letter; 
Verinvest Letter.
    \776\ See, e.g., Accredify Letter; Commonwealth of Massachusetts 
Letter; Farnkoff Letter (``A third-party verification regime 
overseen by the SEC or FINRA would provide the safest protection 
from fraudsters and reduce risks of liability for funding 
portals.''); Saunders Letter; Verinvest Letter.
    \777\ See, e.g., AFL-CIO Letter; Jacobson Letter.
    \778\ See Merkley Letter (suggesting that the Commission could 
reconsider possible options to relax any strict initial approach 
after the first few years of the final rules being in effect, and 
stating that ``it would be incredible if the verification 
requirements for ordinary investors in crowdfunding were permitted 
to be less than for accredited investors under Rule 506(c)'').
    \779\ See Commonwealth of Massachusetts Letter.
    \780\ See AFR Letter.
---------------------------------------------------------------------------

    Other commenters supported the proposal to allow an intermediary to 
rely on the representations of an investor.\781\ Some of these 
commenters warned against costly compliance requirements such as, for 
example, requiring verification of investment limits by both the issuer 
and the intermediary,\782\ or burdening a broker-dealer with a vetting 
requirement for someone who may only want to invest a small amount, 
such as $25.\783\
---------------------------------------------------------------------------

    \781\ See, e.g., Arctic Island Letter 6; ASSOB Letter; CFA 
Institute Letter; Greenfield Letter; Heritage Letter; Joinvestor 
Letter; Patel Letter; Public Startup Letter 3; RocketHub Letter.
    \782\ See Heritage Letter.
    \783\ See Arctic Island Letter 6.
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    Several commenters supported requiring an intermediary to confirm 
investment limits compliance using a centralized database, should one 
become established.\784\ A number of these commenters suggested the 
database be created and managed by the Commission with mandatory 
intermediary participation \785\ to allow intermediaries to check an 
investor's total year to date purchases across all platforms.\786\ One 
commenter stated that the statute ``contemplates'' the development of a 
central data repository and suggested that it could be established at 
the relevant national

[[Page 71444]]

securities association.\787\ Another commenter suggested, in connection 
with its support for the use of a centralized database, imposing a 
three-to-five year time limit, after which intermediaries would no 
longer be permitted to rely on investor representations about their 
investments on other platforms.\788\ One commenter suggested the 
Commission incentivize the private creation of a centralized 
database.\789\ Another opposed the Commission imposing any obligation 
on intermediaries until after such a centralized database is 
established.\790\ Another commenter, supporting the creation of a 
single, centralized database, warned that ``competing databases'' would 
be incomplete.\791\
---------------------------------------------------------------------------

    \784\ See, e.g., BetterInvesting Letter; Arctic Island Letter 6; 
Consumer Federation Letter; Finkelstein Letter; IAC Recommendation; 
Merkley Letter; Verinvest Letter. See also CFA Institute Letter 
(suggesting that ``the Commission require such intermediaries to 
cross check each investor's information against other files on 
record with the Commission to ensure compliance with the law's 
limitations'').
    \785\ See, e.g., Arctic Island Letter 6; Consumer Federation 
Letter; Finkelstein Letter. See also CFA Institute Letter.
    \786\ See Finkelstein Letter.
    \787\ See Merkley Letter (noting that the proposal ``does not 
establish such a repository or set forth any path towards its 
establishment and thus fails to implement the plain meaning of the 
statutory language'' and suggesting that ``[t]esting, supervisory 
oversight, and other mechanisms to ensure investors are protected . 
. . be more fully considered'').
    \788\ See Consumer Federation Letter.
    \789\ See IAC Recommendation (suggesting the Commission create 
such an incentive by monitoring the effectiveness of the proposed 
reasonable reliance approach and to end that approach if a cost-
effective and suitable cross-portal monitoring system is developed); 
see also BetterInvesting Letter.
    \790\ See Wefunder Letter.
    \791\ See CFIRA Letter 12.
---------------------------------------------------------------------------

    Others commenters expressed concern that the proposed rule included 
no mechanism to prevent investors from registering with multiple 
platforms and investing far in excess of the statutory limits.\792\ 
Commenters who addressed the issue supported requiring intermediaries 
to request information about any other intermediary accounts prior to 
accepting an investment commitment.\793\ One of these commenters 
suggested requiring intermediaries to add a text box to their site that 
requires the investor to input the total dollar amount invested on 
other platforms.\794\ The other commenter stated that an intermediary 
should only be required to request additional information if there are 
doubts about the investor's self-certification.\795\
---------------------------------------------------------------------------

    \792\ See, e.g., Finkelstein Letter; Vann Letter (stating that 
intermediaries should be required to ``make it clear that the 
aggregate limits apply across all such platforms, not just their 
own'').
    \793\ See, e.g., ASSOB Letter; Wefunder Letter.
    \794\ See Wefunder Letter.
    \795\ See ASSOB Letter.
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(c) Final Rules
    After considering the comments, we are adopting Rule 303(b)(1) as 
proposed. As a threshold matter, we note that a number of commenters 
supported the proposed approach for establishing compliance with 
investment limits. Although we appreciate some of the additional 
suggestions provided by commenters, as outlined above, we believe the 
approach in Rule 303(b)(1) for establishing compliance with investment 
limits is an appropriate means of implementing the provisions of 
Section 4A(a)(8), which is designed to help ensure that an investor has 
not made purchases, in the aggregate from all issuers, that exceed 
those limits during a 12-month period. We note, however, that 
intermediaries can, in their discretion, take additional measures for 
evaluating investors' compliance with investment limits, including 
those suggested by commenters, such as: Using a centralized data 
repository, to the extent that one is created; requiring verification 
of income or net worth electronically by uploading financial documents; 
or creating a tool for investors to use, such as a questionnaire, to 
assemble the underlying data.
    While several commenters opposed permitting an intermediary to rely 
on the representations of an investor about investment limits and some 
suggested requiring intermediaries to take certain affirmative steps to 
verify compliance, we believe that it would be difficult for 
intermediaries to monitor or independently verify whether each investor 
remains within his or her investment limits where the investor may be 
participating in offerings on multiple platforms. We note, however, 
that reliance on investor representations must be reasonable. At a 
minimum, it would not be reasonable, and therefore would be a violation 
of the rule and potentially subject to an enforcement action by the 
Commission, for an intermediary to ignore investments made by an 
investor in other offerings on the intermediary's platform, to not 
obtain information and take into account investments made by an 
investor in other offerings (made in reliance on Section 4(a)(6)) on 
platforms that are controlled by or under common control with the 
intermediary, or to ignore other information or facts about an investor 
within its possession.
    Under the final rules, an intermediary will be permitted to 
reasonably rely on a centralized data repository of investor 
information, should one be created in the future. We are not mandating 
the creation of such a database at this time, in part to help to 
minimize the obstacles that intermediaries may face in getting this 
newly formed marketplace up and running.\796\ We note, in response to 
one commenter,\797\ that it is the Commission's normal practice to 
review the effectiveness of all of its rules, particularly in light of 
market developments, and consider changes as the Commission deems 
appropriate. Commission staff expects to review the need for a 
centralized database during the study of the federal crowdfunding 
exemption that it plans to undertake no later than three years 
following the effective date of Regulation Crowdfunding.\798\
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    \796\ We do not believe that the statute requires the 
establishment of a centralized database or repository of investor 
information as one commenter suggested. See Merkley Letter. Instead, 
the statute calls for intermediaries to ``make such efforts as the 
Commission determines appropriate, by rule'' to ensure that no 
investor exceeds the investment limits set forth in Section 4(a)(6).
    \797\ See IAC Recommendation; see also BetterInvesting Letter.
    \798\ See Section II. Further, we anticipate that, because of 
the electronic nature of crowdfunding, many of the books and records 
maintained by intermediaries will be in electronic format. We expect 
this will enable the Commission to analyze data across the 
crowdfunding industry as part of its ongoing oversight. We note that 
Commission staff also expects to review the books and records 
practices of intermediaries as part of its planned three-year 
review.
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(2) Acknowledgment of Risk
(a) Proposed Rule
    Securities Act Section 4A(a)(4) requires an intermediary to ensure 
that each investor: (1) Reviews educational materials; (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, 
Rule 302(b) of Regulation Crowdfunding requires an intermediary to 
provide to investors certain educational materials in connection with 
the opening of an account. In addition, proposed Rule 303(b)(2) of 
Regulation Crowdfunding would 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.\799\ The proposed rule would also require that an 
intermediary obtain from the investor

[[Page 71445]]

answers to questions demonstrating the investor's understanding that 
there are restrictions on the investor's ability to cancel an 
investment commitment 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.
---------------------------------------------------------------------------

    \799\ See Section II.C.4.b. (discussing Rule 302(b)(2) of 
Regulation Crowdfunding).
---------------------------------------------------------------------------

(b) Comments on the Proposed Rule
    Several commenters supported the requirement that intermediaries 
obtain investor acknowledgments.\800\ Some of these commenters, 
however, opposed requiring investors to re-acknowledge or to re-certify 
for each investment commitment.\801\
---------------------------------------------------------------------------

    \800\ See, e.g., Arctic Island Letter 6; CFA Institute Letter; 
Greenfield Letter; Joinvestor Letter; RocketHub Letter; STA Letter; 
Wefunder Letter.
    \801\ See Wefunder Letter; RocketHub Letter (suggesting that 
once an account has been created on an intermediary platform, an 
investor should be able to invest in multiple offerings on the same 
intermediary platform without having to re-certify and review the 
educational materials).
---------------------------------------------------------------------------

    One commenter stated that investors should be required to complete 
and sign ``subscription forms'' that set forth, in addition to what the 
proposed rules would require, additional information concerning the 
investor's level of investment experience, the identity of any person 
from whom the investor acquired any information about the investment 
and the percentage of the investor's liquid net worth represented by 
the proposed investment.\802\
---------------------------------------------------------------------------

    \802\ See Greenfield Letter. See also STA Letter (stating that 
investors should be required to acknowledge that they are aware that 
``they may need to be diligent in notifying the issuer, or its 
designee, of any changes that would affect their ability to receive 
communications from the issuer''). We note, however, that issuers 
are not obligated to contact investors directly.
---------------------------------------------------------------------------

    One commenter supported the Commission providing recommended forms 
of questions and representations, noting that ``any material examples 
provided by the Commission will be helpful to both the investor and the 
intermediary.'' \803\ However, another commenter stated that it would 
be opposed to the Commission providing recommended forms of questions 
as a ``starting point'' because such recommended forms could be seen as 
a safe harbor and constrain effectiveness.\804\ In contrast, a 
different commenter stated that Commission-provided questions and 
representations should serve as a safe harbor so there is an incentive 
for issuers to use them.\805\
---------------------------------------------------------------------------

    \803\ See Joinvestor Letter.
    \804\ See Wefunder Letter.
    \805\ See Public Startup Letter 3.
---------------------------------------------------------------------------

(c) Final Rules
    After considering the comments, we are adopting Rule 302(b)(2) as 
proposed. As noted in the Proposing Release, this rule 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. While an intermediary cannot ensure that all investors 
understand the risks involved, the rule requires intermediaries to 
confirm that an investor: (1) Has reviewed the intermediary's 
educational materials delivered pursuant to Rule 302(b); (2) 
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; and (3) has completed a questionnaire demonstrating an 
understanding of the risks of any potential investment and other 
required statutory elements. In addition, the questionnaire required 
under the rule may help to address, at least in part, the concerns 
expressed by some commenters that Section 4A(a)(4) requires more than a 
mere self-certification.\806\ We note, however, that the plain language 
of Section 4A(a)(4)(B) seemingly requires only that the investor 
positively affirms his or her understanding of the risk of loss.
---------------------------------------------------------------------------

    \806\ See, e.g., Accredify Letter; Commonwealth of Massachusetts 
Letter; Farnkoff Letter; Saunders Letter; Verinvest Letter.
---------------------------------------------------------------------------

    Our final rule does not provide a model form of acknowledgment or 
questionnaire. Rather, the rule permits 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 final rules. As with 
the educational material requirements, we continue to believe that 
rather than providing sample content or a model form of acknowledgment 
or questionnaire, intermediaries should be provided with sufficient 
flexibility to choose both the content, within the requirements of Rule 
302(b), and the format used to present the required materials. 
Likewise, we also believe that an intermediary's familiarity with its 
business and likely investor base make it best able to determine the 
format in which to present the required materials. We note that any 
format used must be reasonably designed to demonstrate receipt and 
understanding of the information. There are many ways, especially on a 
Web-based system, to convey information to, and obtain effective 
acknowledgment from, investors. As explained in the Proposing Release, 
the requirements of the rule would not be satisfied if, for example, an 
intermediary were to pre-select answers for an investor.
    Further, an intermediary in its discretion may require additional 
information, such as information concerning the investor's level of 
investment experience, the identity of any person from whom the 
investor acquired any information about the investment and the 
percentage of the investor's liquid net worth represented by the 
proposed investment, or impose additional requirements on prospective 
investors, such as imposing express acknowledgments of the investor's 
responsibilities with respect to compliance.
    Finally, although several commenters suggested that once an account 
has been created on an intermediary's platform, an investor should be 
able to invest in multiple offerings on the same intermediary platform 
without having to re-certify and review the educational material, we 
continue to believe that, in order to realize the statute's investor 
protection goals, it is prudent to require an intermediary to obtain an 
investor representation and completed questionnaire each time an 
investor seeks to make an investment commitment. Accordingly, under 
Rule 303(b), an intermediary will be required to obtain these items 
each time an investor seeks to make an investment commitment.
c. Communication Channels
(1) Proposed Rule
    Proposed Rule 303(c) of Regulation Crowdfunding 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. An intermediary that is a funding portal would be prohibited 
from participating in communications in these channels.\807\ Proposed 
Rule 303(c) also would require the intermediary to: (1) Make the 
communications channels publicly available; (2) permit only those 
persons who have opened accounts to

[[Page 71446]]

post comments; and (3) require any person posting a comment in the 
communication channels to disclose 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.
---------------------------------------------------------------------------

    \807\ See Rule 303(c)(1) (an intermediary that is a funding 
portal cannot ``participate in these communications, other than to 
establish guidelines for communication and remove abusive or 
potentially fraudulent communications''). See also Exchange Act 
Section 3(a)(80) (defining 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, among other things, 
``offer investment advice or recommendations'').
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    We received comments both supporting \808\ and opposing the 
proposed rules on communications channels.\809\ Several commenters 
agreed that posting in communication channels should be limited to 
registered investors on an intermediary's platform.\810\
---------------------------------------------------------------------------

    \808\ See, e.g., PeoplePowerFund Letter; RocketHub Letter; Vann 
Letter (stating that intermediaries should be allowed to decide who 
may post on the channels).
    \809\ See, e.g., Cromwell Letter (claiming that ``[a]s [a] 
venture investor, you cannot judge the abilities of the management 
team over the Internet. Real venture capitalists do not make their 
investments over the Internet--they spend hours and hours 
interviewing the founders/management team, in person. Small 
investors cannot successfully invest over the Internet, either.''); 
Public Startup Letter 3; Moskowitz Letter (stating that the proposed 
rules do not prevent an accredited investor from, for example, 
posting a solicitation within the communication channels for more 
securities than he or she could purchase in the offering within his 
or her investment limits).
    \810\ See, e.g., PeoplePowerFund Letter; RocketHub Letter; 
Wefunder Letter.
---------------------------------------------------------------------------

    Some commenters stated there should be more privacy or control in 
the manner in which comments are posted to the communications channels, 
such as submitting comments to intermediaries to review prior to 
posting or restricting the publicly viewable comments.\811\ One 
commenter stated that he interprets the proposed rule to permit issuers 
to post videos and other promotional content (similar to marketing 
content used on non-securities-based crowdfunding sites like 
Kickstarter), and that he supported this approach as it would permit 
the issuer to ``communicate freely and creatively . . . while giving 
the crowd a forum to ask questions or offer criticism.'' \812\ Another 
commenter encouraged the Commission ``to provide an investor `hotline', 
where investors can report concerns relating to crowdfunding 
communications or transactions, and that intermediaries be required to 
provide notice on their platforms of how to access this hotline.'' 
\813\
---------------------------------------------------------------------------

    \811\ See, e.g., ASSOB Letter (stating that ``random unmoderated 
comments'' in communication channels should not be permitted, 
because it would allow for unacceptable solicitations or claims of 
return on investment); RocketHub Letter (expressing concern that 
certain confidential information may be disclosed between registered 
investors and the issuer, which would not be suitable for a public 
forum).
    \812\ See Odhner Letter.
    \813\ See CFA Institute Letter.
---------------------------------------------------------------------------

    Several commenters generally supported the disclosure requirement 
on communications by issuers or intermediaries and agreed that these 
communications should be made transparent to investors.\814\
---------------------------------------------------------------------------

    \814\ See, e.g., CFA Institute Letter; RocketHub Letter 
(suggesting that intermediaries should be able to assist posters in 
disclosing their relationship to issuer).
---------------------------------------------------------------------------

    One commenter generally supported the proposed rule requiring each 
promotional communication to be accompanied by disclosure of the 
receipt of past or prospective compensation.\815\ Another commenter 
suggested that the proposed rules should be amended to require that 
intermediaries prominently post the online identities of the issuer's 
paid promoters in the communication channels.\816\ One commenter, 
however, stated that the Commission should not mandate the exact 
methods by which an intermediary achieves compliance with the 
requirement for promoters to disclose their relationship with an 
issuer.\817\
---------------------------------------------------------------------------

    \815\ See CFA Institute Letter.
    \816\ See MCS Letter.
    \817\ See Wefunder Letter (suggesting that the disclosures at 
the account opening stage are better devoted to the discussion of 
the risk of startup investing).
---------------------------------------------------------------------------

    In response to our request for comments, several commenters 
supported requiring intermediaries to keep the communication channels 
available to investors post-offering.\818\ Another commenter, however, 
stated that the communication channels should be closed after stock 
certificates are issued and received by investors.\819\ This commenter 
further noted that the continued maintenance of a communication channel 
after the end of a campaign would be an unnecessary cost. The same 
commenter suggested that the issuer's Web site is a better place for 
communication between investors and issuers.\820\
---------------------------------------------------------------------------

    \818\ See, e.g., PeoplePowerFund Letter (suggesting that the 
posting forum should be live and accessible to all Web site members 
not less than 30 days after the issue has been completed); RocketHub 
Letter; StartupValley Letter (suggesting that intermediaries should 
open a private channel of communication between investors and 
issuers for the post offering period and not use the same public 
channel that was used for the pre-offering and funding periods).
    \819\ See RFPIA Letter.
    \820\ Id. See also CfPA Letter (stating that ongoing 
communication between issuers and investors should be an obligation 
of issuers alone).
---------------------------------------------------------------------------

(3) Final Rule
    After considering the comments, we are adopting Rule 303(c) as 
proposed. We considered commenters' suggestions that the issuer's Web 
site is a better place for communication between investors and issuers 
and that ongoing communication between issuers and investors should be 
an obligation of issuers alone. We believe, however, that communication 
channels on the intermediary's platform will 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.\821\ While the 
JOBS Act does not impose this requirement, we believe it is consistent 
with the legislative intent that such a mechanism be in place for 
offerings made in reliance on Section 4(a)(6).\822\ Also, though 
communications among investors may occur outside of the intermediary's 
platform, communications by an investor with a crowdfunding issuer or 
its representatives about the terms of the offering are required to 
occur through these channels \823\ on the single platform through which 
the offering is conducted.\824\ This requirement is expected to provide 
transparency and accountability, and thereby further the protection of 
investors.
---------------------------------------------------------------------------

    \821\ See also discussion in Section II.B.5.
    \822\ 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.'').
    \823\ See Rule 204 of Regulation Crowdfunding and discussion in 
Section II.B.4.
    \824\ See Rule 100(a)(3) of Regulation Crowdfunding and 
discussion in Section II.A.3.
---------------------------------------------------------------------------

    Although one commenter stated that it interpreted the proposed rule 
to permit issuers to post videos and other promotional content, aside 
from Rule 303(c)(4) and its requirements for promotional activity, Rule 
303(c) itself does not address the content or form used by issuers when 
communicating with investors through the channels provided on an 
intermediary's platform. Rather, Rule 204 of Regulation Crowdfunding 
sets forth the advertising requirements for issuers and, as explained 
above, Rule 204 allows an issuer to communicate with 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

[[Page 71447]]

itself as the issuer in all communications.\825\
---------------------------------------------------------------------------

    \825\ See Section II.B.4 (discussing Rule 204).
---------------------------------------------------------------------------

    We are requiring intermediaries to make the communications on the 
channels publicly available for viewing. We believe that this 
requirement is consistent with the concept of crowdfunding, as it 
provides for transparent crowd discussions about a potential investment 
opportunity. We also are requiring in Rule 303(c)(3) that 
intermediaries limit the posting in communication channels to those 
individuals who have opened an account with the intermediary on its 
platform. As stated in the Proposing Release, 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 it will help to establish accountability 
for comments made in the communication channels. We continue to believe 
that, without this measure, there would be greater risk of the 
communications including unfounded, potentially abusive or biased 
statements intended to promote or discredit the issuer and improperly 
influence the investment decisions of members of the crowd.
    With respect to one commenter's suggestion that the Commission 
provide an investor ``hotline'' where investors can report concerns 
relating to crowdfunding communications or transactions, we note that 
the Commission has an existing ``Tips, Complaints and Referrals 
Portal'' available on its Web site,\826\ where the public may provide 
the Commission with information about potential fraud or wrongdoing 
involving alleged violations of the securities laws.
---------------------------------------------------------------------------

    \826\ See Enforcement Tips and Complaints, available at https://www.sec.gov/complaint/tipscomplaint.shtml.
---------------------------------------------------------------------------

    We are mindful of the cost associated with the communications 
channel, and, therefore, we are not requiring that intermediaries keep 
the communication channels available to investors post-offering, as 
suggested by some commenters.\827\ However, an intermediary in its 
discretion can choose to maintain the communication channels post-
offering.\828\
---------------------------------------------------------------------------

    \827\ See, e.g., PeoplePowerFund Letter; RocketHub Letter; 
StartupValley Letter.
    \828\ It is important to note that an intermediary would still 
have to maintain records of such communications to satisfy the books 
and records requirements of the crowdfunding rules. See Rule 
404(a)(3).
---------------------------------------------------------------------------

    Consistent with the prohibition on a funding portal offering 
investment advice or recommendations,\829\ the rule as adopted will 
prohibit an intermediary that is a funding portal from participating in 
any communications in these channels, apart from establishing 
guidelines for communication and removing abusive or potentially 
fraudulent communications. A funding portal can, for example, establish 
guidelines pertaining to the length or size of individual postings in 
the communication channels and can remove postings that include 
offensive or incendiary language. Also, although we understand the 
reasons for commenters' suggestions that there should be more privacy 
or control in the manner in which comments are posted, we believe that 
aside from intermediaries removing abusive or potentially fraudulent 
communications, investor protection is better served by providing the 
opportunity for uncensored and transparent crowd discussions about a 
potential investment opportunity.
---------------------------------------------------------------------------

    \829\ See Rule 300(c)(2)(i). Exchange Act Section 3(a)(80) 
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, among other things, ``offer 
investment advice or recommendations.''
---------------------------------------------------------------------------

    Finally, under the rule as adopted an intermediary must require any 
person posting on the communication channel 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 will 
apply to officers, directors and other representatives of the issuer, 
and also will be required of an intermediary that is a broker and its 
associated persons. We continue to believe that intermediaries, as the 
hosts of the communication channels, are well placed to take measures 
to ensure that promoters clearly identify themselves in their 
communication channels, in accordance with Securities Act Section 
4A(b)(3).
d. Notice of Investment Commitment
(1) Proposed Rule
    Proposed Rule 303(d) of Regulation Crowdfunding 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. Pursuant to proposed Rule 302(a)(2) of Regulation 
Crowdfunding, this notification would be provided by email or other 
electronic media, and would be documented in accordance with applicable 
recordkeeping rules.\830\
---------------------------------------------------------------------------

    \830\ See Section II.C.4 (discussing Rule 100(a)(3)) and Section 
II.D.5 (discussing the recordkeeping rules applicable to funding 
portals). See also note 1114 (discussing the recordkeeping rules 
applicable to brokers and intermediaries).
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    Commenters generally supported the requirement that intermediaries 
send these notifications to investors.\831\ One of these commenters 
stated that, in its view, the notice should be submitted twice: first, 
when an investor has made a commitment, and again when the cancellation 
period is over.\832\ One commenter stated that, in its view, investors 
also should be notified of whether a campaign has been successful or 
not, both when the campaign is near completion and when the campaign 
has been closed.\833\ However, one commenter opposed all notice 
requirements.\834\
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    \831\ See, e.g., CFA Institute Letter; Joinvestor Letter; 
RocketHub Letter.
    \832\ See RocketHub Letter.
    \833\ See Joinvestor Letter.
    \834\ See Public Startup Letter 3.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting Rule 303(d) as 
proposed. As stated in the Proposing Release, the 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 of 
his or her ability to cancel the investment commitment. We believe that 
the adopted notification requirements will be useful to investors and 
provide transparency. We also believe that requiring that this 
notification be sent once--promptly upon receipt of an investment 
commitment from an investor--rather than multiple times as commenters 
suggested--will help to minimize the costs associated with providing 
additional notification, while still providing the investor with, among 
other things, an important reminder about the ability to cancel the 
investment commitment. Although an intermediary can decide, in its 
discretion, to provide additional notifications to its customers as a 
business decision, we believe at this time that adopting additional 
notification requirements could hamper flexibility in the evolving 
crowdfunding market and potentially impair the development of best 
practices that are

[[Page 71448]]

tailored to this unique form of raising capital.
e. Maintenance and Transmission of Funds
(1) Proposed Rule
    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.'' Proposed Rule 303(e)(1) of Regulation 
Crowdfunding 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), by requiring an intermediary that 
is a registered broker to comply with established requirements in 
Exchange Act Rule 15c2-4 \835\ for the maintenance and transmission of 
investor funds.
---------------------------------------------------------------------------

    \835\ 17 CFR 240.15c2-4.
---------------------------------------------------------------------------

    Proposed Rule 303(e)(2) would establish separate requirements for 
an intermediary that is a funding portal. 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 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. Proposed Rule 303(e)(2) 
would define ``qualified third party'' to mean a bank \836\ that has 
agreed in writing to either: (i) 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) establish a bank 
account (or accounts) for the exclusive benefit of investors and the 
issuer.
---------------------------------------------------------------------------

    \836\ See Exchange Act Section 3(a)(6) [15 U.S.C. 78c(a)(6)] 
(defining ``bank'').
---------------------------------------------------------------------------

    Proposed Rule 303(e)(3) 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, provided that in no event may the funding portal 
direct this transmission of funds 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 under Rules 201 and 
203(a) of proposed Regulation Crowdfunding.
(2) Comments on the Proposed Rule
    Several commenters generally supported the proposed fund 
maintenance and transmission requirements.\837\ One commenter suggested 
that intermediaries be allowed to reject an investor's investment 
commitment if that investor does not have a correlating balance in an 
account with the intermediary.\838\ Another commenter suggested that 
the Commission require that such accounts be interest bearing and that 
either (1) the investors' funds be returned to them with their pro rata 
portion of the interest in the event the offering is canceled, or (2) 
the funds and the accrued interest be dispersed to the issuer upon the 
offering's successful closing.\839\ Another commenter suggested that 
qualified third parties should be registered and verified for 
``reputations [of] integrity''; complaints against those entities 
should be made public; and ``drawdown'' schedules should be submitted 
at the onset of projects and subsequently control issuer access to 
``project funds.'' \840\
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    \837\ See, e.g., Arctic Island Letter 6; ASTTC Letter; CSTTC 
Letter; Greenfield Letter (suggesting that the issuer should be 
required to certify in writing under penalty of perjury to the 
escrow bank that the offering has been completed pursuant to the 
terms in the offering statement and that there have been no material 
changes of circumstances that would render the representations in 
the offering statement false or misleading); Joinvestor Letter; STA 
Letter.
    \838\ See Zhang Letter.
    \839\ See MCS Letter.
    \840\ See Otherworld Letter.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on various 
alternatives to the proposed rules. As to whether the proposed rules 
should prohibit any variations of a contingency offering, such as 
minimum-maximum, offerings, one commenter stated that the target amount 
of a crowdfunding campaign ``should represent the minimum to avoid 
investor confusion'' and that ``oversubscription should be allowed.'' 
\841\ This commenter noted that these conditions would allow companies 
to ``choose to set their own minimum and maximum range.'' \842\ Another 
commenter suggested that we permit contingency offers based on a 
maximum amount of funds being raised or other benchmarks if the maximum 
is not met or, alternatively, permit ``all-or-none'' offerings.\843\
---------------------------------------------------------------------------

    \841\ See Joinvestor Letter.
    \842\ Id.
    \843\ See PeoplePowerFund Letter (suggesting also that any 
oversubscribed issues be allocated on a ``first come first served'' 
basis in connection with ``all-or-none'' offerings).
---------------------------------------------------------------------------

    As to whether other types of custody arrangements should be 
permitted, one commenter requested clarification that a carrying broker 
would not be deemed to accept any part of the sale price of any 
security for purposes of Exchange Act Rule 15c2-4 under specific 
circumstances.\844\
---------------------------------------------------------------------------

    \844\ See FOLIOfn Letter. Although this commenter stated its 
belief that the proposed procedure is consistent with Rule 15c2-4 on 
the basis that the carrying broker would not be ``accept[ing] any 
part of the sale price'' until closing, at which time funds would be 
promptly transferred to the issuer, it stated that additional 
clarity would be helpful to ensure that the Proposing Release does 
not introduce confusion if read by some as containing an implication 
to the contrary.
---------------------------------------------------------------------------

    As to whether there should be a fixed deadline for transmission of 
funds (such as three business days), one commenter stated that ``fixed 
deadlines should be set to protect investor and issuer interests.'' 
This commenter suggested that ``one week (7 days) should be sufficient 
to disburse collected funds.'' \845\ Another commenter suggested a 
three-day deadline.\846\
---------------------------------------------------------------------------

    \845\ See Joinvestor Letter.
    \846\ See Public Startup Letter 3.
---------------------------------------------------------------------------

    As to whether SRO and staff guidance on Exchange Act Rule 15c2-4 
should be expressly incorporated into the rules, one commenter 
suggested that there was no need for incorporation of prior guidance 
about Rule 15c2-4 into the proposed rules.\847\
---------------------------------------------------------------------------

    \847\ See Arctic Island Letter 6.
---------------------------------------------------------------------------

    As to whether the definition of ``qualified third party'' should be 
expanded to include entities other than a bank, one commenter stated 
that the Commission should ``consider [permitting] non-bank custodians, 
such as internet services that specialize in escrow and payment 
transfer.'' \848\ Another commenter suggested that ``qualified third 
parties'' should include credit unions, savings and loans and other 
institutions that offer similar protections to banks.\849\ Similarly, 
another commenter suggested that credit unions should be included.\850\ 
One commenter suggested that banks should not be a qualified third 
party.\851\ One

[[Page 71449]]

commenter suggested that the definition of ``qualified third party'' be 
expanded to include certain broker-dealers that ``hold funds and 
securities on behalf of customer accounts pursuant to [Exchange Act] 
Rule 15c3-3 and maintain net capital pursuant to [Exchange Act] Rule 
15c3-1(a)(2)(i)''.\852\ The commenter also suggested that funding 
portals and other brokers should be able to utilize these brokers ``to 
the identical degree they would be able to utilize banks under Rule 
15c2-4.'' \853\
---------------------------------------------------------------------------

    \848\ See Joinvestor Letter.
    \849\ See Growthfountain Letter.
    \850\ See Vann Letter.
    \851\ See Public Startup Letter 3 (claiming that ``[b]anks are 
unable to serve as the `qualified third party' '' and that no 
entities other than registered broker-dealers should serve this 
function in connection with Regulation Crowdfunding sales.). But see 
Computershare Letter (supporting the ``inclusion of a requirement 
that Funding Portals use a qualified third party, which is a bank, 
to hold investor funds as escrow agent and transmit the funds to the 
issuer once the offering requirements are met''); ASTTC Letter 
(stating that it ``strongly supports the Proposed Rule's requirement 
that Funding Portals be required to utilize qualified escrow agents 
to hold the investor assets prior to transmittal to issuers and that 
``[q]ualified escrow agents are generally regulated banks''); STA 
Letter (stating that ``[it] is pleased that the Proposed Rules 
contain a requirement that Funding Portals transmit investor assets 
to qualified escrow agents, which are banks, prior to their release 
to the issuer.'').
    \852\ See FOLIOfn Letter. See also Arctic Island Letter 8 
(suggesting that the rules permit a $250,000 net capital broker-
dealer to act as trustee for an omnibus escrow account at an FDIC 
insured bank); Ex 24 Letter.
    \853\ See FOLIOfn Letter (stating also its belief that the 
brokers ``should be distinguished from other broker-dealers in the 
context of Regulation Crowdfunding and not be subject to the 
requirements of SEC Rule 15c2-4(b)'').
---------------------------------------------------------------------------

    Commenters generally agreed with our proposed approach not to 
require funding portals to maintain net capital, noting among other 
things that imposing ``net capital requirements would increase the cost 
of starting a new funding portal and reduce the potential number of 
intermediaries, while providing little additional protection to 
investors and issuers.''\854\
---------------------------------------------------------------------------

    \854\ See Tiny Cat Letter (stating that ``[f]unding portals are 
already prohibited from handling funds and securities, and are also 
subject to a fidelity bond in the proposed regulations''). See also 
Joinvestor Letter (suggesting that since funding portals will not be 
monetary custodians, there should be no net capital requirement 
instituted); Vann Letter (stating that a ``capital requirement would 
unnecessarily restrict competition'').
---------------------------------------------------------------------------

    As to whether certain methods of payment for the purchase of 
securities should either be required or prohibited, one commenter 
suggested that the types of payment methods not be limited in any 
way.\855\ However, some commenters stated, generally, that credit cards 
should be prohibited as a form of payment for securities in connection 
with crowdfunding.\856\
---------------------------------------------------------------------------

    \855\ See Public Startup Letter 3.
    \856\ See, e.g., Arctic Island Letter 6 (suggesting that, given 
the chargeback periods for credit cards, broker-dealers should only 
be permitted to accept credit card payments from investors if the 
broker-dealer ``directly and unconditionally guarantees the amounts 
obtained thereby to both the issuer and the escrow agent''); 
Consumer Federation Letter (suggesting that allowing payment via 
credit card increases the risk that investors will make crowdfunding 
investments that they cannot afford); Joinvestor Letter; RocketHub 
Letter (stating that ``[p]ermitting debt-based payment vehicles, 
such as credit cards, which have their own rescission policies, 
(i.e., charge backs) is problematic'').
---------------------------------------------------------------------------

(3) Final Rule
    After considering the comments, we are adopting Rule 303(e) 
substantially as proposed, but with certain revisions in response to 
comments. Rule 303(e)(1), as adopted, requires an intermediary that is 
a registered broker-dealer to comply with established requirements in 
Exchange Act Rule 15c2-4 for the maintenance and transmission of 
investor funds. Rule 15c2-4 requires, in relevant part, that in 
connection with a contingency offering of a security, any money or 
other consideration received by a broker-dealer participating in the 
distribution must be 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 
thereafter promptly transmitted or returned to the persons entitled 
thereto; \857\ or alternatively, that all such funds must be promptly 
transmitted to a bank that 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.\858\ When the 
Commission adopted Rule 15c2-4, the Commission explained that the rule 
was designed to prevent fraud by a broker-dealer ``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.'' \859\ As such, consistent with Securities Act Section 
4A(a)(7), the intermediary may transmit the proceeds to the issuer only 
if the target offering amount is met or exceeded.
---------------------------------------------------------------------------

    \857\ See Exchange Act Rule 15c2-4(b)(1). We note, however, that 
any broker-dealer seeking to hold such investor funds in a separate 
bank account as agent or trustee for the persons who have a 
beneficial interest therein are still subject to net capital 
requirements pursuant to Exchange Act Rule 15c3-1.
    \858\ See Exchange Act Rule 15c2-4(b)(2).
    \859\ Adoption of Rule 15c2-4 under the Securities Exchange Act 
of 1934, Release No. 34-6737 (Feb. 21, 1962) [27 FR 2089 (Mar. 3, 
1962)].
---------------------------------------------------------------------------

    Rule 303(e)(2) as adopted establishes separate requirements for an 
intermediary that is a funding portal (as compared to an intermediary 
that is a broker-dealer) because a funding portal cannot, by statute, 
hold, manage, possess, or otherwise handle investor funds or 
securities.\860\ Therefore, Rule 303(e)(2) requires a funding portal to 
direct investors to transmit money or other consideration directly to a 
qualified third party that has agreed in writing \861\ 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.\862\
---------------------------------------------------------------------------

    \860\ See Exchange Act Section 3(a)(80)(D).
    \861\ This written agreement is required to be maintained by the 
funding portal pursuant to proposed Rule 404 of Regulation 
Crowdfunding. See Section II.D.5.
    \862\ In the crowdfunding context, we expect that the 
intermediary will make the determination as to whether the 
contingency (i.e., the target offering amount) has been met. See 
Securities Act Section 4A(a)(7) (requiring 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.'').
---------------------------------------------------------------------------

    We are revising the definition of a ``qualified third party'' to 
include for purposes of the final rule: a registered broker or dealer 
that carries customer or broker or dealer accounts and holds funds or 
securities for those persons,\863\ a bank, or a credit union insured by 
the National Credit Union Administration (``NCUA'').\864\ We had 
proposed to define ``qualified third party'' to mean a bank \865\ 
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.\866\ However, after considering the comments, we agree with 
those commenters who suggested that the definition of ``qualified third 
party'' should be expanded to include entities other than a bank and 
should include, as one commenter suggested, credit unions provided that 
these entities offer similar protections to banks.\867\ We also

[[Page 71450]]

made a corresponding change to the language of the rule text to 
indicate that a qualified third party arrangement may involve either a 
bank or credit union account (or accounts) established for the 
exclusive benefit of investors and the issuer.
---------------------------------------------------------------------------

    \863\ Broker-dealers that may serve as qualified third parties 
under Rule 303(e) include only those broker-dealers that are 
required to maintain minimum net capital of $250,000 or a higher 
minimum amount depending on their status under Appendix E of Rule 
15c3-1 under the Exchange Act. See Exchange Act Rules 15c3-
1(a)(2)(i) and 15c3-1(a)(7)(i).
    \864\ The NCUA was established by the Federal Credit Union Act 
of 1934. See Federal Credit Union Act of 1934, as amended, 12 U.S.C. 
1752 et seq. The NCUA administers the National Credit Union Share 
Insurance Fund (``NCUSIF''), which is backed by the full faith and 
credit of the U.S. government. NCUSIF protection covers the deposits 
in federal credit unions, as well as a majority of state-chartered 
credit unions. See NCUA Share Insurance Fund Information, Reports, 
and Statements, Frequently Asked Questions, National Credit Union 
Administration, http://www.ncua.gov/DataApps/Pages/SI-FAQs.aspx.
    \865\ See Proposing Release, at 182-83 [78 FR 66427, at 66473]. 
See also Exchange Act Section 3(a)(6) [15 U.S.C. 78c(a)(6)] 
(defining ``bank'').
    \866\ For example, bank deposit accounts at FDIC-insured banks 
are protected by FDIC deposit insurance. See Federal Deposit 
Insurance Corp., Deposit Insurance FAQs, available at http://www.fdic.gov/deposit/deposits/faq.html.
    \867\ We do not believe that the definition of qualified third 
party should be extended to include Internet service providers that 
specialize in escrow and payment transfer, as suggested by one 
commenter, because we do not believe that such entities are governed 
by a regulatory scheme designed to provide similar protections as 
the other entities that we are defining as qualified third parties 
under Rule 303(e). We note that another commenter suggested the 
addition of savings and loan associations. We believe that certain 
savings and loan associations are covered by the definition of 
``bank'' under Exchange Act Section 3(a)(6), and as such, are 
qualified third parties under Rule 303(e). We note that the Federal 
Deposit Insurance Corp. extended its authority to cover savings and 
loan associations in 1989. See Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA) (creating the Savings 
Association Insurance Fund (SAIF)).
---------------------------------------------------------------------------

    After considering the comments, we further believe that the 
definition of ``qualified third party'' should be expanded to include 
certain types of registered broker-dealers. We are expanding the 
definition to include registered broker-dealers that carry customer or 
broker or dealer accounts and holds funds or securities for those 
persons. We believe such brokers-dealers are appropriate entities to 
serve as qualified third parties as they are subject to various 
regulatory obligations, which are designed to provide enhanced 
protection of investor funds through the imposition of capital and 
other requirements.\868\ We note that we are not amending the 
requirements of Rule 15c2-4 through this release and not distinguishing 
broker-dealers that participate in offerings made in reliance on 
Securities Act Section 4(a)(6), either as a qualified third party or an 
intermediary, from broker-dealers in any other contingency offerings. 
As such, broker-dealers participating in offerings made in reliance on 
Section 4(a)(6), either as an intermediary or as a qualified third 
party, are still subject to Rule 15c2-4.\869\ Further, we believe that 
existing Commission and staff guidance on Rule 15c2-4 is extensive and 
clear and does not warrant incorporation into the final rule or 
clarification.
---------------------------------------------------------------------------

    \868\ See, e.g., Exchange Act Rule 15c3-1 and Rule 15c2-4.
    \869\ Under existing Rule 15c2-4, the qualified third party 
broker-dealer will be required to promptly deposit the funds 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 thereafter promptly transmit or return 
the funds to the persons entitled thereto. See Rule 15c2-4(b)(1).
---------------------------------------------------------------------------

    The statute does not limit or require a particular payment 
mechanism, and we are not imposing such a restriction because we 
believe that the rules should provide reasonable flexibility regarding 
the payment mechanisms intermediaries employ. We believe that 
restrictions on particular payment mechanisms would not serve to 
significantly increase investor protection, particularly in light of 
the established investment limits. We note, however that an 
intermediary can, in its discretion, decline to accept certain payment 
methods, such as credit cards, or accept them only in certain 
circumstances.\870\
---------------------------------------------------------------------------

    \870\ We note, for example, that an intermediary can, in its 
discretion, decline to accept credit cards given that, as at least 
one commenter suggested, an investor's use of his or her right to 
dispute credit card charges can 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 will 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 is 
statutorily prohibited from extending credit or margin to customers.
---------------------------------------------------------------------------

    We also are not adopting additional requirements that would, for 
example, (1) prohibit variations of a contingency offering, such as 
minimum-maximum offerings; (2) establish a fixed deadline for 
transmission of funds as compared to the proposed requirement to 
transmit funds ``promptly''; or (3) require funding portals to maintain 
a certain amount of net capital. We believe that additional 
restrictions, such as prohibiting variations of a contingency offering 
or establishing a fixed deadline for the transmission of funds could 
hamper flexibility in the nascent crowdfunding market and prohibit the 
development of best practices specifically tailored to this unique form 
of capital raising. Finally, we are not requiring in the final rule net 
capital standards for funding portals. As noted above, funding portals 
are prohibited from handling, managing or possessing investor funds or 
securities.\871\ We continue to believe that the requirements relating, 
in particular, to transmission of proceeds under the final rules will 
help ensure that investor funds are protected, without requiring 
funding portals to maintain net capital.
---------------------------------------------------------------------------

    \871\ See Exchange Act Section 3(a)(80)(D) [15 U.S.C. 
78c(a)(80)(D)] and discussion in Section II.C.1.
---------------------------------------------------------------------------

f. Confirmation of Transactions
(1) Proposed Rule
    As proposed, Rule 303(f)(1) of Regulation Crowdfunding 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. This notification would 
be required to be provided by email or other electronic media,\872\ and 
to be documented in accordance with applicable recordkeeping 
rules.\873\ Pursuant to proposed Rule 303(f)(2), 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 \874\ for 
the subject transaction.
---------------------------------------------------------------------------

    \872\ See proposed Rule 302(a)(2) (requiring an intermediary to 
provide all information electronically). See also Section II.C.4.a 
(discussing electronic delivery requirements).
    \873\ Intermediaries that are brokers are subject to the 
recordkeeping requirements of Exchange Act Rules 17a-3 and 17a-4, 
and intermediaries that are funding portals are subject to 
recordkeeping requirements under Rule 404 of Regulation 
Crowdfunding. See note 1114 (discussing the recordkeeping rules 
applicable to brokers and intermediaries). See also Section II.D.5.
    \874\ See note 882 (discussing Exchange Act Rule 10b-10 (17 CFR 
240.10b-10) generally).
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    Commenters generally supported the proposed confirmation 
requirements.\875\ One commenter, however, stated its view that 
permitting intermediaries to satisfy the delivery requirement for 
transaction confirmations through delivery of a message that contains a 
notice that the information is available on the intermediary's Web site 
would not be sufficient.\876\
---------------------------------------------------------------------------

