Vol. 78 Tuesday, No. 214 November 5, 2013
Part II
Securities and Exchange Commission
17 CFR Parts 200, 227, 232 et al. Crowdfunding; Proposed Rule
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SECURITIES AND EXCHANGE (http://sec.gov/rules/proposed.shtml). 2. Restrictions on Resales COMMISSION Comments also are available for Web 3. Information Available to States site viewing and printing in the 4. Exemption From Section 12(g) 17 CFR Parts 200, 227, 232, 239, 240 Commission’s Public Reference Room, 5. Scope of Statutory Liability and 249 6. Disqualification 100 F Street NE., Washington, DC F. General Request for Comment [Release Nos. 33–9470; 34–70741; File No. 20549, on official business days III. Economic Analysis S7–09–13] between the hours of 10:00 a.m. and A. Economic Baseline 3:00 p.m. All comments received will be 1. Existing Funding Sources Available to RIN 3235–AL37 posted without change; we do not edit Startups and Small Businesses 2. Current Sources of Funding for Startups Crowdfunding personal identifying information from submissions. You should submit only and Small Businesses That Could Be Substitutes or Complements to AGENCY: information that you would like to make Securities and Exchange Crowdfunding Commission. publicly available. 3. Survival Rates for Startups and Small ACTION: Proposed rules. FOR FURTHER INFORMATION CONTACT: Businesses With regard to requirements for issuers, 4. Market Participants SUMMARY: The Securities and Exchange Sebastian Gomez Abero or Jessica B. Analysis of Proposed Rules Commission is proposing for comment Dickerson, Division of Corporation 1. Broad Economic Considerations new Regulation Crowdfunding under Finance, at (202) 551–3500, and with 2. Crowdfunding Exemption the Securities Act of 1933 and the regard to requirements for 3. Issuer Requirements Securities Exchange Act of 1934 to 4. Intermediary Requirements intermediaries, Joseph Furey, Joanne 5. Additional Funding Portal Requirements implement the requirements of Title III Rutkowski, Leila Bham, Timothy White 6. Insignificant Deviations of the Jumpstart Our Business Startups or Carla Carriveau, Division of Trading 7. Relationship With State Law Act. Regulation Crowdfunding would and Markets, at (202) 551–5550, 8. Exemption From Section 12(g) prescribe rules governing the offer and Securities and Exchange Commission, 9. Disqualification sale of securities under new Section 100 F Street NE., Washington, DC C. Request for Comment 4(a)(6) of the Securities Act of 1933. The 20549. IV. Paperwork Reduction Act proposal also would provide a A. Background SUPPLEMENTARY INFORMATION: framework for the regulation of B. Estimate of Issuers and Intermediaries registered funding portals and brokers Table of Contents C. Estimate of Burdens D. Collections of Information Are that issuers are required to use as I. Introduction and Background Mandatory intermediaries in the offer and sale of A. Overview of Crowdfunding E. Confidentiality securities in reliance on Section 4(a)(6). B. Title III of the JOBS Act F. Retention Period of Recordkeeping In addition, the proposal would exempt C. Approach to Proposed Rules Requirements securities sold pursuant to Section II. Discussion of Proposed Regulation G. Request for Comment 4(a)(6) from the registration Crowdfunding V. Small Business Regulatory Enforcement requirements of Section 12(g) of the A. Crowdfunding Exemption Fairness Act 1. Limitation on Capital Raised Securities Exchange Act of 1934. VI. Initial Regulatory Flexibility Act Analysis 2. Investment Limitation A. Reasons for the Proposed Actions DATES: Comments should be received on 3. Transaction Conducted Through an B. Objectives or before February 3, 2014. Intermediary C. Small Entities Subject to the Proposed ADDRESSES: Comments may be 4. Exclusion of Certain Issuers From Rules submitted by any of the following Eligibility Under Section 4(a)(6) D. Projected Reporting, Recordkeeping and B. Requirements on Issuers methods: Other Compliance Requirements 1. Disclosure Requirements E. Duplicative, Overlapping or Conflicting Electronic Comments 2. Ongoing Reporting Requirements Federal Rules 3. Form C and Filing Requirements • F. Significant Alternatives Use the Commission’s Internet 4. Prohibition on Advertising Terms of the 1. Issuers comment form (http://www.sec.gov/ Offering 2. Intermediaries rules/proposed.shtml); 5. Compensation of Persons Promoting the G. Request for Comment • Send an email to rule-comments@ Offering VII. Statutory Authority and Text of Proposed sec.gov. Please include File Number S7– 6. Other Issuer Requirements Regulation C. Requirements on Intermediaries 09–13 on the subject line; or Exhibit A • 1. Brokers and Funding Portals Use the Federal eRulemaking Portal 2. Requirements and Prohibitions I. Introduction and Background (http://www.regulations.gov). Follow the 3. Measures To Reduce Risk of Fraud instructions for submitting comments. 4. Account Opening A. Overview of Crowdfunding 5. Requirements With Respect to Paper Comments Crowdfunding is a new and evolving Transactions method to raise money using the • Send paper comments in triplicate 6. Completion of Offerings, Cancellations and Reconfirmations Internet. Crowdfunding serves as an to Elizabeth M. Murphy, Secretary, alternative source of capital to support Securities and Exchange Commission, 7. Payments to Third Parties D. Additional Requirements on Funding a wide range of ideas and ventures. An 100 F Street NE., Washington, DC Portals entity or individual raising funds 20549–1090. 1. Registration Requirement through crowdfunding typically seeks All submissions should refer to File 2. Exemption From Broker-Dealer small individual contributions from a Number S7–09–13. This file number Registration large number of people.1 A should be included on the subject line 3. Safe Harbor for Certain Activities 4. Compliance if email is used. To help us process and 1 See, e.g., C. Steven Bradford, Crowdfunding and 5. Records To Be Created and Maintained review your comments more efficiently, the Federal Securities Laws, 2012 Colum. Bus. L. by Funding Portals Rev. 1, 10 (2012) (‘‘Bradford’’). Crowdfunding has please use only one method. The E. Miscellaneous Provisions some similarities to ‘‘crowdsourcing,’’ which is the Commission will post all comments on 1. Insignificant Deviations From Regulation concept that ‘‘the power of the many can be the Commission’s Internet Web site Crowdfunding leveraged to accomplish feats that were once the
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crowdfunding campaign generally has a through crowdfunding.6 The required to be registered unless an specified target amount for funds to be crowdfunding provisions of the JOBS exemption is available. At least one raised, or goal, and an identified use of Act were designed to help provide commenter has stated that registered those funds. Individuals interested in startups and small businesses with offerings are not feasible for raising the crowdfunding campaign—members capital by making relatively low dollar smaller amounts of capital, as is done in of the ‘‘crowd’’—may share information offerings of securities less costly.7 They a typical crowdfunding transaction, about the project, cause, idea or also permit Internet-based platforms to because of the costs of conducting a business with each other and use