    \875\ See, e.g., CFA Institute Letter; Joinvestor Letter.
    \876\ See Consumer Federation Letter (stating that ``[w]hile 
most if not all intermediaries would be likely to deliver the actual 
confirmation to investors, the rule would not guarantee this'').
---------------------------------------------------------------------------

(3) Final Rule
    After considering the comments, we are adopting Rule 303(f), as 
proposed, but with one clarifying change. As proposed, Rule 
303(f)(1)(vi) would have required an intermediary to give or send to 
each investor a notification disclosing: ``[t]he source and amount of 
any remuneration received or to be received by the intermediary in 
connection with the transaction, including the amount and form of any 
remuneration that is received, or will be received, by the intermediary 
from persons other than the issuer. We are

[[Page 71451]]

revising Rule 303(f)(1)(vi) to require disclosure as well of the form 
of any remuneration received or to be received by the intermediary in 
connection with the transaction, including any remuneration received or 
to be received by the intermediary from persons other than the issuer. 
This edit is intended to clarify the rule by placing ``source, form and 
amount'' together, rather than having ``form'' listed out separately as 
proposed.
    As explained in the Proposing Release, we believe that 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.\877\ Each of the required items of information is 
intended to assist investors in memorializing and assessing their 
transactions. Furthermore, the requirement that an intermediary 
disclose to an investor the source, form and amount of any remuneration 
received or to be received is designed to help to highlight potential 
conflicts of interest if, for example, an intermediary has a financial 
interest in an issuer using its services.\878\
---------------------------------------------------------------------------

    \877\ See Proposing Release at 78 FR 66475. See also 
Confirmation of Transactions, Release No. 34-34962 (Nov. 10, 1994) 
[59 FR 59612, 59613 (Nov. 17, 1994)].
    \878\ Although Securities 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 final rules do not include a complete prohibition on the 
intermediary, itself, having a financial interest in an issuer using 
its services. The intermediary may have a financial interest in an 
issuer using its services, subject to certain limitations. See Rule 
300(b). See also Section II.C.2.b.
---------------------------------------------------------------------------

    As for the concern raised by one commenter about the delivery 
requirements for transaction confirmations,\879\ we note, as we did in 
the Proposing Release, that the confirmation is required to be provided 
by email or other electronic media, consistent with the Commission's 
long-standing policies on the use of electronic media for delivery 
purposes.\880\ This is also consistent with the requirement for an 
intermediary to provide all information electronically. We believe that 
this delivery requirement is appropriate for crowdfunding transactions 
and satisfies our obligation that requirements under Securities Act 
Section 4A(a)(12) be for the protection of investors and in the public 
interest. As to the same commenter's view that the rule would not 
guarantee delivery of a confirmation to investors,\881\ although we 
acknowledge that statutes and rules cannot guarantee compliance, there 
is a robust regulatory scheme in place that is designed to promote 
compliance and that is coupled with supervision and enforcement by both 
the Commission and the registered national securities association.
---------------------------------------------------------------------------

    \879\ See Consumer Federation Letter.
    \880\ See Proposing Release, at 189 [78 FR 66427, at 66475]. See 
also Use of Electronic Media, note 714 at 25853 (discussing the 
``access equals delivery'' concept and citing Use of Electronic 
Media for Delivery Purposes, Release No. 34-36345 (Oct. 6, 1995) [60 
FR 53548, 53454 (Oct. 13, 1995)])).
    \881\ See Consumer Federation Letter.
---------------------------------------------------------------------------

    In addition, under Rule 303(f)(2) as adopted, an intermediary that 
gives or sends to each investor the notification described above is 
exempt from the requirements of Exchange Act Rule 10b-10 for the 
subject transaction.\882\ The confirmation terms under Rule 303(f)(2) 
are similar to, but not as extensive as, those broker-dealers are 
subject to under Rule 10b-10. We believe that this difference is 
appropriate given the more limited scope of an intermediary's role in 
crowdfunding transactions. Rule 10b-10, for example, requires 
disclosure about such matters as payment for order flow, riskless 
principal transactions, payment of odd-lot differentials and asset-
backed securities. 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. Therefore, we believe that 
if an intermediary satisfies the notification requirements of the final 
rules, the intermediary will have provided investors with sufficient 
relevant information about the crowdfunding security, and so should not 
be required to meet the additional requirements of Rule 10b-10.
---------------------------------------------------------------------------

    \882\ 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 disclosure requirements of Rule 303(f)(2)(vi) are 
required across all crowdfunding transactions where remunerations 
are received or are to be received. Given the limits on the dollar 
amount of securities that can be offered, as well as the limits on 
individual investment amounts, in transactions relying on Section 
4(a)(6), we do not expect investors to negotiate individualized 
compensation agreements.
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6. Completion of Offerings, Cancellations and Reconfirmations
a. Proposed Rule
    Under Securities Act Section 4A(a)(7), an intermediary is required 
to allow investors to cancel their commitments to invest as the 
Commission shall, by rule, determine appropriate. Securities Act 
Section 4A(b)(1)(G) requires an issuer, prior to sale, to provide 
investors ``a reasonable opportunity to rescind the commitment to 
purchase the securities.'' We proposed, therefore, in Rule 304(a) of 
Regulation Crowdfunding, to 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. 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 of the offering (except in the event of a material change to the 
offering, as discussed below).\883\
---------------------------------------------------------------------------

    \883\ See proposed Rule 304(c).
---------------------------------------------------------------------------

    We also proposed in Rule 304(b) that if an issuer reached the 
target offering amount prior to the deadline identified in its offering 
materials, it could close the offering once the target offering amount 
was reached, provided that: (1) The offering had been open for a 
minimum of 21 days; (2) the intermediary provided notice about the new 
offering deadline at least five business days prior to the new offering 
deadline; (3) investors would be 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 continued to meet or exceed 
the target offering amount.
    In addition, we proposed in Rule 304(c) that if there was a 
material

[[Page 71452]]

change \884\ to the terms of an offering or to the information provided 
by the issuer about the offering, the intermediary would be required to 
give or send to any 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.\885\ As 
proposed, if the investor failed to reconfirm his or her investment 
within those five business days, the intermediary would be required, 
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.\886\ This notification, like other notifications from 
an intermediary, would be required to be provided by email or other 
electronic media, and to be documented in accordance with applicable 
recordkeeping rules.\887\
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    \884\ In the Proposing Release, we noted that in those instances 
where an issuer had 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. We also noted that if 
the change involved closing 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 those in Rule 304(c), would apply.
    \885\ The proposed rules also required that an issuer extend an 
offering to allow for a five business day period in instances where 
material changes to the offering or to the information provided by 
the issuer occurred within five business days of the maximum number 
of days that an offering was to remain open. See proposed Rule 
304(c)(2) of Regulation Crowdfunding. See also Rule 302(a)(2) 
(requiring that notification be provided by email or through other 
electronic media).
    \886\ See proposed Rule 304(c)(1) of Regulation Crowdfunding.
    \887\ 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. See note 1114 (discussing the recordkeeping rules 
applicable to brokers and intermediaries). See also Section II.D.5; 
Section II.C.4. (discussing an intermediary's electronic delivery 
requirements and Rule 302(a)(2)).
---------------------------------------------------------------------------

    Finally, we proposed in Rule 304(d) that if an issuer did not 
complete an offering, for example, because the target was not reached 
or the issuer decided to terminate the offering, the intermediary would 
be required, 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. This notification, like other notifications 
from an intermediary, would be required to be provided by email or 
other electronic media, and to be documented in accordance with 
applicable recordkeeping rules.\888\
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    \888\ See note 1114 (discussing the recordkeeping rules 
applicable to brokers and intermediaries).
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b. Comments on the Proposed Rule
    One commenter supported the unconditional right of investors to 
cancel an investment commitment for any reason until 48 hours prior to 
the close of an offering.\889\ Other commenters, however, expressed 
concern over the potential for misconduct regarding cancellations,\890\ 
such as scenarios where investors commit and then withdraw at the last 
minute.\891\
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    \889\ See CFA Institute Letter.
    \890\ See, e.g., Joinvestor Letter (suggesting the lock-in-date 
should be fourteen days prior to the closing date to prevent any 
misconduct surrounding the approach of a target, or the limit of 
oversubscription, near to the close of the round); Consumer 
Federation Letter; RocketHub Letter.
    \891\ See, e.g., RocketHub Letter (recommending a 24-hour 
cancellation period in order to protect investors from `` `pump & 
rescind' schemes'' and minimize an issuer's exposure to the risk of 
`` `short fall' situations''); Consumer Federation Letter (noting 
the risk that ``individuals associated with the issuer will commit 
money to the offering early in the process in order to stimulate 
interest and create a sense of urgency about investing, only to 
withdraw at the last minute''). The same commenter suggested that 
potential gamesmanship by investors associated with the issuer has 
the potential to discredit crowdfunding and recommended that the 
Commission consider more meaningful restrictions on issuer 
participation.
---------------------------------------------------------------------------

    One commenter stated that the rule on early closure of an offering 
should be more narrowly defined.\892\ This commenter requested that the 
Commission clarify whether, under such circumstances, an offering 
should be closed from accepting more funds or keep accepting 
commitments until the end of the five business day period, even if this 
puts an offering over set limits.\893\
---------------------------------------------------------------------------

    \892\ See RFPIA Letter (stating that ``[i]f the issuer reaches 
the target offering amount prior to the deadline the current 
proposed regulation require[s] a funding portal to give a 5 day 
notice to investors of the new closing date. Since funding portals 
have no crystal balls, this process needs to be more narrowly 
defined'').
    \893\ Id.
---------------------------------------------------------------------------

    Some commenters supported the proposal that existing disclosure 
materials can be modified in the event of a material change, with the 
original offering remaining open,\894\ while one commenter also 
suggested that no changes should be allowed within 21 days of the close 
date.\895\ Several commenters generally agreed that an investor should 
have to reconfirm the commitment to invest when a material change 
occurs.\896\ One commenter stated that many investors would prefer not 
to have to re-confirm their investments and recommended allowing 
investors to decide how to handle material changes.\897\ Another 
commenter opposed any reconfirmation requirement because it believed 
there should be a presumption that any changes made would be in the 
best interest of the issuer and all of its stakeholders.\898\
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    \894\ See, e.g., Arctic Island Letter 6; Joinvestor Letter; 
Wales Capital Letter 2.
    \895\ See Joinvestor Letter.
    \896\ See, e.g., CFA Institute Letter; Wales Capital 2 Letter.
    \897\ See Wefunder Letter.
    \898\ See Public Startup Letter 3.
---------------------------------------------------------------------------

    Some commenters supported the proposed five-day reconfirmation 
period for investors.\899\ Some commenters, however, stated that five 
business days is not enough time for an investor to decide whether to 
reconfirm an investment commitment after a material change is made by 
the issuer.\900\ One commenter suggested a shorter reconfirmation time 
period.\901\ Another commenter recommended that the Commission clarify 
when the five-day reconfirmation period begins.\902\ One commenter 
suggested material revisions made to the offering should restart the 
21-day minimum period for the campaign, though generally agreed that a 
five-business day notification is sufficient in the event that an 
offering is cancelled.\903\
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    \899\ See, e.g., CFA Institute Letter; Wales Capital 2 Letter.
    \900\ See, e.g., Arctic Island Letter 6 (advocating that the 
time period be ``indefinite'' so as to give investors more time to 
consider the changes and to give issuers more time to answer 
questions of individual investors and provide clarifications or make 
subsequent changes as needed); CfPA Letter (recommending that any 
change in offering documents on a Web site after initial posting 
restart the 21-day period (or at least half of that) during which 
offerings cannot close and prospective or pledged investors can 
reconsider and rescind their commitments).
    \901\ See RFPIA Letter (suggesting eliminating the requirement 
or reducing it to 72 hours).
    \902\ See ODS Letter.
    \903\ See Wales Capital Letter 2.
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c. Final Rules
    We are adopting Rule 304 as proposed, with a technical change to 
correct a cross-cite in the rule text. We believe that the final rule 
appropriately takes into consideration the needs of investors to be 
able to consider material

[[Page 71453]]

changes to the terms of the offering and new views expressed by the 
crowd, while allowing issuers to have certainty about their ability to 
close an offering at the end of the offering period. We have considered 
the comments outlined above about concerns with cancellation generally 
and those suggesting other types of cancellation or lock-in periods. 
However, we continue to believe that allowing investors to cancel any 
investment commitments for any reason until 48 hours prior to the 
deadline identified in the issuer's offering materials is an 
appropriate cancellation period because it is consistent with the 
requirement of Section 4A(b)(1)(G) that investors have a ``reasonable 
opportunity'' to rescind investment commitments, while also providing 
issuers with certainty within a reasonable amount of time about whether 
they have indeed received investment commitments. Although we 
acknowledge commenters' concerns about potential misconduct in 
connection with cancellations of investment commitments, we note that 
issuers and investors, including investors associated with the issuer, 
are subject to the antifraud provisions of the securities laws. We also 
note that, as we discussed above, an intermediary is required to 
promptly remove an offering from its platform if it becomes aware of 
information that causes it to believe that the issuer or the offering 
presents the potential for fraud or otherwise raises concerns about 
investor protection.\904\
---------------------------------------------------------------------------

    \904\ See Section II.C.3.
---------------------------------------------------------------------------

    In regards to one commenter's request for clarification as to 
whether an intermediary may continue to receive investment commitments 
during the five business day period prior to an early closure of an 
offering (even if the commitment may be oversubscribed), we note that 
intermediaries are permitted to continue to receive investment 
commitments during that time period, provided that the intermediary 
informs investors about the continuation of such acceptance in 
accordance with Rule 304(b).\905\
---------------------------------------------------------------------------

    \905\ However, the issuer will still have to comply with the 
rules regarding oversubscriptions. See Section II.B.6.a. This same 
commenter expressed uncertainty about how an issuer will communicate 
early closure to a funding portal so that the funding portal can 
provide appropriate notice to investors about the new offering 
deadline. The final rules do not prescribe the mechanics for how 
funding portals must communicate with issuers as we believe the 
better course is to provide for flexibility in this regard so that 
intermediaries and issuers can arrive at efficient working 
arrangements.
---------------------------------------------------------------------------

    In addition, 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 by reconfirming the 
investment commitment. Despite some commenters' concerns outlined 
above, we continue to believe that a five business day period is 
appropriate because it reasonably reflects the need to allow an 
investor sufficient time to consider material changes to the terms of 
the offering while giving issuers certainty about their ability to 
close an offering. For the same reasons noted above, we also believe 
that five business days is a sufficient amount of time for 
intermediaries to notify investors about offerings that are not 
completed or terminated. Finally, we believe that requiring an investor 
to reconfirm his or her investment commitment within five business days 
of receipt of the notice of a material change is sufficiently clear as 
to when the reconfirmation period begins and provides additional 
investor protection and is therefore an appropriate requirement for the 
final rule.
7. Payments to Third Parties
a. Proposed Rule
    Securities Act 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.''
    We proposed in Rule 305(a) of Regulation Crowdfunding to prohibit 
an intermediary from compensating any person for providing it with the 
``personally identifiable information'' \906\ of any investor. As 
explained in the Proposing Release, we believe that any person 
compensated for providing the personally identifiable information of 
investors would be acting as a promoter, finder or lead generator 
within the meaning of Securities Act Section 4A(a)(10).
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    \906\ As proposed, the term ``personally identifiable 
information'' would mean any information that 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. See proposed Rule 
305(c) of Regulation Crowdfunding. As explained in the Proposing 
Release, personally identifiable information could include any 
information that can be used to identify an individual, such as 
name, social security number, date or place of birth, mother's 
maiden name or biometric records, as well as any other information 
that is linked directly to an individual, such as financial, 
employment, educational or medical information.
---------------------------------------------------------------------------

    Proposed Rule 305(b), however, would permit an intermediary to 
compensate a person for directing issuers or investors to the 
intermediary's platform if: (1) The person does not provide the 
intermediary with the personally identifiable information of any 
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 Securities Act Section 
4(a)(6) on or through the intermediary's platform.\907\
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    \907\ 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.
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Some commenters generally supported the portion of the proposed 
rule that allows intermediaries to compensate third parties for 
directing investors to the platform.\908\ Some of these comments also 
agreed that intermediaries should be permitted to compensate third 
parties for general business advertising including, for example, web 
search engine direction or other standard Internet marketing 
techniques.\909\ In response to our request for comment as to whether 
disclosures should be required when an intermediary compensates third 
parties for directing investors to its platform, one commenter 
suggested the Commission should not require disclosure of ``standard 
Internet marketing [practices]'' that ``inform investors of companies 
they may be interested in.'' \910\ Another commenter stated that 
compensation should only be allowed under limited circumstances, albeit 
without providing examples of those limited circumstances.\911\ We did 
not receive comments related to the definition of the term ``personally 
identifiable information'' as proposed in Rule 305(c).
---------------------------------------------------------------------------

    \908\ See, e.g., RoC Letter; RocketHub Letter; Wefunder Letter.
    \909\ See, e.g., RocketHub Letter; Wefunder Letter. See also ABA 
Letter (discussing the practice of so-called ``passive bulletin 
boards'').
    \910\ Wefunder Letter.
    \911\ See Joinvestor Letter (``We believe such compensation 
should be allowed under extremely limited circumstances, as 
promotion will be a central issue to these campaigns.'').
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c. Final Rules
    We are adopting Rule 305 with modifications. Rule 305(a), like the 
proposed rule, states that an intermediary may not compensate any 
person for providing the intermediary with the personally identifiable 
information of any investor in securities offered and sold in reliance 
on Section 4(a)(6) of the Securities Act. However, we are not including 
in the final rule

[[Page 71454]]

what was proposed in paragraph (b), which stated that an intermediary 
may compensate a person for directing issuers to the intermediary's 
platform, provided that unless the compensation is made to a registered 
broker or dealer, the compensation is not based, directly or 
indirectly, on the purchase or sale of a security offered in reliance 
on Section 4(a)(6) of the Securities Act on or through the 
intermediary's platform. Upon further consideration, we believe this 
provision would be duplicative of Rule 402(b)(6), which addresses 
referral payments that funding portals are permitted to pay to third 
parties.\912\ In addition, registered broker-dealers are already 
subject to limitations on the types of compensation that they may pay 
to third parties, and as we explained in the Proposing Release, are 
subject to an established regulatory and oversight regime that provides 
important safeguards for investors.
---------------------------------------------------------------------------

    \912\ See Section II.D.3.
---------------------------------------------------------------------------

    We agree with those commenters who believe intermediaries should be 
permitted to compensate third parties for general business advertising 
including, for example, web search engine direction or other standard 
Internet marketing techniques so long as that compensation is not 
based, directly or indirectly, on the purchase or sale of a security 
offered in reliance on Securities Act Section 4(a)(6).\913\ We believe 
permitting compensation for these types of general business advertising 
does not raise the same privacy concerns as those implicated by the 
provision of personally identifiable information and is generally 
consistent with the statutory scheme for crowdfunding promotional 
activities. Therefore, under the rules, an intermediary may pay a 
person a flat fixed fee \914\ to direct persons to the intermediary's 
platform through, for example, hyperlinks or search term results or 
make payments to a person to advertise its existence.\915\ The 
intermediary, however, cannot pay to receive personally identifiable 
information in under any circumstances pursuant to the prohibition in 
Rule 305(a).
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    \913\ See, e.g., 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.'').
    \914\ A flat fixed fee is one that is not based on the success 
of the offering, and so would not be transaction-based compensation. 
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 this kind of compensation 
needs to consider whether it would be required to register as a 
broker.
    \915\ See also Rule 402 of Regulation Crowdfunding and 
discussion in Section II.D.3 (discussing advertising and marketing 
activities in which a funding portal may engage under the 
Regulation's safe harbor).
---------------------------------------------------------------------------

    Finally, we are adopting as proposed the definition of personally 
identifiable information, which will be renumbered as Rule 305(b).

D. Additional Funding Portal Requirements

1. Registration Requirement
a. Generally
(1) Proposed Rules
    Securities Act Section 4A(a)(1) requires that an intermediary 
facilitating a transaction made in reliance on Securities Act 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.\916\ 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 
the Commission to impose, as part of its authority to exempt funding 
portals from broker registration, ``such other requirements under [the 
Exchange Act] as the Commission determines appropriate.''
---------------------------------------------------------------------------

    \916\ Compare Exchange Act Section 15(b) [15 U.S.C. 78o(b)] 
(prescribing the manner of registration of broker-dealers).
---------------------------------------------------------------------------

    We proposed 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 the Uniform Application for 
Broker-Dealer Registration (``Form BD'').\917\ Under proposed Rule 
400(a), a funding portal would register by completing a Form Funding 
Portal, which would include information concerning the funding portal's 
principal place of business, its legal status 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.\918\ Proposed Rule 400(a) also would require 
a funding portal to become a member of FINRA or another applicable 
national securities association registered under Exchange Act Section 
15A. As proposed in Rule 400(a), 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.
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    \917\ 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.
    \918\ We discuss in Section II.D.1.b the information required to 
be included in Form Funding Portal.
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    Proposed Rule 400(b) would require a funding portal to file an 
amendment to Form Funding Portal within 30 days of any of the 
information previously submitted on the form becoming inaccurate for 
any reason.
    In addition, proposed Rule 400(c)(1) 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. As proposed in Rule 400(c)(1), the registration would 
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.\919\ Proposed Rule 400(c)(1), therefore, would not apply where 
the predecessor funding portal intends to continue to engage in funding 
portal activities.
---------------------------------------------------------------------------

    \919\ 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 was filed by the 
successor. See proposed Rule 400(c)(1). A similar process exists for 
registered broker-dealers under Exchange Act Rule 15b1-3 (17 CFR 
240.15b1-3).
---------------------------------------------------------------------------

    In certain circumstances, proposed Rule 400(c)(2) would allow the 
successor to file an amendment to the predecessor's Form Funding Portal 
rather than requiring the successor and predecessor, respectively, to 
follow the registration filing and withdrawal process under Rule 
400(c)(1) described above. Specifically, proposed Rule 400(c)(2) 
provides that, if the 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. Successions by amendment 
would be limited to those successions that

[[Page 71455]]

resulted from a formal change in the structure or legal status of the 
funding portal but did not result in a change in control.
    The instructions to the proposed Form Funding Portal would limit 
the term ``successor'' to an entity that assumed or acquired 
substantially all of the assets and liabilities of the predecessor 
funding portal's business.
    We also proposed in Rule 400(d) to require a funding portal to 
promptly file a withdrawal of registration on Form Funding Portal upon 
ceasing to operate as a funding portal. The withdrawal would be 
effective on the later of 30 days after receipt by the Commission, 
after the funding portal was no longer operational, or within a longer 
period of time consented to by the funding portal or that the 
Commission, by order, determined as necessary or appropriate in the 
public interest or for the protection of investors.\920\
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    \920\ 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.
---------------------------------------------------------------------------

    Proposed Rule 400(e) would provide that each application for 
registration, amendment thereto, successor registration or withdrawal 
would be considered filed when a complete Form Funding Portal was 
submitted with the Commission or its designee. Proposed Rule 400(e) 
also would 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.
(2) Comments on the Proposed Rule
    We received some comments generally supporting the proposed 
registration method,\921\ while one commenter generally opposed the 
proposed registration method, stating the Commission is requiring too 
stringent a registration process and financial overhead for funding 
portals.\922\ One commenter encouraged the Commission to require 
broker-dealers to register on the same form as funding portals.\923\
---------------------------------------------------------------------------

    \921\ See, e.g., Joinvestor Letter; DreamFunded Letter (favoring 
the proposed rules which provide a ``high barrier to entry'' to 
funding portals, as it will ``stop anyone from potentially creating 
a funding portal over a weekend'').
    \922\ See PeoplePowerFund Letter (suggesting that the Commission 
should consider, ``a simple registration detailing the owners and 
operators of a web portal, the legal domicile and registration 
contact information etc. and the portals [sic] commitment to 
adherence of the rules of the [C]ommission'').
    \923\ See RocketHub Letter. The commenter also stated that it 
has ``a serious concern with [broker-dealers] having an unfair 
advantage in the market, by already being regulated and registered 
with the Commission as well as FINRA. Therefore, they may be able to 
service the market well ahead of [funding] [p]ortals.''
---------------------------------------------------------------------------

    In the Proposing Release, we requested comments on whether we 
should impose other restrictions or prohibitions on affiliations of the 
funding portal, such as affiliation with a registered broker-dealer or 
registered transfer agent. Some commenters opposed the imposition of 
other restrictions or prohibitions on affiliations of the funding 
portal.\924\ One of these commenters stated that affiliations and 
partnerships with brokers or transfer agents should be optional.\925\
---------------------------------------------------------------------------

    \924\ See, e.g., Joinvestor Letter; Tiny Cat Letter.
    \925\ See Tiny Cat Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 400(a)-(e) generally as proposed with one 
change. We are deleting from Rule 400(e) as proposed the language 
stating that Form Funding Portal may be filed with a Commission 
designee, as we have determined not to designate this function. Rather, 
these filings will be made through the EDGAR system as explained in 
more detail below.
    Rule 400 establishes a streamlined registration process for a 
funding portal to register with the Commission. We have considered the 
general comment suggesting that the registration requirement for 
funding portals is too stringent and creates financial overhead. We 
believe, however, that the rules as adopted provide a reasonable 
approach to funding portal registration--they are based on broker-
dealer registration requirements, which we believe have been effective 
in providing investor protection and allowing the Commission to perform 
its oversight function. At the same time, the registration requirement 
takes into account the more limited activities of funding portals as 
compared to broker-dealers. As such, the registration requirements we 
are imposing on funding portals are generally consistent with those 
imposed on broker-dealers, while not as extensive in every aspect. As 
we note in Section III.B.5, we have considered the costs of funding 
portal registration and believe that the anticipated costs to funding 
portals are justified in light of the expected benefits investors will 
receive from utilizing funding portals that are subject to registration 
requirements, which include public disclosure of registration 
information on Form Funding Portal in EDGAR, as described in more 
detail in Section II.D.1.b below. We believe that having such a 
registration system will promote investor confidence in this new and 
emerging market, while providing us and FINRA (and any other applicable 
national securities association registered pursuant to Exchange Act 
Section 15A) with information integral to effective oversight.
    Finally, consistent with the proposal, we are not imposing 
additional restrictions or prohibitions on affiliations of the funding 
portal in the final rules. We note, however, that Form Funding Portal, 
which will be publicly available, requires a funding portal to disclose 
information about its control relationships and the disciplinary 
history of associated persons.\926\
---------------------------------------------------------------------------

    \926\ See Item 4--Control Relationship of Form Funding Portal 
and Item 5--Disclosure Information of Form Funding Portal. 
``Control'' is defined for the purposes of Form Funding Portal as 
``[t]he power, directly or indirectly, to direct the management or 
policies of the funding portal, whether through contract, or 
otherwise. A person is presumed to control a funding portal if that 
person: (1) IS A director, general partner or officer exercising 
executive responsibility (or has a similar status or functions); (2) 
directly or indirectly has the right to vote 25 percent or more of a 
class of a voting security or has the power to sell or direct the 
sale of 25 percent or more of a class of voting securities of the 
funding portal; or (3) in the case of a partnership, has 
contributed, or has a right to receive, 25 percent or more of the 
capital of the funding portal.'' See Instructions to Form Funding 
Portal.
---------------------------------------------------------------------------

b. Form Funding Portal
(1) Proposed Rules
    As noted above, proposed Rule 400(a) requires a funding portal 
seeking to register with the Commission, through an initial 
application, to file a completed Form Funding Portal with the 
Commission. As proposed, Rule 400(b)-(d) would have also required 
funding portals to use proposed Form Funding Portal to amend any part 
of the funding portal's most recent Form Funding Portal, including 
certain successor registrations, or to withdraw from registration as a 
funding portal with the Commission.\927\ We proposed 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.
---------------------------------------------------------------------------

    \927\ As noted in Section II.D.1.a., a successor funding portal 
may amend the registration of its predecessor on Form Funding 
Portal, within 30 days after succession, if the succession is based 
solely on a change of the predecessor's date of incorporation, state 
of incorporation, form of organization, or composition of a 
partnership. Otherwise, a successor must file a registration 
statement on Form Funding portal within 30 days after succession and 
a predecessor must file a withdrawal on Form Funding Portal. See 
Rule 400(c).
---------------------------------------------------------------------------

    As proposed, Form Funding Portal appropriately considered the need 
to provide efficiency in completing the

[[Page 71456]]

form while requesting sufficient information from funding portals to 
allow for effective regulatory oversight. The proposed form would have 
consisted of eight sections, including items related to: Identifying 
information, form of organization, successions, control persons, 
disclosure information, non-securities related business, escrow, 
compensation arrangements, and withdrawal. These items would require an 
applicant to provide certain basic 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.\928\ Under proposed Form Funding 
Portal, a funding portal would be able to operate multiple Web site 
addresses under a single funding portal registration, provided the 
funding portal disclosed on Form Funding Portal all the Web sites and 
names under which it did business.\929\ In addition, the proposed form 
would have required an applicant to describe any non-securities related 
business activities and supply information about its escrow 
arrangements, compensation arrangements with issuers and fidelity bond.
---------------------------------------------------------------------------

    \928\ 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 
on proposed Form Funding Portal.
    \929\ See proposed Form Funding Portal, Item 1; 17 CFR 249.2000.
---------------------------------------------------------------------------

    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 in Section II.D.1.d. below, 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 
have been required to complete Schedule C to Form Funding Portal, which 
would require information about the applicant's arrangements to have an 
agent for service of process in the United States, as well as a 
certification and 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.
    We also proposed that a person duly authorized to bind the funding 
portal be required to sign Form Funding Portal in order to execute the 
documents.\930\ As proposed, the funding portal also would have been 
required to consent to service of process to its contact person on the 
form.\931\
---------------------------------------------------------------------------

    \930\ See execution statement of proposed Form Funding Portal. 
We proposed requiring a person executing Form Funding Portal and 
Schedule C (if applicable) 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.
    \931\ See execution statement of proposed Form Funding Portal. 
Specifically, we proposed requiring the funding portal 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.
---------------------------------------------------------------------------

    Finally, we proposed 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).\932\
---------------------------------------------------------------------------

    \932\ See proposed Instructions to Form Funding Portal.
---------------------------------------------------------------------------

(2) Comments on Proposed Rules
    We received one comment in support of using EDGAR for all funding 
portal filing and registration requirements.\933\ Some commenters also 
generally supported allowing a funding portal to file one registration 
application to operate multiple Web sites.\934\ One commenter, however, 
expressed concern about allowing funding portals to file one 
registration form for multiple Web sites. This commenter suggested the 
Commission ``clearly address Portals that register with the Commission, 
and then subsequently license out or sell their registration.'' \935\ 
The same commenter stated that ``[s]ome entrepreneurs have indicated 
that they intend to operate a `parent' funding [p]ortal, which allows 
other sites to operate under its umbrella, (leveraging the parent's 
systems, architecture, design, infrastructure, etc.).'' \936\
---------------------------------------------------------------------------

    \933\ See Public Startup Letter 3.
    \934\ See, e.g., Joinvestor Letter; Tiny Cat Letter (stating 
that requiring new applications for each Web site would be 
unnecessary as it ``would not provide any new information for either 
the commission or the public'' so long as the expansion involves no 
material changes to information in the initial application).
    \935\ RocketHub Letter.
    \936\ Id.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Form Funding Portal generally as proposed,\937\ 
with the following changes:
---------------------------------------------------------------------------

    \937\ We also made minor non-substantive technical changes and 
changes to increase the clarity of the information being requested 
in the form.
---------------------------------------------------------------------------

     The final rules amend Regulation S-T to permit a funding 
portal to file PDF exhibits and attachments to Form Funding Portal on 
EDGAR as ``official filings.'' \938\
---------------------------------------------------------------------------

    \938\ See Rule 101(a)(1)(xviii) of Regulation S-T. As we noted 
in Section II.B.3, Regulation S-T generally allows PDF documents to 
be filed only as unofficial copies. See Rule 104 of Regulation S-T. 
However, Rule 101 provides for certain exceptions to this 
restriction. The PDF documents must be in the format required by the 
EDGAR Filer Manual, as defined in Rule 11 of Regulation S-T.
---------------------------------------------------------------------------

     The following has been added to the title of the form: 
``Application or Amendment to Application for Registration or 
Withdrawal from Registration as Funding Portal'' to clarify that the 
form will be used for all funding portal registration applications, 
amendments and withdrawals;
     Amendments to Form Funding Portal will require a narrative 
explaining the amendment, which we believe will clarify to investors 
and potential investors the particular information being amended by the 
funding portal in its filing;
     Form Funding Portal will not require information about 
fidelity bonds since we are not adopting the fidelity bond requirement 
in the proposed rules; \939\
---------------------------------------------------------------------------

    \939\ See Section II.D.1.c.
---------------------------------------------------------------------------

     Item 1 also will require information about Web site URL 
changes on the most recent Form Funding Portal, title of the contact 
employee and the month the applicant funding portal's fiscal year ends;
     The title of Item 4 is changed from ``Control Persons,'' 
as proposed, to ``Control Relationships,'' as adopted, to clarify that 
Item 4 may capture information not being captured in Schedules A and B;
     The language in Item 5 ``to determine whether to approve 
an

[[Page 71457]]

application for registration'' has been deleted;\940\
---------------------------------------------------------------------------

    \940\ We note, however, that failure to answer a question in 
Item 5 will result in an incomplete application for registration.
---------------------------------------------------------------------------

     Item 7, as adopted, references ``qualified third party 
arrangements'' rather than ``escrow arrangements,'' as proposed, to 
indicate that, in addition to holding the funds in escrow, a qualified 
third party may also hold investor funds in an account for the benefit 
of investors and the issuer;\941\
---------------------------------------------------------------------------

    \941\ See Section II.C.5.e.
---------------------------------------------------------------------------

     ``G--Other (general partner, trustee, or elected member)'' 
has been added as an ownership code in Schedule A;
     Schedules A and B have been changed from the proposal to 
clarify that the Schedules are collecting information about whether 
direct owners and executive officers are ``control'' persons;
     The language to Schedule C of Form Funding Portal has been 
changed to track more closely the requirements of Rule 400(f) for 
nonresident funding portals and to add an execution section for these 
entities; and
     Withdrawal information for funding portals proposed to be 
collected under Item 8 will instead be collected in a new ``Schedule 
D''.\942\
---------------------------------------------------------------------------

    \942\ There have been no substantive changes to the withdrawal 
information to be collected on Schedule D. The instructions to Form 
Funding Portal have been modified from the proposal to (1) include 
IRS Tax Identification Number and the contact employee's fax number 
as information that will be redacted on Form Funding Portal by the 
Commission and, therefore, not disseminated to the public by the 
form; and (2) inform funding portals that they should manually 
redact certain personally identifiable information or other 
information with significant potential for misuse (including the 
contact employee's direct phone number, fax number and email address 
and any IRS Employer Identification Number, IRS Tax Identification 
Number, social security number, or any other similar information) 
from any PDF attachments they file as part of their Form Funding 
Portal submission due to privacy concerns. The instructions have 
also been modified to amend the definition of SRO to delete the 
reference to Section 3 of the Exchange Act and clarify that the 
phrase ``any national securities association registered with the 
Commission'' in the definition encompasses any national securities 
association registered under Section 15A of the Exchange Act, in 
order to alleviate any confusion by funding portals when completing 
the form.
---------------------------------------------------------------------------

    We continue to believe that the information required by Form 
Funding Portal is important for our oversight of funding portals and to 
allow us to assess a funding portal's application for registration and 
perform examinations of funding portals. We also note that the 
information required by the Form will be available to investors and 
potential investors and will provide transparency regarding 
intermediaries. Although we generally modeled Form Funding Portal on 
Form BD, we have tailored the questions to the activities of funding 
portals. For example, Form Funding Portal, in contrast to Form BD, does 
not include any questions about holding customer funds and securities 
because funding portals are statutorily prohibited from holding or 
maintaining customer funds or securities. We also included questions in 
Form Funding Portal to address specific restrictions that are imposed 
upon funding portals but not upon broker-dealers. For example, Form 
Funding Portal requires specific information about a funding portal's 
qualified third party arrangements because a funding portal is 
prohibited from holding and maintaining customer funds.
    In developing these requirements, we have taken into account that 
funding portals are limited purpose brokers that are conditionally 
exempt from registration as broker-dealers, and accordingly have sought 
to require appropriate information from these entities, while, at the 
same time, not making the process of completing and filing the required 
form inappropriately burdensome for funding portals.
    As noted above, we proposed to make a blank Form Funding Portal 
available through our Web site or another electronic database. At the 
time of the Proposing Release, we had not yet determined the 
appropriate database through which to access and electronically file 
Form Funding Portal. We requested comments in the Proposing Release on 
the type of web-based registration that funding portals should use for 
accessing and filing Form Funding Portal, and as noted above, received 
one comment in support of using EDGAR for funding portal filing and 
registration requirements.\943\ We have determined to require funding 
portals to access and file Form Funding Portal through the Commission's 
EDGAR system. Before a funding portal will be able to access EDGAR and 
electronically file Form Funding Portal, it will have to obtain EDGAR 
access codes and a central index key (``CIK'') by creating and 
submitting a Form ID with the Commission for authorization to access 
EDGAR. The applicant will be required to fill out general user 
information fields on Form ID, including filer type name, address, 
phone number, email address, organization name and employer 
identification number and file a signed, notarized version of the 
document. To facilitate this process, we are amending Form ID to add 
``Funding Portal'' as a filer type and are also revising the 
instructions to the form to include the definition of ``funding 
portal'' (as defined by Rule 300(c)(2)). Once the application has been 
accepted by the Commission, the funding portal will receive an email 
with a CIK, which it can use (along with a passphrase that it has 
previously created) to generate EDGAR access codes, and access the 
system and Form Funding Portal.
---------------------------------------------------------------------------

    \943\ See Public Startup Letter 3.
---------------------------------------------------------------------------

    As proposed, a funding portal will be required to check a box 
indicating the purpose for which the funding portal was 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.
    The funding portal will receive an SEC file number after it files 
its Form Funding Portal initial application, and thereafter must 
provide us that file number when submitting an amendment or withdrawal 
from registration on Form Funding Portal. We will use this number to 
cross-reference amendments and withdrawals to the original 
registration.
    When a funding portal's registration becomes effective, the 
information on Form Funding Portal will be made available to the public 
through EDGAR, with the exception of certain personally identifiable 
information or other information with significant potential for misuse 
(including the contact employee's direct phone number, fax number and 
email address and any IRS Employer Identification Number, IRS Tax 
Identification Number, social security number, date of birth or any 
other similar information). In addition to current versions of Form 
Funding Portal, investors and potential investors also will be able to 
access historical versions of a funding portal's filings on EDGAR. We 
believe that making these documents publicly available and searchable 
will provide the public with information about the registration process 
and the funding portal industry, thereby increasing transparency into 
this developing market.
    The final rule permits a funding portal to operate multiple Web 
site addresses under a single funding portal registration. As we noted 
in the Proposing Release, we believe that allowing a funding portal to 
utilize more than one Web site address, if it chooses to do so, may 
allow the portal to minimize its regulatory costs while having the 
flexibility to customize each Web site to fit its specific needs, such 
as appealing to certain industries or

[[Page 71458]]

investors. We have considered one commenter's concern about funding 
portals licensing or selling their registrations, and note that 
registrations are not transferrable among entities; rather, each 
funding portal is required to register with the Commission, pursuant to 
Rule 400(a). As explained above, an entity may succeed to and continue 
the business of a registered funding portal, but the successor must 
file a registration on Form Funding Portal within 30 days after any 
succession resulting in a change of control.\944\
---------------------------------------------------------------------------

    \944\ See Section II.D.1.a.
---------------------------------------------------------------------------

c. Fidelity Bond
(1) Proposed Rule
    Proposed Rule 400(f) would have required that funding portals, as a 
condition of registration, have in place, and thereafter maintain for 
the duration of such registration, a fidelity bond 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 set 
forth by FINRA or any other registered national securities association 
of which it is a member. While fidelity bond coverage was not mandated 
by statute, the proposed requirement was intended to help insure 
against the loss of investor funds that might occur if a funding portal 
were to violate the express prohibition set forth in Exchange Act 
Section 3(a)(80) on holding, managing, possessing or otherwise handling 
investor funds or securities.
(2) Comments on Proposed Rule
    We received comments both in support of,\945\ and opposition 
to,\946\ the proposed requirement for funding portals to maintain 
fidelity bonds. One commenter stated its view that a fidelity bond may 
be necessary as a preventative measure to protect the interests of 
investors and issuers.\947\ Another commenter noted that although 
fidelity bond coverage may be ``indirect'' to customers, they are 
protected under such coverage because the insured entity may recover 
its losses due to theft or embezzlement by its employees and meet the 
obligations of its customers.\948\ The same commenter, however, 
suggested that the Commission may find a surety bond more appropriate 
in the crowdfunding context than a fidelity bond because investors 
would be able to make a direct claim under it for losses due to a 
funding portal's violation of the rules, and the insurer would be able 
to seek indemnity for that amount from the funding portal.\949\ One 
commenter stated that it is not appropriate to require that the 
fidelity bond cover associated persons, and that the requirement is a 
``hangover from a non-transparent financial services sector,'' unlike 
the transparent crowdfunding model.\950\ Another commenter noted that a 
fidelity bond would protect a funding portal from employee theft or 
embezzlement, and suggested that there is a low risk of this occurring 
since a funding portal not does hold cash or customer funds.\951\ The 
commenter further stated that ``[o]btaining a bond is simply one more 
expense that the portal must incur and it is necessary to control 
compliance costs if crowdfunding is to be a success.'' \952\
---------------------------------------------------------------------------

    \945\ See, e.g., Joinvestor Letter; Public Startup 3 Letter; 
RocketHub Letter; SFAA Letter.
    \946\ See, e.g., ASSOB Letter; Heritage Letter; PeoplePowerFund 
Letter; RoC Letter.
    \947\ See Joinvestor Letter.
    \948\ See SFAA Letter.
    \949\ See id.
    \950\ See ASSOB Letter.
    \951\ See Heritage Letter
    \952\ Id.
---------------------------------------------------------------------------

(3) Final Rules
    After taking into account the comments and upon further 
consideration, we have determined not to adopt a fidelity bond 
requirement for funding portals. We have been persuaded by the comments 
that such a requirement may not be appropriate. We believe that the 
statutory protections and prohibitions set forth in Exchange Act 
Section 3(a)(80) on holding, managing, possessing or otherwise handling 
investor funds or securities provide substantial protections to 
investors. We recognize, as some commenters observed, that there may be 
potential risks to investors if a funding portal were to violate the 
prohibitions in Regulation Crowdfunding, including the potential loss 
of investor funds. As we discussed in the Proposing Release, funding 
portals will not be members of the Securities Investor Protection 
Corporation (``SIPC'') and their customers, therefore, will not receive 
SIPC protection.\953\ Furthermore, consistent with the proposed rules, 
the final rules also do not subject funding portals to minimum net 
capital requirements. Despite these vulnerabilities, we note that the 
potential burden associated with the requirement of a fidelity bond (or 
any bond) may not be justified by the benefits that could be derived 
from requiring that a funding portal obtain such a bond. In particular, 
we are concerned that a fidelity bond requirement could create a 
potential barrier to entry for some funding portals that could be 
detrimental to our mission of capital formation, as well as the 
feasibility of crowdfunding. At the same time, we are mindful of the 
potentially limited benefits of requiring such bonds to be obtained by 
funding portals, when taking into account the statutory restrictions on 
funding portals' permissible activities. Instead, we believe at this 
time that the prohibition on a funding portal from handling customer 
funds and securities as well as the general anti-fraud provisions of 
our statutes and rules provide significant investor protections that do 
not need to be supplemented by a fidelity bond requirement. This 
decision is consistent with our approach generally to the regulation of 
funding portals in which we have sought to structure rules tailored to 
the business of funding portals that address the risks posed by such 
activities while considering the impact that our rules may have on this 
emerging market.
---------------------------------------------------------------------------

    \953\ See Proposing Release at 78 FR at 66482. 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).
---------------------------------------------------------------------------

d. Requirements for Nonresident Funding Portals
(1) Proposed Rules
    Under proposed Rule 400(g), registration pursuant to Rule 400 of 
Regulation Crowdfunding by a ``nonresident funding portal'' \954\ 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 rule 
would further require a nonresident funding portal registered or 
applying for registration 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; \955\ (2) furnish the Commission with the name 
and address of its agent for services of process on

[[Page 71459]]

Schedule C of Form Funding Portal; \956\ and (3) certify on Schedule C 
of Form Funding Portal and provide an opinion of counsel 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 such national securities 
association.\957\
---------------------------------------------------------------------------

    \954\ See proposed Rule 400(g)(1) of Regulation Crowdfunding 
(defining ``nonresident funding portal'' as ``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 in any place not in the United States or 
its territories'').
    \955\ See proposed Rule 400(g)(2)(i) of Regulation Crowdfunding.
    \956\ See proposed Rule 400(g)(2)(ii) of Regulation 
Crowdfunding.
    \957\ See proposed Rule 400(g)(3)(i) 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.''
---------------------------------------------------------------------------

    Proposed Rule 400(g)(2)(iv) 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. In 
addition, proposed Rule 400(g)(2)(iii) would require a registered 
funding portal to promptly amend Schedule C to its Form Funding Portal 
if its agent, or the agent's name or address, changes. Finally, 
proposed Rule 400(g)(2)(v) 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.
    In addition, we proposed in Rule 400(g)(3)(ii) to require a 
registered nonresident funding portal to re-certify, on Schedule C to 
Form Funding Portal, within 90 days after any changes in the legal or 
regulatory framework that would affect: (1) Its ability to provide (or 
the manner in which it provides) the Commission, or the national 
securities association of which it is a member, with prompt access to 
its books and records; or (2) the ability of the Commission or the 
national securities association to inspect and examine the nonresident 
funding portal. The re-certification would be accompanied by a revised 
opinion of counsel describing how, as a matter of law, the entity can 
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.\958\
---------------------------------------------------------------------------

    \958\ See proposed Rule 400(g)(3)(ii) of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    One commenter stated its view that the definition of a nonresident 
funding portal will create a competitive advantage for foreign 
intermediary platforms.\959\ Another commenter stated its view that 
nonresident funding portals should be subject to the same rules as 
domestic funding portals.\960\
---------------------------------------------------------------------------

    \959\ See Public Startup Letter 3 (stating its view that the 
definition of nonresident funding portal is ``flawed'' because it 
believes these foreign entities could choose to act as 
intermediaries for U.S. issuers and U.S. investors in crowdfunding 
transactions without relying on Section 4(a)(6) and, therefore, gain 
a competitive advantage by not having to comply with the 
requirements of the rules under Regulation Crowdfunding in the same 
manner as domestic funding portals). But see Joinvestor Letter 
(stating its belief that ``nonresident funding portal is properly 
defined'').
    \960\ See Wales Capital Letter 3. The commenter also recommended 
using the term `` `foreign' funding portal'' to be consistent with 
the treatment of corporations incorporated in another jurisdiction 
under various state laws. According to the commenter, a foreign 
corporation must file a notice of doing business in any state or 
nation in which it does substantial regular business, and must name 
an `` `agent for acceptance of service' '' in that nation (or the 
Secretary of State as agent) to allow people doing business with a 
foreign corporation to be able bring legal actions locally.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comments about other actions 
or requirements that could address our concern that the Commission and 
the applicable national securities association be able to have direct 
access to books and records and be able to adequately examine and 
inspect a nonresident funding portal, if it would be impossible or 
impractical for such funding portal to obtain the required opinion of 
counsel. In response, a commenter suggested an arrangement between a 
nonresident funding portal and a domestic funding portal in which the 
nonresident funding portal would be required to make and keep current 
books and records, but the domestic funding portal would have the 
ability to obtain and be responsible for the accuracy of such books and 
records.\961\
---------------------------------------------------------------------------

    \961\ Id.
---------------------------------------------------------------------------

    One commenter suggested that nonresident funding portals be 
required to clearly indicate on their Web sites that they are organized 
and operating outside of the U.S. and indicate whether a U.S. or non-
U.S. bank will be used to process investors' funds.\962\ One commenter 
suggested that a nonresident funding portal should be required to 
appoint a U.S. agent for all potential proceedings,\963\ while another 
commenter suggested that a nonresident funding portal should be 
required to have a resident legal representative to handle any matters 
between issuers or investors and the portal.\964\
---------------------------------------------------------------------------

    \962\ See Zhang Letter.
    \963\ Wales Capital Letter 3.
    \964\ See Joinvestor Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 400(g) as proposed with certain minor changes, 
and renumbering it as Rule 400(f) due to the elimination of the 
fidelity bond requirement proposed as subparagraph (f).\965\ We are 
changing the language of the rule as adopted applicable to a 
nonresident funding portal to:
---------------------------------------------------------------------------

    \965\ We also added ``Inspections and Examinations'' to the 
heading of Rule 400(f)(3); this modification does not change the 
requirements from those proposed. In addition, we changed a cross-
cite in the rule text to reflect the renumbering.
---------------------------------------------------------------------------

     Add the term ``registered'' to any references to national 
securities association in the Rule to be more consistent with the 
terminology in the Exchange Act; and
     Require the nonresident funding portal also to certify 
that it ``will'' provide the Commission and any national securities 
association of which it ``becomes'' (rather than ``is'') a member with 
prompt access to the books and records and ``will'' submit to onsite 
inspection and examination by the Commission and such national 
securities association.\966\
---------------------------------------------------------------------------

    \966\ The language in the proposed rule required a certification 
that the funding portal ``can'' meet such obligations but did not 
require a certification that it ``will'' meet them.
---------------------------------------------------------------------------

    As we noted in the Proposing Release, the rule aims to help ensure 
that we and any applicable registered national securities association 
can access the books and records of, conduct examinations and 
inspections of, and enforce U.S. laws and regulations with respect to, 
funding portals that are not based in the United States, or that are 
subject to laws other than those of the United States. We believe that 
these rules will further our goal of promoting the ability of the 
Commission and any applicable national securities association to 
conduct effective regulatory oversight of funding portals.
    We have considered the comments and believe that the final rule 
appropriately takes into consideration the need to provide more choices 
for U.S. issuers seeking to use intermediaries or access investors 
outside of the United States, while meeting the challenges associated 
with supervising, examining, and enforcing rules regarding activities 
of intermediaries based outside the United States. For example, as we 
noted in the Proposing Release, the requirement for an information 
sharing arrangement is designed to provide us with greater assurance 
that we will be able to obtain information about a nonresident funding 
portal necessary for our oversight of the funding portal. The ability 
to obtain information and secure

[[Page 71460]]

the cooperation of the home country regulator according to established 
practices and protocols is expected to help to address the increased 
challenges that may arise from oversight of entities located outside of 
the United States. We note that nonresident funding portals are subject 
to the same registration requirements as other funding portals under 
Rule 400.\967\
---------------------------------------------------------------------------

    \967\ We have considered the commenter's view that there would 
be a potential competitive advantage for foreign intermediaries 
choosing to operate outside of the Section 4(a)(6) exemption. See 
Public Startup Letter 3. However, we note that any entities (foreign 
or domestic) intermediating offerings of securities between U.S. 
issuers and investors generally will be broker-dealers, either 
required to register under the Exchange Act or to be exempt from 
registration. See 15 U.S.C. 78o(a). We also note that the offer and 
sale of securities in the United States or to U.S. persons must be 
registered unless an exemption is available.
---------------------------------------------------------------------------

    We have also considered the comment submitted in response to our 
question about the use of books and records arrangements in situations 
where it would be impossible or impractical for a nonresident funding 
portal to obtain the required opinion of counsel.\968\ We have 
determined not to adopt an alternative to the opinion of counsel 
requirement for nonresident funding portals in Regulation Crowdfunding. 
The opinion of counsel requirement is consistent with our approach to 
other nonresident registered entities and we believe it is an 
appropriate mechanism to use here, as well.\969\ As we stated in the 
Proposing Release, we believe that the certification and supporting 
opinion of counsel requirements are important to confirm that each 
nonresident funding portal is in a position to provide the Commission 
and FINRA (or the applicable national securities association registered 
under Exchange Act Section 15A) with information that is necessary for 
us and the national securities association to effectively fulfill 
regulatory oversight responsibilities.\970\ We do not believe that the 
books and records arrangement suggested by the commenter would provide 
assurance that we or FINRA would be able to consistently obtain such 
information, which could hinder our ability to fulfill our regulatory 
oversight responsibilities.
---------------------------------------------------------------------------

    \968\ See Wales Capital Letter 3.
    \969\ We note that the opinion of counsel requirement is 
generally consistent with the requirement for nonresident security-
based swap dealers and major security-based swap participants, as 
well as those for nonresident municipal advisors. See Exchange Act 
Rule 15Fb2-4 and Rule 15Ba1-6.
    \970\ See Exchange Act Section 3(h)(1)(A). Failure to make this 
certification or re-certification or to provide an opinion of 
counsel or revised opinion of counsel will result in an incomplete 
application for registration.
---------------------------------------------------------------------------

    We have also considered the comment suggesting that a nonresident 
funding portal be required to clearly indicate on its Web site that it 
is organized and operating outside of the United States and whether it 
will use a U.S. or non-U.S. bank to process investors' funds.\971\ 
However, in light of the other disclosure requirements we are adopting, 
we are not persuaded that such a requirement is necessary. We note that 
the information required to be filed on Form Funding Portal (and that 
will be publicly disclosed) will include information about the 
qualified third party for the maintenance and transmission of 
investors' funds under Rule 303(e), including the name and address of 
the qualified third party.\972\ In addition, a nonresident funding 
portal will be required to publicly disclose information on Schedule C 
to Form Funding Portal. Since Schedule C is required to be completed by 
nonresident funding portals only, investors will be able to discern 
easily whether or not the entity is a nonresident funding portal and, 
among other things, has certified (and provided an attached opinion of 
counsel indicating) that it is able to provide the Commission and any 
national securities association prompt access to its books and records 
and will submit to onsite inspection and examination by the same.
---------------------------------------------------------------------------

    \971\ See Zhang Letter.
    \972\ See Form Funding Portal, Item 7--Qualified Third Party 
Arrangements; Compensation Arrangements.
---------------------------------------------------------------------------

    Finally, we have considered the comments suggesting that a 
nonresident funding portal should be required to have a U.S. agent for 
potential proceedings,\973\ or a resident legal representative to 
handle any matters between issuers or investors, and the portal.\974\ 
We note that, as discussed above, we are requiring funding portals to 
execute a written consent and power of attorney appointing an agent in 
the United States. The agent will be the representative of the funding 
portal for service of any process, pleadings or other papers in any 
action to enforce the Exchange Act, Securities Act or any rule or 
regulation promulgated thereunder. As we noted above, we have limited 
the types of actions for which a nonresident funding portal will be 
required to have an agent for service of process, pleadings, or other 
papers in order to remain generally consistent with recent requirements 
that we have imposed on other types of nonresident entities. The 
funding portal will be required to disclose the name and address of its 
U.S. agent in Schedule C to its Form Funding Portal, and amend the 
Schedule promptly upon any change to the agent, agent's name or agent's 
address. We are not, however, requiring that nonresident funding 
portals have a resident legal representative to handle any matters 
between the portal and issuers or investors, which is consistent with 
our approach to other nonresident registered entities.\975\
---------------------------------------------------------------------------

    \973\ See Wales Capital Letter 3.
    \974\ See Joinvestor Letter.
    \975\ For example, we note that requiring a U.S. agent for 
service of process but not requiring a U.S. legal representative to 
handle any matters between a funding portal and issuers or investors 
is generally consistent with the requirements for nonresident 
security-based swap dealers and major security-based swap 
participants, as well as those for nonresident municipal advisors. 
See Exchange Act Rule 15Fb2-4 and Rule 15Ba1-6.
---------------------------------------------------------------------------

2. Exemption From Broker-Dealer Registration
a. Proposed Rule
    Exchange Act Section 3(h)(1), which was added by Section 304(a) of 
the JOBS Act, directs the Commission by rule 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.
    As explained earlier, the role contemplated by Title III of the 
JOBS Act for 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).\976\ 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 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

[[Page 71461]]

4A(a)(7).\977\ 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. 
Thus, absent an exemption or exception, a funding portal would be 
required to register as a broker under the Exchange Act.
---------------------------------------------------------------------------

    \976\ 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)].
    \977\ At the same time, there are statutory restrictions on the 
scope of services that a funding portal could provide. See Section 
II.C.1 (discussing Exchange Act Section 3(a)(80)).
---------------------------------------------------------------------------

    We proposed Rule 401(a) to provide an exemption for registered 
funding portals from the broker registration requirements of Exchange 
Act Section 15(a)(1) in connection with its activities as a funding 
portal. Consistent with the JOBS Act, the funding portal would remain 
subject to the full range of our examination and enforcement authority, 
even though it is not registered as a broker.\978\ In this regard, 
proposed Rule 403 would require that a funding portal permit the 
examination and inspection of all of its business and business 
operations that related 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.\979\ Proposed Rule 404 also would impose certain recordkeeping 
requirements on funding portals.\980\
---------------------------------------------------------------------------

    \978\ 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 highlighted in the 
Proposing Release 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.
    \979\ See Section II.D.4.
    \980\ See Section II.D.5.
---------------------------------------------------------------------------

    We had further proposed in Rule 401(b) that, notwithstanding the 
exemption from broker registration, for purposes of Chapter X of Title 
31 of the Code of Federal Regulations, a funding portal would be a 
broker or dealer ``required to be registered'' with the Commission 
under the Exchange Act, thereby requiring funding portals to comply 
with Chapter X, including certain anti-money laundering (``AML'') 
provisions thereunder.\981\
---------------------------------------------------------------------------

    \981\ 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].
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Commenters generally agreed with the funding portal exemption from 
registration as a broker-dealer.\982\ One commenter stated that funding 
portals that provide no advice, make no warranties as to the 
suitability of an investment and do not handle share transfers or 
money, should not be required to register as a broker-dealer and 
requiring them to do so would provide no benefit to the public.\983\
---------------------------------------------------------------------------

    \982\ See, e.g., Heritage Letter; Joinvestor Letter; 
PeoplePowerFund Letter; RocketHub Letter.
    \983\ See, e.g., PeoplePowerFund Letter (stating that requiring 
funding portals ``to register as broker dealers thus crushing the 
very idea of crowd sourced funding as a people driven force for the 
good of the `everyman' '').
---------------------------------------------------------------------------

    One commenter stated that the exemption from broker-dealer 
registration actually precludes funding portals from becoming members 
of FINRA,\984\ and asserted that funding portals should not have to 
comply with the same requirements as broker-dealers for purposes of 
Chapter X of Title 31 of the CFR.\985\ Another commenter, however, 
stated that it ``supports the Commission's interpretation of the 
exemption, and believes that AML compliance is necessary.'' \986\
---------------------------------------------------------------------------

    \984\ See Vann Letter (reasoning that, because a funding portal 
is ``not registered as a `broker dealer,' '' and because ``the 
Securities Exchange Act of 1934 states `A registered securities 
association shall deny membership to any person who is not a 
registered broker or dealer,' '' then funding portals cannot become 
members of FINRA).
    \985\ Id. (arguing that such requirements would be ``overly 
burdensome'' because funding portals ``do not, by law, handle any 
money'').
    \986\ See RocketHub Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting, as proposed, paragraph (a) under Rule 401, but 
renumbering it as Rule 401 as we not adopting proposed Rule 401(b). We 
note, however, that the exemption from broker registration is 
applicable only to funding portals that are registered under Rule 400. 
Therefore, a funding portal that ceases to be registered under Rule 400 
will no longer be exempt from broker registration under Rule 401. In 
response to the comment that this exemption precludes funding portals 
from becoming members of FINRA, as we noted above, because a funding 
portal will be engaged in the business of effecting securities 
transactions for the accounts of others through crowdfunding, it will 
be a ``broker'' within the meaning of Section 3(a)(4) of the Exchange 
Act. We also note that Exchange Act Section 3(h)(2) states that for 
purposes of sections 15(b)(8) and 15A, the term ``broker or dealer'' 
includes a funding portal and the term ``registered broker or dealer'' 
includes a registered funding portal. Therefore, funding portals are 
explicitly permitted by statute to become members of FINRA.
    We are not, however, adopting proposed Rule 401(b). As described in 
more detail in Section II.D.4.b. below, we have determined that the 
imposition of AML requirements on funding portals should be addressed 
outside of the rules that we are adopting in this release.
3. Safe Harbor for Certain Activities
    Under Exchange Act Section 3(a)(80), which was added by Section 
304(b) of the JOBS Act, a funding portal is defined as an intermediary 
that does not: (i) Offer investment advice or make recommendations; 
(ii) solicit purchases, sales or offers to buy the securities offered 
or displayed on its platform or portal; (iii) compensate employees, 
agents or other persons for such solicitation or based on the sale of 
securities displayed or referenced on its platform or portal; (iv) 
hold, manage, possess or otherwise handle investor funds or securities; 
or (v) engage in such other activities as the Commission, by rule, 
determines appropriate. As noted in the Proposing Release, commenters 
have raised questions about the scope of permissible activities for 
funding portals consistent with these prohibitions.\987\ To provide 
regulatory clarity, we proposed Rule 402, which would provide a non-
exclusive conditional safe harbor for funding portals under which 
certain limited activities would be deemed consistent with the 
statutory prohibitions on funding portals. The permissible activities 
in the proposed safe harbor involved: (i) Limiting offerings on the 
platform; (ii) highlighting and displaying offerings on the platform; 
(iii) providing communication channels; (iv) providing search 
functions; (v) advising issuers; (vi) compensating others for referring 
persons to the funding portal; (vii) paying or offering to pay 
compensation to registered brokers or dealers; (viii) receiving 
compensation from a registered broker or dealer; (ix) advertising the 
funding portal and offering; (x) denying access to, or cancelling, 
offerings due to fraud or investor protection concerns; (xi) accepting 
investment commitments on behalf of the issuer; (xii) directing the 
transmission of investor funds; and (xiii) directing a qualified third 
party's transmission of investor funds.
---------------------------------------------------------------------------

    \987\ See Proposing Release, 78 FR 66484-66485.

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

[[Page 71462]]

    Proposed Rule 402(a) also stated that no presumption shall arise 
that a funding portal has violated the prohibitions under Section 
3(a)(80) of the Exchange Act or Regulation Crowdfunding by reason of 
the funding portal or its associated persons engaging in activities in 
connection with the offer or sale of securities in reliance on Section 
4(a)(6) of the Securities Act that do not meet the conditions specified 
in the safe harbor, and that the antifraud provisions and all other 
applicable provisions of the federal securities laws continue to apply 
to the activities described in the safe harbor.
    Commenters strongly supported the idea of a safe harbor for funding 
portals,\988\ but they also suggested additional examples for the safe 
harbor. We are adopting the safe harbor in Rule 402 with certain 
changes as discussed further below. Each activity of the safe harbor is 
addressed below.
---------------------------------------------------------------------------

    \988\ See, e.g., CFIRA Letter 1; Joinvestor Letter; Merkley 
Letter (stating that the proposed safe harbor ``strikes the right 
balance''). But see Public Startup 3 Letter (stating that the safe 
harbor should cover any activity by a funding portal not directly 
related to the sale of securities for the account of others).
---------------------------------------------------------------------------

a. Limiting Offerings
(1) Proposed Rule
    Proposed Rule 402(b)(1) would permit a funding portal to apply 
objective criteria to limit the securities offered in reliance on 
Section 4(a)(6) of the Securities Act through the funding portal's 
platform where: (i) The criteria are reasonably designed to result in a 
broad selection of issuers offering securities through the funding 
portal's platform, are applied consistently to all potential issuers 
and offerings and are clearly displayed on the funding portal's 
platform; and (ii) the criteria could include, among other things, the 
type of securities being offered (for example, common stock, preferred 
stock or debt securities), the geographic location of the issuer and 
the industry or business segment of the issuer, provided that a funding 
portal may not deny access to an issuer based on the advisability of 
investing in the issuer or its offering, except to the extent described 
in proposed Rule 402(b)(10) for fraud and investor protection concerns.
(2) Comments on Proposed Rule
    We received a significant number of comments on the ability of a 
funding portal to limit the offerings on its platform. Many of these 
comments suggested a broader standard than the standard that we 
proposed. Several commenters expressed concern that the proposed safe 
harbor placed funding portals at a competitive disadvantage to 
registered brokers because it did not provide funding portals with the 
flexibility to limit the offerings on their platforms,\989\ even if 
they have legitimate concerns about offerings aside from fraud or 
investor protection.\990\ For example, commenters suggested that a 
funding portal should be permitted to reject offerings based on 
whatever factors the portal deems appropriate without automatically 
triggering regulation as a broker-dealer,\991\ especially if it deems 
the offering to have tangible shortcomings that could be detrimental to 
investors or overly risky.\992\
---------------------------------------------------------------------------

    \989\ See, e.g., EMKF Letter; SBA Office of Advocacy Letter.
    \990\ See, e.g., ABA Letter; CfPA Letter; CrowdCheck 2 Letter; 
Graves Letter; Seyfarth Letter (stating that ``even with a lower 
liability threshold, curation is an essential tool for investor 
protection'').
    \991\ See, e.g., IAC Recommendation (suggesting that ``[o]ne of 
the most cost-effective ways to reduce the risk of serious 
compliance violations is to give crowdfunding intermediaries a free 
hand to reject any offering they believe could pose an undue 
compliance or fraud risk''); see also CFIRA Letter 12 (agreeing with 
IAC's suggestion ``that all intermediaries . . . should have greater 
latitude in their ability to curate offerings. . . . All 
intermediaries (including non-BD portals) should be allowed to use 
their discretion as to whether or not any particular offering is 
suitable for their service''). See also BetterInvesting Letter.
    \992\ See Graves Letter.
---------------------------------------------------------------------------

    Commenters asserted that a funding portal's ability to limit the 
offerings on its platform is important for investor protection. They 
stated that funding portals should be permitted to screen out clearly 
unprepared or ill-conceived offerings,\993\ and should be permitted to 
limit offerings on their platforms to issuers that are ``crowdfund-
ready.''\994\ Commenters drew a distinction between the permissibility 
of applying internal screening standards to limited offerings on the 
platform versus the prohibition on providing investment advice or 
recommendations.\995\ Some commenters suggested that having a 
disclaimer that ``curation'' (or limiting offerings on a platform) does 
not constitute a recommendation on the advisability of any investment 
displayed on the platform;\996\ or that the funding portal does not 
advertise or make statements that the offerings listed on its platform 
are safer or better investments than those listed on other 
platforms,\997\ would mitigate regulatory concerns. Some commenters 
also suggested that the criteria used to limit offerings should be 
clearly displayed on a funding portal's platform.\998\
---------------------------------------------------------------------------

    \993\ See EMKF Letter.
    \994\ See SBEC Letter.
    \995\ See, e.g., Angel 1 Letter (``Forcing portals to become the 
equivalent of common carriers that have to take every offering, no 
matter how foolish, will make crowdfunding more likely to fail.''); 
Consumer Federation Letter; Saunders Letter.
    \996\ See, e.g., EarlyShares Letter; EMKF Letter; SBA Office of 
Advocacy Letter.
    \997\ See Milken Institute Letter.
    \998\ See, e.g., ABA Letter; CFIRA Letter 1.
---------------------------------------------------------------------------

    In addition, some commenters pointed to a tension in the statute 
under which a funding portal is potentially subject to liability for 
material misstatements and omissions in the issuer's offering materials 
but, at the same time, may be limited in its ability to deny access to 
its platform.\999\ These commenters argued that it was not equitable 
for a funding portal to have such liability if it cannot determine 
whether and under what circumstances to permit an issuer or offering 
access to its platform.
---------------------------------------------------------------------------

    \999\ See, e.g., CrowdCheck 2 Letter; Milken Institute Letter; 
RocketHub Letter.
---------------------------------------------------------------------------

(3) Final Rules
    In view of the comments, and upon further consideration, we are 
modifying Rule 402(b)(1) to expressly provide that a funding portal 
may, consistent with the prohibitions under Exchange Act Section 
3(a)(80) (including the prohibition against offering investment advice 
or recommendations in Section 3(a)(80)(A)), determine whether and under 
what terms to allow an issuer to offer and sell securities in reliance 
on Securities Act Section 4(a)(6) through its platform.\1000\
---------------------------------------------------------------------------

    \1000\ See also Rule 402(b) (limiting permissible activities to 
those consistent with the prohibitions under Exchange Act Section 
3(a)(80)). The discretion a funding portal has to limit offerings on 
its platform is in addition to the requirement under Rule 301 to 
deny access, and cancel offerings, based on fraud and investor 
protection concerns.
---------------------------------------------------------------------------

    We agree with commenters that the ability of a funding portal to 
determine which issuers may use its platform is important for the 
protection of investors, as well as to the viability of the funding 
portal industry, and thus the crowdfunding market. We acknowledge the 
concerns raised by commenters that the proposed rules could otherwise 
have unduly restricted a funding portal's ability to limit offerings 
conducted on its platform, and we are modifying the safe harbor 
contained in Rule 402(b)(1) to address these concerns. Specifically, we 
are revising Rule 402(b)(1) to read that a funding portal may 
``[d]etermine whether and under what terms to allow an issuer to offer 
and sell securities in reliance on Section 4(a)(6) of the Securities 
Act (15 U.S.C. 77d(a)(6)) through its platform, provided that the 
funding portal otherwise complies with Regulation Crowdfunding 
(Sec. Sec.  227.100 et se.).'' The new language is designed to

[[Page 71463]]

make it clear that a funding portal may exercise its discretion, 
subject to the prohibition in the statute on providing investment 
advice or recommendations, to limit the offerings and issuers that it 
allows on its platform under the safe harbor, as long as it complies 
with all other provisions of Regulation Crowdfunding.
    In making this change, we recognize that the activities in which a 
funding portal may engage are, by definition, far more limited than the 
activities in which a registered broker-dealer may engage. At the same 
time, we believe that the JOBS Act established an important role for 
intermediaries, both broker-dealers and funding portals, to play in 
crowdfunding offerings. While we are providing funding portals with 
broad discretion to determine whether and under what circumstances to 
allow an issuer to offer and sell securities through its platform in 
reliance on Section 4(a)(6) of the Securities Act (15 U.S.C. 
77d(a)(6)), a funding portal must comply with all applicable provisions 
of Regulation Crowdfunding, including the prohibition on providing 
investment advice or recommendations. In this regard and as more fully 
discussed below, among other things, a funding portal cannot advertise, 
make statements or otherwise represent that the offerings listed on its 
platform are safer or better investments than those listed on other 
platforms. Given this statutory restriction, we are not, as some 
commenters suggested, requiring a funding portal to provide a 
disclaimer stating that limiting the offerings on its platform does not 
constitute investment advice or a recommendation, nor are we requiring 
that its criteria for limiting offerings on its platform be publicly 
displayed. We do not believe that requiring a funding portal to display 
its criteria for limiting offerings on its platform will add 
significant investor protection. While a funding portal may decide to 
make such criteria public, we caution that a funding portal must avoid 
any appearance that it is giving investment advice or recommendations 
or that the funding portal believes its offerings are investment 
worthy.
b. Highlighting Issuers and Offerings
(1) Proposed Rule
    Proposed Rule 402(b)(2) would permit a funding portal to apply 
objective criteria to highlight offerings on the funding portal's 
platform where: (i) The criteria are reasonably designed to highlight a 
broad selection of issuers offering securities through the funding 
portal's platform, are applied consistently to all issuers and 
offerings and are clearly displayed on the funding portal's platform; 
(ii) the criteria may include, among other things, the type of 
securities being offered (for example, 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, progress in meeting the issuer's target offering 
amount or, if applicable, the maximum offering amount; and the minimum 
or maximum investment amount; provided that a funding portal may not 
highlight an issuer or offering based on the advisability of investing 
in the issuer or its offering; and (iii) the funding portal does not 
receive special or additional compensations for highlighting one or 
more issuers or offerings on its platform.
(2) Comments on Proposed Rule
    Several commenters suggested additional criteria for the safe 
harbor, including for example: (i) How long the issuer has been 
operational or profitable;\1001\ (ii) historical and projected revenue 
and earnings before interest, taxes, depreciation and amortization 
(EBITDA); \1002\ (iii) the size of the issuer's management team; \1003\ 
(iv) relevant experience and length of experience of the issuer's 
management;\1004\ (v) the type of corporate structure of the 
issuer;\1005\ (vi) the stage and operating history of the issuer; 
\1006\ (vii) valuation methodology; \1007\ (viii) results of securities 
and background checks;\1008\ (ix) ``trending''; \1009\ and (x) most 
money raised, soonest offering to close, most money invested, least 
money invested, or on a purely random basis (so long as none of the 
bases are value-driven--that is, which investment is a safer or better 
investment).\1010\ Another commenter questioned whether, under the safe 
harbor, funding portals would be permitted to highlight offerings based 
on their discretion or the use of metrics, such as topic, media 
coverage, or momentum.\1011\ However, another commenter suggested that 
a funding portal should not have discretion regarding which objective 
criteria it can use to highlight issuers or offerings because it may 
result in the portal implicitly recommending securities.\1012\ This 
commenter suggested that the Commission should create a specific list 
of acceptable objective criteria that a funding portal may apply.\1013\
---------------------------------------------------------------------------

    \1001\ See, e.g., CFIRA Letter 1; CFIRA Letter 2.
    \1002\ Id.
    \1003\ Id.
    \1004\ See, e.g., CFIRA Letter 2.
    \1005\ See RocketHub Letter.
    \1006\ Id.
    \1007\ Id.
    \1008\ Id.
    \1009\ See Seyfarth Letter.
    \1010\ See ASSOB Letter.
    \1011\ See RocketHub Letter.
    \1012\ See Commonwealth of Massachusetts Letter; c.f. ABA Letter 
(requesting Commission guidance that a portal engaging in activities 
covered by the safe harbor will not trigger the application of the 
Investment Advisers Act).
    \1013\ See Commonwealth of Massachusetts Letter. See also ABA 
Letter (requesting explicit Commission guidance as to permissible 
criteria).
---------------------------------------------------------------------------

    Several commenters stated that the criteria used to highlight 
offerings should be clearly displayed on the platform.\1014\ However, 
one commenter stated that algorithms should not be required to be 
disclosed on the platform.\1015\
---------------------------------------------------------------------------

    \1014\ See, e.g., ABA Letter; CFIRA Letter 1.
    \1015\ See Joinvestor Letter.
---------------------------------------------------------------------------

    Several commenters suggested that the safe harbor should include 
the ability of a funding portal to provide mechanisms by which 
investors can rate an issuer or an offering, which then could be 
highlighted on the platform.\1016\ However, one of these commenters 
stated that any such rating must be mathematical rather than value-
driven or it would amount to ``enticement.''\1017\
---------------------------------------------------------------------------

    \1016\ See, e.g., ASSOB Letter; CFIRA Letter 1; Joinvestor 
Letter.
    \1017\ See ASSOB Letter.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting Rule 402(b)(2) as 
proposed. Specifically, Rule 402(b)(2) allows a funding portal to 
highlight particular issuers or offerings of securities made in 
reliance on Section 4(a)(6) on its platform based on objective criteria 
where the criteria are reasonably designed to highlight a broad 
selection of issuers offering securities through the funding portal's 
platform, are applied consistently to all issuers and offerings and are 
clearly displayed on the funding portal's platform. Consistent with the 
proposal, the final rule specifies in subparagraph (b)(2)(ii) that 
objective criteria may include, for example: 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; the 
progress in meeting the target offering amount or, if applicable, the 
maximum offering amount; and the minimum or maximum investment amount.
    It is important to note that the criteria must be reasonably 
designed to highlight a broad selection of issuers and offerings, so as 
not to recommend

[[Page 71464]]

or implicitly endorse one issuer or offering over another, and must be 
applied consistently to all potential issuers and offerings.\1018\ This 
highlighting of issuers or offerings that have been admitted to a 
funding portal's platform can, depending on relevant facts and 
circumstances, involve providing investment advice that violates the 
prohibition on a funding portal providing such advice. To that end, the 
rule provides a safe harbor only when a funding portal is using 
objective criteria and such criteria are clearly displayed on its 
platform to inform investors why certain issuers or offerings are being 
highlighted.\1019\ To reiterate, a funding portal may not highlight an 
issuer or offering based on the advisability of investing in the issuer 
or offering or give the impression that the funding portal is providing 
an implicit (or explicit) recommendation on whether to invest in the 
issuer or offering.
---------------------------------------------------------------------------

    \1018\ See Rule 402(b)(2) and (b)(2)(i).
    \1019\ Id.
---------------------------------------------------------------------------

    To help prevent conflicts of interest and incentives for funding 
portals to favor certain issuers over others, the final rule also 
prohibits 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.\1020\
---------------------------------------------------------------------------

    \1020\ See Rule 402(b)(2)(iii) of Regulation Crowdfunding. This 
rule prohibits paid placements of the kind suggested by one 
commenter. See Earlyshares Letter.
---------------------------------------------------------------------------

    Although some commenters suggested that we include additional 
criteria in subparagraph (b)(2)(ii), we emphasize that the rule does 
not establish an exclusive list. The listed criteria are intended as 
examples, and the safe harbor is non-exclusive. Crowdfunding is a new 
and evolving market, and we believe that providing principles in the 
safe harbor by which a funding portal can highlight offerings on its 
platform will provide it with the flexibility to adapt to the 
crowdfunding market as it develops while maintaining investor 
protection. In this regard, the examples listed in Rule 402(b)(2)(ii) 
are intended to provide guidance to funding portals as they develop 
their platform and related tools.
    Although we are not including additional criteria in Rule 
402(b)(2)(ii) at this time, we note that certain of the suggested 
highlighting criteria are covered by the criteria listed in the rule, 
such as the issuer's industry; the type of securities being offered; 
and the geographic location of the issuer's business. Others, while not 
listed in the final rule, we believe are based on objective criteria, 
such as the amount of money being raised or size of the offering; 
soonest offering to close; most or least money invested; how long the 
issuer has been operational or profitable; the size of the management 
team of the issuer; the stage and operating history of the issuer; 
valuation methodology; ``trending''; earnings before interest, taxes, 
depreciation and amortization (EBITDA); and highlighting on a purely 
random basis. However, we caution that a funding portal must be 
cognizant not to present highlighted issuers in a manner that, directly 
or implicitly, results in the provision of investment advice or 
recommendations.\1021\
---------------------------------------------------------------------------

    \1021\ For example, a funding portal may provide the EBITDA of 
an issuer but it cannot insinuate or state on its platform that the 
EBITDA corresponds to the advisability of investing in an issuer.
---------------------------------------------------------------------------

c. Providing Search Functions
(1) Proposed Rule
    Proposed Rule 402(b)(3) would permit a funding portal to provide 
search functions or other tools that investors can use to search, sort, 
or categorize the offerings available through the funding portal's 
platform according to objective criteria where: (i) The objective 
criteria may include, among other things, the type of securities being 
offered (for example, 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, progress in meeting the issuer's target offering 
amount or, if applicable, the maximum offering amount; and the minimum 
or maximum investment amount; and (ii) the objective criteria may not 
include, among other things, the advisability of investing in the 
issuer or its offering, or an assessment of any characteristic of the 
issuer, its business plan, its key management or risks associated with 
an investment.
(2) Comments on Proposed Rule
    Several commenters suggested that the safe harbor be broadened to 
include additional criteria.\1022\ One commenter suggested that funding 
portals should be permitted to sort offerings based on an algorithmic 
score that takes into account any objective numerical data that is 
reasonably likely to correlate to successful investments, such as 
numeric ratings by accredited and unaccredited investors, number of 
investment commitments weighted by investor portfolio valuation, and 
number of page views.\1023\ Another commenter stated that the use of 
the word ``assessment'' in the proposed safe harbor \1024\ is 
inappropriately vague when applied to technology, as it could 
effectively prohibit the use of any computational sorting algorithm 
using objective searching and sorting criteria. This commenter 
suggested that the word ``assessment'' be substituted with the word 
``opinion,'' and also that the term ``objective criteria'' be removed 
so that the safe harbor would prohibit the use of subjective criteria--
such as the advisability of investing or an opinion of any 
characteristic of the issuer, its business plan, its key management or 
risks associated with an investment--``generated exclusively by the 
portal,'' excepting instances of peer review and feedback generated by 
users.\1025\
---------------------------------------------------------------------------

    \1022\ See, e.g., EMKF Letter; EquityNet Letter.
    \1023\ See EMKF Letter.
    \1024\ Rule 402(b)(3)(ii) states in part that the ``objective 
criteria may not include . . . an assessment of any characteristic 
of the issuer, its business plan, its key management or risks . . . 
''
    \1025\ See EquityNet Letter (noting that ``[a]llowing investors 
the ability to sort through each other's comments or opinions 
becomes an integral part of any site where commenting is allowed on 
products'' and that ``[b]ecause sorting comments would require a 
technological assessment of subjective data, we believe an explicit 
carve out in the safe harbor provisions is necessary'').
---------------------------------------------------------------------------

(3) Final Rules
    After considering comments, we are adopting Rule 402(b)(3) 
substantially as proposed. The final rule permits a funding portal to 
provide search functions or other tools on its platform that users 
could use to search, sort or categorize available offerings according 
to objective criteria.\1026\ The final rule also permits search 
functions that, for example, will allow an investor to sort through 
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 the 
closing date of an offering.\1027\ However, the final rule makes clear 
that the search criteria may not include 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. In this regard, we are

[[Page 71465]]

making minor changes from proposed Rule 402(b)(3)(i) and (ii) by 
deleting the word ``objective'' in the final rules because the term is 
redundant to the requirement in Rule 402(b)(3) that the criteria be 
``objective.'' Further, we are persuaded by one commenter's observation 
that the use of the word objective in the subparts could be 
misleading.\1028\ The new sentence structure also makes Rule 402(b)(3) 
consistent with Rule 402(b)(2), which we believe provides additional 
clarity and consistency for funding portals when complying with the 
rules.
---------------------------------------------------------------------------

    \1026\ See 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.'').
    \1027\ See Rule 402(b)(3) of Regulation Crowdfunding. Rule 
402(b)(3)(i) provides examples of search criteria that are 
consistent with those listed in the Rule 402(b)(2)(ii) safe harbor 
for highlighting issuers and offerings.
    \1028\ See EquityNet Letter. However, we do not agree with the 
commenter's assertion that using the word ``assessment'' in Rule 
402(b)(3) equates to a prohibition on the use of computational 
sorting algorithms using objective searching and sorting criteria 
because, in this context, assessment is used to refer to subjective 
criteria.
---------------------------------------------------------------------------

    Rule 402(b)(3) does not preclude the use of computational sorting 
algorithms using objective searching and sorting criteria.\1029\ 
However, a funding portal must take care not to indicate that the 
platform's search results or tools, directly or indirectly, correlate 
to successful investments. Likewise, we believe that the more 
particular, biased or weighted a funding portal's algorithm or 
assessment is, the less likely the criteria as a whole will be 
objective. However, this does not preclude a funding portal from 
permitting investors with access to its communication channels from 
rating issuers or offerings (e.g., a star rating) on its platform or 
searching such ratings, as long as a funding portal (including its 
associated persons, such as its employees) does not participate in the 
rating process.\1030\
---------------------------------------------------------------------------

    \1029\ In response to one commenter's suggestion that a funding 
portal should be permitted to use algorithmic scores, the final rule 
does not preclude the use of algorithms as long as the criteria used 
by the algorithm are objective. See EMKF Letter. Thus, a ``score'' 
based on an algorithm may be used as long as it does not involve 
subjective criteria.
    \1030\ See Rule 402(b)(4)(i).
---------------------------------------------------------------------------

d. Providing Communication Channels
(1) Proposed Rule
    Proposed Rule 402(b)(4) would address the terms under which a 
funding portal could provide communication channels by which investors 
can communicate with one another and with representatives of the issuer 
through the funding portal's platform about offerings conducted through 
the platform, as required by Rule 303(c). Under the terms of Rule 
402(b)(4) as proposed, the safe harbor would apply so long as the 
funding portal (and its associated persons): (i) Does not participate 
in these communications, other than to establish guidelines for 
communication and remove abusive or potentially fraudulent 
communications; (ii) permits public access to view the discussions made 
in the communication channels; (iii) restricts posting of comments in 
the communication channels to those persons who have opened an account 
on its platform; and (iv) requires 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 an 
issuer's offering.
(2) Comments on Proposed Rule
    Several commenters supported permitting a funding portal to provide 
communication channels on its platform through which investors can make 
comments, rate issuers and provide other feedback, and through which 
issuers can respond to investor comments.\1031\ One of these commenters 
stated that these capabilities could enable a funding portal to share 
with investors information related to issuers, capital raised by an 
issuer, crowd investing, or the crowd-based rating of specific 
issuers.\1032\ Another commenter suggested that funding portals allow 
investors to assign a quantifiable indicator to each other's comments, 
so that users can search out the best and worst of the comments and 
issuers have a chance to respond to investor comments in an open 
forum.\1033\ One commenter recommended that permission to rate issuers 
or offerings should only be given to investors who actually invested in 
or committed to invest in the offering.\1034\
---------------------------------------------------------------------------

    \1031\ See, e.g., CFIRA Letter 1; EquityNet Letter; Milken 
Institute Letter.
    \1032\ See Milken Institute Letter.
    \1033\ See EquityNet Letter.
    \1034\ See CFIRA Letter 1.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting, as proposed, Rule 402(b)(4) to address the terms 
under which a funding portal can provide communication channels by 
which investors can communicate with one another and with 
representatives of the issuer through the funding portal's platform 
about offerings conducted through the platform, as required by Rule 
303(c).\1035\ The safe harbor specifies 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. Under Rule 402(b)(4), a funding portal must make 
communication channels available to the general public and restrict the 
posting of comments on those channels to those who have accounts on the 
funding portal's platform. In addition, the funding portal must require 
each person posting comments to disclose clearly with each posting in 
the channel 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 or will receive any compensation for promoting an 
issuer.\1036\
---------------------------------------------------------------------------

    \1035\ See Section II.C.5.b(3) for a discussion of Rule 303(c).
    \1036\ See Rule 402(b)(4)(iv).
---------------------------------------------------------------------------

    We agree with commenters that investors should be permitted to 
communicate with one other, and with representatives of the issuer, 
over communication channels on the platform provided by the funding 
portal.\1037\ The communication channel is meant to strengthen and 
foster the ability of the crowd to communicate. We believe that the 
capabilities within the communication channel will develop and evolve 
over time. For example, as noted above, a communication channel may 
permit investors to rate or comment on an issuer or offering, or to 
assign quantifiable indicators to one other's comments. Also, a funding 
portal must make communication channels available for viewing by the 
general public, and permit anyone who has opened an account on its 
platform to post comments on the channel.\1038\ As we stated in the 
Proposing Release, requiring investors to have accounts with the 
funding portal before posting a comment should provide a measure of 
control over these communications 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.
---------------------------------------------------------------------------

    \1037\ As discussed in Section II.C.5, an issuer, its agents and 
promoters must identify themselves in all communications through the 
communication channel.
    \1038\ See Rule 402(b)(4)(i) and (ii).
---------------------------------------------------------------------------

    We reiterate that while a funding portal must provide for a 
communication channel and may develop certain features or tools as a 
part of that channel (such as a crowd-based rating system), a funding 
portal (including its associated persons, such as its employees) may 
not engage or participate in such communications.\1039\

[[Page 71466]]

In addition, a funding portal should consider whether the tools or 
features of the communication channels it develops and the guidelines 
it establishes for the channel would constitute the funding portal 
providing impermissible investment advice or recommendations. For 
example, the funding portal may not establish a guideline that permits 
a person to rate an offering only if the person provides a positive 
rating, or otherwise incentivizes persons to give positive ratings. 
However, contrary to what one commenter suggested, we do not believe a 
funding portal may limit the rating capability to those account holders 
who have made investment commitments to the relevant offering.\1040\ We 
believe that limiting ratings capability to persons that invest in an 
offering is likely to skew the ratings, and therefore, we would view 
such a limitation as inappropriate. Further, such a limitation could 
prevent persons with relevant and important information about the 
investment from contributing their views to the crowd.
---------------------------------------------------------------------------

    \1039\ See Rule 402(b)(4)(i). See also Rule 303(c).
    \1040\ See CFIRA Letter 1.
---------------------------------------------------------------------------

e. Advising Issuers
(1) Proposed Rule
    Proposed Rule 402(b)(5) would permit a funding portal to advise an 
issuer about the structure or content of the issuer's offering, 
including assisting the issuer in preparing offering documentation.
(2) Final Rules
    We did not receive any comments that specifically addressed the 
ability of a funding portal to advise issuers and are adopting Rule 
402(b)(5) as proposed. The rule permits a funding portal to advise an 
issuer about the structure or content of the issuer's offering, 
including preparing offering documentation. We believe funding portals 
will be in a position to provide experience and assistance to issuers 
relatively efficiently, and should be able to leverage their expertise 
to increase the viability of crowdfunding.
    We believe that funding portals, as well as broker-dealers, should 
be permitted to provide certain services to issuers to facilitate the 
offer and sale of securities in reliance on Section 4(a)(6). Without 
these services, crowdfunding as a method to raise capital might not be 
viable. Rule 404(b)(5) permits funding portals to advise an issuer 
about the structure and content of the issuer's offering in a number of 
ways. A funding portal can, for example, provide pre-drafted templates 
or forms for an issuer to use in its offering that will help it comply 
with its proposed disclosure obligations. Other examples of permissible 
assistance can include advice about the types of securities the issuer 
can offer, the terms of those securities and the procedures and 
regulations associated with crowdfunding.
f. Paying for Referrals
(1) Proposed Rule
    Proposed Rule 402(b)(6) would permit a funding portal to compensate 
a third party for referring a person to the funding portal, so long as 
the third party does not provide the funding portal with personally 
identifiable information of any investor and the compensation, other 
than that paid to a registered broker or dealer, is not based, directly 
or indirectly, on the purchase or sale of a security in reliance on 
Section 4(a)(6) of the Securities Act offered on or through the funding 
portal's platform.
(2) Comment on Proposed Rule
    One commenter requested clarification as to: (i) Whether and when 
compensation paid to a non-broker-dealer will be deemed improperly 
based on the purchase or sale of a security; (ii) whether a funding 
portal may pay a registered broker-dealer a referral fee without a 
formal agreement; and (iii) whether a funding portal may charge issuers 
fees based on the success of the offering.\1041\
---------------------------------------------------------------------------

    \1041\ See ABA Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(6) as proposed. Rule 402(b)(6) permits 
a funding portal to 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 about any investor and 
the compensation, other than that paid to a registered broker or 
dealer, is not based, directly or indirectly, on the purchase or sale 
of a security in reliance on Section 4(a)(6) of the Securities Act 
offered on or through the funding portal's platform. We believe the 
safe harbor in this regard addresses the prohibition in Rule 305 
against an intermediary compensating any person for providing the 
intermediary with the personally identifiable information of any 
investor in securities offered and sold in reliance on Section 4(a)(6). 
We also believe that Rule 402(b)(6)'s prohibition on funding portals 
paying transaction-based compensation to third parties, other than that 
paid to a registered broker or dealer, will help to minimize the 
incentive for high-pressure sales tactics and other abusive practices 
in this area. One commenter requested additional guidance as to what 
types of compensation would equate to compensation based on the offer 
or sale of a security.\1042\ The Commission and courts have interpreted 
the definition of transaction-based compensation broadly,\1043\ and 
whether compensation is transaction-based is a facts and circumstances 
determination. Thus, we do not believe that additional guidance is 
necessary or appropriate in this context.
---------------------------------------------------------------------------

    \1042\ Id.
    \1043\ See, e.g., Applicability of Broker-Dealer Registration to 
Banks, Exchange Act Rel. No. 20,357 at n.14 (Nov. 8, 1983).
---------------------------------------------------------------------------

    In response to a commenter's inquiry, a funding portal may not pay 
a registered broker-dealer a referral fee without a written agreement 
under the safe harbor. Such an arrangement would be covered by Rule 
402(b)(7), which is discussed below.
g. Compensation Arrangements With Registered Broker-Dealers
(1) Proposed Rule
    Proposed Rule 402(b)(7) would permit a funding portal to pay or 
offer to pay any compensation to a registered broker or dealer for 
services in connection with the offer or sale of securities by the 
funding portal in reliance on Section 4(a)(6) of the Act, provided 
that: (i) Such services are provided pursuant to a written agreement 
between the funding portal and the registered broker or dealer; (ii) 
such services and compensation are permitted under Regulation 
Crowdfunding and are not otherwise prohibited under Rule 305; and (iii) 
such compensation complies with and is not prohibited by the rules of 
any registered national securities association of which the funding 
portal is required to be a member.
    Proposed Rule 402(b)(8) would permit a funding portal to receive 
any compensation from a registered broker or dealer for services 
provided by the funding portal in connection with the offer or sale of 
securities by the funding portal in reliance on Section 4(a)(6) of the 
Act, provided that: (i) Such services are provided pursuant to a 
written agreement between the funding portal and the registered broker 
or dealer; (ii) such compensation is permitted under Regulation 
Crowdfunding; and (iii) such compensation complies with and is not 
prohibited by the rules of any registered national securities 
association of which the funding portal is required to be a member.

[[Page 71467]]

(2) Comments on Proposed Rule
    Several commenters expressed concerns about the permitted 
relationships between funding portals and broker-dealers.\1044\ One of 
these commenters stated that the proposed safe harbor is ``overly 
broad'' and creates ``unmanageable conflicts between funding portals 
and broker dealers,'' and suggested the Commission prevent these 
conflicts by prohibiting funding portals from paying broker-dealers any 
type of compensation in connection with the offer or sale of securities 
under the crowdfunding exemption.\1045\ Another of these commenters 
suggested that the Commission require relationships between funding 
portals and brokers to be arms-length and, if they are not, require 
that the funding portal activity be operated by the broker-dealer 
entity.\1046\
---------------------------------------------------------------------------

    \1044\ See, e.g., Commonwealth of Massachusetts Letter; 
RocketHub Letter.
    \1045\ See Commonwealth of Massachusetts Letter.
    \1046\ See RocketHub Letter (expressing concern over broker-
dealers creating entities that would register as funding portals so 
as to evade FINRA oversight as a broker-dealer).
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(7) generally as proposed, but with 
minor modifications for clarity and consistency. Rule 402(b)(7) 
specifies that a funding portal may pay or offer to pay compensation to 
a registered broker or dealer for services, including for referring a 
person to the funding portal, in connection with the offer or sale of 
securities by the funding portal in reliance on Section 4(a)(6) of the 
Securities Act, provided that (i) such services are provided pursuant 
to a written agreement between the funding portal and the registered 
broker or dealer; (ii) such compensation is permitted under Regulation 
Crowdfunding; and (iii) such compensation complies with the rules of 
any registered national securities association of which the funding 
portal is a member. As discussed above, proposed Rule 402(b)(7) did not 
contain a reference to ``referrals,'' while proposed Rule 402(b)(6) 
included the language ``for referring a person to the funding portal.'' 
We have added a reference to ``referrals pursuant to [Rule 402](b)(7)'' 
to make clear that all payment arrangements with a broker-dealer, 
including paying a broker-dealer for referrals as permitted under 
subparagraph (b)(6), must be in writing.
    Proposed Rule 402(b)(7)(ii) had also stated that ``such 
compensation is permitted under this part and is not otherwise 
prohibited under Sec.  227.305''; and subparagraph (b)(7)(iii) stated 
``such compensation complies with and is not prohibited by-the rules of 
any registered national securities association of which the funding 
portal is required to be a member.'' We are deleting the phrases ``and 
is not otherwise prohibited under Sec.  227.305'' and ``and is not 
prohibited by'' to make the language in Rule 402(b)(7) and Rule 
402(b)(8) consistent, and because the phrases are redundant. Also, we 
are deleting the phrase ``required to be a member'' and replacing it 
with ``is a member'' in recognition of the fact that additional 
national securities associations may exist in the future and that a 
funding portal would only have to be a member of one such association.
    Consistent with Rule 402(b)(7), a funding portal may, for example, 
pay a broker-dealer for certain services, such as information 
technology services, qualified third party services or referral 
services, pursuant to a written agreement. Each party to this type of 
arrangement will need to comply with all applicable regulations, 
including the rules of the registered national securities association 
of which it is a member.
    Similarly, we are adopting Rule 402(b)(8) as proposed with minor 
modifications. Rule 402(b)(8) permits 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), provided that: (i) Such services are 
provided pursuant to a written agreement between the funding portal and 
the registered broker or dealer; (ii) such compensation is permitted 
under Regulation Crowdfunding; and (iii) such compensation complies 
with the rules of any registered national securities association of 
which the funding portal is a member. The proposed rules had stated 
that ``such compensation complies with and is not prohibited by the 
rules of any registered national securities association of which the 
funding portal is required to be a member.'' For the reasons discussed 
above with regard to Rule 402(b)(7)(ii), we are deleting the phrase 
``and is not prohibited'' because it is redundant and deleting the 
phrase ``required to be a member'' and replacing it with ``is a 
member.''
    Pursuant to Rule 402(b)(8), a funding portal may receive 
compensation, including transaction-based compensation, from a broker-
dealer for providing referrals to that broker-dealer relating to an 
offering made pursuant to Section 4(a)(6). It is important to emphasize 
that the safe harbor does not permit a funding portal to receive 
transaction-based compensation for referrals of investors in other 
types of offerings, such as Rule 506 offerings, that are effected by a 
registered broker-dealer.\1047\ Further, these arrangements must be 
compliant with 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.\1048\ As we stated in the Proposing Release, the safe harbor 
is 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 written record of compensation payments.
---------------------------------------------------------------------------

    \1047\ Receipt of transaction-based compensation in connection 
with such referrals can 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)).
    \1048\ See Section II.C.7 (discussing Rule 305).
---------------------------------------------------------------------------

    We disagree with the commenter who suggested that Rules 402(b)(7) 
and (8) create an unmanageable conflict between funding portals and 
broker-dealers.\1049\ We believe that any potential conflict of 
interest between broker-dealers and funding portals as a result of 
compensation arrangements is mitigated due to the fact that both 
entities are registered with the Commission and members of FINRA and 
because permissible activities under Rule 402(b)(7) and (8) are limited 
by Regulation Crowdfunding. We also are not prohibiting a registered 
broker-dealer and a registered funding portal from being affiliated, 
nor are we requiring that any crowdfunding operation be performed by 
the registered broker-dealer in such an affiliation.\1050\ Because 
funding portals and broker-dealers are each registered with the 
Commission and required to be members of a registered national 
securities association with the attendant rules and oversight, we 
believe concerns about conflicts of interests among affiliated funding 
portals and broker-dealers are sufficiently mitigated by this 
regulatory framework.
---------------------------------------------------------------------------

    \1049\ See Commonwealth of Massachusetts Letter.
    \1050\ See RocketHub Letter (expressing concern over broker-
dealers creating entities that would register as funding portals, so 
as to evade FINRA oversight as a broker-dealer).
---------------------------------------------------------------------------

    While a commenter questioned whether a funding portal may pay 
introducing brokers a fee for referring persons to the funding portal 
without a formal written arrangement,\1051\ we emphasize that Rule 
402(b)(7) requires all such arrangements to be in writing.
---------------------------------------------------------------------------

    \1051\ See ABA Letter.

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

[[Page 71468]]

h. Advertising
(1) Proposed Rule
    Proposed Rule 402(b)(9) would permit a funding portal to advertise 
the existence of the funding portal and identify one or more issuers or 
offerings available on the portal on the basis of objective criteria, 
as long as: (i) The criteria are reasonably designed to identify a 
broad selection of issuers offering securities through the funding 
portal's platform and are applied consistently to all potential issuers 
and offerings; (ii) the criteria may include, among other things, the 
type of securities being offered (for example, common stock, preferred 
stock or debt securities); the geographic location of the issuer; the 
industry or business segment of the issuer; the expressed interest by 
investors, as measured by number or amount of investment commitments 
made, progress in meeting the issuer's target offering amount or, if 
applicable, the maximum offering amount; and the minimum or maximum 
investment amount; and (iii) the funding portal does not receive 
special or additional compensation for identifying the issuer or 
offering in this manner.
(2) Comments on Proposed Rule
    Several commenters supported the proposed safe harbor on funding 
portal advertising.\1052\ However, commenters were divided on whether 
funding portals should be permitted to advertise current offerings and 
issuers in their advertisements. One commenter was supportive of 
allowing funding portals to ``advertise more generally, as well as 
highlight ongoing offerings through various communication channels.'' 
\1053\ The same commenter stated that a portal's decision to feature or 
highlight issues available should not be viewed by the Commission as 
investment advice, a recommendation, or a solicitation.\1054\ This 
commenter nonetheless cautioned that ``[p]ortals should be barred from 
language that implicates the level of risk involved in the investment 
or the overall quality of the investment opportunity'' as well as 
``from soliciting investments for any specific campaign by providing 
offering details outside of the Portal itself.'' \1055\ Another 
commentator expressed opposition to ``a limitation on the funding 
portal to only advertise its past offerings,'' stating that such a 
limitation ``would be overly restrictive.'' \1056\
---------------------------------------------------------------------------

    \1052\ See, e.g., CFIRA Letter 1; Commonwealth of Massachusetts 
Letter; ABA Letter.
    \1053\ See RocketHub Letter.
    \1054\ Id.
    \1055\ Id.
    \1056\ See CFIRA Letter 1.
---------------------------------------------------------------------------

    In contrast, one commenter stated that, while funding portals 
should be allowed to advertise, funding portals should not be able to 
display specific issuers in their advertising materials.\1057\ This 
commenter stated that ``[t]he concern with displaying individual 
issuers is that investors will interpret this as a recommendation and 
endorsement of the issuer.'' \1058\ The commenter noted that the 
prohibition on providing recommendations can be easily circumvented by 
manipulating otherwise seemingly objective criteria, and that funding 
portals could advertise offerings based on certain criteria, such as 
high target offerings, that may generate more money for the funding 
portal (i.e., a funding portal can mask self-interest by using 
objective criteria).\1059\ This same commenter suggested that the 
Commission could allow descriptions of the portals themselves and the 
specific business segments featured on their Web sites, without 
mentioning specific issuers currently registered with the portal.\1060\
---------------------------------------------------------------------------

    \1057\ See Commonwealth of Massachusetts Letter.
    \1058\ Id.
    \1059\ Id.
    \1060\ Id.
---------------------------------------------------------------------------

    One commenter suggested the Commission clarify that it would be 
inappropriate for a funding portal to send out soliciting emails 
recommending investment in particular companies to investors who have 
signed up with that portal.\1061\ Another commenter stated that a 
funding portal should not be permitted to advertise or otherwise make 
statements that offerings listed are somehow safer or better than other 
platforms.\1062\
---------------------------------------------------------------------------

    \1061\ See ABA Letter.
    \1062\ See Milken Institute Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(9) as proposed. Rule 402(b)(9) permits 
a funding portal to advertise its existence and identify one or more 
issuers or offerings available on the portal on the basis of objective 
criteria, as long as: (i) The criteria are reasonably designed to 
identify a broad selection of issuers offering securities through the 
funding portal's platform and are applied consistently to all potential 
issuers and offerings; (ii) the criteria may include, among other 
things, the type of securities being offered (for example, common 
stock, preferred stock or debt securities); the geographic location of 
the issuer; the industry or business segment of the issuer; the 
expressed interest by investors, as measured by number or amount of 
investment commitments made, progress in meeting the issuer's target 
offering amount or, if applicable, the maximum offering amount; and the 
minimum or maximum investment amount; and (iii) the funding portal does 
not receive special or additional compensation for identifying the 
issuer or offering in this manner. However, a funding portal may not 
base its decision as to which issuers to include in its advertisements 
on whether it has a financial interest in the issuer,, and any 
advertising may not directly or indirectly favor issuers in which the 
funding portal has invested or will invest.
    After considering the comment letters, we believe that the 
requirements of the safe harbor, including the requirement for 
objective criteria designed to result in a broad selection of 
highlighted issuers or offerings, will result in advertisements that 
are focused on the funding portal itself, as opposed to recommending a 
particular offering or offerings.\1063\ Funding portals continue to be 
subject to the statutory prohibition on providing investment advice and 
recommendations.\1064\ An advertisement by a funding portal must not be 
an implicit (or explicit) recommendation as to whether to invest in the 
issuer or offering or advice on the advisability of investing in the 
issuer or offering. Therefore, consistent with the views of one 
commenter, a funding portal may not advertise in such a way that 
expresses the funding portal's view that, for example, certain 
offerings on its platform are of a higher quality, safer or more worthy 
than others, or that otherwise gives a recommendation.\1065\
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    \1063\ The safe harbor is limited to identifying one or more 
issuers. More detailed information about an issuer should be 
provided on the funding portal's platform.
    \1064\ See Exchange Act Section 3(a)(80)(A).
    \1065\ See Milken Institute Letter.
---------------------------------------------------------------------------

    We recognize that advertisements can take many varied forms, 
including non-traditional means, such as blogs, emails through social 
media or other methods. We believe that these types of communications, 
when made by a funding portal to investors can be a permissible means 
of advertising within the scope of Rule 402(b)(9). We agree, however, 
with a commenter's statement that it would be inconsistent with the 
statutory prohibition on providing investment advice or recommendations 
for a funding portal to send out soliciting emails recommending 
investments in particular companies as part of its advertising.\1066\
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    \1066\ See ABA Letter.

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[[Page 71469]]

i. Deny Access to Platform
(1) Proposed Rule
    Proposed Rule 402(b)(10) would permit 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 investor protection concerns.
(2) Comments on Proposed Rule
    Some commenters asserted that the proposed rules are ambiguous, and 
that the lack of specificity exposes funding portals to potential 
liability. The commenters were concerned that the perceived lack of 
specificity may also lead funding portals to unintentionally violate 
the ban on providing investment advice with their attempts to mitigate 
liability.\1067\
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    \1067\ See, e.g., RocketHub Letter and Seyfarth Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(10) substantially as proposed with 
modifications to make it consistent with Rule 301(c)(2), which requires 
an intermediary to deny access if it has a reasonable basis for 
believing that the issuer or the offering presents the potential for 
fraud or otherwise raises concerns about investor protection.\1068\ In 
satisfying this requirement, an intermediary must deny access if it 
reasonably believes that it is unable to adequately or effectively 
assess the risk of fraud of the issuer or its potential offering. In 
addition, if an intermediary becomes aware of information after it has 
granted access that causes it to reasonably believe that the issuer or 
the offering presents the potential for fraud or otherwise raises 
concerns about investor protection, the intermediary must promptly 
remove the offering from its platform, cancel the offering, and return 
(or, for funding portals, direct the return of) any funds that have 
been committed by investors in the offering. Rule 402(b)(10) requires a 
funding portal to deny access to its platform to, or cancel an offering 
of an issuer, pursuant to Rule 301(c)(2), if the funding portal has a 
reasonable basis for believing that the issuer or the offering presents 
the potential for fraud or otherwise raises concerns.
---------------------------------------------------------------------------

    \1068\ See Section II.C.3 discussing the change to Rule 301(c) 
to include a ``reasonable basis'' standard.
---------------------------------------------------------------------------

    We changed the standard in Rule 402(b)(10) to a ``reasonable basis 
for believing''--rather than ``believes''--to conform the safe harbor 
to the requirements of Rule 301(c)(2) as adopted. Thus, the standard in 
Rule 402(b)(10) is consistent with the modifications that we made to 
the standard in Rule 301(c)(2).\1069\ We believe this change also 
should help to address commenters' concerns about the perceived lack of 
specificity in the proposed safe harbor by providing an objective 
``reasonable belief'' standard for the required determinations. Under 
this standard a funding portal may not ignore facts about an issuer 
that indicate fraud or investor protection concerns such that a 
reasonable person would have denied access to the platform. At the same 
time, a funding portal can also feel assured in its decision to deny an 
issuer access or cancel an offering if it has a reasonable basis for 
such a determination. We also believe that including a ``reasonable 
basis'' standard adds objectivity to a funding portal's determinations 
regarding which issuers must be denied access to (or removed from) its 
platform, which is expected to help to address concerns regarding the 
clarity of the standard under the proposed rule.
---------------------------------------------------------------------------

    \1069\ See Section II.C.3.
---------------------------------------------------------------------------

j. Accepting Investor Commitments
(1) Proposed Rule
    Proposed Rule 402(b)(11) would permit a funding portal to accept, 
on behalf of an issuer, an investment commitment for securities offered 
in reliance on Section 4(a)(6) of the Securities Act by that issuer on 
the funding portal's platform.
(2) Comments on Proposed Rule
    One commenter noted that the statute prohibits funding portals from 
handling investor funds or securities, and that the proposed rule 
requiring the use of third-party entities would create additional 
transaction costs for funding portals.\1070\ Another commenter stated 
that the safe harbor for accepting investor commitments should permit a 
funding portal to assist issuers in handling a direct registration 
system (DRS) between issuers and investors.\1071\
---------------------------------------------------------------------------

    \1070\ See Stephenson, et al., Letter.
    \1071\ See RocketHub (suggesting that a portal should be 
permitted to provide DRS support to issuers and investors). A DRS 
allows investors to transfer a security that is registered in the 
investor's name on the issuer's books, and either the company or its 
transfer agent holds the security for the investor in book-entry 
form.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(11) as proposed. Rule 402(b)(11) 
permits a funding portal, on behalf of an issuer, to accept investment 
commitments from investors for securities offered in reliance on 
Section 4(a)(6) by that issuer on the funding portal's platform. We are 
not broadening the safe harbor to permit funding portals to handle 
customer funds, as suggested by one commenter. Although we recognize 
that the requirement to use a third party entity to handle customer 
funds imposes an additional expense on a funding portal, Exchange Act 
Section 3(a)(80)(D) explicitly prohibits funding portals from handling 
customer funds and securities. Similarly, we believe it would be 
inconsistent with the statute for a funding portal to facilitate a 
securities registration system for issuers and investors because such 
activity implicitly requires funding portals to handle customer funds 
and securities, which is prohibited by the statute. In this regard, we 
note that the activities that a funding portal is permitted to engage 
in are limited in scope, and as such are subject to a more limited 
regulatory scheme as compared to registered broker-dealers.
k. Directing Transmission of Funds
(1) Proposed Rule
    Proposed Rule 402(b)(12) would permit a funding portal to 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) of the Securities Act.
    Proposed Rule 402(b)(13) would permit a funding portal to direct a 
qualified third party, as required by Rule 303(e), to release proceeds 
to an issuer upon completion of a crowdfunding offering or to return 
proceeds to investors in the event an investment commitment or an 
offering is cancelled.
(2) Final Rules
    We did not receive comments on the ability of a funding portal to 
direct investment funds and are adopting Rules 402(b)(12) and (13) as 
proposed. Rules 402(b)(12) and (13) provide that a funding portal can 
fulfill its obligations with respect to the maintenance and 
transmission of funds and securities, as set forth in Rule 303, without 
violating the prohibition in Exchange Act Section 3(a)(80)(D). 
Specifically, a funding portal can 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),\1072\ and as required 
by Rule 303(e), a funding portal can 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

[[Page 71470]]

investment commitment or offering is cancelled.\1073\
---------------------------------------------------------------------------

    \1072\ See Rule 402(b)(12) of Regulation Crowdfunding.
    \1073\ See Rule 402(b)(13) of Regulation Crowdfunding.
---------------------------------------------------------------------------

l. Posting News
    In the Proposing Release, we asked whether we should adopt a safe 
harbor that permits a funding portal to post news, such as market news 
and news about a particular issuer or industry, on its platform. In 
response to our request for comment, some commenters stated that the 
safe harbor should permit funding portals to post third party news 
related to issuers or offerings on their platform.\1074\ One commenter 
cautioned that objective criteria should be used to ensure, for 
example, that funding portals are not picking out the most flattering 
or positive news.\1075\ Another commenter suggested that funding 
portals should be aware of the content of materials posted on their 
portal and held responsible for inappropriate information that is 
posted.\1076\
---------------------------------------------------------------------------

    \1074\ See, e.g., CFIRA Letter 1; RoC Letter; StartupValley 
Letter. But see Joinvestor Letter; Wefunder Letter.
    \1075\ See CFIRA Letter 1.
    \1076\ See RoC Letter.
---------------------------------------------------------------------------

    While we believe it is possible for funding portals to post news on 
their platforms in a manner that would not violate the prohibitions in 
Exchange Act Section 3(a)(80), we are not including such activities 
within the safe harbor because we believe the permissibility of posting 
news should be a facts and circumstances determination. When posting 
news, funding portals will need to ensure that they do not violate the 
prohibition on giving investment advice and recommendations. For 
example, if a funding portal selectively determines which news articles 
to post or posts only flattering or positive news, then the funding 
portal is more likely to be giving impermissible investment advice or 
recommendations.
m. No Presumption and Anti-Fraud Provisions
(1) Proposed Rule
    Proposed Rule 402(a) also stated that no presumption shall arise 
that a funding portal has violated the prohibitions under Section 
3(a)(80) of the Exchange Act or Regulation Crowdfunding by reason of 
the funding portal or its associated persons engaging in activities in 
connection with the offer or sale of securities in reliance on Section 
4(a)(6) of the Securities Act that do not meet the conditions specified 
in the safe harbor and that the antifraud provisions and all other 
applicable provisions of the federal securities laws continue to apply 
to the activities described in the safe harbor.
(2) Final Rules
    We did not receive any comments on the proposed ``no presumption'' 
and anti-fraud provisions and are adopting Rule 402(a) as proposed. We 
also reiterate that Rule 402(b) is a non-exclusive safe harbor. Rule 
402(a) expressly provides that the failure of a funding portal to meet 
the conditions of the safe harbor does not give rise to a presumption 
that the funding portal is in violation of the statutory prohibitions 
of Exchange Act Section 3(a)(80) or Regulation Crowdfunding.\1077\
---------------------------------------------------------------------------

    \1077\ See Rule 402(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Further, the safe harbor under Rule 402 does not prohibit funding 
portals from engaging third party service providers to assist the 
funding portal in operating its platform, such as providers of 
software, Web site maintenance and development, communication channel 
applications, recordkeeping systems, and other technology.\1078\ 
However, the funding portal remains responsible for its activities and 
the operation of its platform and for compliance with Regulation 
Crowdfunding and other applicable federal securities laws.
---------------------------------------------------------------------------

    \1078\ One commenter asked whether funding portals could engage 
third party service providers consistent with Regulation 
Crowdfunding. See CFIRA Letter 1.
---------------------------------------------------------------------------

4. Compliance
a. Policies and Procedures
(1) Proposed Rule
    As proposed, Rule 403(a) would require a funding portal to 
implement written policies and procedures reasonably designed to 
achieve compliance with the federal securities laws and the rules and 
regulations thereunder, relating to its business as a funding 
portal.\1079\
---------------------------------------------------------------------------

    \1079\ 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.
---------------------------------------------------------------------------

(2) Comments on the Proposed Rules
    One commenter agreed that the Commission should not specify 
requirements for a funding portal's policies and procedures, while 
another commenter thought the Commission should provide guidance 
concerning the policies and procedures.\1080\ Another commenter 
suggested that all changes to a funding portal's policies and 
procedures should be disclosed within 30 days and publicly 
announced.\1081\ Yet another commenter suggested requiring the SRO to 
mandate that broker-dealers and funding portals follow the same 
policies.\1082\
---------------------------------------------------------------------------

    \1080\ See ASSOB Letter; Consumer Federation of America (``[The 
Commission] fails to address at all the areas that should be covered 
by such policies and procedures, or what a funding portal's 
responsibilities to monitor compliance would be.'').
    \1081\ See Joinvestor Letter.
    \1082\ See Rockethub Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 403(a) as proposed. We believe that the 
requirement to implement written policies and procedures will provide 
important investor protections as it will necessitate that funding 
portals remain aware of the various regulatory requirements to which 
they are subject and take appropriate steps for complying with such 
requirements. We recognize, however, that funding portals may have 
various business models and, therefore, consistent with the views of 
one commenter, we are not imposing specific requirements for a funding 
portal's policies and procedures, provided the policies and procedures 
are reasonably designed to achieve compliance with the federal 
securities laws and the rules relating to their business as funding 
portals. Rather, we are providing a funding portal with discretion to 
establish, implement, maintain and enforce its policies and procedures 
based on its relevant facts and circumstances.
    We note, however, that a funding portal may rely on the 
representations of others when meeting certain requirements under 
Regulation Crowdfunding, unless the funding portal has reason to 
question the reliability of those representations. For example, a 
funding portal may rely on an issuer's representation to establish a 
reasonable basis for believing that an issuer seeking to offer and sell 
securities in reliance on Section 4(a)(6) through its platform complies 
with the requirements in Securities Act Section 4A(b) and the related 
requirements in Regulation Crowdfunding, unless the funding portal has 
reason to question the reliability of that representation.\1083\ A 
funding portal may also rely on an investor's representation to 
establish a reasonable basis for believing that an investor satisfies 
the investment limits established by Section 4(a)(6)(B), unless the 
funding portal has reason to question the reliability of that 
representation.\1084\ We believe that when a funding portal relies on 
the representations of others to form a reasonable basis, the funding 
portal

[[Page 71471]]

should have policies and procedures regarding under what circumstances 
it can reasonably rely on such representations and when additional 
investigative steps may be appropriate. We further believe that a 
funding portal's policies and procedures should cover not only 
permitted activities, but also address prohibited activities. For 
example, a funding portal should have policies and procedures on the 
criteria used to limit, highlight and advertise issuers and offerings.
---------------------------------------------------------------------------

    \1083\ See Rule 301(a).
    \1084\ See Rule 303(b)(1).
---------------------------------------------------------------------------

    We note one commenter's suggestion that 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. However, as explained in the Proposing Release, we 
believe that the requirement for reasonably designed policies and 
procedures includes an ongoing obligation for a funding portal to 
promptly update its policies and procedures if necessary to reflect 
changes in applicable rules and regulations, a funding portal's 
business practices, and/or the marketplace.\1085\ Finally, in response 
to one commenter's suggestion that we require SROs to mandate that 
broker-dealers and funding portals follow the same policies, as noted 
above, we believe that funding portals should have flexibility to 
implement policies and procedures suited to their own facts and 
circumstances. Moreover, we note that any proposed SRO rules relating 
to policies and procedures of either broker-dealers or funding portals 
will be subject to the Exchange Act Section 19(b) SRO rule filing 
process.\1086\
---------------------------------------------------------------------------

    \1085\ Consistent with our requirements for broker-dealers, we 
are not requiring that a funding portal's policies and procedures be 
made public, as suggested by a commenter.
    \1086\ Pursuant to Exchange Act Section 19(b) and Rule 19b-4, 
SROs are required to file proposed new rules and rule changes with 
the Commission.
---------------------------------------------------------------------------

    Commission staff expects to review intermediaries' compliance 
policies and procedures relating to their activities in connection with 
the offer or sale of securities in reliance on Section 4(a)(6) during 
the study of the federal crowdfunding exemption that it plans to 
undertake no later than three years following the effective date of 
Regulation Crowdfunding.\1087\
---------------------------------------------------------------------------

    \1087\ See Section II.
---------------------------------------------------------------------------

b. Anti-Money Laundering
(1) Proposed Rule
    Proposed Rule 403(b) would require that funding portals comply with 
certain AML provisions,\1088\ as set forth in Chapter X of Title 31 of 
the Code of Federal Regulations. The BSA and its implementing 
regulations establish the basic framework for AML obligations imposed 
on financial institutions.\1089\ The BSA is intended to facilitate the 
prevention, detection and prosecution of money laundering, terrorist 
financing and other financial crimes.
---------------------------------------------------------------------------

    \1088\ See also Section II.D.2. (discussing proposed Rule 
401(b)).
    \1089\ See BSA, note 981; 31 CFR Chapter X.
---------------------------------------------------------------------------

    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;\1090\ (2) establish and maintain a Customer 
Identification Program; \1091\ (3) monitor for and file reports of 
suspicious activity (SARs); \1092\ and (4) comply with requests for 
information from the Financial Crimes Enforcement Network 
(``FinCEN'').\1093\ 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.'' \1094\ As explained above, Exchange 
Act Section 3(h) expressly directs the Commission, conditionally or 
unconditionally, to exempt funding portals from the requirement to 
register as a broker or dealer under Section 15(a). As such, a funding 
portal is not a broker ``registered or required to be registered'' if 
it registers as a funding portal with the Commission. We proposed that, 
notwithstanding this exemption from broker registration, under Rule 
401(b) a funding portal would be ``required to be registered'' as a 
broker or dealer with the Commission under the Exchange Act solely for 
purposes of Chapter X of Title 31 of the Code of Federal Regulations, 
thus subjecting funding portals to the AML requirements of Chapter X of 
Title 31.
---------------------------------------------------------------------------

    \1090\ See 31 U.S.C. 5318(h). See also 31 CFR 1023.210; FINRA 
Rule 3310.
    \1091\ See 31 CFR 1023.220.
    \1092\ See 31 CFR 1023.320. See also FINRA Rule 3310.
    \1093\ See 31 CFR 1010.520.
    \1094\ See 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.
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    A few commenters generally suggested that since funding portals are 
prohibited from handling customer funds and securities they should not 
be required to comply with AML provisions.\1095\ Some commenters, 
however, generally supported requiring funding portals to comply with 
AML provisions.\1096\ One commenter, noting that non-U.S. investors may 
participate in crowdfunding and use U.S.-based funding portals, 
requested that the Commission provide advice and suggestions on ``how 
to prevent anti-money laundering.'' \1097\
---------------------------------------------------------------------------

    \1095\ See PeoplePowerFund Letter; Public Startup 3 Letter; 
RFPIA Letter; Vann Letter.
    \1096\ See RocketHub Letter (stating that it ``supports the 
Commissions [sic] interpretation of the exemption, and believes that 
AML compliance is necessary''); Berlingeri Letter (supporting 
funding portal ``compliance with existing anti-money laundering 
provisions and the requirement to report suspicious activity'').
    \1097\ See Zhang Letter.
---------------------------------------------------------------------------

(3) Final Rules
    Upon further consideration, we have determined not to adopt 
proposed Rule 403(b). The BSA requirements play a critical role in 
detecting, preventing, and reporting money laundering and other illicit 
financing, such as market manipulation and fraud. However, after 
careful consideration, we believe that AML obligations for funding 
portals are better addressed outside of the rules that we are currently 
adopting in this release, and that it would be more appropriate to work 
with other regulators to develop consistent and effective AML 
obligations for funding portals.\1098\ We note, however, that broker-
dealers continue to have their own AML obligations, as do certain other 
parties involved in transactions

[[Page 71472]]

conducted pursuant to Section 4(a)(6), such as a bank acting as a 
qualified third party to hold investor funds.
---------------------------------------------------------------------------

    \1098\ FinCEN within the Department of Treasury has primary 
regulatory responsibility for administering the BSA. We note that 
FinCEN has included in the Unified Agenda and Regulatory Plan an 
item that states: ``FinCEN . . . is proposing amendments to the 
regulatory definitions of `broker or dealer in securities' under the 
regulations implementing the Bank Secrecy Act. The proposed changes 
are intended to expand the current scope of the definitions to 
include funding portals. In addition, these amendments would require 
funding portals to implement policies and procedures reasonably 
designed to achieve compliance with all of the Bank Secrecy Act 
requirements that are currently applicable to brokers or dealers in 
securities.'' See Office of Mgmt. & Budget, Exec. Office of the 
President, Office of Info. & Regulatory Affairs, Amendments of the 
Definition of Broker or Dealer in Securities, RIN 1506-AB29, 
available at http://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201504&RIN=1506-AB29. In addition, the 
Commission has adopted its own rules that require broker-dealers to 
comply with certain requirements of the BSA's implementing 
regulations, such as books and records requirements. See Exchange 
Act Rule 17a-8. See also Section II.D.5.
---------------------------------------------------------------------------

c. Privacy
(1) Proposed Rule
    Section 4A(a)(9) of the Securities Act requires intermediaries to 
take such steps to protect the privacy of information collected from 
investors as the Commission shall, by rule, determine appropriate. 
Proposed Rule 403(c) would implement the requirements of Section 
4A(a)(9) by subjecting funding portals to the same privacy rules as 
those applicable to brokers. Proposed Rule 403(c), therefore, would 
have required funding portals to comply with Regulation S-P (Privacy of 
Consumer Financial Information and Safeguarding Personal 
Information),\1099\ Regulation S-AM (Limitations on Affiliate 
Marketing),\1100\ and Regulation S-ID (Identity Theft Red Flags) \1101\ 
(collectively, the ``Privacy Rules'').\1102\
---------------------------------------------------------------------------

    \1099\ See Privacy of Consumer Financial Information (Regulation 
S-P), Release No. 34-42974 (June 22, 2000) [65 FR 40334 (June 29, 
2000)].
    \1100\ See Regulation S-AM: Limitations on Affiliate Marketing, 
Release No. 34-60423 (Aug. 4, 2011) [74 FR 40398 (Aug. 11, 2009)].
    \1101\ See Identity Theft Red Flags Rules, Release No. 34-69359 
(Apr. 10, 2013) [78 FR 23637 (Apr. 19, 2013)] (adopted jointly with 
the Commodity Futures Trading Commission).
    \1102\ See 17 CFR part 248.
---------------------------------------------------------------------------

    Regulation S-P governs the treatment of nonpublic personal 
information by brokers, among others.\1103\ 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 
about the consumer's transactions or experiences with the covered 
person) received from the covered person.\1104\ 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.\1105\
---------------------------------------------------------------------------

    \1103\ See 17 CFR part 248, subpart A.
    \1104\ See 17 CFR part 248, subpart B.
    \1105\ See 17 CFR part 248, subpart C.
---------------------------------------------------------------------------

(2) Comments and Final Rules
    We are adopting Rule 403(c) as proposed, but renumbering it as Rule 
403(b).\1106\ One commenter opposed Proposed Rule 403(c), which would 
impose the Privacy Rules on funding portals, stating that in its view, 
funding portals do not raise privacy concerns.\1107\ We disagree. We 
believe that privacy is a concern as it relates to funding portals 
given that funding portals will collect and maintain sensitive personal 
information about the investors using their platforms.
---------------------------------------------------------------------------

    \1106\ The rule is being renumbered to account for the 
elimination of the proposed AML provision in proposed Rule 403(b), 
which is discussed in Section II.D.4.b above.
    \1107\ See Public Startup Letter 3.
---------------------------------------------------------------------------

d. Inspections and Examinations
(1) Proposed Rule
    Exchange Act Section 3(h)(1)(A) specifies that funding portals must 
remain subject to our examination authority to, among other things, 
rely on any exemptions from broker-dealer registration that we impose. 
Under proposed Rule 403(d) of Regulation Crowdfunding, 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.
(2) Comment and Final Rules
    We are adopting Rule 403(d) as proposed, but renumbering it as 
403(c).\1108\ One commenter opposed the Commission's proposed 
inspections and examinations rules as unnecessary.\1109\ 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, our examination authority. We believe 
that inspections and examinations are an important aspect of our 
oversight function of funding portals as they will assist us in 
monitoring the activities of funding portals in light of applicable 
statutory and regulatory requirements. Therefore, we are adopting Rule 
403(c) to implement the statute and retain examination authority over 
funding portals.
---------------------------------------------------------------------------

    \1108\ The Rule is being renumbered to account for the 
elimination of the proposed anti-money laundering provision in 
proposed Rule 403(b), which is described in more detail in Section 
II.D.4.b. We are also adding the word ``registered'' to ``national 
securities association'' to be consistent with the rest of the rule 
text and with Exchange Act Section 3(h)(1)(B).
    \1109\ See Public Startup Letter 3.
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5. Records To Be Created and Maintained by Funding Portals
a. Proposed Rule
    As proposed, Rule 404(a) would require funding portals 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. The required 
records would include the following:
     All records relating to investors who purchase or attempt 
to purchase securities through the funding portal; \1110\
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    \1110\ This would include information relating to educational 
materials provided to investors, account openings and transactions, 
including notices of investment commitments and reconfirmations.
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     All 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;
     Records of all communications that occur on or through its 
platform;
     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;
     All records demonstrating a funding portal's compliance 
with requirements of Subparts C (intermediary obligations) and D 
(additional funding portal requirements); \1111\
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    \1111\ This requirement alone would not, however, require the 
creation of any records or proscribe the format or manner of any 
records. However, without records, it would be difficult for a 
funding portal to demonstrate compliance with Subparts C and D to 
examiners.
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     All notices provided by the funding portals to issuers and 
investors generally through the funding portal's platform or otherwise; 
\1112\
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    \1112\ 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.
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     All written agreements (or copies thereof) entered into by 
a funding portal, relating to its business as such;
     All daily, monthly and quarterly summaries of transactions 
effected through the funding portal; \1113\ and
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    \1113\ 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.

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[[Page 71473]]

     A log reflecting the progress of each issuer who offers 
and sells securities through the funding portal toward meeting the 
target offering amount.
    As proposed, Rule 404(b) would require that a funding portal make 
and preserve its organizational documents during its operation as a 
funding portal and also those of any successor funding portal. 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).
    We also proposed in Rule 404(c) that the records required to be 
maintained and preserved pursuant to Rule 404(a) be produced, 
reproduced, and maintained in the original, non-alterable format in 
which they were created or as permitted under Section 17a-4(f) of the 
Exchange Act. We proposed in Rule 404(d) to allow third parties to 
prepare or maintain the required records on behalf of the funding 
portal, provided that there is a written undertaking in place between 
the funding portal and the third party stating that the required 
records are the property of the funding portal and will be surrendered 
promptly, on request by the funding portal, to the Commission or the 
national securities association of which the funding portal is a 
member.\1114\ The funding portal also would have been 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. As proposed, an agreement between a 
funding portal and a third party would not relieve the funding portal 
of its responsibility to prepare and maintain records, as required 
under Rule 404 of Regulation Crowdfunding.
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    \1114\ 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, 
and 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.
     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 has been scaled to be 
more appropriate for funding portals.
---------------------------------------------------------------------------

    As proposed, Rule 404(e) would require all records of a funding 
portal to 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.
    Finally, we proposed in Rule 404(f) that funding portals would be 
required to comply with the reporting, recordkeeping and record 
retention requirements of Chapter X of Title 31 of the Code of Federal 
Regulations. Where Chapter X of Title 31 and proposed rules 404(a) and 
404(b) would require the same records or reports to be preserved for 
different periods of time, we proposed requiring the records or reports 
to be preserved for the longer period of time.
b. Comments on Proposed Rule
    Commenters generally did not object to the proposed recordkeeping 
requirements. Some commenters suggested that the cost for a funding 
portal to maintain the proposed books and records would not be 
significant.\1115\ A few commenters suggested that funding portals 
should maintain required records for a longer period of time. One of 
these commenters recommended a retention period of 10 years,\1116\ 
while the other suggested that issuer data should be kept permanently 
accessible by the funding portal.\1117\ Another commenter suggested 
that the Commission should require intermediaries, rather than the 
issuers, to maintain records (or arrange for third-party recordkeeping) 
of the offering materials used by the issuers, thereby reducing the 
burden on issuers by no longer requiring them to transcribe offering 
materials into something that can be filed with EDGAR.\1118\
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    \1115\ See, e.g., CFIRA Letter 1, Joinvestor Letter.
    \1116\ See Joinvestor Letter.
    \1117\ Mollick, et al Letter. See also Public Startup Letter 5 
(suggesting that the Commission should improve ``forensic record-
keeping obligations of a funding portal'' by requiring portals to 
``maintain the URLs and Web site content in perpetuity for all 
issuers who use the portal to raise capital from the public.'').
    \1118\ CFIRA Letter 1.
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c. Final Rules
    We are adopting Rule 404 as proposed, with a modification to 
subparagraph (e) to require that books and records subject to review 
under the subsection be produced promptly to representatives of the 
Commission and the national securities association of which the funding 
portal is a member,\1119\ and a minor modification to subparagraph (f) 
related to anti-money laundering related records.\1120\ We also made a 
modification to state that, in addition to being furnished to 
representatives of the Commission, books and records would have to be 
furnished to the Commission itself. We are also adding the word 
``registered'' to ``national securities association'' to be consistent 
with the rest of the rule text and with Exchange Act Section 
3(h)(1)(B).\1121\
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    \1119\ We are making this change to remain consistent with the 
prompt production standard that is required for third party 
recordkeeping undertakings pursuant to Rule 404(d).
    \1120\ In the Proposing Release and as noted in this section, we 
have provided examples of the types of information that would be 
required to be maintained under each of the specified records. The 
same guidance applies with respect to application of the final 
rules.
    \1121\ Conforming changes were made to both Rules 404(d) and 
(e).
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    We believe that it is important for funding portals to be subject 
to the recordkeeping requirements in order to create a meaningful 
record of crowdfunding transactions and communications. For example, we 
are requiring records of all notices provided by the funding portals to 
issuers and investors generally through the funding portal's platform 
or otherwise. We believe that, in addition to the list of examples 
provided in the rule, this encompasses any notices relating to the 
funding portal's business as such, including communications in 
electronic form sent from an associated person of a funding portal to 
issuers or investors (including potential investors). Every funding 
portal is required under Rule 404 to furnish promptly to the Commission 
and its representatives, and the registered national securities 
association of which the funding portal is a member, legible, true, 
complete and current copies of such records of the funding portal that 
are requested by the representatives of the Commission and the national 
securities association.\1122\
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    \1122\ The Commission generally interprets the term ``promptly'' 
or ``prompt'' to mean making reasonable efforts to produce records 
that are requested by the staff during an examination without delay. 
The Commission believes that in many cases a funding portal could, 
and therefore will be required to, furnish records immediately or 
within a few hours of a request. The Commission expects that only in 
unusual circumstances would a funding portal be permitted to delay 
furnishing records for more than 24 hours. Accord Security-Based 
Swap Data Repository Registration, Duties, and Core Principles, 
Exchange Act Release No. 74246 (Feb. 11, 2015), 80 FR 14438, 14500 
n. 846 (Mar. 19, 2015) (similarly interpreting the term ``promptly'' 
in the context of Exchange Act Rule 13n-7(b)(3)); Registration of 
Municipal Advisors, Exchange Act Release No. 70462 (Sept. 20, 2013), 
78 FR 67468, 67578-67579 n. 1347 (Nov. 12, 2013) (similarly 
interpreting the term ``prompt'' in the context of Exchange Act Rule 
15Ba1-8(d)).

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[[Page 71474]]

    The requirements will enable regulators to more effectively gather 
information about the activities in which a funding portal has been 
engaged, as well as about the other parties involved in crowdfunding 
(e.g., issuers, promoters, and associated persons), to discern whether 
the funding portals and the other parties are in compliance with the 
requirements of Regulation Crowdfunding and any other applicable 
federal securities laws. We believe the requirements will assist 
regulators' compliance examinations because, without these records, the 
Commission and any registered national securities association of which 
the funding portal is a member may have difficulty examining a funding 
portal for compliance with the requirements of Regulation Crowdfunding 
and the federal securities laws.\1123\ Therefore, we believe the record 
retention requirements should be mandatory rather than voluntary as 
suggested by one commenter. Although we are not requiring that funding 
portals utilize the record retention services of broker-dealers, as 
suggested by one commenter, we note that a funding portal may find it 
cost-effective or otherwise appropriate to use the recordkeeping 
services of a third party, and the final rules provide the necessary 
flexibility to allow funding portals to utilize these options.
---------------------------------------------------------------------------

    \1123\ See, supra, note 798.
---------------------------------------------------------------------------

    While some commenters suggest a longer record retention period, we 
believe the requirement that funding portals preserve their records for 
five years, with the records retained in a readily accessible place for 
at least the first two years, provides sufficient investor protection, 
while not imposing overly burdensome recordkeeping costs.\1124\ We are 
not adopting, as commenters recommended, a requirement that funding 
portals be required to keep issuer data permanently accessible or 
maintain URLs and Web site content in perpetuity for all issuers, as we 
believe the permanent storage of such information could be unduly 
burdensome and is unnecessary.
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    \1124\ We note that the record retention period requirement 
continues for a funding portal after it withdraws its registration. 
Schedule D of Form Funding Portal requests information about the 
location(s) of where a funding portal will keep its books and 
records after withdrawal.
---------------------------------------------------------------------------

    Because permissible funding portal activity is far more limited 
than that of broker-dealers and a relatively high proportion of funding 
portals will be new market entrants that have not been subject to 
regulation before (rather than broker-dealers switching their business 
models to become funding portals) and, therefore, may not have formal 
recordkeeping practices in place, the recordkeeping requirements for 
funding portals are relatively streamlined compared to those for 
broker-dealers. Funding portals are intended to be subject to less 
regulation than broker-dealers, and recordkeeping requirements adopted 
in the final rules are consistent with this intent.
    Finally, as described above, we are not adopting the proposed 
requirement that a funding portal comply with the BSA.\1125\ 
Nevertheless, we are revising the final recordkeeping rule to require a 
funding portal to maintain books and records related to BSA 
requirements, should funding portals become subject to the requirements 
of the BSA.\1126\
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    \1125\ See Section II.D.4.b.
    \1126\ 15 U.S.C. 5311 et seq. To the extent that funding portals 
become subject to the requirements of the BSA and are required to 
comply with BSA recordkeeping requirements, we believe that this 
recordkeeping requirement will be valuable to our regulatory 
oversight function of funding portals' compliance with such BSA 
requirements. See generally Recordkeeping by Brokers and Dealers, 
Release No. 34-18321 (Dec. 10, 1981) [46 FR 61454 (Dec. 17, 1981)] 
(noting the effectiveness of on-site examinations of broker-dealers 
by the Commission and SROs in enforcing compliance with reporting 
and recordkeeping requirements when adopting Exchange Act Rule 17a-
8). Rule 17a-8 (17 CFR 240.17a-8) requires broker-dealers to comply 
with the reporting, recordkeeping and record retention rules adopted 
under the BSA.
---------------------------------------------------------------------------

    Commission staff expects to review the books and records practices 
of intermediaries during the study of the federal crowdfunding 
exemption that it plans to undertake no later than three years 
following the effective date of Regulation Crowdfunding.\1127\
---------------------------------------------------------------------------

    \1127\ See Section II.
---------------------------------------------------------------------------

E. Miscellaneous Provisions

1. Insignificant Deviations From Regulation Crowdfunding
a. Proposed Rules
    We proposed Rule 502 of Regulation Crowdfunding to provide issuers 
a safe harbor for insignificant deviations from a term, condition or 
requirement of Regulation Crowdfunding. As proposed in Rule 502(a), 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; 
and (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. As proposed in Rule 502(b), notwithstanding this safe harbor, 
any failure to comply with Regulation Crowdfunding would nonetheless be 
actionable by the Commission.
b. Comments on the Proposed Rules
    Commenters were generally in favor of the proposed safe 
harbor.\1128\ However, some commenters representing state securities 
regulators suggested that the safe harbor is unnecessary, would be 
detrimental to state enforcement efforts and would be a burden on 
regulators when issuers assert the safe harbor, whether or not they 
were operating in good faith.\1129\ These commenters also recommended 
that the proposed safe harbor, if adopted, should not be a defense to 
an enforcement action by the states.\1130\
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    \1128\ See, e.g., Arctic Island Letter 7; CFIRA Letter 1; 
Heritage Letter; Joinvestor Letter; Parsont Letter; Schwartz Letter.
    \1129\ See Commonwealth of Massachusetts Letter; NASAA Letter.
    \1130\ Id.
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c. Final Rules
    We are adopting the Rule 502(a) safe harbor as proposed.\1131\ The 
first two prongs of the safe harbor provision in Rule 502(a) are 
modeled after a similar provision in Rule 508 of Regulation D,\1132\ 
and we believe a similar safe harbor is appropriate for offerings made 
in reliance on Section 4(a)(6). We believe that provisions for 
insignificant deviations serve an important function by allowing for 
certain errors that can occur in the offering process without causing 
the issuer to lose the exemption and incur certain consequences, 
including potential private rights of action for rescission for 
violations of Section 5 of the Securities Act,\1133\ and loss of 
preemption for state securities law registration requirements. The 
offering exemption in Section 4(a)(6) was designed to help alleviate 
the funding gap and the accompanying regulatory challenges faced by 
startups and small businesses, many of which may not be familiar with 
the federal securities laws. We continue to believe that issuers should 
not lose the Section 4(a)(6) exemption because of insignificant 
deviations from a term,

[[Page 71475]]

condition or requirement of Regulation Crowdfunding, so long as the 
issuer, in good faith, attempted to comply with the rules. We note that 
whether a deviation from the requirements would be significant to the 
offering as a whole will depend on the facts and circumstances of the 
offering and the deviation. While such determinations will be based on 
the particular facts and circumstances, we believe that a deviation 
from certain fundamental requirements in the rules, such as a failure 
to adhere to the aggregate offering limit under Rule 100(a)(1), 
presumptively would not be an insignificant deviation that would allow 
reliance on this safe harbor.
---------------------------------------------------------------------------

    \1131\ See Rule 502 of Regulation Crowdfunding.
    \1132\ 17 CFR 230.508.
    \1133\ See Securities Act Section 12(a)
---------------------------------------------------------------------------

    We are adopting the third prong of the safe harbor in Rule 502(a) 
because, under the statute, an issuer could lose the exemption and 
potentially violate Section 5 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 a 
failure by the intermediary, which likely will 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 that issuers may be hesitant to participate in 
offerings in reliance on Section 4(a)(6) due to uncertainty about their 
ability to rely on, and to control their ongoing eligibility for, the 
exemption, which could undermine the facilitation of capital raising 
for startups and small businesses.
    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. We also believe the safe harbor appropriately 
protects an issuer who made a diligent attempt to comply with the rules 
from losing the exemption as a result of insignificant deviations from 
Regulation Crowdfunding.
    We also are adopting Rule 502(b) largely as proposed to set forth 
clearly that the safe harbor for insignificant deviations in Rule 
502(a) does not preclude the Commission from bringing an enforcement 
action seeking appropriate relief for an issuer's failure to comply 
with all applicable terms, conditions, and requirements of Regulation 
Crowdfunding. Despite the suggestion of two commenters,\1134\ we are 
not extending Rule 502(b) to enforcement actions by the states. While 
we recognize the concerns of certain state securities regulators that 
the safe harbor could be detrimental to state enforcement efforts, we 
believe that a state's review as to whether there is an insignificant 
deviation from our rules would create undue uncertainty for issuers 
seeking to rely on the Section 4(a)(6) exemption.\1135\ We note that, 
irrespective of the scope of the safe harbor, states retain antifraud 
authority in all cases.
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    \1134\ See Commonwealth of Massachusetts Letter; NASAA Letter.
    \1135\ Securities Act Section 18(b)(4)(C), as amended by the 
JOBS Act, preempts state securities laws' registration and 
qualification requirements for offerings made pursuant to Section 
4(a)(6). 15 U.S.C. 77r(b)(4)(C).
---------------------------------------------------------------------------

2. Restrictions on Resales
a. Proposed Rules
    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).
    Proposed Rule 501 largely tracked the provisions of Section 4A(e). 
We also proposed definitions of ``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 
in Rule 501 of Regulation D.\1136\
---------------------------------------------------------------------------

    \1136\ 17 CFR 230.501(a).
---------------------------------------------------------------------------

    The statute does not define ``member of the family of the purchaser 
or the equivalent.'' We proposed to define the phrase to include 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),\1137\ but with the addition of ``spousal equivalent.''
---------------------------------------------------------------------------

    \1137\ 17 CFR 240.16a-1(e).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Two commenters supported the proposed restrictions on 
resales,\1138\ while several other commenters opposed any resale 
restrictions.\1139\ Two commenters expressed support for the proposal 
that to sell securities purchased in a transaction made in reliance on 
Section 4(a)(6) to an accredited investor during the restricted period, 
the seller of such securities would need to have a reasonable belief 
that the purchaser is an accredited investor.\1140\
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    \1138\ See Arctic Island Letter 7; Joinvestor Letter.
    \1139\ See, e.g., Amram Letter 2 (stating resale restrictions 
prevent trading liquidity and impede price discovery); Crowdstockz 
Letter; Hamman Letter; Kickstarter Coaching Letter; Public Startup 
Letter 2 (recommending a six-month holding period so long as the 
issuer is current in its filing requirements, except that purchasers 
who self-certify that they are low-income investors would not be 
subject to a holding period); Public Startup Letter 3 (also opposing 
accredited investors having an advantage over other buyers).
    \1140\ See Joinvestor Letter; Public Startup Letter 3.
---------------------------------------------------------------------------

    One commenter noted that the investors who are eligible to purchase 
securities from the initial purchasers in the first year would be able 
to circumvent the investment limits of the proposed rules by purchasing 
securities from the initial purchasers in an amount greater than they 
would be able to purchase through intermediaries.\1141\ Another 
commenter noted that the restrictions on resale appear only to cover 
the sale by the initial purchaser, thus creating the possibility that 
securities of a particular issuer could become widely traded within the 
first year if the initial purchaser sells the securities to an eligible 
purchaser who then resells them to the public within the first 
year.\1142\
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    \1141\ See Moskowitz Letter.
    \1142\ CrowdCheck Letter 3 (recommending several alternatives: 
(1) Designate the securities as ``restricted'' within the meaning of 
Rule 144; (2) mirror some or all of the issuer's resale 
restrictions; (3) impose a one-year obligation on the issuer not to 
register the transfer of securities by any person, except in the 
four permitted types of transfers; or (4) remove the words ``by the 
purchaser'' from the first sentence of proposed Rule 501(a)).
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c. Final Rules
    We are adopting the restrictions on resales in Rule 501 as 
proposed, with certain revisions as described below.\1143\ We are 
concerned that, as noted by several commenters, the restrictions on 
resales would cover only the sale by the initial purchaser, which 
creates the possibility that securities of a particular issuer could 
become widely traded within the first year if the initial purchaser 
sells the securities to an eligible purchaser who subsequently resells 
them to the public within the

[[Page 71476]]

first year. Further, the proposed rule could allow, as one commenter 
noted,\1144\ investors to circumvent the investment limits in the first 
year by purchasing securities from the initial purchasers. In response 
to these concerns, we have modified Rule 501 from the proposal so that 
the one-year resale restriction will apply to any purchaser during the 
one-year period beginning when the securities were first issued, not 
just the initial purchaser. In addition, we have modified the 
definition to track more closely the language in Securities Act Rule 
501(a) to clarify that the person reselling the securities must have a 
reasonable belief that the purchaser qualifies as an accredited 
investor.
---------------------------------------------------------------------------

    \1143\ See Rule 501 of Regulation Crowdfunding.
    \1144\ See Moskowitz Letter.
---------------------------------------------------------------------------

    As adopted, the rule provides that securities issued in a 
transaction pursuant to Section 4(a)(6) may not be transferred by any 
purchaser of such securities during that one-year period unless such 
securities are 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 member of the family of the purchaser or the 
equivalent, to a trust controlled by the purchaser, to a trust created 
for the benefit of a member of the family of the purchaser or the 
equivalent, or in connection with the death or divorce of the purchaser 
or other similar circumstance. We recognize that several commenters 
expressed concerns about the exception for resales to accredited 
investors and the potential unfair advantage this could provide to such 
investors. While we appreciate these concerns, we note that this 
treatment will provide some measure of liquidity for holders of these 
securities within the first year of the offering without undermining 
the investor protections otherwise provided by the statute and our 
rules.
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. 
We proposed 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. As we stated in the 
Proposing Release, we believe this approach will satisfy the statutory 
requirement to make the information available to each state and 
territory of the United States, and the District of Columbia. 
Commenters who addressed this issue agreed with our proposed 
approach,\1145\ and we are adopting this provision as proposed.
---------------------------------------------------------------------------

    \1145\ See, e.g., CFIRA Letter 9; Public Startup Letter 3.
---------------------------------------------------------------------------

4. Exemption From Section 12(g)
a. Proposed Rule
    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.\1146\ 
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 triggering reporting 
obligations under Section 12(g). As discussed in the Proposing Release, 
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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    \1146\ 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.
---------------------------------------------------------------------------

    Consistent with the statute, the Commission's proposed Rule 12g-6 
would provide 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).
b. Comments on the Proposed Rules
    Commenters generally supported the permanent exemption from the 
record holder count under Section 12(g).\1147\ One commenter 
recommended that the exemption from the record holder count under 
Section 12(g) apply 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.\1148\ A few commenters recommended conditioning the 
exemption from the record holder count under Section 12(g) on the 
issuer's asset value,\1149\ while a few others opposed such 
concept.\1150\ Another commenter recommended that issuers that fail to 
comply with Regulation Crowdfunding's ongoing reporting requirements be 
disqualified from relying on the exemption from the record holder count 
under Section 12(g),\1151\ while two commenters opposed such 
concept.\1152\
---------------------------------------------------------------------------

    \1147\ See, e.g., ABA Letter; Arctic Island Letter 7; Craw 
Letter; Heritage Letter; Joinvestor Letter; PeoplePowerFund Letter; 
Public Startup Letter 3; Wefunder Letter.
    \1148\ See Arctic Island Letter 7. See also ABA Letter 
(recommending that the Commission, at a minimum, exempt from the 
Section 12(g) record holder count securities issued in a statutory 
merger to change the domicile of the issuer, in reliance on 
Securities Act Rule 145(a)(2)).
    \1149\ See, e.g., ABA Letter ($25 million); PeoplePowerFund 
Letter.
    \1150\ See, e.g., Arctic Island Letter 7; Public Startup Letter 
3.
    \1151\ See Joinvestor Letter.
    \1152\ See Arctic Island Letter 7; Public Startup Letter 3.
---------------------------------------------------------------------------

c. Final Rules
    In response to comments received, we are adopting Rule 12g-6 with 
certain modifications.\1153\ The rule provides that securities issued 
pursuant to an offering made under Section 4(a)(6) are exempted from 
the record holder count under Section 12(g), provided that the issuer 
is current in its ongoing annual reports required pursuant to Rule 202 
of Regulation Crowdfunding, has total assets as of the end of its last 
fiscal year not in excess of $25 million, and has engaged the services 
of a transfer agent

[[Page 71477]]

registered with the Commission pursuant to Section 17A of the Exchange 
Act.\1154\
---------------------------------------------------------------------------

    \1153\ 17 CFR 240.12g-6.
    \1154\ Id.
---------------------------------------------------------------------------

    An issuer that exceeds the $25 million total asset threshold, in 
addition to exceeding the thresholds in Section 12(g), will be granted 
a two-year transition period before it will be required to register its 
class of securities pursuant to Section 12(g), provided it timely files 
all its ongoing reports pursuant to Rule 202 of Regulation Crowdfunding 
during such period.\1155\ Section 12(g) registration will be required 
only if, on the last day of the fiscal year the company has total 
assets in excess of the $25 million total asset threshold, the class of 
equity securities is held by more than 2,000 persons or 500 persons who 
are not accredited investors.\1156\ In such circumstances, an issuer 
that exceeds the thresholds in Section 12(g) and has total assets of 
$25 million or more will be required to begin reporting under the 
Exchange Act the fiscal year immediately following the end of the two-
year transition period.\1157\ An issuer entering Exchange Act reporting 
will be considered an ``emerging growth company'' to the extent the 
issuer otherwise qualifies for such status.\1158\
---------------------------------------------------------------------------

    \1155\ Id.
    \1156\ 15 U.S.C. 78l(g).
    \1157\ 17 CFR 240.12g-6.
    \1158\ Under Section 2(a)(19) of the Securities Act, an 
``emerging growth company'' is defined as, among other things, an 
issuer that had total annual gross revenues of less than $1 billion 
during its most recently completed fiscal year. 15 U.S.C. 
77b(a)(19). See also Section 3(a)(80) of the Exchange Act (which 
repeats the same definition). 15 U.S.C. 78c(a)(80).
---------------------------------------------------------------------------

    An issuer seeking to exclude a person from the record holder count 
has the responsibility for demonstrating that the securities held by 
the person were initially issued in an offering made under Section 
4(a)(6). As noted in the proposal, 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.\1159\ 
In this regard, we note that Title III provides for an alternative 
reporting system under which issuers using the crowdfunding exemption 
are required to file annual reports with the Commission.\1160\ We 
believe that conditionally exempting securities issued in reliance on 
Section 4(a)(6) from the record holder count under Section 12(g), and 
thereby from the more extensive reporting obligations under the 
Exchange Act, is appropriate in light of the existence of the 
alternative ongoing reporting requirements that are tailored to the 
types of issuers and offerings we anticipate under Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    \1159\ 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.'').
    \1160\ See Section II.B.2 for a discussion of the requirement to 
file annual reports.
---------------------------------------------------------------------------

    In determining to provide a conditional exemption from the 
provisions of Section 12(g), we have considered a number of factors. 
First, we believe that conditioning the exemption on the issuer being 
current in its ongoing reporting requirements is consistent with the 
intent behind the original enactment of Section 12(g) because this 
condition requires that relevant, current information about issuers 
will be made routinely available to investors and the 
marketplace.\1161\ Second, we believe that conditioning the 12(g) 
exemption on crowdfunding issuers using a registered transfer agent 
will provide an important investor protection in this context. As 
discussed in Section II.C.3 above, regarding the need for an issuer to 
establish means to keep accurate records of its securities holders, we 
received a number of comments about the benefits of using a registered 
transfer agent. As noted above, we are not mandating the use of a 
transfer agent for all crowdfunding offerings, for both flexibility and 
cost reasons. However, we believe that requiring the use of a transfer 
agent is appropriate for those issuers that are seeking to have their 
crowdfunding securities exempted from the record holder count under 
Section 12(g). We expect that issuers at a stage at which they are 
seeking to rely on the Section 12(g) exemption are likely to be larger 
and thus better able to incur the costs of a transfer agent. In the 
absence of a conditional exemption from the provisions of Section 
12(g), the use of a transfer agent registered under the Exchange Act 
would be required of issuers when they register under the Exchange 
Act.\1162\ We note that a registered transfer agent is a regulated 
entity with experience in maintaining accurate shareholder records, and 
its use will help to ensure that security holder records and secondary 
trades will be handled accurately. Third, we believe that the condition 
of total assets not exceeding $25 million will result in phasing out 
the Section 12(g) exemption once companies grow and expand their 
shareholder base and is consistent with the intent behind Title III of 
the JOBS Act, which was enacted to facilitate smaller company capital 
formation.
---------------------------------------------------------------------------

    \1161\ Section 12(g) was enacted by Congress as a way to ensure 
that investors in over-the-counter securities about which there was 
little or no information, but which had a significant shareholder 
base, were provided with ongoing information about their investment. 
See, generally, Report of the Special Study of Securities Markets of 
the Securities and Exchange Commission. House Document No. 95, House 
Committee on Interstate and Foreign Commerce, 88th Cong., 1st Sess. 
(1963), at 60-62.
    \1162\ Section 3(a)(25) of the Exchange Act provides that a 
``transfer agent'' is any person who engages on behalf of an issuer 
of securities or on behalf of itself as an issuer of securities in: 
(A) Countersigning such securities upon issuance; (B) monitoring the 
issuance of such securities with a view to preventing unauthorized 
issuance (i.e., a registrar); (C) registering the transfer of such 
securities; (D) exchanging or converting such securities; or (E) 
transferring record ownership of securities by bookkeeping entry 
without the physical issuance of securities certificates. 15 U.S.C. 
78c(a)(25). Section 17A(c)(1) of the Exchange Act generally requires 
any person performing any of these functions with respect to any 
security registered pursuant to Section 12 of the Exchange Act to 
register with the Commission or other appropriate regulatory agency. 
15 U.S.C. 78q-1(c)(1).
---------------------------------------------------------------------------

    Rule 12g-6 does not extend the exclusion from the Section 12(g) 
record holder count to different securities issued in exchange for 
Section 4(a)(6)-issued securities in a subsequent restructuring, 
recapitalization or similar transaction. While some commenters 
requested such an extension in instances where the parties to the 
transaction are affiliates of the original issuer, or in certain 
restructuring transactions, we do not believe that such an expansion in 
the context of shares initially issued using Regulation Crowdfunding 
would be appropriate because certain restructuring and recapitalization 
transactions could change the pool of holders of the securities beyond 
those who initially acquired the securities in a crowdfunding 
transaction, denying those holders the protections of Section 12(g) 
registration.
5. Scope of Statutory Liability
    Securities Act Section 4A(c) provides that an issuer will be liable 
to a purchaser of its securities in a 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

[[Page 71478]]

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.''
    In describing the statutory liability provision in the Proposing 
Release, the Commission noted that it appears likely that 
intermediaries would be considered issuers for purposes of the 
provision. Several commenters agreed that Section 4A(c) liability 
should apply to intermediaries noting that it ``may serve as a 
meaningful backstop against fraud'' \1163\ and would create a ``true 
financial incentive'' for intermediaries to conduct checks on issuers 
and their key personnel.\1164\
---------------------------------------------------------------------------

    \1163\ See, e.g., Farnkoff Letter.
    \1164\ See, e.g., BackTrack Letter. See also Patel Letter.
---------------------------------------------------------------------------

    However, a large number of other commenters disagreed that Section 
4A(c) liability should apply to intermediaries.\1165\ Some of these 
commenters stated their views that applying statutory liability to 
intermediaries would have a chilling effect on intermediaries' 
willingness to facilitate crowdfunding offerings.\1166\ Others cited 
the cost of being subject to this liability as overly burdensome on 
funding portals, to the extent that they may not be able to conduct 
business.\1167\ Several commenters also explained that the nature of 
funding portals, as intended by Congress, is distinct from that of 
registered broker-dealers.\1168\ According to these commenters, a 
funding portal's role is not to offer and sell securities, but rather 
to provide a platform through which issuers may offer and sell 
securities. As such, these commenters asserted that it would not be 
appropriate to hold them liable for statements made by issuers.\1169\ 
In addition, one commenter suggested that applying statutory liability 
to funding portals, while precluding their ability to limit the 
offerings that they facilitate, is an ``untenable'' framework.\1170\ 
Some commenters stated that the statutory construct could unnecessarily 
lead to lawsuits against funding portals,\1171\ with one of these 
commenters asserting that such suits would arise ``for any deal that 
loses money'' because the burden of proof is on the funding portal to 
prove it could not have known of material misstatements.'' \1172\ One 
commenter stated that risk disclosures should require an explanation to 
investors that lawsuits by investors are only potentially viable if 
based on claims sounding in fraud or negligence and that ``lawsuits 
cannot be filed just because the retail investor loses their risk 
capital.'' \1173\
---------------------------------------------------------------------------

    \1165\ See, e.g., ABA Letter; AngelList Letter; BetterInvesting 
Letter; CFIRA Letter 10; City First Letter; EarlyShares Letter; EMKF 
Letter; FSI Letter; Graves Letter; Guzik Letter 1; IAC 
Recommendation; Inkshares Letter; Milken Institute Letter; PPA 
Letter; RocketHub Letter; SBA Office of Advocacy Letter; SBEC 
Letter; SeedInvest Letter 3; Seyfarth Letter; StartupValley Letter; 
Wefunder Letter; Winters Letter.
    \1166\ See, e.g., Guzik Letter 1; Inkshares Letter; RocketHub 
Letter; StartupValley Letter.
    \1167\ See, e.g., City First Letter; Guzik Letter 1; SeedInvest 
Letter 3; Wefunder Letter; Winters Letter.
    \1168\ See, e.g., Inkshares Letter (likening funding portals to 
``impartial engineers of transactions'' similar to online service 
providers under the Digital Millennium Copyright Act, that exist 
``for the transmission of information, and with it securities, 
between third parties''); RocketHub Letter; SeedInvest Letter 3; 
Seyfarth Letter.
    \1169\ Id.
    \1170\ AngelList Letter. See also, e.g., Graves Letter (stating 
that ``to achieve the appropriate balance of creating a usable 
crowdfunding model for small businesses while providing adequate 
protections for investors, the Commission should remove the 
liability placed on funding portals in the proposed rules or permit 
them to curate offerings. . . . Otherwise it is highly improbable 
that any rational business would establish a web portal in a heads-
you-win, tails-I-lose environment''); Milken Institute Letter 
(noting also that funding portals should be permitted to make 
subjective judgments in deciding which offerings to list, including 
based on an assessment of the merits or shortcomings of an 
offering); Wefunder Letter. See also Section II.D.3.a (discussing 
Rule 402(b)(1)).
    \1171\ See, e.g., Inkshares Letter; SeedInvest Letter3.
    \1172\ See SeedInvest Letter 3.
    \1173\ See CarbonTech Letter.
---------------------------------------------------------------------------

    One commenter suggested that the Commission retract its statement 
in the Proposing Release that ``it appears likely that intermediaries, 
including funding portals, would be considered issuers for purposes of 
this liability provision.'' \1174\ Other commenters suggested that the 
Commission should take action, such as: (i) Exempting funding portals 
from liability, provided conditions are met such as compliance with 
Regulation Crowdfunding \1175\ or disclosure of the specific steps the 
funding portal has taken in its due diligence; \1176\ (ii) providing a 
safe harbor for activities funding portals can undertake in posting 
issuer materials on their platforms,\1177\ and (iii) providing a list 
of reasonable steps funding portals can take in reviewing an offering 
in order to rely on the reasonable care defense.\1178\
---------------------------------------------------------------------------

    \1174\ See SeedInvest Letter 3.
    \1175\ CFIRA Letter 10; SeedInvest Letter 3 (stating also that 
directors and officers of funding portals should be excluded from 
the definition of ``issuer'' for purposes of the statutory 
provision); StartupValley Letter.
    \1176\ EarlyShares Letter.
    \1177\ CFIRA Letter 10; StartupValley Letter.
    \1178\ CFIRA Letter 10; Milken Institute Letter (stating that 
funding portals ``should not be required to `look behind' every 
material statement in an offering, but rather should be held to a 
standard of satisfying the statute's and proposed rule's steps for 
ensuring that an offering does not invoke concerns of fraud or 
investor protection''); StartupValley Letter.
---------------------------------------------------------------------------

    We have considered the comments both in support of and against 
funding portals being considered issuers for purposes of Section 4A(c) 
liability. Specifically, we acknowledge commenters' concerns that 
statutory liability may adversely affect funding portals, and 
suggestions that, under the statutory scheme, funding portals and 
broker-dealers engage in different activities that do not warrant a 
funding portal being subject to statutory liability. One difference 
commenters highlighted was the inability of a funding portal to limit 
the offerings on its platform under the proposed rules, and the 
untenable position of imposing statutory liability while precluding 
funding portals' ability to limit the offerings on their platforms. In 
response to this comment, as described above, we have modified the 
language of the Rule 402 safe harbor from the proposal to permit 
funding portals to exercise discretion to limit the offerings and 
issuers that they allow on their platforms.\1179\ We believe this will 
avoid the ``untenable'' framework that commenters described. We are 
specifically declining to exempt funding portals (or any 
intermediaries) from the statutory liability provision of Section 4A(c) 
or to interpret this provision as categorically excluding such 
intermediaries. We do not believe that we should preclude the ability 
of investors to bring private rights of action against funding portals 
(or any intermediaries). Such a categorical exemption or exclusion 
could pose undue risks to investors by providing insufficient 
incentives for intermediaries to take steps to prevent their platforms 
from becoming vehicles for fraud.
---------------------------------------------------------------------------

    \1179\ See Rule 402(b)(1); Section II.D.3.a.
---------------------------------------------------------------------------

    Accordingly, we believe that the determination of ``issuer'' 
liability for an intermediary under Section 4A(c) will turn on the 
facts and circumstances of the particular matter in question. While we 
acknowledge the concerns of commenters about the potential application 
of Section 4A(c) liability, we note that Congress provided a defense to 
any such liability if an intermediary did not know, and in the exercise 
of reasonable care could not have known, of the untruth or omission. We 
continue to believe, as we identified in the Proposing Release, that 
there are appropriate steps that intermediaries might take in 
exercising reasonable care in light of this liability provision. These 
steps may include establishing policies

[[Page 71479]]

and procedures \1180\ that are reasonably designed to achieve 
compliance with the requirements of Regulation Crowdfunding, and 
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.
---------------------------------------------------------------------------

    \1180\ With respect to intermediaries that are funding portals, 
see Rule 403(a) of Regulation Crowdfunding and the discussion in 
Section II.D.4.
---------------------------------------------------------------------------

6. Disqualification Provisions
    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 
``bad actor'' disqualification provisions contained in Rule 262 of 
Regulation A \1181\ and they also must cover certain actions by state 
regulators enumerated in Section 302(d)(2).
---------------------------------------------------------------------------

    \1181\ 17 CFR 230.262.
---------------------------------------------------------------------------

    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 also required the Commission 
to adopt rules ``substantially similar'' to Rule 262 of Regulation A 
that disqualify securities offerings involving certain ``felons and 
other `bad actors' '' from reliance on Rule 506 of Regulation D. 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.\1182\ On March 25, 2015, we adopted 
amendments to Rule 262 of Regulation A \1183\ that made those 
provisions substantially similar to those adopted under Rule 506 of 
Regulation D.
---------------------------------------------------------------------------

    \1182\ 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'').
    \1183\ See Rule 506(c) Adopting Release, supra, note 5.
---------------------------------------------------------------------------

a. Issuers and Certain Other Associated Persons
(1) Proposed Rules
    As described in more detail below, the proposed disqualification 
rules as they relate to issuers and certain other associated persons 
would have been substantially similar to the disqualification rules in 
Rules 262 and 506. Under those rules, disqualification arises only with 
respect to events occurring after effectiveness of the rules and 
disqualified persons may seek a waiver from the Commission from 
application of the disqualification provisions.
(2) Comments on Proposed Rules
    Commenters were generally supportive of the proposed 
disqualification rules.\1184\ A few commenters recommended that pre-
existing events should be subject to the disqualification rules,\1185\ 
although another supported the proposed approach of imposing 
disqualification only for events after effectiveness.\1186\ One 
commenter recommended that the Commission expand the list of covered 
persons to include transfer agents and lawyers who are subject to 
certain disqualifications.\1187\
---------------------------------------------------------------------------

    \1184\ See, e.g., ABA Letter (expressing general support and 
recommending the Commission provide guidance on the term ``voting 
securities'' and regarding the waiver process); Commonwealth of 
Massachusetts Letter; Consumer Federation Letter (expressing an 
understanding of why the proposed disqualification rules are 
consistent with those under Regulation D, but noting their belief 
that those rules were weak when adopted); FundHub Letter 1 (stating 
that the proposed disqualification rules ``are, to a certain degree, 
overkill'' and too costly, but that disqualifying bad actors is good 
for the future of equity crowdfunding); Joinvestor (supporting the 
proposed look-back periods and waiver rules). But see Public Startup 
Letter 3 (stating the proposed rules are unconstitutional without 
explaining its reasoning); Public Startup Letter 5 (recommending the 
Commission establish an ``offender registry'' that requires issuers 
to maintain a ``public profile'' containing information about 
potential issuers in a standardized format, similar to FINRA's 
BrokerCheck).
    \1185\ See, e.g., Guzik Letter 1; NASAA Letter.
    \1186\ See Joinvestor Letter.
    \1187\ See Brown J. Letter (also recommending the Commission 
adopt similar bad actor provisions under Rule 504).
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting bad actor disqualification provisions for 
Regulation Crowdfunding \1188\ substantially as proposed with the 
exception of several modifications to further align the final rules 
with similar provisions in Rules 262 and 506. We believe that the final 
rules are appropriate in light of the JOBS Act Section 302(d) mandate. 
We further believe that creating a uniform set of bad actor standards 
for all exemptions that include bad actor disqualification is likely to 
simplify due diligence, particularly for issuers that may engage in 
different types of exempt offerings.
---------------------------------------------------------------------------

    \1188\ See Rule 503 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Under the final disqualification rules, covered persons include the 
issuer and any predecessor of the issuer or affiliated issuer; 
directors, officers, general partners or managing members of the 
issuer; beneficial owners of 20% or more of the issuer's outstanding 
voting equity securities (which we believe should be calculated based 
on the present right to vote for the election of directors, 
irrespective of the existence of control or significant influence); any 
promoter connected with the issuer in any capacity at the time of such 
sale; compensated solicitors of investors; and general partners, 
directors, officers or managing members of any such solicitor.\1189\ We 
have not expanded the list of covered persons, as suggested by a 
commenter, because we believe that the limited additional investor 
protection that such an expansion may provide would not justify the 
costs that would result from inconsistent bad actor disqualification 
rules.
---------------------------------------------------------------------------

    \1189\ See Rule 503(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The disqualifying events include:
     Felony and misdemeanor convictions within the last five 
years in the case of issuers, their predecessors and affiliated 
issuers, and 10 years in the case of other covered persons in 
connection with the purchase or sale of a security, involving the 
making of a false filing with the Commission; or arising out of the 
conduct of the business of an underwriter, broker, dealer, municipal 
securities dealer, investment adviser, funding portal or paid solicitor 
of purchasers of securities; \1190\
---------------------------------------------------------------------------

    \1190\ See Rule 503(a)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     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; involving the making of any 
false filing with the Commission; or arising out of the conduct of the 
business of an underwriter, broker, dealer, municipal securities 
dealer, investment adviser, funding portal or paid solicitor of 
purchasers of securities; \1191\
---------------------------------------------------------------------------

    \1191\ See Rule 503(a)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     certain final orders and bars of certain state and other 
federal regulators; \1192\
---------------------------------------------------------------------------

    \1192\ See Rule 503(a)(3) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     Commission cease-and-desist orders relating to violations 
of scienter-based anti-fraud provisions of the federal securities laws 
or Section 5 of the Securities Act; \1193\
---------------------------------------------------------------------------

    \1193\ See Rule 503(a)(5) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     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 or

[[Page 71480]]

suspension should be issued, or as to which a stop order or suspension 
was issued within the last five years; \1194\
---------------------------------------------------------------------------

    \1194\ See Rule 503(a)(7) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     United States Postal Service false representation orders 
within the last five years; \1195\ and
---------------------------------------------------------------------------

    \1195\ See Rule 503(a)(8) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     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, investment adviser or funding 
portal;
    [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; \1196\ or
---------------------------------------------------------------------------

    \1196\ See Rule 503(a)(4) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    [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.\1197\
---------------------------------------------------------------------------

    \1197\ See Rule 503(a)(6) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Consistent with Rules 262 and 506 and the proposal, we also are 
adopting provisions allowing for a waiver from and a reasonable care 
exception to the disqualification provisions.\1198\ Under the final 
rules, an issuer will not lose the benefit of the Section 4(a)(6) 
exemption if it is able to show that it did not know, and in the 
exercise of reasonable care could not have known, of the existence of a 
disqualification.\1199\ Further, persons that are disqualified from 
relying on the exemption may request a waiver of disqualification from 
the Commission.\1200\
---------------------------------------------------------------------------

    \1198\ See Rule 503(b) of Regulation Crowdfunding.
    \1199\ See Rule 503(b)(4) of Regulation Crowdfunding.
    \1200\ See Rule 503(b)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The final rules also specify that triggering events that pre-date 
effectiveness of the final rules will not cause disqualification, but 
instead must be disclosed on a basis consistent with Rules 262 and 
506(e).\1201\ Specifically, issuers will be required to disclose in 
their offering materials matters that would have triggered 
disqualification had they occurred after the effective date of proposed 
Regulation Crowdfunding.\1202\ In a change from the proposal, Rule 
201(u) does not include the word ``timely'' as is included in Rule 
506(e) of Regulation D, because unlike the disclosure associated with 
Rule 506(e), the disclosure required by Rule 201(u) must be included in 
an issuer's offering statement and thus is required to be timely to the 
offering.
---------------------------------------------------------------------------

    \1201\ See Rules 201(u) and 503(b)(1) of Regulation 
Crowdfunding.
    \1202\ See Rule 201(u) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe this disclosure will put investors on notice of events 
that would, but for the timing of such events, have disqualified the 
issuer from relying on Section 4(a)(6). 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 are disqualified from participating in offerings 
under Section 4(a)(6). If disclosure of a pre-existing, otherwise 
disqualifying event is required and not provided to an investor, we 
would not view this as an insignificant deviation from Regulation 
Crowdfunding under Rule 502.
    Consistent with the proposal and with Rule 506, the final 
disqualification rules provide that events relating to certain 
affiliated issuers are not disqualifying if the events pre-date the 
affiliate relationship. Specifically, Rule 503(c) provides that events 
relating to any affiliated issuer that occurred before the affiliation 
arose will be not considered disqualifying if the affiliated entity is 
not (1) in control of the issuer or (2) under common control with the 
issuer by a third party that was in control of the affiliated entity at 
the time of such events.\1203\
---------------------------------------------------------------------------

    \1203\ See Rule 503(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We also have modified the final rules to expressly include funding 
portals in the list of entities that could be subject to felony and 
misdemeanor convictions, injunctions and court orders that would 
constitute disqualifying events.\1204\ As proposed, funding portals 
would have been included because they meet the definition of broker; 
however, for clarity, the final rule expressly includes them.
---------------------------------------------------------------------------

    \1204\ See Rules 503(a)(1)(iii) and 503(a)(2)(iii) of Regulation 
Crowdfunding. Because funding portals are brokers within the meaning 
of Exchange Act Section (3)(a)(4) (albeit exempt from registration 
as such), we believe that they would be covered by the term 
``broker'' in the final rule. Nevertheless, for clarity, we are 
adding funding portals to the final rule text to avoid any confusion 
in this regard.
---------------------------------------------------------------------------

b. Intermediaries and Certain Other Associated Persons
(1) Proposed Rules
    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 be substantially similar to the provisions 
of Securities Act Rule 262, which applies to issuers. Exchange Act 
Section 3(a)(39) \1205\ 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.\1206\
---------------------------------------------------------------------------

    \1205\ 15 U.S.C. 78c(39).
    \1206\ See the Proposing Release at note 812 for a discussion of 
differences between Exchange Act Section 3(a)(39) and Rule 262. 
Despite the 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.
---------------------------------------------------------------------------

    As proposed, Rule 503(d) would have prohibited 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. The 
term ``subject to a statutory disqualification'' has an established 
meaning under Exchange Act Section 3(a)(39) and defines circumstances 
that subject a person to a statutory disqualification with respect to 
membership or participation in, or association with a member of, a 
self-regulatory organization.\1207\ Because funding portals, like 
broker-dealers, are required to be members of FINRA or any other 
applicable registered national securities association, we anticipate 
that funding portals will take appropriate steps to check the 
background of any person seeking to become associated with them, 
including whether such

[[Page 71481]]

person is subject to a statutory disqualification.
---------------------------------------------------------------------------

    \1207\ 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).
---------------------------------------------------------------------------

    In addition, we proposed 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,\1208\ relating to the 
fingerprinting of securities industry personnel. Under the proposal, 
Exchange Act Rule 17f-2 would have applied to all brokers, including 
registered funding portals. The proposed instruction to Rule 503(d) 
would have clarified that Rule 17f-2 generally requires the 
fingerprinting of every person who is a partner, director, officer or 
employee of a broker, subject to certain exceptions.
---------------------------------------------------------------------------

    \1208\ 17 CFR 240.17f-2.
---------------------------------------------------------------------------

(2) Final Rules
    We are adopting Rule 503(d) as proposed. We received two comments 
on the proposed rule. One commenter was in favor,\1209\ while another 
commenter was opposed.\1210\ The Section 3(a)(39) standard is an 
established one among financial intermediaries and their regulators. 
For this reason, we believe the Section 3(a)(39) standard is more 
appropriate for intermediaries than Rule 262 or the issuer 
disqualification rules under Regulation Crowdfunding. We are concerned 
that if we imposed a new or different statutory disqualification 
standard only for those intermediaries that engage in transactions in 
reliance on Section 4(a)(6), we may create confusion and unnecessary 
burdens on market participants. We note that such a divergence in 
standards would cause brokers that act as intermediaries in reliance on 
Section 4(a)(6) (and their associated persons) to become subject to two 
distinct standards for disqualification. Instead, we believe that 
intermediaries should be subject to the same statutory disqualification 
standard regardless of whether or not they are engaging in transactions 
involving the offer or sale of securities in reliance on Section 
4(a)(6), and note that applying consistent standards for all brokers 
and funding portals will also assist FINRA or any other registered 
national securities association in its oversight of its members. 
Further, Exchange Act Rule 19h-1 prescribes the form and content of, 
and establishes the mechanism by which the Commission reviews, 
proposals submitted by SROs (such as FINRA) for its members, to allow a 
member or associated person subject to a statutory disqualification to 
become or remain a member or be associated with a member (``notice of 
admission or continuance notwithstanding a statutory 
disqualification,'' as described in Rule 19h-1(a)). Among other things, 
Rule 19h-1 provides for Commission review of notices filed by SROs 
proposing to admit any person to, or continue any person in, membership 
or association with a member notwithstanding a statutory 
disqualification as defined in Section 3(a)(39). Because intermediaries 
are required to be members of a registered national securities 
association (which is an SRO), actions taken by the SRO with respect to 
a proposed admission or continuance with respect to an intermediary or 
its associated persons will be subject to Rule 19h-1. Thus, the 
``pursuant to Commission rule'' provision in Rule 503(d) will be 
satisfied if the admission or continuance request was subject to the 
requirements and process of Exchange Act Rule 19h-1. We also are 
adopting, as proposed, the instruction to Rule 503(d) clarifying that 
the Rule 17f-2 fingerprinting requirements are applicable to all 
associated persons of intermediaries engaging in transactions in 
reliance on Section 4(a)(6).
---------------------------------------------------------------------------

    \1209\ See NASAA Letter.
    \1210\ See Public Startup Letter 3.
---------------------------------------------------------------------------

7. Secondary Market Trading
    In addition to the actions the Commission is taking today to permit 
the offer and sale of securities in reliance on Section 4(a)(6), the 
Commission also recently adopted rules that exempt from the 
registration requirements of the Securities Act certain offerings of up 
to $50 million of securities annually,\1211\ and rules to eliminate the 
prohibition against general solicitation in certain offerings pursuant 
to Regulation D under the Securities Act.\1212\ The Commission is 
mindful of the need for market participants to have updated information 
in connection with the secondary market trading of securities issued 
pursuant to these rules.\1213\
---------------------------------------------------------------------------

    \1211\ See Regulation A Adopting Release, supra, note 506.
    \1212\ See Rule 506(c) Adopting Release, supra, note 5.
    \1213\ As discussed in Section II.E.2, Rule 501 imposes a one-
year restriction on the transfer of securities issued in a 
transaction exempt from registration pursuant to Section 4(a)(6) of 
the Securities Act, other than to the issuer, an accredited 
investors, or to a family member of the purchaser or the equivalent 
in connection with certain specified events.
---------------------------------------------------------------------------

    The anti-fraud provisions of the federal securities laws, and rules 
adopted thereunder, apply to the secondary market trading of 
securities, including securities offered and sold in reliance on 
Section 4(a)(6). For example, Exchange Act Rule 15c2-11 governs broker-
dealers' publication of quotations for certain over-the-counter 
securities in a quotation medium other than a national securities 
exchange.\1214\ The Commission adopted Rule 15c2-11 to prevent 
fraudulent and manipulative trading schemes that had arisen in 
connection with the distribution and trading of certain unregistered 
securities.\1215\ The rule prohibits broker-dealers from publishing 
quotations (or submitting quotations for publication) in a ``quotation 
medium'' \1216\ for covered over-the-counter securities without first 
reviewing basic information about the issuer, subject to certain 
exceptions.\1217\ A broker-dealer also must have a reasonable basis for 
believing that the issuer information is accurate in all material 
respects and that it was obtained from a reliable source.\1218\
---------------------------------------------------------------------------

    \1214\ 17 CFR 240.15c2-11.
    \1215\ See generally Initiation or Resumption of Quotations by a 
Broker or Dealer Who Lacks Certain Information, Exchange Act Release 
No. 9310 (Sept. 13, 1971), 36 FR 18641 (Sept. 18, 1971). See also 
Publication or Submission of Quotations Without Specified 
Information, Exchange Act Release No. 39670 (Feb. 17, 1998), 63 FR 
9661, 9662 (Feb. 25, 1998).
    \1216\ 17 CFR 240.15c2-11(e)(1) (defining quotation medium as 
``any `interdealer quotation system' or any publication or 
electronic communications network or other device which is used by 
brokers or dealers to make known to others their interest in 
transactions in any security, including offers to buy or sell at a 
stated price or otherwise, or invitations of offers to buy or 
sell'').
    \1217\ 17 CFR 240.15c2-11(a). See Publication or Submission of 
Quotations Without Specified Information, Exchange Act Release No. 
34-39670 (Feb. 17, 1998), 63 FR 9661 (Feb. 25, 1998).
    \1218\ Id.
---------------------------------------------------------------------------

    To be clear, the rules adopted today do not affect the obligations 
of a broker-dealer under Exchange Rule 15c2-11 to have a reasonable 
basis under the circumstances for believing that the information 
required by Rule 15c2-11 is accurate in all material respects, and that 
the sources of the information are reliable, prior to publishing any 
quotation, absent an exception,\1219\ for a covered security in any 
quotation medium.\1220\ The staff is directed to

[[Page 71482]]

begin promptly an evaluation of the operation of Rule 15c2-11, both 
historically and in light of recent market developments, including 
Regulation Crowdfunding and earlier proposals for amendments to Rule 
15c2-11,\1221\ to assess how the rule is meeting regulatory objectives 
and to recommend any appropriate changes. In addition, and not 
withstanding any changes which may be made to Rule 15c2-11 in the 
interim, the staff is also directed to review the development of 
secondary market trading in these securities during the study it plans 
to undertake within three years following the effective date of 
Regulation Crowdfunding, and to recommend to the Commission such 
additional actions with respect to Rule 15c2-11, as may be 
warranted.\1222\
---------------------------------------------------------------------------

    \1219\ See 17 CFR 240.15c2-11(f). For example, the rule includes 
an exception for unsolicited orders. 17 CFR 240.15c2-11(f)(2). We 
remind broker-dealers that such unsolicited orders must be made by a 
customer (other than a person acting as or for a dealer) and that 
broker-dealers should be prepared to demonstrate that a customer 
initiated the order. 17 CFR 240.15c2-11(b)(1).
    \1220\ Rule 15c2-11(c) further requires that broker-dealers keep 
the documents that they reviewed to establish this reasonable basis 
for believing that the required information is accurate in all 
material respects for a period of not less than three years. 17 CFR 
240.15c2-11(c). The lack of documents used at the time the broker-
dealer established the reasonable basis for its belief or 
presentation of incomplete or non-responsive documents, including 
later-dated filings, would not be sufficient to demonstrate that the 
broker-dealer had satisfied its obligations in this regard. See 
Initiation or Resumption of Quotations Without Specified 
Information, Exchange Act Release No 27247 (Sept. 14, 1989), 54 FR 
39194, 39196 (Sept. 25, 1989) (``Subject to certain exceptions, the 
Rule prohibits a broker or dealer from submitting a quotation for a 
security in a quotation medium unless it has in its records 
specified information concerning the security and the issuer . . 
.'').
    \1221\ See Exchange Act Release No. 41110 (Feb. 25, 1999), 64 FR 
11124 (Mar. 8, 1999).
    \1222\ See Section II.
---------------------------------------------------------------------------

III. Economic Analysis

    Title III sets forth a comprehensive regulatory structure for 
startups and small businesses to raise capital through securities-based 
crowdfunding transactions using the Internet. 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 
transactions between issuers and investors provide certain information 
to 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 broker-
dealers or dealers pursuant to Exchange Act Section 15(a)(1);
     mandates that the Commission adopt 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 adopting Regulation 
Crowdfunding to implement the requirements of Title III. The final 
rules 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 include broker-
dealers and funding portals engaging in such transactions. The final 
rules also permanently exempt securities offered and sold in reliance 
on Section 4(a)(6) from the record holder count under 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 final rules, including the likely 
costs and benefits of Regulation Crowdfunding, as well as the likely 
effect of the final 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 final rules generally to follow the statutory 
provisions. We nonetheless also rely on our discretionary authority to 
adopt certain additional provisions and make certain other adjustments 
to the final rules. While the costs and benefits of the final rules in 
large part stem from the statutory mandate of Title III, certain costs 
and benefits are affected by the discretion we 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.

A. Baseline

    The baseline for our economic analysis of Regulation Crowdfunding, 
including the baseline for our consideration of the effects of the 
final 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).
1. Current Methods of Raising Up to $1 Million of Capital
    The potential economic impact of the final rules, including their 
effects 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 access a variety 
of external financing sources in the capital markets through registered 
or unregistered offerings of debt, equity and hybrid securities and 
bank loans.
    Issuers seeking to raise capital must register the offer and sale 
of securities under the Securities Act or qualify for an exemption from 
registration. Registered offerings, however, are generally too costly 
to be viable alternatives for startups and small businesses. Issuers 
conducting registered offerings incur Commission registration 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 initial compliance cost associated with conducting an 
initial public offering is $2.5 million, followed by an ongoing 
compliance cost for issuers, once public, of $1.5 million per 
year.\1223\ Hence, for

[[Page 71483]]

an issuer seeking to raise less than $1 million, a registered offering 
may not be economically feasible.\1224\ Moreover, issuers conducting 
registered offerings also usually pay underwriter fees, which are, on 
average, approximately 7% of the proceeds for initial public offerings, 
approximately 5% for follow-on equity offerings and approximately 1-
1.5% for issuers raising capital through public bond issuances.\1225\
---------------------------------------------------------------------------

    \1223\ See IPO Task Force, Rebuilding the IPO On-Ramp, at 9 
(Oct. 20, 2011) for the two surveys, available at http://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf 
(``IPO Task Force''). These estimates should be interpreted with the 
caveat that most firms in the IPO Task Force surveys likely raised 
more than $1 million. The IPO Task Force surveys do not provide a 
breakdown of costs by offering size. However, compliance related 
costs of an initial public offering and subsequent compliance 
related costs of being a reporting company likely have a fixed cost 
component that would disproportionately affect small offerings.
     Title I of the JOBS Act provided certain accommodations to 
issuers that qualify as emerging growth companies (EGCs). According 
to a recent working paper, the underwriting, legal and accounting 
fees of EGC and non-EGC initial public offerings were similar (based 
on a time period from April 5, 2012 to April 30, 2014). For a median 
EGC initial public offering, gross spread comprised 7% of proceeds 
and accounting and legal fees comprised 2.4% of proceeds. See Susan 
Chaplinsky, Kathleen W. Hanley, and S. Katie Moon, The JOBS Act and 
the Costs of Going Public, Working Paper (2014), available at http://ssrn.com/abstract_id=2492241.
    \1224\ Id.
    \1225\ See, e.g., Hsuan-Chi Chen and Jay R. Ritter, The Seven 
Percent Solution, 55 J. Fin. 1105-1131 (2000); Mark Abrahamson, Tim 
Jenkinson, and Howard Jones, Why Don't U.S. Issuers Demand European 
Fees for IPOs? 66 J. Fin. 2055-2082 (2011); 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); Rongbing Huang and Donghang Zhang, Managing Underwriters and 
the Marketing of Seasoned Equity Offerings, 46 J. Fin. Quant. 
Analysis 141-170 (2011); 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).
---------------------------------------------------------------------------

    An alternative to raising capital through registered offerings is 
to offer and sell securities by relying on an existing exemption from 
registration under the federal securities laws. For example, startups 
and small businesses could rely on current exemptions from registration 
under the Securities Act, such as Section 3(a)(11),\1226\ Section 
4(a)(2),\1227\ Regulation D,\1228\ and Regulation A.\1229\ 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 seeking to raise up to $1 million use these exemptions.
---------------------------------------------------------------------------

    \1226\ Securities Act Section 3(a)(11), generally known as the 
``intrastate offering exemption,'' provides an exemption from 
registration for issuers doing business within a particular state or 
territory. To qualify for this exemption, the offering must be 
``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.''
    \1227\ Securities Act Section 4(a)(2) provides that the 
registration provisions of the Securities Act shall not apply to 
``transactions by an issuer not involving a public offering.''
    \1228\ Regulation D provides exemptions and a nonexclusive safe 
harbor from registration for certain types of securities offerings.
    \1229\ Regulation A provides a conditional exemption from 
registration for certain small issuances.
---------------------------------------------------------------------------

    Based on Regulation D filings by issuers that are not pooled 
investment vehicles from 2009 to 2014,\1230\ a substantial number of 
issuers chose to raise capital by relying on Rule 506, even though 
their offering size would qualify for an exemption under Rule 504 or 
Rule 505.\1231\ The 2013 amendment to Rule 506 of Regulation D permits 
an issuer to engage in general solicitation and general advertising in 
offering and selling securities pursuant to Rule 506(c), subject to 
certain conditions,\1232\ which can enable issuers to reach a 
potentially broader base of accredited investors. As shown in the table 
below, although issuers can raise unlimited amounts of capital relying 
on the Rule 506(c) exemption, most of the issuers made offers for 
amounts of up to $1 million.
---------------------------------------------------------------------------

    \1230\ See Scott Bauguess, Rachita Gullapalli, and Vladimir 
Ivanov, Capital Raising in the U.S.: An Analysis of the Market for 
Unregistered Securities Offerings, 2009-2014 (October 2015) 
(``Unregistered Offerings White Paper''), available at: http://www.sec.gov/dera/staff-papers/white-papers/unregistered-offering10-2015.pdf.
    \1231\ This tendency could, in part, be attributed to two 
features of Rule 506: preemption from state registration (``blue 
sky'') requirements 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'').
    \1232\ In particular, all purchasers of securities sold in any 
offering under the exemption must be accredited investors, and the 
issuer must take reasonable steps to verify that purchasers of 
securities sold in any offering are accredited investors (17 CFR 
230.506). See Rule 506(c) Adopting Release, supra, note 5.

----------------------------------------------------------------------------------------------------------------
                                                                           Offering size
             Regulation D exemption              ---------------------------------------------------------------
                                                   <=$1 Million    $1-5 Million    $5-50 Million   >$50 Million
----------------------------------------------------------------------------------------------------------------
Rule 504........................................           3,643
Rule 505........................................             501             774
Rule 506(b).....................................          27,106          25,746          18,670           2,733
Rule 506(c).....................................             588             531             419              89
                                                 ---------------------------------------------------------------
    Total.......................................          31,838          27,051          19,089           2,822
----------------------------------------------------------------------------------------------------------------
Regulation A....................................               5              33
----------------------------------------------------------------------------------------------------------------
Note: Data based on Form D, excluding issuers that are pooled investment vehicles, and Form 1-A filings from
  2009 to 2014. We consider only new offerings and exclude offerings with amounts sold reported as $0 on Form D.
  Data on Rule 506(c) offerings covers the period from September 23, 2013 (the day the rule became effective) to
  December 31, 2014. We also use the maximum amount indicated in Form 1-A to determine offering size for
  Regulation A offerings.\1233\

    Based on the table above, from 2009 to 2014, almost no issuers in 
offerings of up to $1 million relied on Regulation A. This data does 
not reflect the recent changes to Regulation A adopted by the 
Commission on March 25, 2015. Those changes allow issuers to raise up 
to $50 million over a 12-month period and exempt certain Regulation A 
offerings (Tier 2 offerings) from state registration requirements. 
Because these changes are so recent, more time is needed to observe how 
the amendments to Regulation A will affect capital raising by small 
issuers.\1234\
---------------------------------------------------------------------------

    \1233\ We only consider Regulation A offerings that have been 
qualified by the Commission. For purposes of counting filings, we 
exclude amendments or multiple Form 1-A filings by the same issuer 
in a given year. For purposes of determining the offering size for 
Regulation A offerings, we use the maximum amount indicated on the 
latest pre-qualification Form 1-A or amended Form 1-A. We reclassify 
two offerings that are dividend reinvestment plans with unclear 
offering amounts as having the maximum permitted offering amount.
    \1234\ See Regulation A Adopting Release.
---------------------------------------------------------------------------

    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

[[Page 71484]]

to intrastate offerings.\1235\ Issuers conducting a Regulation A 
offering may be required to register their offerings with states or 
meet additional regulatory requirements, such as investment limitations 
(if the investor is not an accredited investor), audited financial 
statements and ongoing reporting. In addition, issuers in all 
Regulation A offerings are required to file with the Commission an 
offering document on Form 1-A. Such compliance related costs may be a 
more significant constraint on issuers in offerings of up to $1 
million.\1236\ 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 
investors, which also can place a significant limitation on offerings 
by startups and small businesses. While Rule 506 under Regulation D 
preempts the applicability of state registration requirements and new 
Rule 506(c) permits general solicitation and general advertising, an 
issuer seeking to rely on Rule 506(c) is limited to selling securities 
only to accredited investors.\1237\
---------------------------------------------------------------------------

    \1235\ See note 1226.
    \1236\ 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 1231.
    \1237\ See Rule 506(c) Adopting Release, note 5.
---------------------------------------------------------------------------

    The table below summarizes the main features of each exemption.
---------------------------------------------------------------------------

    \1238\ Aggregate offering limit on securities sold within a 
twelve-month period.
    \1239\ Although Section 3(a)(11) does not have explicit resale 
restrictions, the Commission has explained that ``to give effect to 
the fundamental purpose of the exemption, it is necessary that the 
entire issue of securities shall be offered and sold to, and come to 
rest only in the hands of residents within the state.'' See SEC Rel. 
No. 33-4434 (Dec. 6, 1961) [26 FR 11896 (Dec. 13, 1961)]. State 
securities laws, however, may have specific resale restrictions. 
Securities Act Rule 147, a safe harbor under Section 3(a)(11), 
limits resales to persons residing in-state for a period of nine 
months after the last sale by the issuer. [17 CFR 230.147].
    \1240\ Section 4(a)(2) of the Securities Act provides a 
statutory exemption for ``transactions by an issuer not involving 
any public offering.'' See SEC v. Ralston Purina Co. 346 U.S. 119 
(1953) (holding that an offering to those who are shown to be able 
to fend for themselves is a transaction ``not involving any public 
offering.'')

--------------------------------------------------------------------------------------------------------------------------------------------------------
                             Offering limit                            Issuer and investor                              Resale           Blue sky law
    Type of offering             \1238\            Solicitation           requirements        Filing requirement     restrictions         preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 3(a)(11)........  None...............  All offerees must    All issuers and           None..............  No \1239\.........  No
                                                be resident in       investors must be
                                                state.               resident in state.
Section 4(a)(2).........  None...............  No general           Transactions by an        None..............  Restricted          No
                                                solicitation.        issuer not involving                          securities.
                                                                     any public offering
                                                                     \1240\.
Regulation A............  Tier 1: $20 million  Testing the waters   U.S. or Canadian          File testing the    No................  Tier 1: No
                           with $6 million      permitted both       issuers, excluding        waters materials                       Tier 2: Yes
                           limit on secondary   before and after     investment companies,     and Form 1-A for
                           sales by             filing the           blank-check companies,    Tiers 1 and 2;
                           affiliates of the    offering statement.  reporting companies,      file annual, semi-
                           issuer;                                   and issuers of            annual, and
                          Tier 2: $50 million                        fractional undivided      current reports
                           with $15 million                          interests in oil or gas   for Tier 2; file
                           limit on secondary                        rights, or similar        exit report for
                           sales by                                  interests in other        Tier 1 and to
                           affiliates of the                         mineral rights \1241\.    suspend or
                           issuer.                                                             terminate
                                                                                               reporting for
                                                                                               Tier 2.
Rule 504 Regulation D...  $1 million.........  General              Excludes investment       File Form D \1243\  Restricted in some  No
                                                solicitation         companies, blank-check                        cases \1244\.
                                                permitted in some    companies, and Exchange
                                                cases \1242\.        Act reporting companies.
Rule 505 Regulation D...  $5 million.........  No general           Unlimited accredited      File Form D \1245\  Restricted          No
                                                solicitation.        investors and up to 35                        securities.
                                                                     non-accredited
                                                                     investors.
Rule 506(b) Regulation D  None...............  No general           Unlimited accredited      File Form D \1246\  Restricted          Yes
                                                solicitation.        investors and up to 35                        securities.
                                                                     non-accredited
                                                                     investors.
Rule 506(c) Regulation D  None...............  General              Unlimited accredited      File Form D \1248\  Restricted          Yes
                                                solicitation is      investors; no non-                            securities.
                                                permitted subject    accredited investors.
                                                to certain
                                                conditions \1247\.
--------------------------------------------------------------------------------------------------------------------------------------------------------

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 from 
several sources that could be close substitutes for or complements to 
crowdfunding transactions that rely on Section 4(a)(6). This capital 
raising generally is conducted through unregistered securities 
offerings, involves lending by financial institutions or derives from 
family and friends.
---------------------------------------------------------------------------

    \1241\ The Regulation A exemption also is not available to 
companies that have been subject to any order of the Commission 
under Exchange Act Section 12(j) entered within the past five years; 
have not filed ongoing reports required by the regulation during the 
preceding two years, or are disqualified under the regulation's 
``bad actor'' disqualification rules.
    \1242\ No general solicitation or advertising is permitted 
unless the offering is registered in a state requiring the use of a 
substantive disclosure document or sold under a state exemption for 
sales to accredited investors with general solicitation.
    \1243\ Filing is not a condition of the exemption, but it is 
required under Rule 503.
    \1244\ Restricted unless the offering is registered in a state 
requiring the use of a substantive disclosure document or sold under 
a state exemption for sale to accredited investors.
    \1245\ Filing is not a condition of the exemption, but it is 
required under Rule 503.
    \1246\ Filing is not a condition of the exemption, but it is 
required under Rule 503.
---------------------------------------------------------------------------

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 engages in arm's-length and more formal funding 
channels.\1249\ 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.\1250\ 
In contrast to a commercial lender that, for example, would need to 
assess factors such as the willingness and ability of a borrower to

[[Page 71485]]

repay the loan and the viability of its business, family and friends 
may be willing to provide capital based primarily or solely on 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 not knowledgeable about the 
structuring of loan agreements, equity investments or related areas of 
accounting. We do not have data available on these financing sources 
that allow us to quantify their magnitude and compare them to other 
current sources of capital.
---------------------------------------------------------------------------

    \1247\ General solicitation and general advertising are 
permitted under Rule 506(c), provided that all purchasers are 
accredited investors and the issuer takes reasonable steps to verify 
accredited investor status.
    \1248\ Filing is not a condition of the exemption, but it is 
required under Rule 503.
    \1249\ 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, 27 Rev. Fin. 
Stud. 153-179 (2014) (``Robb'').
    \1250\ See Robb, note 1249.
---------------------------------------------------------------------------

b. Commercial Loans, Peer-to-Peer Loans and Microfinance
    Startups and small businesses also may seek loans from financial 
institutions.\1251\ A 2014 study of the financing choices of startups 
suggests that they resort to bank financing early in their 
lifecycle.\1252\ The study finds that businesses rely heavily in the 
first year after being formed on external debt sources such as bank 
financing, mostly in the form of personal and commercial bank loans, 
business 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.\1253\ Trends in small 
business lending by FDIC-insured depository institutions are 
illustrated in the figure below. As of June 2014, business loans of up 
to $1 million amounted to approximately $590 billion, approximately 17% 
lower than the 2008 level.\1254\
---------------------------------------------------------------------------

    \1251\ Using data from the 1993 Survey of Small Business 
Finance, one 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.
    \1252\ See Robb, note 1249.
    \1253\ See The Kauffman Foundation, 2013 State of 
Entrepreneurship Address (Feb. 5, 2013), available at http://www.kauffman.org/uploadedFiles/DownLoadableResources/SOE%20Report_2013pdf. 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.
    \1254\ We define small business loans to include commercial and 
industrial loans to U.S. addressees of up to $1 million and loans 
secured by nonfarm nonresidential properties. See Federal Deposit 
Insurance Corporation, Statistics on Depository Institutions Report, 
available at http://www2.fdic.gov/SDI/SOB/ (``FDIC Statistics'').
[GRAPHIC] [TIFF OMITTED] TR16NO15.149

    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.\1255\ These loans were borrowed from two types of 
financial institutions--depositary and non-depositary institutions 
(e.g., finance companies, factors or leasing companies).\1256\ Lines of 
credit were the most widely used type of credit.\1257\ Other types 
included mortgage loans, equipment loans and motor vehicle loans.\1258\
---------------------------------------------------------------------------

    \1255\ 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'').
    \1256\ See Rebel Cole, What Do We Know About the Capital 
Structure of Privately Held Firms? Evidence from the Surveys of 
Small Business Finance, 42 Fin. Management 777-813 (2013).
    \1257\ See 2003 Survey, note 1255 (estimating that 34% of small 
businesses use lines of credit).
    \1258\ 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 be willing to provide 
absent a guarantee.\1259\ Although the SBA does

[[Page 71486]]

not itself act as a lender, the agency guarantees a portion of loans 
made and administered by lending institutions. SBA loan guarantee 
programs include 7(a) loans \1260\ and CDC/504 loans.\1261\ For 
example, in SBA fiscal year 2014, the SBA supported approximately $28.7 
billion in 7(a) and CDC/504 loans distributed to approximately 51,500 
small businesses.\1262\ SBA-guaranteed loans, however, currently 
account for a relatively small share (18 percent) of the balances of 
small business loans outstanding.\1263\ The SBA also offers the 
Microloan program, which provides funds to specially designated 
intermediary lenders that administer the program for eligible 
borrowers.\1264\
---------------------------------------------------------------------------

    \1259\ 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.
    \1260\ 15 U.S.C. 631 et se. The 7(a) loans provide small 
businesses with financing guarantees for a variety of general 
business purposes through participating lending institutions.
    \1261\ 15 U.S.C. 695 et se. 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 total project costs.
    \1262\ See U.S. Small Business Administration, FY 2016 
Congressional Budget Justification and FY 2014 Annual Performance 
Report, available at https://www.sba.gov/content/fiscal-year-2016-congressional-budget-justificationannual-performance-report (``2014 
Annual Performance Report'').
    \1263\ As of the end of SBA fiscal year 2014, the SBA-guaranteed 
business loans outstanding (including 7(a) and 504 loans) equaled 
$107.5 billion. See Small Business Administration Unpaid Loan 
Balances by Program, available at https://www.sba.gov/sites/default/files/files/WDS_Table1_UPB_Report.pdf. This comprises approximately 
18% of the approximately $590 billion in outstanding small business 
loans for commercial real estate and commercial and industrial loans 
discussed above. In 2014 the SBA expanded eligibility for loans 
under its business loan programs. See SBA 504 and 7(a) Loan Programs 
Updates (Mar. 21, 2014) [79 FR 15641 (Apr. 21, 2014)]. In addition 
to loan guarantees, the SBA program portfolio also includes direct 
business loans, which are mainly microloans (outstanding direct 
business loans equaled $137.1 billion), and disaster loans.
    \1264\ 15 U.S.C. 631 et se. 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. Intermediaries 
are nonprofit community-based organizations with experience in 
lending, as well as management and technical assistance. 
Intermediaries set their own lending requirements and generally 
require some type of collateral as well as the personal guarantee of 
the business owner. See Microloan Program, U.S. Small Business 
Administration, available at http://www.sba.gov/content/microloan-program.
    As of the end of SBA fiscal year 2014, the SBA Microloans 
outstanding equaled $136.7 billion. See Small Business 
Administration Unpaid Loan Balances by Program, available at https://www.sba.gov/sites/default/files/files/WDS_Table1_UPB_Report.pdf.
---------------------------------------------------------------------------

    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 and/or 
a guarantee,\1265\ which startups, small businesses and their owners 
may not be able to provide. Collateral and/or a guarantee may similarly 
be required for loans guaranteed by the SBA.
---------------------------------------------------------------------------

    \1265\ 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 1251.
---------------------------------------------------------------------------

    Another source of debt financing for startups and small businesses 
is peer-to-peer lending, which began developing in 2005.\1266\ Such 
debt transactions are facilitated by online platforms that connect 
borrowers and lenders and potentially offer small businesses additional 
flexibility on pricing, repayment schedules, collateral or guarantee 
requirements, and other terms. Some market participants offer a 
secondary market for loans originated on their own sites.\1267\ At 
least one of the platforms sells third-party issued securities to 
multiple individual investors, thus improving the liquidity of these 
securities.\1268\ Like in any traditional lending arrangement, however, 
borrowers are required to make regular payments to their lenders. This 
requirement could 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. According to some estimates, the global volume 
of ``lending-based'' crowdfunding, which includes peer-to-peer lending 
to consumers and businesses, had risen to approximately $11.08 billion 
in 2014.\1269\
---------------------------------------------------------------------------

    \1266\ 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.
    \1267\ Id.
    \1268\ Id. We note that under current law, this activity would 
require broker-dealer registration.
    \1269\ See Massolution, 2015CF Crowdfunding Industry Report: 
Market Trends, Composition and Crowdfunding Platforms, available at 
http://reports.crowdsourcing.org/index.php?route=product/product&product_id=54 (``Massolution 2015'') at 56. The Massolution 
2015 report refers to peer-to-peer lending to consumers and peer-to-
business lending to small businesses as ``lending-based'' 
crowdfunding. The discussion in this economic analysis refers to 
peer-to-peer business lending more broadly in a sense synonymous 
with ``lending-based'' crowdfunding.
---------------------------------------------------------------------------

    Technology has facilitated the growth of alternative models of 
small business lending. According to one study,\1270\ the outstanding 
portfolio balance of online lenders has doubled every year, although 
this market represents less than $10 billion in outstanding loan 
capital as of the fourth quarter of 2013. Several models of online 
small business lending have emerged: Online lenders raising capital 
from institutional investors and lending on their own account (for 
example, short-term loan products similar to a merchant cash advance); 
peer-to-peer platforms; and ``lender[hyphen]agnostic'' online 
marketplaces that facilitate small business borrower access to various 
loan products (such as term loans, lines of credit, merchant cash 
advances and factoring products) from traditional and alternative 
lenders.\1271\ According to the 2014 Small Business Credit 
survey,\1272\ 18% of all small businesses surveyed applied for credit 
with an online lender. The survey also showed differences in the use of 
online lenders by type of borrower: 22% of small businesses categorized 
in the survey as ``startups'' (i.e., businesses that have been in 
business for less than five years) applied for credit with online 
lenders. By comparison, 8% of small businesses categorized in the 
survey as ``growers'' (i.e., businesses that were profitable and 
experienced an increase in revenue) applied with online lenders, and 3% 
of small businesses categorized in the survey as ``mature firms'' 
(i.e., businesses that have been in business for more than five years, 
had over ten employees, and had prior debt) applied with an online 
lender. The latter two categories of small businesses were more likely 
to apply for credit with bank lenders than with online lenders.
---------------------------------------------------------------------------

    \1270\ See Karen Gordon Mills and Brayden McCarthy, The State of 
Small Business Lending: Credit Access during the Recovery and How 
Technology May Change the Game, Harvard Business School Working 
Paper 15-004 (2014), available at http://ssrn.com/abstract=2470523.
    \1271\ Id.
    \1272\ The survey was conducted by the Federal Reserve Banks of 
New York, Atlanta, Cleveland, and Philadelphia between September and 
November of 2014. It focused on credit access among businesses with 
fewer than 500 employees in Alabama, Connecticut, Florida, Georgia, 
Louisiana, New Jersey, New York, Ohio, Pennsylvania, and Tennessee. 
The survey authors note that since the sample is not a random 
sample, results were reweighted for industry, age, size, and 
geography to reduce coverage bias. See Federal Reserve Banks of New 
York, Atlanta, Cleveland and Philadelphia, Joint Small Business 
Credit Survey Report (2014), available at http://www.newyorkfed.org/smallbusiness/SBCS-2014-Report.pdf.
---------------------------------------------------------------------------

    Microfinance 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

[[Page 71487]]

income-generating activities.\1273\ The typical users of microfinance 
services and, in particular, of microcredit 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.\1274\
---------------------------------------------------------------------------

    \1273\ See Craig Churchill and Cheryl Frankiewicz, Making 
Microfinance Work: Managing for Improved Performance, Geneva 
International Labor Organization (2006).
    \1274\ 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, 
according to one report, in fiscal year 2012, the U.S. microfinance 
industry was estimated to have disbursed $292.1 million across 36,936 
microloans and was estimated to have $427.6 million in outstanding 
microloans (across 45,744 in microloans).\1275\ As of 2013, this report 
identified 799 microenterprise programs that provide loans, training, 
technical assistance and other microenterprise services directly to 
micro-entrepreneurs.\1276\
---------------------------------------------------------------------------

    \1275\ See FIELD at the Aspen Institute, U.S. Microenterprise 
Census Highlights, FY 2012, available at http://fieldus.org/Publications/CensusHighlightsFY2012.pdf.
    \1276\ Id. See also note 1264 (describing the SBA Microloan 
program).
---------------------------------------------------------------------------

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 sources of capital 
that generally do not require the entrepreneurs to relinquish control 
rights (e.g., personal funds from family and friends).
    According to data from the National Venture Capital Association, in 
calendar year 2014, VCs invested approximately $49.3 billion in 4,361 
transactions involving 3,665 companies, which included seed, early-
stage, expansion, and late-stage companies. Seed and early-stage deals 
represented 1.5% and 32.2%, respectively, of the dollar volume of deals 
and 4.4% and 49.7%, respectively of the overall number of VC 
deals.\1277\
---------------------------------------------------------------------------

    \1277\ See National Venture Capital Association, 2015 National 
Venture Capital Association Yearbook, available at http://nvca.org/?ddownload=1868 (``NVCA'').
---------------------------------------------------------------------------

    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 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.\1278\ 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.\1279\ 
In 2014, according to an industry source, information technology and 
medical/health/life sciences deals attracted the largest dollar volume 
of VC financing.\1280\ According to a 2012 academic study, VCs appear 
to focus on scale or potential for scale rather than short-term 
profitability in their selection of targets, and firms that receive VC 
financing tend to be significantly larger than non-VC firms, based on 
employment and sales.\1281\
---------------------------------------------------------------------------

    \1278\ See Gompers, note 1249.
    \1279\ 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).
    \1280\ See NVCA, note 1277.
    \1281\ See Manju Puri and Rebecca Zarutskie, On the Life Cycle 
Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms, 
67 J. Fin., 2247-2293 (2012) (``Puri'').
[GRAPHIC] [TIFF OMITTED] TR16NO15.150

    According to a recent report, angel investments amounted to $24.1 
billion in 2014, with approximately 73,400 entrepreneurial ventures 
receiving angel funding and approximately 316,600 active angel 
investors.\1282\ In 2014, angel

[[Page 71488]]

investments were concentrated in software, healthcare, and IT services. 
The average angel deal size was approximately $328,500. Seed/startup 
stage deals accounted for 25% and early stage deals accounted for 
46%.\1283\ As suggested by an academic study, angel investors tend to 
invest in younger companies than VCs.\1284\
---------------------------------------------------------------------------

    \1282\ See Jeffrey Sohl, The Investor Angel Market in 2014: A 
Market Correction in Deal Size, Center for Venture Research, May 14, 
2015, available at https://paulcollege.unh.edu/sites/paulcollege.unh.edu/files/webform/2014%20Analysis%20Report.pdf 
(``Sohl'').
    \1283\ Id.
    \1284\ See Gumpers, note 1249.
---------------------------------------------------------------------------

3. Current Crowdfunding Practices
    A recent crowdfunding industry report \1285\ defines the current 
crowdfunding activity in the United States generally as ``lending-
based,'' \1286\ ``reward-based,'' ``donation-based,'' ``royalty-
based,'' ``equity-based,'' \1287\ and ``hybrid.'' We note that the 
definitions of crowdfunding types used in this industry report and the 
characteristics of crowdfunding activity currently in existence are not 
directly comparable to the contours of security-based crowdfunding 
transactions contemplated by the rules being adopted today. Thus, 
considerable caution must be exercised when generating projections of 
future crowdfunding volume from current activity broadly attributed to 
the ``crowdfunding'' industry. In particular, the industry report 
defines reward-based crowdfunding as a model where funders receive a 
``reward,'' such as a perk or a pre-order of a product, and it defines 
donation-based crowdfunding as a model where funders make philanthropic 
donations to causes that they want to support, with no return on their 
investment expected.\1288\ According to the industry report, royalty-
based crowdfunding, which involves a percentage of revenue from a 
license or a usage-based fee for the other parties' right to the 
ongoing use of an asset, continues to grow.\1289\
---------------------------------------------------------------------------

    \1285\ See Massolution 2015.
    \1286\ Id. In this industry report, ``lending-based'' 
crowdfunding includes peer-to-peer lending to consumers and peer-to-
business lending.
    \1287\ The report does not identify which jurisdictions were 
represented in the survey. For example, France, Italy, Japan, and 
the UK have adopted specialized equity crowdfunding regimes. It 
should be noted that ``equity-based'' crowdfunding is not a one-
size-fits-all model. The crowdfunding regimes in these four 
countries differ on a number of dimensions (e.g., securities allowed 
to be sold by issuers, or types of issuers allowed to use the 
exemption), amongst themselves and when compared to Regulation 
Crowdfunding. Some number also allow equity crowdfunding through 
their general securities laws. See Eleanor Kirby and Shane Worner, 
Crowd-funding: An Infant Industry Growing Fast, Staff Working Paper 
of the IOSCO Research Department, available at http://www.iosco.org/research/pdf/swp/Crowd-funding-An-Infant-Industry-Growing-Fast.pdf.
    \1288\ See Massolution 2015 at 42. 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.
    \1289\ Id. at 43. The Massolution 2015 report did not provide 
separate statistics on royalty-based and hybrid crowdfunding models 
prior to the 2013 report.
---------------------------------------------------------------------------

    The industry report indicates that, in 2014, crowdfunding platforms 
raised approximately $16.2 billion globally, which represented a 167% 
increase over the amount raised in 2013.\1290\ These amounts include 
various types of crowdfunding: lending-based crowdfunding accounted for 
the largest share of volume (approximately $11.08 billion) followed by 
equity-based crowdfunding (approximately $1.11 billion), reward-based 
crowdfunding (approximately $1.33 billion), donation-based crowdfunding 
(approximately $1.94 billion), royalty-based crowdfunding 
(approximately $273 million), and hybrid crowdfunding (approximately 
$487 million).\1291\ In 2014, North American crowdfunding volume was 
approximately $9.46 billion, which represented a 145% increase over the 
amount raised in 2013 \1292\ (including approximately $1.23 billion in 
reward-based crowdfunding, approximately $959 million in donation-based 
crowdfunding, and approximately $787.5 million in equity-based 
crowdfunding, with the remainder comprised of lending-based, royalty-
based, and hybrid models \1293\). The industry report further indicates 
that global equity-based crowdfunding volume grew by 182% in 
2014.\1294\ According to the report, this rapid growth in equity-based 
crowdfunding has been driven largely by North America and Europe.\1295\
---------------------------------------------------------------------------

    \1290\ Id. at 13.
    \1291\ Id. at 14.
    \1292\ Id. at 53.
    \1293\ Id. at 55.
    \1294\ Id. at 14. By comparison, in 2014, ``reward-based'' 
crowdfunding grew by 84%, ``lending-based'' crowdfunding by 223%; 
``donation-based'' crowdfunding by 45%; ``royalty-based'' 
crowdfunding by 336%; and ``hybrid'' crowdfunding by 290%.
    \1295\ Id. at 55. ``Equity-based'' crowdfunding in North America 
($787.5 million) and Europe ($177.5 million) grew by 301% and 145%, 
respectively.
---------------------------------------------------------------------------

    The industry report further indicates that, in 2014 the worldwide 
average size of a funded campaign was less than $4,000 for consumer 
lending-based, reward-based, and donation-based crowdfunding 
types.\1296\ Crowdfunded business loans and equity-based campaigns, 
however, were substantially higher. In 2014, the global average size of 
a funded peer-to-business lending-based crowdfunding campaign was 
$103,618.\1297\ In 2014, a typical equity-based campaign was larger, 
with the global average size of $275,461.\1298\ These figures suggest 
that the types of ventures financed through equity-based crowdfunding 
could be different than those financed through other crowdfunding 
methods. In 2014, the average size of a funded equity-based campaign in 
North America was $175,000.\1299\
---------------------------------------------------------------------------

    \1296\ Id. at 59.
    \1297\ Id. at 60.
    \1298\ Id. at 60.
    \1299\ Id. at 60. The report does not provide the average size 
of North American donation-based, reward-based, or lending-based 
crowdfunding campaigns. The report notes that, in 2014, the average 
funded North American donation-based and reward-based campaigns were 
56% and 54%, respectively, of the average size of funded European 
donation-based and reward-based campaigns. Id. at 60.
---------------------------------------------------------------------------

    Since the passage of the JOBS Act, many U.S. states have made 
changes to their securities laws to accommodate intrastate securities-
based crowdfunding transactions. Based on information from NASAA, as of 
September 2015, 29 states and the District of Columbia have enacted 
state crowdfunding provisions that rely, at the federal level, on the 
intrastate offering exemptions under Securities Act Section 3(a)(11) 
and Rule 147 or on Rule 504 of Regulation D. These state crowdfunding 
rules allow businesses in a state to use securities-based crowdfunding 
to raise capital from investors within that state.\1300\ There is 
limited information available to us about the scope of domestic 
crowdfunding activity in reliance on the intrastate exemptions. Since 
December 2011, when the first state (Kansas) enacted its crowdfunding 
provisions, 118 state crowdfunding offerings have been reported to be 
filed with the respective state regulator and 102 were reported to be 
approved or cleared, as of August 1, 2015.\1301\
---------------------------------------------------------------------------

    \1300\ See NASAA's Intrastate Crowdfunding Resource Center at 
http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/, accessed in September 
2015. See also NASAA's State Crowdfunding Update, available at: 
http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2014/12/Intrastate-Crowdfunding-Overview-2015.pdf.
    \1301\ Based on information provided by NASAA. The jurisdictions 
included in the estimate are Alabama, District of Columbia, Georgia, 
Idaho, Indiana, Kansas, Maine, Maryland, Massachusetts, Michigan, 
Oregon, Texas, Vermont, Washington, and Wisconsin.
---------------------------------------------------------------------------

4. 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

[[Page 71489]]

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.\1302\
---------------------------------------------------------------------------

    \1302\ 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, available at http://www.kauffman.org/uploadedFiles/kfs_2010_report.pdf (``Kauffman Firm Survey'').
---------------------------------------------------------------------------

    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.\1303\ Additionally, 
another 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.\1304\ Another study, based on 
a sample ending in 2005, found cumulative failure rates of 34.1% for 
VC-financed firms and 66.3% for non-VC-financed firms, with the 
difference driven by lower failure rates of VC-financed firms in the 
initial years after receiving VC financing.\1305\
---------------------------------------------------------------------------

    \1303\ 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).
    \1304\ See Deborah Gage, The Venture Capital Secret: 3 Out of 4 
Start-Ups Fail, Wall St. J., Sept. 19, 2012.
    \1305\ See Puri, note 1281. According to this study, the 
difference in the outcomes of VC-financed and non-VC-financed firms 
decreases after accounting for observable differences in firm 
characteristics, but it does not disappear. However, as the study 
notes, in evaluating the remaining differences in the outcomes of 
VC-financed and non-VC-financed firms, it is not possible to fully 
differentiate the effects of superior selection on the basis of 
unobservable firm characteristics from the effects of VC monitoring 
and expertise.
---------------------------------------------------------------------------

    Taken all together, the failure rates documented in these studies 
are high for startups and small businesses, even with the involvement 
of sophisticated investors like VCs. Because we expect that issuers 
that will engage in offerings made in reliance on Section 4(a)(6) will 
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.
5. Market Participants
    The final 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 2013, 
there were more than 5 million small businesses, defined by the U.S. 
Census Bureau as having fewer than 500 paid employees.\1306\ As of June 
2014, FDIC-insured depositary institutions held approximately $590 
billion in approximately 23.4 million small business loans.\1307\ 
According to the SBA's fiscal year 2014 annual performance report, 
approximately 51,500 small businesses received funding in 2014 through 
SBA's main lending programs, 7(a) and 504 loans.\1308\ In 2014, VCs 
invested $49.3 billion of capital in in 4,361 transactions involving 
3,665 startups, according to an industry source.\1309\ In 2014, angel 
investors contributed $24.1 billion, with approximately 73,400 
entrepreneurial ventures receiving angel funding.\1310\
---------------------------------------------------------------------------

    \1306\ See U.S. Department of Commerce, United States Census 
Bureau, Business Dynamics Statistics, Data: Firm Characteristics 
(2013), available at http://www.census.gov/ces/dataproducts/bds/data_firm.html.
    \1307\ For the purposes of this figure, small business loans are 
defined as loans secured by nonfarm nonresidential properties and 
commercial and business loans of $1,000,000 or less. See FDIC 
Statistics, note 1254.
    \1308\ See 2014 Annual Performance Report, note 1262.
    \1309\ See NVCA, note 1277.
    \1310\ See Sohl, note 1282.
---------------------------------------------------------------------------

    Below, we analyze the economic effect of the final rules on the 
following parties: (1) Issuers, typically startups and small 
businesses, that seek 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 final rules will depend on how these market 
participants respond to the final rules. Each of these parties is 
discussed in further detail below.
a. Issuers
    The final rules will permit certain entities to raise capital by 
issuing securities for the first time. The number, type and size of the 
potential issuers that will seek to use crowdfunding to offer and sell 
securities in reliance on Section 4(a)(6) is uncertain, but data on 
current market practices may help identify the number and 
characteristics of potential issuers.
    It is challenging to precisely predict the number of future 
securities offerings that might rely on Section 4(a)(6), particularly 
because rules governing the process are being adopted today.\1311\
---------------------------------------------------------------------------

    \1311\ See also Section IV.B.1.
---------------------------------------------------------------------------

    According to filings made with the Commission, from 2009 to 2014, 
there were approximately 4,559 issuers per year in new Regulation D 
offerings with offer sizes of up to $1 million (excluding issuers that 
are pooled investment vehicles), including approximately 1,020 (22%) 
per year that reported having no revenue and approximately 861 (19%) 
per year that reported revenues of up to $1 million.\1312\ Among 
issuers in new Regulation D offerings with offer sizes of up to $1 
million (excluding issuers that are pooled investment vehicles) during 
this period, the overwhelming majority of issuers (approximately 80%) 
are younger than 5 years old, with the median age of approximately one 
year. Approximately 92% of these issuers were organized as either a 
corporation or a limited liability company.
---------------------------------------------------------------------------

    \1312\ In addition, in an average year, approximately 50% of 
issuers in new Regulation D offerings with offer sizes of up to $1 
million (excluding issuers that are pooled investment vehicles) 
declined to disclose their revenues. It is also possible that some 
issuers in Regulation D offerings that report revenues in excess of 
$1 million may participate in offerings in reliance on Section 
4(a)(6).
---------------------------------------------------------------------------

    It is expected that many future issuers of securities in 
crowdfunding offerings would have otherwise raised capital from one of 
the alternative sources of financing discussed above, while others 
would have been financed by friends and family or not financed at all. 
Due to the differences between small business loans (including SBA-
guaranteed loans) and securities-based crowdfunding offerings that can 
be conducted under the final rules, we are not able to estimate how 
many small businesses utilizing these forms of financing may instead 
pursue an offering in reliance on Section 4(a)(6). Similarly, due to 
the differences between the terms of crowdfunding campaigns in 
existence today and the provisions of the final rules, is not clear how 
many current campaigns can instead become offerings in reliance on 
Section 4(a)(6).\1313\

[[Page 71490]]

Hence, while some of the businesses using these alternative funding 
sources may become issuers offering and selling securities in reliance 
on Section 4(a)(6) in the future, we cannot know how many of these 
businesses will 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.
---------------------------------------------------------------------------

    \1313\ A recent industry report estimated that the equity-based 
crowdfunding volume in North America in 2014 was $787.5 million and 
the average size of a successful equity-based crowdfunding campaign 
was $175,000. See Massolution 2015 at 55 and 60. This allows us to 
estimate approximately 4,500 successful equity-based crowdfunding 
campaigns for North America in 2014. The report does not provide 
statistics for the United States alone. Equity-based crowdfunding 
campaigns in the United States are currently limited to accredited 
investors or intrastate offerings in certain jurisdictions. Further, 
the industry report does not provide information that would allow us 
to estimate the number of crowdfunding campaigns of other types 
(such as reward-based or donation-based) in North America or the 
United States in 2014. We note that many such campaigns, 
particularly those that relate to individual projects, may not have 
a defined or sustained business model commensurate with typical 
issuers of securities. In particular, many of the current reward-
based or donation-based crowdfunding projects likely entail 
endeavors that may not be suitable to a long-lived securities 
issuance (e.g., certain artistic endeavors or artistic projects).
---------------------------------------------------------------------------

    We believe that many potential issuers of securities through 
crowdfunding will be startups and small businesses that are close to 
the ``idea'' stage of the business venture and that have business plans 
that are not sufficiently well-developed or do not offer the growth 
potential or business model to attract VCs or angel investors. 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.\1314\
---------------------------------------------------------------------------

    \1314\ 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. 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 broker-dealers, both those that are 
already registered with the Commission and those that will register, 
might wish to facilitate securities-based crowdfunding transactions. 
New entrants that do not wish to register as broker-dealers 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 
relationships might seek to leverage these relationships and register 
as funding portals, or register as or associate with registered broker-
dealers. Although the number of potential intermediaries that will fill 
these roles is uncertain, practices of existing broker-dealers and 
crowdfunding platforms provide insight into how the market might 
develop.
    Based on FOCUS Reports filed with the Commission, as of December 
2014, there were 4,267 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, 
816 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 report estimates that, as of 2014, 1,250 crowdfunding 
platforms were operating worldwide, including 375 platforms operating 
in North America.\1315\ Globally, approximately 19% (236) of platforms 
were engaged in equity-based crowdfunding, 18.3% in lending-based 
crowdfunding, 22.6% in donation-based crowdfunding, 28.9% in reward-
based crowdfunding, with the remainder engaged in royalty-based and 
hybrid crowdfunding.\1316\ An earlier industry report indicated that 
crowdfunding platforms typically charge entrepreneurs a ``transaction 
fee'' that is based on how large the target amount is and/or upon 
reaching the target and that fees from survey participants worldwide 
ranged from 2% to 25%, with an average of 7% in North America and 
Europe.\1317\ The 2012 industry report provides one case study of fees 
for a ``large-securities-based CFP'' stating ``[t]here are no 
management fees for uncommitted capital, but a ``2 and 20'' arrangement 
is set on deals funded.'' \1318\
---------------------------------------------------------------------------

    \1315\ See Massolution 2015 at 84. The report does not provide 
separate statistics for the United States.
    \1316\ Id. at 89.
    \1317\ See Massolution Crowdfunding Industry Report: Market 
Trends, Composition and Crowdfunding Platforms (May 2012) 
(``Massolution 2012'') at 38.
    \1318\ Id.
---------------------------------------------------------------------------

    We do not know at present which market participants will become 
intermediaries under Section 4(a)(6) and Regulation Crowdfunding, 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).\1319\
---------------------------------------------------------------------------

    \1319\ For example, the Massolution 2012 industry report 
suggests that funding portal reputation is important in the 
crowdfunding market, especially for equity-based crowdfunding. See 
Massolution 2012 at 46.
---------------------------------------------------------------------------

    Under the statute and the final rules, funding portals are 
constrained in the services they can 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 broker-dealers or investment advisers, depending on their 
activities. Although we expect that initially, upon adoption of the 
final rules, more new registrants will register as funding portals than 
as broker-dealers given the less extensive regulatory requirements 
imposed on funding portals, it is possible 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. One commenter 
suggested that funding portals may find it beneficial to cooperate with 
registered broker-dealers and transfer agents.\1320\ Other commenters 
on the proposal did not provide additional information on this issue. 
There is anecdotal evidence that such partnerships are already forming 
under existing regulations in crowdfunding transactions involving 
accredited investors.\1321\ The final rules provide that intermediaries 
will be deemed to have satisfied the requirement 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

[[Page 71491]]

intermediary's platform if the issuer has engaged the services of a 
registered transfer agent.\1322\ This registered transfer agent safe 
harbor may lead intermediaries to encourage issuers to use a registered 
transfer agent.
---------------------------------------------------------------------------

    \1320\ See TinyCat Letter (but noting that such partnerships 
should be optional).
    \1321\ See David Drake, Rich Man's Crowd Funding, Forbes, Jan. 
15, 2013, available at http://www.forbes.com/sites/groupthink/2013/01/15/rich-mans-crowd-funding/. See also Mohana Ravindranath, For 
broker/dealers, crowdfunding presents new opportunity, Wash. Post, 
Mar. 29, 2013, available at http://www.washingtonpost.com/business/on-small-business/for-brokerdealers-crowdfunding-presents-new-opportunity/2013/03/28/bb835942-8075-11e2-8074-b26a871b165a_story.html; J.J. Colao, In the Crowdfunding Gold Rush, 
This Company Has a Rare Edge, Forbes, June 5, 2013, available at 
http://www.forbes.com/sites/jjcolao/2013/06/05/in-the-crowdfunding-gold-rush-this-company-has-a-rare-edge/; Arina Shulga, Crowdfunding 
Right Now (Fund Model, Broker-Dealer Model, Lending Platforms and 
Intrastate Offerings), LexisNexis.com, Aug. 7, 2014, available at 
http://www.lexisnexis.com/legalnewsroom/banking/b/venture-capital/archive/2014/08/07/crowdfunding-right-now-fund-model-broker-dealer-model-lending-platforms-and-intrastate-offerings.aspx; Alessandra 
Malito, Broker-dealer expands crowdfunding reach with new 
partnership, InvestmentNews, Apr. 14, 2015, available at http://www.investmentnews.com/article/20150414/FREE/150419972/broker-dealer-expands-crowdfunding-reach-with-new-partnership.
    \1322\ See Rule 301(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

c. Investors
    It is unclear what types of investors will participate in offerings 
made in reliance on Section 4(a)(6), but given the investment 
limitations in the final rules, we believe that many investors affected 
by the final rules will likely be individual retail investors who 
currently do not have broad access to investment opportunities in 
early-stage ventures. Offerings made in reliance on Section 4(a)(6) may 
provide retail investors with additional investment opportunities, 
although the extent to which they invest in such offerings will 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 may make these offerings less attractive for 
professional investors, including VCs and angel investors.\1323\ While 
an offering made in reliance on Section 4(a)(6) can bring an issuer to 
the attention of these investors, it is possible that professional 
investors will prefer, instead, to invest in offerings in reliance on 
Rule 506, which are not subject to the investment limitations 
applicable to offerings made in reliance on Section 4(a)(6).
---------------------------------------------------------------------------

    \1323\ 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.
---------------------------------------------------------------------------

d. Other Capital Providers, Broker-Dealers and Finders in Private 
Offerings
    The final rules may affect other parties that provide sources of 
capital, such as small business lenders, VCs, family and friends and 
angel investors that currently finance small private businesses. The 
current scope of financing provided by these capital providers is 
discussed above. As discussed below, the magnitude of the final rules' 
economic impact will 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 may, outside of 
offerings in reliance on Section 4(a)(6), 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 investors for a fee.\1324\ These 
private offering intermediaries also may be affected by the final 
rules, because once issuers can undertake offerings in reliance on 
Section 4(a)(6), some issuers might no longer need the services of 
those broker-dealers and finders.
---------------------------------------------------------------------------

    \1324\ Depending on their activities, these persons may need to 
be registered as broker-dealers.
---------------------------------------------------------------------------

    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 final rules permit, 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. Based on a staff 
study, only 21% of all new Regulation D offerings from 2009 to 2014 
used an intermediary such as a broker-dealer or a finder.\1325\ The use 
of a broker-dealer or a finder increased with offering size; they 
participated in approximately 17% of offerings for up to $1 million and 
30% of offerings for more than $50 million. Moreover, the fee tends to 
decrease with offering size. Unlike the gross spreads in registered 
offerings, the differences in fees for Regulation D offerings of 
different sizes are large: the average total fee (commission plus 
finder fee) paid by issuers conducting offerings of up to $1 million 
(6.4% in 2014) is almost three times larger on a percentage basis than 
the average total fee paid by issuers conducting offerings of more than 
$50 million (1.9% in 2014).\1326\ These estimates, however, only 
reflect practices in 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, may use 
broker-dealers and finders more frequently and have different fee 
structures.
---------------------------------------------------------------------------

    \1325\ See Unregistered Offerings White Paper, note 1230.
    \1326\ ID.
---------------------------------------------------------------------------

B. Analysis of Final Rules

    As noted above, we are mindful of the costs and benefits of the 
final rules, as well as the impact that the final rules may 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 are expected to provide startups and small 
businesses with the means to raise relatively modest amounts of 
capital, from a broad cross section of investors, through securities 
offerings that are exempt from registration under the Securities Act. 
They also are expected to permit small investors to participate in a 
wider range of securities offerings than may be currently 
available.\1327\ Specifically, the statutory provisions and the final 
rules address several challenges specific to financing startups and 
small businesses, including, for example, accessing a large number of 
investors, the regulatory requirements associated with issuing a 
security, protecting investors and making such securities offerings 
cost-effective for the issuer.
---------------------------------------------------------------------------

    \1327\ 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 crowdfunding regulatory regime, as well as the potential 
impacts of such a regulatory regime on efficiency, competition and 
capital formation, in light of the baseline discussed above.
1. Broad Economic Considerations
    In this release, we discuss the potential costs and benefits of the 
final 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 participants in a market that does 
not yet exist. For instance, costs to issuers can be passed on to 
investors and costs to intermediaries can be passed on to issuers and 
investors. These difficulties in estimating and quantifying such costs 
are exacerbated by the limited public data that indicates how issuers, 
intermediaries and investors will respond to these new capital raising 
opportunities.
    The discussion below highlights several general areas where 
uncertainties about the new crowdfunding market might affect the 
potential costs and benefits of the final rules, as well as our ability 
to quantify those costs and benefits. It also highlights the potential 
effects on

[[Page 71492]]

efficiency, competition and capital formation.
    The extent to which the statute and the final rules affect capital 
formation and the cost of capital to issuers depends in part on the 
issuers that choose to participate. In particular, if offerings in 
reliance on Section 4(a)(6) only attract issuers that are otherwise 
able to raise capital through another type of exempt offering, the 
statute and the final rules may result in a redistribution of capital 
flow, which may enhance allocative efficiency but have a limited impact 
on the aggregate level of capital formation.\1328\
---------------------------------------------------------------------------

    \1328\ For example, a 2012 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 to 
Rule 506 offerings under Regulation D, as a result of the preemption 
of state law registration requirements for Rule 506 offerings that 
occurred in 1996. See GAO Report, note 1231.
---------------------------------------------------------------------------

    Notwithstanding the existence of these alternative methods of 
capital raising, we believe that offerings pursuant to Section 4(a)(6) 
will likely represent a new source of capital for many small issuers 
that currently have difficulty raising capital. 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 \1329\ and, thus, 
less collateral for traditional bank loans. As discussed above, 
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. Some small businesses may not qualify for 
traditional bank loans and may find alternative debt financing too 
costly or incompatible with their financing needs. While some small 
businesses may attract equity investments from angel investors or VCs, 
other small businesses, particularly, businesses at the seed stage may 
have difficulty obtaining external equity financing from these sources. 
We believe that the statute, as implemented by the final rules, may 
increase both capital formation and the efficiency of capital 
allocation among small issuers by expanding the range of methods of 
external financing available to small businesses and the pool of 
investors willing to finance such types of businesses. The extent to 
which such issuers will use the Section 4(a)(6) offering exemption, 
however, is difficult to assess.
---------------------------------------------------------------------------

    \1329\ 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 other capital raising options 
more attractive than securities-based crowdfunding, the impact of 
Section 4(a)(6) on capital formation may be limited. Even so, the 
availability of securities-based crowdfunding as a financing option may 
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 offering price might be challenging. Offerings 
relying on Section 4(a)(6) will not involve an underwriter who, for 
larger offerings, typically assists the issuer with pricing and placing 
the offering. Investors in offerings relying on Section 4(a)(6) may 
lack the sophistication to evaluate the offering price. Thus, the 
involvement of these investors, who are likely to have a more limited 
capacity for conducting due diligence on deals, may contribute to less 
accurate valuations.
    Moreover, because of the investment limitations in securities-based 
crowdfunding transactions, there may not be a strong incentive, even 
assuming adequate knowledge and experience, for an investor to perform 
a thorough analysis of the issuer disclosures. To the extent that these 
potential information asymmetries resulting from the lack of a thorough 
analysis of the disclosures are anticipated by prospective investors, 
investor participation in offerings made in reliance on Section 4(a)(6) 
may decline and the associated benefits of capital formation may be 
lower.
    Uncertainty surrounding exit strategies for investors in 
crowdfunding offerings also may limit the benefits. In particular, it 
is unlikely that purchasers in crowdfunding transactions will be able 
to follow the typical path to liquidity that investors in other exempt 
offerings follow. For instance, investors in a VC-backed startup may 
eventually sell their securities in an initial public offering on a 
national securities exchange or to another company in an 
acquisition.\1330\ We anticipate that most businesses engaging in 
offerings in reliance on Section 4(a)(6) will be unlikely to progress 
directly to an initial public offering on a national securities 
exchange given their small size,\1331\ and investors may lack adequate 
strategies or opportunities to eventually divest their holdings.\1332\ 
A sale of the business will require the issuer to have a track record 
in order to attract investors with the capital willing to buy the 
business.
---------------------------------------------------------------------------

    \1330\ See Gompers, note 1249.
    \1331\ As noted, under the statute and the final rules, issuers 
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, the size of an initial public offering generally 
exceeds $50 million. See IPO Task Force, note 1223.
    \1332\ In contrast, given the required investor qualifications 
and offering limit amounts, Regulation D offerings may generally 
attract issuers that are more experienced 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.
---------------------------------------------------------------------------

    Further, the likely broad geographical dispersion of crowdfunding 
investors may make shareholder coordination difficult. It may also 
exacerbate information asymmetries between issuers and investors, if 
the distance between them diminishes the ability for investors to 
capitalize on local knowledge that may be of value in assessing the 
viability of the issuer's business. The use of electronic means may 
mitigate some of these difficulties. Even if an issuer can execute a 
sale or otherwise offer to buy back or retire the securities, it might 
be difficult for investors to determine whether the issuer is offering 
a fair market price. These uncertainties may limit the use of the 
Section 4(a)(6) exemption.
    The potential benefits of the final rules also may 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 transactions conducted in reliance on 
Section 4(a)(6) will be transferred in the secondary market after the 
one-year restricted period ends, and investors who purchased securities 
in transactions conducted in reliance on Section 4(a)(6) and who seek 
to divest their securities may not find a liquid market.\1333\ Assuming 
a secondary market develops, securities may be quoted on the over-the-
counter market or on trading platforms for shares of private 
companies.\1334\ Nevertheless, it

[[Page 71493]]

is possible that secondary trading costs for investors may be 
substantial, effective and quoted spreads may be wide, trading volume 
may be low, and price volatility may be high compared to those of 
listed securities.\1335\ Illiquidity, to different degrees, remains a 
concern for other exempt offerings and for registered offerings by 
small issuers. However, because investors purchasing securities sold in 
reliance on Section 4(a)(6) may be less sophisticated than investors in 
other private offerings due to the fact that there are no investor 
qualification requirements, they may face additional challenges in 
addressing the impact of illiquidity, either in finding a suitable 
trading venue or negotiating with the issuer for an alternative 
liquidity option. The potentially high degree of illiquidity associated 
with securities purchased in reliance on Section 4(a)(6) may discourage 
some investors from investing in issuers through such offerings, thus 
limiting the potential efficiency, competition and capital formation 
benefits of the final rules.
---------------------------------------------------------------------------

    \1333\ Academic studies have shown that the over-the-counter 
market is less liquid than the national exchanges. See Nicolas 
Bollen and William Christie, Market Microstructure of the Pink 
Sheets, 33 J. Banking & Fin. 1326-1339 (2009); Andrew Ang, Assaf 
Shtauber and Paul Tetlock, Asset Pricing in the Dark: The Cross 
Section of OTC Stocks, 26 Rev. Fin. Stud. 2985-3028 (2013).
    \1334\ Given the services that funding portals are permitted to 
provide under the statute and the final rules, investors will not be 
able to use funding portals to trade in securities offered and sold 
in reliance on Section 4(a)(6) in the secondary market.
    \1335\ 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) will have an 
ongoing reporting obligation, so disclosure of information about the 
issuer will continue to be required.
---------------------------------------------------------------------------

    Even with the mandated disclosures, unsophisticated investors 
purchasing securities issued in reliance on Section 4(a)(6) may face 
certain expropriation risks, potentially limiting the upside of their 
investment, even when they select investments in successful ventures. 
This can occur if issued securities include certain features (e.g., 
callable securities or securities with differential control rights) or 
if issuers conduct insider-only financing rounds or financing rounds at 
reduced prices (so-called ``down rounds'') that 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) 
may 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.\1336\ Moreover, 
the disperse ownership stakes of investors in securities-based 
crowdfunding offerings may weaken their incentives to monitor the 
issuer to minimize the risk of expropriation. The ensuing expropriation 
risk may discourage some investors from participating in offerings made 
in reliance on Section 4(a)(6), potentially limiting the efficiency, 
competition and capital formation benefits of the final rules.
---------------------------------------------------------------------------

    \1336\ See Kaplan, note 1279.
---------------------------------------------------------------------------

    The final rules also may 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 investors. The precise impact of the 
final rules on these intermediaries will 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 final rules 
primarily attract new issuers. The impact of the final rules on 
registered broker-dealers will also depend on the extent to which 
broker-dealers participate as intermediaries in the securities-based 
crowdfunding market. 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 may negatively 
affect the revenue of finders and broker-dealers in the private 
offerings market. While this may disadvantage existing private offering 
market intermediaries, the new competition may ultimately lead to more 
efficient allocation of capital.
    If securities-based crowdfunding primarily attracts new issuers to 
the market, the impact on broker-dealers and finder revenue may be 
negligible and the final rules may even have a positive effect on their 
revenues by revealing more potential clients for them, particularly to 
the extent that they chose to operate a funding portal. Additionally, 
greater investor interest in private company investment may increase 
capital formation, creating new opportunities for broker-dealers and 
finders that otherwise would have been unavailable.
    The final rules also may encourage current participants in the 
crowdfunding market to diversify their funding models to attract a 
broader group of companies 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 will implicate the federal 
securities laws unless an exemption from registration is 
available.\1337\ Under the final rules, these platforms may choose to 
register as funding portals and permit businesses to offer securities 
that provide investors with the opportunity to obtain a return on 
investment. This can 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 issuance costs for issuers.
---------------------------------------------------------------------------

    \1337\ 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 
or 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 may not always be optimal or 
preferred, particularly if complying with the final rules proves 
disproportionately costly compared to the potential amount of 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 
a 12-month

[[Page 71494]]

period.\1338\ The final rules preserve the $1 million limit. The 
limitation on the amount that may be raised is expected to benefit 
investors by reducing the potential loss from dilution or fraud \1339\ 
in the securities-based crowdfunding market. However, we recognize that 
this limit on the amount that may be sold in reliance on Section 
4(a)(6) also can prevent certain issuers from raising all the capital 
they need to make their businesses viable, which in turn can result in 
lost opportunities, as indicated by various commenters.\1340\ It also 
is likely to limit efficiency to the extent that capital cannot be 
channeled to the most productive use. Due to the lack of data, however, 
we are not able to quantify the unrealized efficiency or capital 
formation associated with the adoption of the $1 million limit instead 
of the alternative of a higher limit. Since issuers in securities-based 
crowdfunding offerings bear certain fixed costs, as discussed in 
Section III.B.3., offering costs as a percentage of offering proceeds 
will be larger under the $1 million limit than under the alternative of 
a higher limit.
---------------------------------------------------------------------------

    \1338\ See also Rule 100(a)(1) of Regulation Crowdfunding.
    \1339\ While we lack information to predict the potential 
incidence of fraud in securities-based crowdfunding offerings made 
in reliance on Section 4(a)(6) and note that current crowdfunding 
practices differ significantly from the securities-based 
crowdfunding market that may develop upon effectiveness of the final 
rules, some concern has been expressed about the potential for fraud 
in this area. See, e.g., NASAA Enforcement Report: 2015 Report on 
2014 data, September 2015, available at http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2011/08/2015-Enforcement-Report-on-2014-Data_FINAL.pdf (listing Internet fraud 
(including social media and crowdfunding) among the products and 
schemes that are frequently investigated by states, without 
statistics specific to securities-based crowdfunding).
    \1340\ See, e.g., Advanced Hydro Letter; Bushroe Letter; Cole D. 
Letter; Concerned Capital Letter; Hamman Letter; Harrison Letter; 
Hillside Letter; Jazz Letter; Kickstarter Coaching Letter; McCulley 
Letter; McGladrey Letter; Meling Letter; Miami Nation Enterprises 
Letter; Multistate Tax Service Letter; Peers Letter; Pioneer Realty 
Letter; Public Startup Letter 2; Qizilbash Letter; Rosenthal O. 
Letter; Sarles Letter; SBM Letter; Taylor R. Letter; Taylor T. 
Letter; Wales Capital Letter 1; Wales Capital Letter 3; WealthForge 
Letter; Wear Letter; Wilhelm Letter; Winters Letter; Yudek Letter.
---------------------------------------------------------------------------

    As an alternative, we could have defined the $1 million limit to be 
net of intermediary fees, as suggested by some commenters.\1341\ If a 
funding portal announces in advance the fees it charges for a given 
transaction (fixed or variable), the economic effects of such an 
alternative definition would be qualitatively similar to the effects of 
raising the offering limit. If the funding portal fees are not known in 
advance, then this alternative may also create uncertainty for issuers 
about how much capital they would be able to raise. Several commenters 
opposed such an alternative.\1342\
---------------------------------------------------------------------------

    \1341\ See, e.g., Benjamin Letter; FundHub Letter 1; Hackers/
Founders Letter; Joinvestor Letter; Odhner Letter; Omara Letter; 
Public Startup Letter 2; RFPIA Letter; RoC Letter; RocketHub Letter; 
Seed&Spark Letter; Thomas Letter 1; Wales Capital Letter 1; Whitaker 
Chalk Letter; Wilson Letter.
    \1342\ See, e.g., Arctic Island Letter 4; ASSOB Letter; 
Commonwealth of Massachusetts Letter; MCS Letter; PeoplePowerFund 
Letter.
---------------------------------------------------------------------------

    The costs associated with not increasing the investment limit above 
$1 million are mitigated in part by the ability of issuers to 
concurrently seek additional financing in reliance on another type of 
exempt offering, such as Regulation D or Regulation A, in addition to 
the offering in reliance on Section 4(a)(6). In this release, we 
provide guidance clarifying our view that issuers may conduct other 
exempt offerings without having those offerings integrated with the 
offering made in reliance on Section 4(a)(6), provided that each 
offering complies with the applicable exemption relied upon for that 
particular offering. Several commenters opposed this approach on the 
ground that it could result in fewer investor protections than if the 
offerings were integrated. Some commenters noted that a potential cost 
to investors associated with not requiring integration is a reduction 
in investor protection due to the possibility of an issuer's use of 
advertising for one offering to indirectly promote another exempt 
offering that would have been subject to more stringent advertising 
restrictions.\1343\ While we recognize this concern, we note that the 
final rules do not provide a blanket exemption from integration with 
other private offerings that are conducted simultaneously with, or 
around the same time as, a Section 4(a)(6) offering. Rather, we provide 
guidance that an offering made in reliance on Section 4(a)(6) is not 
required to be integrated with another exempt offering made by the 
issuer to the extent that each offering complies with the requirements 
of the applicable exemption that is being relied upon for that 
particular offering. As mentioned earlier, an issuer conducting a 
concurrent exempt offering for which general solicitation is not 
permitted will 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). Alternatively, an issuer conducting a concurrent exempt 
offering for which general solicitation is permitted, for example, 
under Rule 506(c), cannot include in any such general solicitation an 
advertisement of the terms of an offering made in reliance on Section 
4(a)(6), unless that advertisement otherwise complies with Section 
4(a)(6) and the final rules. This may partly alleviate some of 
commenters' concerns because each offering will have the investor 
protections of the offering exemption upon which it relies.
---------------------------------------------------------------------------

    \1343\ See AFR Letter; BetterInvesting Letter; Consumer 
Federation Letter; Fund Democracy Letter; IAC Recommendation; MCS 
Letter.
---------------------------------------------------------------------------

    As an alternative, in line with the suggestions of some 
commenters,\1344\ we could have provided guidance that the amounts 
offered in reliance on Section 4(a)(6) should be integrated 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). Such an 
alternative would potentially limit the amount of capital raised by 
issuers, including the set of issuers eligible to conduct an exempt 
offering relying on Section 4(a)(6), and thus potentially limit the 
capital formation benefits of the final rules. Compared to this 
alternative, the ability of issuers to conduct other exempt offerings 
that do not count toward the maximum offering amount under Section 
4(a)(6) may alleviate some of the concerns that certain issuers will 
not be able to raise sufficient capital. The net effect on capital 
formation will also depend on whether issuers seeking an aggregate 
exempt offering amount in excess of $1 million elect to rely on 
Regulation Crowdfunding as part of their capital raising or elect to 
rely on a different exemption, such as Rule 506 of Regulation D. These 
considerations and the relative differences in the investor protections 
associated with the different offering exemptions will determine the 
net effect on the amount of information about issuers available to 
market participants and the level of investor protection.
---------------------------------------------------------------------------

    \1344\ See, e.g., AFL-CIO Letter; Brown J. Letter; Consumer 
Federation Letter; Fund Democracy Letter; MCS Letter; NASAA Letter.
---------------------------------------------------------------------------

b. Investment Limitations
    Since offering documents for offerings made in reliance on Section 
4(a)(6) will not be subject to review by Commission staff prior to the 
sale of securities, we are sensitive to potential investor protection 
concerns arising from the participation of less sophisticated investors 
in these exempt offerings. Some commenters \1345\ raised concerns that 
the ``wisdom of the crowd'' will not result in investors pooling 
information so as to lead to better informed

[[Page 71495]]

investment decisions.\1346\ While we acknowledge these concerns, we 
note that, by adding Section 4(a)(6) to the Securities Act, Congress 
made an express determination to facilitate securities-based 
crowdfunding transactions under the federal securities laws, subject to 
certain specified investor protections.
---------------------------------------------------------------------------

    \1345\ See, e.g., AFR Letter; Brown J. Letter; Consumer 
Federation Letter.
    \1346\ Predictions in research studies regarding the impact of 
social interaction on investor decisions are mixed. On the one hand, 
a recent study of opinions that were posted on the Internet Web site 
http://seekingalpha.com finds evidence of predictability of earnings 
surprises and returns that is interpreted as potentially suggesting 
the value relevance of user opinions rather than a na[iuml]ve 
investor reaction. See Hailiang Chen, Prabuddha de, Yu Hu, and 
Byoung-Hyoun Hwang, Wisdom of Crowds: The Value of Stock Opinions 
Transmitted Through Social Media, 27 Rev. Fin. Stud. 1367-1403 
(2014). An earlier theoretical paper shows that word-of-mouth can, 
under some circumstances, result in superior decisions. See Glenn 
Ellison and Drew Fudenberg, Word-of-Mouth Communication and Social 
Learning, 110 Quarterly J. Econ. 93-125 (1995). On the other hand, 
some behavioral finance literature examines irrational herding and 
contagion of thought and behavior through social interaction, such 
as the propagation of investing memes, which need not be predictive 
of superior trading performance. For example, one article 
characterizes memes as ``mental representation (such as an idea, 
proposition, or catchphrase) that can be passed from person to 
person''. The article provides an example of investors using 
``verbal `reasons' to decide how to trade'' and notes that these 
reasons ``are often not cogent''. The article notes that such 
reasons, or financial memes, can be simple or can be elaborate 
structures of analysis, examples, terminology, catchphrases, and 
modeling. See for example, David A. Hirshleifer and Siew Hong Teoh, 
Thought and Behavior Contagion in Capital Markets, Handbook of 
Financial Markets: Dynamics and Evolution (2009). Another article 
compares the investment decisions of stock clubs and individuals. It 
finds that while both individuals and clubs are more likely to 
purchase stocks that are associated with ``good reasons'' (such as a 
company that is featured on a list of ``most-admired'' companies), 
stock clubs favor such stocks more than individuals, despite the 
fact that such reasons do not improve performance. The article 
analyzes social dynamics that may make ``good reasons'' more 
important for groups than individuals. See Brad Barber, Chip Heath, 
and Terrance Odean, Good Reasons Sell: Reason-Based Choice Among 
Group and Individual Investors in the Stock Market, 49 Management 
Science 1636-1652 (2003).
---------------------------------------------------------------------------

    Consistent with the statute, the final rules incorporate several 
important investor protections, including limits on the amount that can 
be raised, issuer eligibility criteria, and issuer and intermediary 
requirements, including statutorily mandated investor education 
requirements. The statute and the final rules also impose certain 
limitations on the aggregate dollar amount of securities in offerings 
in reliance on Section 4(a)(6) that may be sold to an investor during a 
12-month period.\1347\ These provisions are designed to limit the 
potential investment and, consequently, the potential losses for any 
single investor, thus providing downside protection for investors.
---------------------------------------------------------------------------

    \1347\ See Section 4(a)(6)(B). See also Rule 100(a)(2) of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    We recognize that these provisions also will limit the potential 
upside for investors. This may particularly affect the decisions of 
investors with large portfolios who might be able to absorb losses and 
understand the risks associated with risky investments and who may have 
more expertise and stronger incentives to acquire and analyze 
information about an issuer. For these investors, the $100,000 
aggregate limit may reduce 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 impeding 
capital formation. Moreover, limiting the participation of such 
investors may 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 can add value to the discussions taking place through an 
intermediary's communication channels about a potential offering by 
providing their views on the issuer's financial viability and potential 
for fraud. Persons with larger portfolios are also likely to be in a 
better position to monitor the issuer's insiders, which can reduce the 
extent of moral hazard and the risk of fraud on the part of the issuer 
and the issuer's insiders, yielding benefits for all investors. Such 
investors also can add value by advising the issuer and contributing 
strategic expertise, which can be particularly beneficial for early-
stage issuers. Some of these potential benefits, however, may still be 
available to issuers that seek to attract such investors through 
another type of exempt offering, such as a Regulation D offering.
    The aggregate limit on crowdfunding investments also can impede the 
ability of investors to diversify within the securities-based 
crowdfunding market. As securities-based crowdfunding investments might 
have inherently high failure rates,\1348\ investors who do not or 
cannot diversify their investments across a number of offerings can 
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.\1349\ 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.\1350\ The statutory caps on aggregate securities-based 
crowdfunding investments under Section 4(a)(6) may 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 is to invest smaller amounts in a greater 
number of ventures. However, such a strategy has limited benefit to the 
extent that there is a fixed cost to the due diligence associated with 
identifying and reviewing each investment opportunity, making it more 
costly to implement than a strategy that relies on the selection of 
fewer investment opportunities.
---------------------------------------------------------------------------

    \1348\ See discussion in Section III.A.4 above.
    \1349\ See, e.g., John Cochrane, The Risk and Return of Venture 
Capital, 75 J. of Fin. Econ. 3 (2005).
    \1350\ See Rajshree Agarwal and Michael Gort, Firm and Product 
Life Cycles and Firm Survival, 92 Am. Econ. Rev. 184-190 (2002).
---------------------------------------------------------------------------

    In a change from the proposed rules, both the investor's annual 
income and net worth must be above $100,000 for the 10 percent 
limitation to apply. This change is intended to strengthen investor 
protections for investors whose annual income or net worth is below 
$100,000. Such investors may not be as well situated to bear the risk 
of loss (e.g., in the event of fraud on the part of an issuer) as 
investors with both income and net worth of $100,000 or more. According 
to Commission staff analysis of the data in the 2013 Survey of Consumer 
Finances, approximately 17% of U.S. households have both income and net 
worth of $100,000 or higher. By comparison, 39% of U.S. households have 
either income or net worth of $100,000 or higher.\1351\ Thus, 
approximately 22% of households will be subject to a lower investment 
limit under the final rules than under the proposal. We note that these 
figures are only available at the household level rather than at the 
individual level. We further note that these figures do not account for 
the fact that only some households might seek to invest in an offering 
in reliance on Section 4(a)(6). Thus, we are not able to determine the

[[Page 71496]]

actual percentage of investors affected by this change in the final 
rules relative to the proposal.
---------------------------------------------------------------------------

    \1351\ Based on data from the 2013 Survey of Consumer Finances, 
a triennial survey sponsored by the Federal Reserve Board, available 
at http://www.federalreserve.gov/econresdata/scf/scfindex.htm.
---------------------------------------------------------------------------

    Within each investment limitation tier, the investment limitation 
percentage is multiplied by the ``lesser of'' an investor's annual 
income or net worth in the investment limitation calculation, which was 
suggested by several commenters.\1352\ This change from the proposal is 
expected to reduce the permitted investment limit for each individual 
investor because most investors are unlikely to have annual income and 
net worth amounts that are identical.\1353\
---------------------------------------------------------------------------

    \1352\ See, e.g., AFR Letter; BetterInvesting Letter; Consumer 
Federation Letter; Fund Democracy Letter; Fryer Letter; 
Growthfountain Letter; IAC Recommendation (but also stating that the 
``greater of'' approach would be appropriate for accredited 
investors); Merkley Letter; NASAA Letter; Schwartz Letter; Zhang 
Letter (recommending that net worth not be used to calculate the 
investment limit).
    \1353\ Although we lack information to determine the average 
change in the applicable investment limit resulting from this 
change, based on Commission staff analysis of the 2013 Survey of 
Consumer Finances, a larger percentage of households exceeded a 
particular dollar threshold, such as $100,000 or $200,000, based on 
the net worth standard than the percentage of households that 
exceeded the same dollar threshold based on the income standard.
---------------------------------------------------------------------------

    Investment limitations will likely have a negative effect on 
capital formation. For example, investment limitations may make it more 
difficult for some issuers to reach their funding targets. However, 
these limits also are expected to reduce the risk and impact of 
potential loss for investors that accompany the high failure rates 
associated with investments in small businesses and startups, thus 
potentially improving investor protection. There is no available market 
data that would allow us to empirically evaluate the magnitude of these 
effects.
    Consistent with the proposed rules, the final rules allow an issuer 
to rely on the efforts that an intermediary is required to undertake 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, which was supported by 
various commenters.\1354\ This may result in aggregate verification 
cost savings since a given intermediary may be involved in and have 
information on crowdfunding transactions pertaining to the offerings of 
multiple issuers, which makes it potentially less costly to identify 
investors that exceed the investment limitation. As a potential 
alternative, we could have imposed more extensive verification 
requirements on issuers, which would have resulted in larger compliance 
costs for issuers but could have potentially increased investor 
compliance with the investment limitations, with corresponding investor 
protection benefits. As noted above, we believe the final rules 
appropriately consider investor protection and facilitating capital 
formation.
---------------------------------------------------------------------------

    \1354\ See, e.g., Arctic Island Letter 4; CFA Institute Letter; 
Consumer Federation Letter; CrowdBouncer Letter; EarlyShares Letter; 
EMKF Letter; Finkelstein Letter; Fund Democracy Letter; Heritage 
Letter; Joinvestor Letter; Public Startup Letter 2; RoC Letter; 
RocketHub Letter; Vann Letter; Wefunder Letter; Whitaker Chalk 
Letter.
---------------------------------------------------------------------------

c. Issuer Eligibility
    Section 4A(f) of the statute excludes certain categories of issuers 
from eligibility to engage in securities-based crowdfunding 
transactions in reliance on Section 4(a)(6). The final rules exclude 
those categories of issuers.\1355\ The final rules also exclude two 
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, the final rules 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,\1356\ which is 
generally consistent with suggestions from several commenters.\1357\ 
This additional exclusion is not expected to impose any additional 
burdens and costs on an issuer that it 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 and file 
up to two annual reports at one time in order to become eligible to 
rely on Section 4(a)(6) is expected to incentivize issuers to provide 
updated and current information to investors, if they intend to rely 
again on Section 4(a)(6) to raise additional capital, without 
necessarily requiring an issuer to become fully current in its 
reporting obligations. We 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 result in less 
information being available to investors in some periods, with 
potential adverse 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 along with potential 
enforcement action for failure to comply with a regulatory reporting 
obligation and the modification from the proposed rules to require an 
issuer to disclose in its offering statement if it or any of its 
predecessors previously failed to comply with the ongoing reporting 
requirements of Rule 203 of Regulation Crowdfunding, however, may help 
to mitigate these potential adverse effects. As an alternative, we 
could have chosen not to impose this exclusion or adopted a shorter 
look-back period, as suggested by some commenters.\1358\ Compared to 
the provisions in the final rules, either of these alternatives could 
result in less information being available to investors and reduced 
informational efficiency of securities prices or possibly increased 
likelihood of issuer misconduct in offerings made in reliance on 
Section 4(a)(6).
---------------------------------------------------------------------------

    \1355\ These categories of 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; (3) investment companies as 
defined in the Investment Company Act or companies that are excluded 
from the definition of investment company under Section 3(b) or 3(c) 
of the Investment Company Act. See Section 4A(f). See also Rule 
100(b) of Regulation Crowdfunding.
    \1356\ See discussion in Section II.A.4 above.
    \1357\ See, e.g., ASSOB Letter; Commonwealth of Massachusetts 
Letter; Consumer Federation Letter; Fund Democracy Letter; Grassi 
Letter; Joinvestor Letter; NASAA Letter; Wefunder Letter.
    \1358\ See, e.g., ABA Letter; Parsont Letter; Projectheureka 
Letter; Public Startup Letter 2; RocketHub Letter.
---------------------------------------------------------------------------

    Second, the final rules 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, as 
suggested by several commenters.\1359\ This requirement is intended to 
help ensure that investors have adequate information about the issuer's 
proposed business plan to make an informed investment decision, which 
may increase investor protection in some instances. As an alternative, 
we could have chosen not to impose this exclusion or to impose a less 
restrictive exclusion, as suggested by several commenters.\1360\ 
Although these alternatives might increase capital formation by 
allowing a subset of additional issuers to rely on Section 4(a)(6), 
they may also result in less

[[Page 71497]]

informed investor decisions in such offerings.
---------------------------------------------------------------------------

    \1359\ See, e.g., Anonymous Letter 2; CFA Institute Letter; 
CFIRA Letter 7; Commonwealth of Massachusetts Letter; Consumer 
Federation Letter; NASAA Letter; ODS Letter; Traklight Letter; 
Whitaker Chalk Letter.
    \1360\ See, e.g., ABA Letter; FundHub Letter 1; Projectheureka 
Letter; Public Startup Letter 2; RoC Letter; RocketHub Letter; SBM 
Letter; Wilson Letter.
---------------------------------------------------------------------------

    Overall, categories of issuers that are excluded from eligibility 
under the final rules may be at a competitive disadvantage relative to 
those that are eligible to offer securities under the final rules, to 
the extent that excluded issuers may raise less external capital or 
incur a higher direct or indirect cost of financing, or additional 
restrictions, when seeking financing from alternative sources.
3. Issuer Requirements
a. Issuer Costs
    We recognize that there are benefits and costs associated with 
Regulation Crowdfunding's requirements pertaining to issuers, including 
the final rule's disclosure requirements. In the Proposing Release, we 
provided cost estimates for each of these requirements and requested 
comment on our estimates.\1361\ In response, we received several 
comment letters providing alternative cost estimates, some of which 
were lower and some of which were higher than the cost estimates in the 
Proposing Release.\1362\ For example, one commenter \1363\ provided the 
following cost estimates: Portal fees of 6% to 15% \1364\; accounting 
review fees of $1,950 to $9,000; accounting audit fees of $3,100 to 
$9,000; financial statements/projections costs of $2,000 to $5,000; 
Title III disclosure/compliance costs of $1,000 to $4,000; and 
corporate formation costs of $300 to $500.\1365\ In addition, the 
commenter estimated the total cost to raise $99,000 of capital under 
the proposed rules to be $9,300 to $24,500 (9.4% to 24.7%); to raise 
$499,000 of capital to be $33,240 to $84,750 (6.7% to 17%); and to 
raise $1 million of capital to be $72,800 to $168,500 (7.3% to 16.9%). 
The commenter stated that the entry of new vendors into the market and 
ensuing competition may lead to a decline in some of these costs over 
time. Another commenter \1366\ estimated that a $200,000 offering will 
incur the following average costs: Legal fees of $10,000; intermediary 
fees of $20,000 (10%); accounting fees of $5,000; accounting review 
fees of $8,000; and other fees (transfer agent, campaign development, 
filing and other) of $7,000. A different commenter estimated that the 
cost to issuers could range from 26% to 601% of the offering amount 
over a five-year period, depending on the size of the offering, which 
does not account for additional estimated opportunity costs of internal 
personnel time of $35,000 to $85,000 over a five-year period.\1367\ 
Some commenters referred to estimates of total costs without estimating 
individual components of those costs.\1368\ Other commenters provided 
additional analysis of costs under different scenarios and offering 
sizes based on the estimates in the Proposing Release.\1369\
---------------------------------------------------------------------------

    \1361\ See Proposing Release, Section III.B.3.
    \1362\ See, e.g., StartEngine Letter 2; FundHub Letter 2; 
Heritage Letter; SeedInvest Letter 1; SeedInvest Letter 2; Traklight 
Letter.
    \1363\ See StartEngine Letter 2.
    \1364\ The commenter does not specify whether these fees are 
expressed as a percentage of the amount sought or raised in the 
offering.
    \1365\ We do not consider the costs associated with the 
incorporation or formation of the business itself to be part of the 
incremental costs of Regulation Crowdfunding, as these are costs 
associated with forming any business endeavor that relies on outside 
sources of capital.
    \1366\ See Grassi Letter.
    \1367\ See SeedInvest Letter 1.
    \1368\ See, e.g., WealthForge Letter (suggesting that the costs 
associated with completing a crowdfunding transaction under the 
current regulations can be as high as one hundred thousand dollars, 
including audit fees, intermediary fees, legal fees and other 
offering costs); Berlingeri Letter (suggesting that the total cost 
would amount to between 15% and 20% of the offering); Traklight 
Letter (suggesting that the total cost would amount to between 15% 
and 20% of the offering for offerings above $100,000); FundHub 
Letter 1 (referring to potential costs, based on the Commission's 
estimates and the commenter's assumptions, of between $15,000 and 
$25,000 associated with raising $100,000); Harrison Letter and 
Ramsey Letter (referencing a Forbes estimate that the costs of 
disclosure documents, engaging an intermediary, performing 
background checks, and filing annual reports with the Commission 
might be upwards of $100,000). See also SEC Proposes Crowdfunding 
Rules, Forbes, Oct. 23, 2013, http://www.forbes.com/sites/deborahljacobs/2013/10/23/sec-proposes-crowdfunding-rules/.
    \1369\ See, e.g., EarlyShares Letter; RocketHub Letter; 
SeedInvest Letter 1.
---------------------------------------------------------------------------

    In general, commenters identified the following as the main costs 
for issuers in securities-based crowdfunding offerings: The 
intermediary fees; the costs of preparing, ensuring compliance with, 
and filing of Form C and Form C-AR; and the cost of accounting review 
or audit of financial statements.\1370\ Below we discuss the comments 
received on each of these costs and any revisions to our estimates made 
in response.
---------------------------------------------------------------------------

    \1370\ But see Growthfountain Letter (suggesting that 
crowdfunding issuers will also incur investor relations costs). We 
do not consider investor relations costs to be incremental to 
Regulation Crowdfunding, as these costs may be incurred by any 
business that relies on outside sources of capital and a widely 
dispersed investor base. However, to the extent that investment 
limitations in crowdfunding offerings increase the number of 
investors in a typical offering and to the extent that some investor 
relations costs are variable, issuers in crowdfunding offerings may 
incur higher investor relations costs than issuers in types of 
offerings that typically have fewer investors.
---------------------------------------------------------------------------

    With regard to intermediary fees, the estimates of the commenters 
that quantified these fees \1371\ were generally very close to our 
estimates in the Proposing Release (5% to 15%). We agree with the 
commenter that suggested that there is likely to be a fixed component 
to these costs that reflects a certain necessary level of due diligence 
and background screening, which will result in these costs as a 
percentage of offering size being higher for smaller offerings.\1372\ 
Thus, we have revised our intermediary fee estimates in the following 
way: We project (as a percentage of offering proceeds) 5% to 15% for 
offerings of $100,000 or less, 5% to 10% for offerings between $100,000 
and $500,000, and 5% to 7.5% for offerings above $500,000. Data on 
Regulation D offerings that involve intermediaries suggests that 
offerings of up to $1 million have an intermediary fee (commission and/
or finder fee) of approximately 6.5% on average, which is within the 
range we estimate for larger crowdfunding offerings. Although 
crowdfunding intermediaries are not expected to provide issuers with 
services commensurate with those provided by underwriters in registered 
offerings (and, in fact, funding portals would be prohibited from doing 
so), the fees charged in a crowdfunding offering can 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.\1373\ In general, 
to the extent that a significant component of these fees is fixed, the 
transaction costs for issuers will make smaller offerings more

[[Page 71498]]

expensive on a percentage basis. As previously discussed, we believe 
that competition among crowdfunding venues and the potential 
development of new products and services may have a significant impact 
on these estimates over time.
---------------------------------------------------------------------------

    \1371\ See StartEngine Letter 2 (estimating portal fees of 6-
15%). See also Grassi Letter (estimating an intermediary fee of 
$20,000 for a $200,000 offering, which amounts to 10% of the 
offering). But see Wefunder Letter (noting that, in contrast to the 
assumption in the Proposing Release, ``good startups will pay a 
maximum of $0'' and citing three accredited investor crowdfunding 
platforms that use a ``carried interest'' model for Rule 506 
offerings, including the example of the commenter itself that does 
not charge a fee to startups but that charges investors a $25 fee 
and 10% carried interest (share of profits upon acquisition or 
initial public offering)).
    \1372\ See Heritage Letter.
    \1373\ See, e.g., Hsuan-Chi Chen and Jay R. Ritter, The Seven 
Percent Solution, 55 J. Fin. 1105-1131 (2000); Mark Abrahamson, Tim 
Jenkinson, and Howard Jones, Why Don't U.S. Issuers Demand European 
Fees for IPOs? 66 J. Fin. 2055-2082 (2011); 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); Rongbing Huang and Donghang Zhang, Managing Underwriters and 
the Marketing of Seasoned Equity Offerings, 46 J. Fin. Quant. 
Analysis 141-170 (2011); 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).
---------------------------------------------------------------------------

    The next major cost driver for issuers in securities-based 
crowdfunding offerings, as suggested by commenters, is the cost of 
preparing and filing disclosure documents and the internal burden of 
ensuring compliance with the disclosure requirements of the final 
rules. Issuers will incur costs to comply with the disclosure 
requirements and file the information in the new Form C: Offering 
Statement and Form C-U: Progress Update before the offering is funded. 
Thus, issuers will incur those costs regardless of whether their 
offerings are successful. In addition, for successful offerings, 
issuers will incur costs to comply with the ongoing reporting 
requirements and file information in the new Form C-AR: Annual 
Report.\1374\
---------------------------------------------------------------------------

    \1374\ See Rule 203(b) of Regulation Crowdfunding. See also 
Section II.B.3 above.
---------------------------------------------------------------------------

    Several commenters provided estimates of these costs. One commenter 
stated that Form C could be prepared by third-party service providers, 
such as itself, at much lower costs than those estimated by the 
Commission, noting that it can prepare Form C and other required 
disclosure documents, perform ``bad actor'' checks, verify investor 
status and fulfill other compliance requirements for an estimated total 
cost of $2,500 for an offering of $100,000 and that, in most cases, its 
services and associated legal fees will cost an issuer between $2,500 
and $5,000 for an offering up to $500,000 and between $5,000 and 
$10,000 for an offering between $500,000 and $1,000,000.\1375\
---------------------------------------------------------------------------

    \1375\ See FundHub Letter 2.
---------------------------------------------------------------------------

    Other commenters indicated that the compliance costs for issuers 
are likely to be higher than the Commission's estimates. One commenter 
indicated that the burden of completing Form C would likely exceed the 
60 burden hours estimated by the Commission in the proposed rules and 
that the sum of attorney and accounting fees and management and 
administrative time and other costs to prepare these required 
disclosures will likely exceed $10,500, except in cases of start-ups 
with no operating history.\1376\ The commenter also noted that most 
Regulation D offerings, which tend to be less complex than crowdfunding 
offerings, based on the requirements in the proposed rules, incur 
accounting and legal fees above $2,500.\1377\ Another commenter noted 
that issuers and intermediaries will likely incur higher attorney and 
accounting fees and financial and administrative burdens than estimated 
in the proposed rules but did not provide estimates.\1378\
---------------------------------------------------------------------------

    \1376\ See Heritage Letter.
    \1377\ Id.
    \1378\ See NSBA Letter.
---------------------------------------------------------------------------

    One commenter submitted several estimates of the compliance costs 
associated with the final rules' disclosure requirements. In one 
comment letter, the commenter estimated the upfront compliance costs of 
the proposed rules to be potentially hundreds of hours in internal 
company time and $20,000 to $50,000 in outside professional costs and 
noted that such costs will likely be a significant deterrent to 
crowdfunding.\1379\ In a different comment letter,\1380\ this commenter 
stated that, based on an informal survey of potential vendors, it 
believes the costs of preparing a Form C-AR would range from $6,000 to 
$20,000, with the median being roughly $10,000. The commenter \1381\ 
further estimated that an additional $15,000 worth of internal burden 
per year would be required to prepare Form C-AR and an additional 
$5,000 to $10,000 worth of internal burden would be required to prepare 
financial statements. In yet another comment letter,\1382\ this 
commenter estimated the cost of ongoing disclosure obligations and 
ongoing requirements to file financial statements under the proposed 
rules to be upwards of $10,000 to $40,000 per year.
---------------------------------------------------------------------------

    \1379\ See SeedInvest Letter 2.
    \1380\ See SeedInvest Letter 1.
    \1381\ Id.
    \1382\ See SeedInvest Letter 4.
---------------------------------------------------------------------------

    Based on these comments, we have revised our estimates of the 
compliance costs associated with the disclosure requirements of the 
final rules and Forms C and C-AR. On the lower end of the spectrum, one 
commenter suggested that the cost of preparing and filing these forms 
and the associated compliance costs would range from $3,000 to 
$9,000.\1383\ Another commenter estimated preparation and compliance 
costs of $2,500 for an offering of $100,000, between $2,500 and $5,000 
for an offering between $100,000 and $500,000, and between $5,000 and 
$10,000 for an offering between $500,000 and $1,000,000.\1384\ We rely 
on this commenter's estimates of the costs of preparing and filling 
Form C for offerings of up to $100,000 and offerings between $100,000 
and $500,000. Another commenter presented higher estimates, ranging 
from $6,000 to $20,000, with a median cost of $10,000, but did not 
provide estimates for different offering sizes.\1385\ Given commenters' 
estimates, we think that the $6,000 to $20,000 estimate is more 
appropriate for larger offerings (of more than $500,000). Thus, to 
estimate the costs of preparing, filing, and complying with Form C for 
large offerings, we combine the cost ranges provided by the two 
commenters for these types of offerings, resulting in a cost estimate 
between $5,000 and $20,000. As in the Proposing Release, we estimate 
that the cost of preparing and complying with the requirements related 
to Form C-AR will be approximately two-thirds of that for Form C. We 
base this estimate on the fact that no offering-specific information 
will be required in Form C-AR and issuers may thus be able to update 
disclosure previously provided on Form C. Our estimates of the costs of 
Forms C and C-AR are exclusive of the costs of an accounting review or 
audit, which are discussed separately below.
---------------------------------------------------------------------------

    \1383\ See StartEngine Letter 2.
    \1384\ See FundHub Letter 2.
    \1385\ See SeedInvest Letter 1.
---------------------------------------------------------------------------

    We expect that the cost of preparing and filing Forms C and C-AR 
will vary based on the characteristics of issuers, but we do not have 
the information to quantify such variation. For example, issuers with 
little operating activity may have less to disclose than issuers with 
more complex operations. Further, some issuers may rely to a greater 
extent on the services of outside professionals in preparing the 
required filings,\1386\ while other issuers may choose to prepare and 
file the required forms without seeking the assistance of outside 
professionals.\1387\ We also recognize the possibility that many if not 
all of the filing requirements may ultimately be performed by funding 
portals on behalf of issuers using their platforms.
---------------------------------------------------------------------------

    \1386\ See, e.g., McGladrey Letter (suggesting that issuers that 
are startups may rely on outside professional services to a greater 
extent, which would increase costs).
    \1387\ For purposes of the PRA, we estimate that, for the 
average issuer, 25 percent of the burden associated with preparing 
and filing Form C and Form C-AR will be carried by outside 
professionals. See Section IV.C.1.a below.
---------------------------------------------------------------------------

    The other significant cost for crowdfunding issuers, as identified 
by commenters, is the cost of an independent accounting review or 
audit. As discussed above, reviewed financial statements will be 
required in offerings of more than $100,000 but not more than $500,000, 
unless the issuer has audited statements otherwise available. Audited 
financial statements

[[Page 71499]]

are required in offerings of more than $500,000.
    In a change from the proposal, issuers that have not previously 
sold securities in reliance on Section 4(a)(6) will be permitted to 
provide reviewed financial statements in offerings of more than 
$500,000 but not more than $1,000,000, unless the issuer has audited 
statements otherwise available. This change is expected to greatly 
reduce the initial costs associated with providing financial statements 
for first-time crowdfunding issuers offering more than $500,000 but not 
more than $1,000,000. According to one commenter, the difference in 
cost for reviewed versus audited financial statements could easily run 
into tens of thousands of dollars.\1388\
---------------------------------------------------------------------------

    \1388\ See FundHub Letter 1. The comment letter also cites the 
commenter's article, which notes that ``while a review could be in 
the range of $1000 in some cases, a formal audit by a CPA typically 
starts at $5,000 and could be much more.'' See Kendall Almerico, Has 
The SEC Made Equity Crowdfunding Economically Unfeasible? Crowdfund 
Insider (Nov. 21, 2014), available at http://www.crowdfundinsider.com/2013/11/26291-sec-made-equity-crowdfunding-economicallyunfeasible.
---------------------------------------------------------------------------

    Some commenters argued that the cost of reviewed or audited 
financial statements of startup companies, which is the type of 
companies expected to use Regulation Crowdfunding, would be lower than 
our estimates because such companies would be less complex and because 
a competitive industry would develop to support the compliance and 
disclosure needs of securities-based crowdfunding issuers.\1389\ 
Commenters provided estimates for the cost of an accounting review of 
financial statements that generally ranged from $1,500-$10,000.\1390\ 
One commenter suggested that the cost of an accounting review is 
approximately 60% of the cost of an audit.\1391\ Consistent with this 
comment, we also use an alternative way to estimate the cost of an 
accounting review: indirectly, from the cost of an audit.
---------------------------------------------------------------------------

    \1389\ See, e.g., CrowdFunding Network Letter; dbbmckennon 
Letter; Denlinger Letter 2; FundHub Letter 2; Holm Letter; 
StartEngine Letter 1; StartEngine Letter 2.
    \1390\ See, e.g., Grassi Letter (estimating the cost of 
accounting review for a $200,000 offering as $8,000); NPCM Letter 
(suggesting that the minimum cost to obtain an audit, or even a 
review, would be $5,000); StartEngine Letter 1 (estimating 
accounting review and audit costs of $1,500-$10,000 for smaller, 
newer companies); StartEngine Letter 2 (estimating accounting review 
costs of $1,950-$9,000).
    \1391\ See Traklight Letter.
---------------------------------------------------------------------------

    Commenters provided several estimates of the cost of an audit for 
securities-based crowdfunding issuers, most of which ranged from $2,500 
to $10,000.\1392\ Other commenters, however, provided higher annual 
audit cost estimates of up to $20,000-$30,000.\1393\ Based on a 
compilation of audit fee data from reporting companies for fiscal year 
2014, 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 $20,000.\1394\ We estimate the audit cost to be 
approximately $2,500 to $30,000. In the Proposing Release, we estimated 
the audit cost to be $28,700, which falls within this range. Assuming 
that, as suggested by one commenter,\1395\ the accounting review cost 
is approximately 60% of the audit cost, this range of audit costs 
yields an estimate of the accounting review cost of approximately 
$1,500 to $18,000. In the Proposing Release, we estimated the 
accounting review cost to be $14,350, which falls within this range. 
Estimates of the cost of an accounting review that we received from 
commenters also fall within this range. In light of the wide range of 
estimates provided by commenters for the cost of a review or audit of 
financial statements, we use in this release a range of estimates 
($1,500-$18,000 for the accounting review cost and $2,500-$30,000 for 
the audit cost) instead of a single point estimate for these 
anticipated costs for offerings.
---------------------------------------------------------------------------

    \1392\ See, e.g., dbbmckennon Letter (estimating audit costs of 
$4,000-$9,000 for new companies with limited historical operations); 
Denlinger Letter 2 (noting that audit costs may be in the range of 
$2,000-$4,000 for a pre-revenue startup); FundHub Letter 2 (noting 
the emergence of CPA firms willing to perform a complete audit for a 
startup for $2,500 or less); NPCM Letter (suggesting that the 
minimum cost to obtain an audit, or even a review, would be $5,000); 
StartEngine Letter 1 (estimating accounting review and audit costs 
of $1,500-$10,000 for smaller, newer companies); StartEngine Letter 
2 (estimating audit costs of $3,100-$9,000).
    \1393\ See, e.g., Frutkin Letter (suggesting a ``rough estimate 
of $30,000 per audit''); Graves Letter (suggesting that audit costs 
can be upwards of $18,000 to $25,000); Startup Valley Letter 
(suggesting that audit fees can be up to $10,000 for small startups 
with no financials and can exceed $20,000 for companies that have 
been in business for a few years); Traklight Letter (suggesting that 
audit costs can be up to $20,000).
    \1394\ 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 greater than zero 
and less than $1 million (the smallest subgroup of companies for 
which data is compiled). We note that the cost of an audit for many 
issuers conducting a securities-based crowdfunding offering in 
reliance on Section 4(a)(6) is likely to be lower than for the 
subset of Exchange Act reporting companies referenced above, because 
they likely would be at an earlier stage of development than issuers 
that file Exchange Act reports with us and, thus, could be less 
complex to audit.
    \1395\ See Traklight Letter.
---------------------------------------------------------------------------

    As discussed below, in a change from the proposal, the final rules 
do not require issuers to provide reviewed or audited financial 
statements in the annual report, unless such statements are otherwise 
available, which is expected to yield cost savings on an annual basis 
compared with the proposal.
    The table below presents the main adjusted cost estimates for the 
final rules.\1396\
---------------------------------------------------------------------------

    \1396\ In addition to the compliance costs outlined in the 
table, issuers also will incur costs to (1) obtain EDGAR access 
codes on Form ID; (2) prepare and file progress updates on Form C-U; 
and (3) prepare and file Form C-TR to terminate ongoing reporting. 
These additional compliance costs are discussed further below. In 
addition, for purposes of the Paperwork Reduction Act (``PRA''), we 
provide burden estimates for each of these filings obligations in 
Section IV.C.1, below.
    \1397\ For purposes of the table, we estimate the range of fees 
that an issuer would pay the intermediary assuming the following: 
(1) The fees would be calculated as a percentage of the offering 
amount ranging from 5% to 15% of the total offering amount for 
offerings of $100,000 or less, 5% to 10% for offerings between 
$100,000 and $500,000, and 5% to 7.5% for offerings of more than 
$500,000; 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 fees paid to the intermediary 
may, or may not, cover services to an issuer in connection with the 
preparation and filing of the forms identified in this table.

----------------------------------------------------------------------------------------------------------------
                                                             Offerings of more than
                                      Offerings of $100,000  $100,000, but not more     Offerings of more than
                                             or less              than $500,000                $500,000
----------------------------------------------------------------------------------------------------------------
Fees paid to the                     $2,500-$7,500.........  $15,000-$30,000.......  $37,500-$56,250.
 intermediary.\1397\.
Costs per issuer for preparation     $2,500................  $2,500-$5,000.........  $5,000-$20,000.
 and filing of Form C for each
 offering and related compliance
 costs.
----------------------------------------------------------------------------------------------------------------


[[Page 71500]]


----------------------------------------------------------------------------------------------------------------
                                                             Offerings of more than
                                      Offerings of $100,000  $100,000, but not more     Offerings of more than
                                             or less              than $500,000                $500,000
----------------------------------------------------------------------------------------------------------------
Costs per issuer for preparation     $1,667................  $1,667-$3,333.........  $3,333-$13,333.
 and filing of annual report on
 Form C-AR \1398\ and related
 compliance costs.
Costs per issuer for review or       Not required..........  $1,500-$18,000........  $2,500-$30,000.
 audit of financial statements.                                                      ($1,500-$18,000 for first-
                                                                                      time issuers raising more
                                                                                      than $500,000 but not more
                                                                                      than $1,000,000.) \1399\
----------------------------------------------------------------------------------------------------------------

    We do not have additional data on the costs likely to be incurred 
by crowdfunding issuers to prepare the required disclosures beyond the 
information discussed above. Overall, we recognize that cost estimates 
may vary from issuer to issuer and from service provider to service 
provider. However, even with the additional accommodations provided in 
the final rules, the costs of compliance may be significant for some 
issuers.
---------------------------------------------------------------------------

    \1398\ As noted above, we estimate that these costs are 
approximately two-thirds of the costs for preparation and filing of 
Form C.
    \1399\ First-time crowdfunding issuers within this offering 
range will be permitted to provide reviewed financial statements.
---------------------------------------------------------------------------

b. General Disclosure Requirements
    The statute and the final rules related to issuer disclosures are 
intended to reduce the information asymmetries that currently exist 
between small businesses and 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 generally are not required to hire an 
independent accountant to review financial statements. 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 about that company.
    Such information asymmetries may be especially acute in the 
securities-based crowdfunding market because the market includes 
startups and small businesses that have significant risk factors and 
other characteristics that may 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 investors who may not have the resources necessary to 
gather and analyze information about issuers before investing or to 
effectively monitor issuers after investing. Moreover, investment 
limits in securities-based crowdfunding offerings in reliance on 
Section 4(a)(6) will likely lead to investors having smaller stakes in 
the firm, which may reduce their incentives to monitor or gather 
information for a given investor. These considerations may give rise to 
adverse selection and moral hazard in offerings in reliance on Section 
4(a)(6). For instance, some issuers may use capital to fund riskier 
projects than what was disclosed to investors, or they may not pursue 
their stated business objectives. If investors in securities-based 
crowdfunding have limited information about issuers or a limited 
ability to monitor such issuers, they may seek higher returns for their 
investment or choose to withdraw from the securities-based crowdfunding 
market altogether, which would increase the cost of capital to issuers 
and limit the capital formation benefits of the final rules. In 
addition, investors in offerings made in reliance on Section 4(a)(6) 
may make relatively small investments, due in part to the application 
of investment limitations. This potential dispersed investor base may 
make it difficult for investors to solve collective action problems in 
monitoring the issuer.
    The statute and the final 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) during the 
offering and on an annual basis thereafter.\1400\ Issuers also are 
required to provide these disclosures to investors and, in the case of 
offering documents, to investors and the relevant intermediary. The 
disclosure requirements, which are described above,\1401\ are more 
extensive than those required under some other existing exemptions from 
registration. For example, although the current requirements of Tier 1 
Regulation A offerings include similar initial financial disclosures, 
issuers in Tier 1 offerings are not required to file ongoing 
reports.\1402\ Issuers using the Rule 504 exemption under Regulation D 
to raise up to $1 million are not required 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 (and 
unaudited statements of income, cash flows and changes in stockholders' 
equity) to non-accredited investors, but there are no periodic 
reporting requirements. The disclosure requirements in Regulation 
Crowdfunding are expected to benefit investors by enabling them to 
better evaluate the issuer and the offering, monitor how the issuer is 
performing over time and be aware of when the issuer may terminate its 
ongoing reporting obligations. This will allow investors with various 
risk preferences to invest in the offerings best suited for their risk 
tolerance, thus improving allocative efficiency.
---------------------------------------------------------------------------

    \1400\ See Section 4A(b). See also Rules 201, 202 and 203 of 
Regulation Crowdfunding.
    \1401\ See Section II.B.1 above.
    \1402\ However, issuers in Tier 1 Regulation A offerings are 
required to provide information about sales in such offerings and to 
update certain issuer information by electronically filing a Form 1-
Z exit report with the Commission not later than 30 calendar days 
after the termination or completion of an offering. Further, Tier 1 
offerings must be qualified by the Commission and are subject to 
state registration requirements. Issuers in Tier 2 offerings are 
subject to annual, semiannual and current reporting requirements. 
See Regulation A Adopting Release.
---------------------------------------------------------------------------

    The disclosure requirements also may improve informational 
efficiency in the market. Specifically, the required disclosure may 
provide investors with a useful benchmark to evaluate the issuer and 
compare the issuer to other private issuers both within and outside of 
the securities-based crowdfunding market.\1403\ Additionally, 
disclosure by issuers engaging in crowdfunding transactions in reliance 
on Section 4(a)(6) may inform financial markets more generally about 
new consumer trends and new products, thus creating externalities that 
benefit other types of investors and issuers.
---------------------------------------------------------------------------

    \1403\ 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.

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[[Page 71501]]

    We recognize, however, that the disclosure requirements also will 
have associated limitations and costs, including the direct costs of 
preparation, certification, independent accounting review (when 
necessary) and dissemination of the disclosure documents. As noted 
above, 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 exempt offerings. The statute also provides us 
with the discretion to impose additional requirements on issuers 
engaging in crowdfunding transactions, and in some cases, the final 
rules require issuers to disclose information beyond what is 
specifically mandated by the statute.\1404\ We recognize that these 
additional discretionary disclosure provisions may impose additional 
compliance costs on issuers compared with the proposal. However, we 
believe these provisions will improve investor decision-making and may 
ultimately benefit issuers by improving price efficiency in the 
securities-based crowdfunding market. Although requiring less 
disclosure could impose lower compliance costs, we believe that the 
disclosure requirements we are adopting appropriately consider the need 
to enhance the ability of issuers relying on Section 4(a)(6) to raise 
capital while enabling investors to make informed investment decisions. 
In response to the suggestion by some commenters that issuers not be 
required to disclose information in multiple places,\1405\ under the 
final rules, an issuer is not required to repeat disclosure that is 
already provided in the issuer's financial statements. This may help to 
mitigate the cost of compliance for issuers.
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    \1404\ See Section 4A(b)(5). See also Section II.B.1.a.i(g) for 
a description of the additional disclosure requirements.
    \1405\ See, e.g., EY Letter (noting that certain required 
disclosure would be included in an issuer's financial statements); 
Grassi Letter (same).
---------------------------------------------------------------------------

    We note that the disclosure requirements may have indirect costs to 
the extent that information disclosed by issuers relying on Section 
4(a)(6) can be used by their competitors, resulting in a potential loss 
of a competitive advantage or intellectual property, particularly for 
high-growth issuers and issuers engaged in significant research and 
development. Requiring significant levels of disclosure at an early 
stage of an issuer's lifecycle may affect an issuer's competitive 
position and may limit the use of the exemption in Section 4(a)(6) by 
issuers who are especially concerned with confidentiality. These 
disclosure costs also may make other types of private offerings more 
attractive to potential securities-based crowdfunding issuers. For 
example, the 2013 changes to Rule 506 of Regulation D,\1406\ which 
allow for general solicitation, subject to certain conditions, may make 
it a more attractive option for small business financing and, thus, may 
divert potential issuers from crowdfunding.
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    \1406\ See Rule 506(c) Adopting Release, note 5.
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    In addition, under the statute and the final rules, issuers that 
complete a crowdfunding offering in reliance on Section 4(a)(6) are 
subject to ongoing reporting requirements,\1407\ which will increase 
compliance costs. The ongoing reporting, however, may provide a 
liquidity benefit for secondary sales of securities issued in 
crowdfunding transactions and make the prices of such securities more 
informationally efficient, should a secondary market develop.
---------------------------------------------------------------------------

    \1407\ See Rule 202 of Regulation Crowdfunding.
---------------------------------------------------------------------------

c. Financial Condition and Financial Statement Disclosure Requirements
    Consistent with the statute, the final rules require narrative 
disclosure about the issuer's financial condition, including, to the 
extent material, liquidity, capital resources and the issuer's 
historical results of operations.\1408\ We expect that this discussion 
will inform investors about the financial condition of the issuer, 
without imposing significant costs on issuers, because issuers likely 
will already have such information readily available. In addition, the 
final rules do not prescribe the content or format for this 
information.
---------------------------------------------------------------------------

    \1408\ See 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 final rules implement tiered financial disclosure requirements 
based on the aggregate amount of securities offered and sold in 
reliance on Section 4(a)(6) during the preceding 12-month period, 
inclusive of the offering amount in the offering for which disclosure 
is being provided.\1409\ The disclosure requirements will provide 
investors with more information than might otherwise be obtained in 
private offerings, but also may create additional costs for those 
issuers that have limited financial and accounting expertise necessary 
to produce the financial disclosures envisioned by the statute and the 
final rules.
---------------------------------------------------------------------------

    \1409\ See Rule 201(t) of Regulation Crowdfunding. See also 
Section II.B.1.a.(ii)(b) above.
---------------------------------------------------------------------------

    The final rules, consistent with the proposed rules, require 
issuers to provide a complete set of their financial statements 
(balance sheets, statements of comprehensive income, statements of cash 
flows and statement of changes in stockholders' 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.\1410\ We could have chosen an alternative that allows 
financial statements to be prepared in accordance with other 
comprehensive bases of accounting, as some commenters suggested.\1411\ 
Such an alternative may have mitigated costs for some issuers, 
especially those smaller issuers that historically have prepared their 
financial statements in accordance with other comprehensive bases of 
accounting rather than U.S. GAAP. However, as we discussed above, this 
alternative would reduce the comparability of financial statements 
across issuers and might not provide investors with a fair 
representation of a company's financial position and results of 
operations. Further, it may be difficult for investors to determine 
whether the issuer complied with such basis of accounting.\1412\
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    \1410\ See Instruction 3 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \1411\ See, e.g., ABA Letter (for offerings of $100,000 or less, 
but stating that the Commission could require providing U.S. GAAP 
financial statements if available); AICPA Letter; CFIRA Letter 5; 
CFIRA Letter 7; CrowdCheck Letter 4; EarlyShares Letter; EY Letter 
(for offerings of $100,000 or less, unless U.S. GAAP financial 
statements are available); Grassi Letter; Graves Letter (for issuers 
with less than $5 million in revenue); Mahurin Letter (stating that 
simple Excel spreadsheets accompanied by bank records should meet 
the financial statement requirements); Milken Institute Letter (for 
early-stage issuers); NFIB Letter; SBEC Letter; StartupValley 
Letter; Tiny Cat Letter (for offerings of less than $500,000); 
Whitaker Chalk Letter (for offerings of less than $500,000 if the 
issuer has an asset or income level below a certain level).
    \1412\ See Section II.B.1.a.(ii)(b) above.
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    The final rules also specify that an issuer may 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, and financial statements for the 
most recently completed fiscal year are not otherwise available.\1413\ 
This may impose a cost on investors to the extent that the investors do 
not have more current financial information about the issuer. However, 
this concern is somewhat mitigated by the requirement that issuers 
include a discussion of any material changes or trends known to 
management in the financial condition and results of

[[Page 71502]]

operations subsequent to the period for which financial statements are 
provided.\1414\
---------------------------------------------------------------------------

    \1413\ See Instruction 10 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \1414\ See Rule 201(s) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Requiring financial statements covering the two most recently 
completed fiscal years is expected to 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 some commenters suggested,\1415\ requiring a 
second year of financial statements will to some degree increase the 
cost for the issuer. Also, to the extent that the issuer had little or 
no operations in the prior year, the benefit of comparability may not 
be realized. We recognize that many crowdfunding issuers may not have 
any financial history, and investors may make investment decisions 
without a track record of issuer performance, relying largely on the 
belief that an issuer can succeed based on their business plan and 
other factors. Nevertheless, for those issuers that do have a financial 
history, we believe this disclosure can contribute to better informed 
investment decisions and improve the overall allocative efficiency of 
the securities-based crowdfunding market.
---------------------------------------------------------------------------

    \1415\ See, e.g., Denlinger Letter 1; EY Letter; Fryer Letter; 
Grassi Letter; Joinvestor Letter; Public Startup Letter 2; RFPIA 
Letter; RocketHub Letter.
---------------------------------------------------------------------------

    For offerings of $100,000 or less, the final rules require the 
issuer to provide financial statements that are certified by the 
principal executive officer to be true and complete in all material 
respects.\1416\ The final rules include a form of certification for the 
principal executive officer to provide in the issuer's offering 
statement, which we believe will help issuers comply with the 
certification required by the statute and the final rules.\1417\ 
However, if reviewed financial statements or audited financial 
statements are otherwise available, they must be provided.\1418\
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    \1416\ See Section 4A(b)(1)(D)(i). See also Rule 201(t)(1) of 
Regulation Crowdfunding.
    \1417\ See Instruction 4 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \1418\ See Rule 201(t)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would have required income tax returns for the 
most recently completed year (if any). In a change from the proposed 
rules, consistent with the suggestions of some commenters and to 
respond to privacy concerns,\1419\ the final rules do not require 
complete tax returns and instead require that an issuer disclose its 
total income, taxable income and total tax, or the equivalent line 
items from the applicable form, and have the principal executive 
officer certify that those amounts reflect accurately the information 
in the issuer's federal income tax returns.\1420\ We believe that the 
requirement to provide selected items from the return, rather than the 
return itself, will alleviate some of the privacy concerns for issuers. 
This change may increase record keeping costs for issuers and give rise 
to potential transcription errors. It also may reduce the amount of 
information available to investors, but as we noted in the Proposing 
Release, it is not clear to what extent all of the information 
presented in a tax return would be useful for an investor evaluating 
whether or not to purchase securities from the issuer. Finally, 
although principal executive officers will incur some incremental 
liability for their certification that these amounts reflect accurately 
the information in the issuer's federal income tax return, we do not 
expect this change from the proposal to impose substantial additional 
costs on officers or issuers given the limited scope of the required 
certification.
---------------------------------------------------------------------------

    \1419\ See, e.g., AICPA Letter (stating that disclosure of an 
issuer's tax return ``. . . has the potential to cause serious 
problems. Tax returns are intended to be confidential and should 
remain so.''); Public Startup Letter 2; RocketHub Letter; SBM 
Letter; Wilson Letter (suggesting that personal income tax 
information should be on a voluntary basis only); Zhang Letter.
    \1420\ See Rule 201(t)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Moreover, the final rules 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 may use 
information from the tax return filed for the prior year, on the 
condition that the issuer provides information from the tax return for 
the most recently completed fiscal year when it is filed, if it is 
filed during the offering period.\1421\ This accommodation is expected 
to 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 may impose a cost on investors 
because they might not receive the most up-to-date tax information 
about the issuer.
---------------------------------------------------------------------------

    \1421\ See Instruction 6 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would have required financial statements for 
offerings exceeding $100,000 but not exceeding $500,000 to be reviewed 
by a public accountant independent of the issuer and financial 
statements for offerings exceeding $500,000 to be audited by a public 
accountant independent of the issuer. The final rules specify that the 
required financial statements must be reviewed by a public accountant 
that is independent of the issuer for offerings exceeding $100,000 but 
not exceeding $500,000.\1422\ If, however, financial statements of the 
issuer are available that have been audited by a public accountant that 
is independent of the issuer, the issuer must provide those financial 
statements instead and need not include the reviewed financial 
statements.\1423\
---------------------------------------------------------------------------

    \1422\ See Rule 201(t)(2) of Regulation Crowdfunding.
    \1423\ Id.
---------------------------------------------------------------------------

    Similar to the proposal, issuers in offerings exceeding $500,000 
must provide audited financial statements. In a change from the 
proposal, the final rules specify that issuers that have not previously 
sold securities in reliance on Section 4(a)(6) and are conducting 
offerings with a target offering amount exceeding $500,000 but not 
exceeding $1,000,000 can provide reviewed financial statements, unless 
audited financial statements are otherwise available.\1424\ Audited 
financial statements can benefit investors in evaluating offerings by 
issuers with substantive prior business activity by providing them with 
potentially higher-quality financial statements. However, as noted by a 
number of commenters \1425\ and discussed above, requiring audited 
financial statements could significantly increase the cost to issuers 
compared to requiring reviewed financial statements.\1426\ Further, for 
issuers that are newly formed, with no or very limited operations, and 
for small issuers, the benefit of the audit may not justify its cost.
---------------------------------------------------------------------------

    \1424\ See Rule 201(t)(3) of Regulation Crowdfunding. See also 
Section II.B.1.a.ii.
    \1425\ See, e.g., AEO Letter; Angel Letter 1; AWBC Letter; CFIRA 
Letter 5; CfPA Letter; CrowdFundConnect Letter; EarlyShares Letter; 
EMKF Letter; EY Letter; Finkelstein Letter; FundHub Letter 1; 
Generation Enterprise Letter; Grassi Letter; Graves Letter; Guzik 
Letter 1; Hakanson Letter; Holland Letter; Johnston Letter; 
Kickstarter Coaching Letter; McGladrey Letter; Milken Institute 
Letter; NACVA Letter; NFIB Letter; NPCM Letter; NSBA Letter; PBA 
Letter; Reed Letter; RocketHub Letter; Saunders Letter; SBA Office 
of Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth Letter; 
Verrill Dana Letter; WealthForge Letter; Wefunder Letter; Woods 
Letter; Zeman Letter.
    \1426\ See also Section III.B.3.a.
---------------------------------------------------------------------------

    As discussed above \1427\ the approach in the final rules of 
requiring reviewed financial statements rather than audited financial 
statements, unless otherwise

[[Page 71503]]

available, for first-time crowdfunding issuers that undertake offerings 
of more than $500,000 but not more than $1,000,000 is expected to 
reduce the costs associated with financial statements for such first-
time issuers compared to the proposed requirement of audited financial 
statements for all issuers in offerings of more than $500,000. This 
accommodation is expected to alleviate the significant upfront cost of 
an audit for first-time issuers that have not yet raised capital in a 
crowdfunding offering and may be more financially constrained. To the 
extent that their financing needs have not been met through alternative 
financing methods, first-time crowdfunding issuers are likely to be 
more financially constrained than issuers that have already established 
a track record of successful crowdfunding offerings. We recognize, 
however, that there are costs associated with this accommodation. Not 
requiring audited financial statements for offerings of more than 
$500,000 but not more than $1,000,000 by first-time issuers may reduce 
the quality of financial disclosure, which may be a more significant 
concern for new crowdfunding issuers due to the fact that their more 
limited track record may translate into a higher level of information 
asymmetry between issuers and investors. The potentially reduced 
quality of financial disclosure associated with offerings of more than 
$500,000 by first-time issuers may affect the likelihood of detecting 
fraud, which would decrease investor protection. To the extent that 
investors anticipate such increased risks, issuers may face a higher 
cost of capital or be unable to raise the entire amount offered, which 
would diminish the capital formation benefits of the final rule. We 
note that some first-time issuers in offerings of more than $500,000 
but not more than $1,000,000 may have audited statements otherwise 
available, which could partly mitigate the described effects. We also 
note that some first-time issuers concerned about investor confidence 
in the quality of their financial statements may voluntarily provide 
audited financial statements.
---------------------------------------------------------------------------

    \1427\ Id.
---------------------------------------------------------------------------

    Tiered disclosure requirements aim to partially mitigate the impact 
of the fixed component of compliance costs on issuers in smaller 
securities-based crowdfunding offerings. However, it is possible that 
the thresholds may have an adverse competitive effect on some issuers. 
For example, the cost of reviewed financial statements may cause 
issuers in offerings exceeding but close to $100,000 to incur 
significantly higher offering costs as a percentage of the amount 
offered compared to issuers offering less than but close to $100,000. 
Similarly, the cost of audited financial statements may cause issuers 
in follow-on crowdfunding offerings exceeding but close to $500,000 to 
incur significantly higher offering costs as a percentage of the amount 
offered compared to issuers in offerings of less than but close to 
$500,000. We note, however, that the issuer has the ability to select 
its offering amount, and since the choice of offering amount determines 
which financial statement requirements will apply to its offering, the 
issuer, by choosing its offering amount, effectively also chooses its 
financial statement requirements.
    We considered the alternative of exempting issuers with no 
operating history or issuers that have been in existence for fewer than 
12 months from the requirement to provide financial statements. We 
believe that financial statements contain valuable information that can 
aid investors in making better informed decisions, particularly, when 
evaluating early-stage issuers characterized by a high degree of 
information asymmetry. We also expect that other accommodations in the 
final rules will help alleviate some of these issuer compliance costs.
    Similar to the proposed rules, financial statements must be 
reviewed in accordance with SSARS issued by the AICPA.\1428\ Although 
we could have chosen to develop a new review standard for purposes of 
the final rules, we believe that issuers will benefit from using the 
AICPA's widely-utilized review standard. We believe that many 
accountants reviewing financial statements of issuers raising capital 
in reliance on Section 4(a)(6) are familiar with the AICPA's standards 
and procedures for review, which should help to partly mitigate review 
costs.
---------------------------------------------------------------------------

    \1428\ See Rule 201(t)(2) of Regulation Crowdfunding. See also 
Instruction 8 to paragraph (t) of Rule 201 of Regulation 
Crowdfunding.
---------------------------------------------------------------------------

    As described above, the final rules require certain financial 
statements to be reviewed or audited by a public accountant that is 
independent of the issuer.\1429\ In a change from the proposed rules, 
the final rules permit the use of independence standards set forth in 
Rule 2-01 of Regulation S-X or the independence standards of the 
AICPA.\1430\ This change to allow the use of AICPA standards may reduce 
issuer compliance costs to the extent that there are higher costs 
associated with engaging an accountant that satisfies the independence 
standards set forth in Rule 2-01 of Regulation S-X. The change also 
will increase the number of public accountants able to perform the 
reviews or audits, which may lead to a decrease in the price of their 
services and thus a decrease in the direct issuance costs to issuers 
compared with the proposal. The benefit from this change will accrue to 
issuers making offerings of $100,000 to $1,000,000. To the extent that 
the AICPA independence standards impose fewer restrictions with respect 
to potential conflicts of interest than the independence standards in 
Rule 2-01 of Regulation S-X, however, this accommodation may weaken 
investor protection. Moreover, any decrease in investor confidence in 
the reliability of financial statements as a result of this change will 
limit the capital formation benefits of the final rules.
---------------------------------------------------------------------------

    \1429\ See Section II.B.1 above.
    \1430\ See Instruction 10 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
---------------------------------------------------------------------------

    In addition, the final rules require an issuer to file a signed 
review report or audit report, whichever is applicable, and notify the 
public accountant of the issuer's intended use of the report in the 
offering.\1431\ This can 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 from the requirement to file the report. As discussed 
above,\1432\ in a change from the proposal, the final rules do not 
permit qualified audit reports. This change may impose an additional 
cost on issuers, which we are not able to quantify. However, this 
change is expected to provide investors with more reliable financial 
statements, which should enable investors to better evaluate the 
prospects of issuers relying on Section 4(a)(6) and thus make better 
informed investment decisions. By providing investors with a greater 
degree of confidence in the reliability of the financial information, 
audited financial statements will reduce the information asymmetry 
about the issuer's financial condition that exists between issuers and 
potential investors. This decrease in information asymmetry may lead to 
greater capital formation.
---------------------------------------------------------------------------

    \1431\ See Instructions 8 and 9 to paragraph (t) of Rule 201 of 
Regulation Crowdfunding.
    \1432\ See Section II.B.1.a.(ii)(b) above.
---------------------------------------------------------------------------

    In a change from the proposed rules, the final rules do not require 
financial statements in the annual report that meet a standard of 
review equal to the highest standard provided in a prior 
offering.\1433\ The final rules require an annual report to include 
financial statements of the issuer to be certified

[[Page 71504]]

by the principal executive officer of the issuer as true and complete 
in all material respects.\1434\ Issuers that otherwise have available 
financial statements that have been reviewed or audited by an 
independent certified public accountant, must provide them and will not 
be required to have the principal executive officer 
certification.\1435\ As discussed above, these changes will reduce the 
compliance costs to issuers compared with the proposal.\1436\ At the 
same time, they may reduce the quality of the ongoing financial 
statements, resulting in a potential decrease in investor protection 
and investor confidence in the quality of these financial statements. 
We note that some issuers may have reviewed or audited financial 
statements otherwise available, which would partly mitigate this 
concern. In addition, an issuer is able to voluntarily provide 
financial statements that meet a higher standard, so if an issuer is 
concerned about investor confidence in the quality of financial 
statements, it can choose to provide reviewed or audited financial 
statements.
---------------------------------------------------------------------------

    \1433\ See Section II.B.2.c above.
    \1434\ See Rule 202(a) of Regulation Crowdfunding.
    \1435\ Id.
    \1436\ See Section III.B.3.a. above.
---------------------------------------------------------------------------

d. Issuer Filing Requirements
    As discussed above, issuers will incur costs to prepare and file 
the various disclosures required under Regulation Crowdfunding.\1437\ 
The statute requires issuers to file and provide to investors certain 
specified information at the time of offering, such as information 
about the issuer, officers and directors, and certain shareholders, a 
description of the business, a description of the purpose and intended 
use of proceeds, target offering amount and the deadline to reach it, 
offering price (or the method for determining the price) and other 
terms of the offering, a description of the financial condition of the 
issuer, as well as certain other disclosures.\1438\ These disclosure 
requirements are expected to strengthen investor protection and enable 
investors to make better informed investment decisions. The statute 
does not specify a format that issuers must use to present the required 
disclosures to the Commission. As noted above, the final rules require 
issuers to file the mandated disclosure on EDGAR using new Form 
C.\1439\
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    \1437\ See Section III.B.3.a. above.
    \1438\ See Rule 201 of Regulation Crowdfunding. See also Section 
II.B.1 above.
    \1439\ See Rule 203(a) of Regulation Crowdfunding. See also 
Section II.B.3 above.
---------------------------------------------------------------------------

    Form C requires certain disclosures to be submitted using an XML-
based filing,\1440\ while allowing the issuer to customize the 
presentation of other required disclosures. This approach provides 
issuers with the flexibility to present the required disclosures in a 
cost-effective manner, while also requiring the disclosure of certain 
key offering information in a standardized format, which we believe 
will benefit investors and help facilitate capital formation.
---------------------------------------------------------------------------

    \1440\ See Instruction to paragraph (a)(1) of Rule 203 of 
Regulation Crowdfunding. See also Section II.B.3 above.
------------------------------------------------------------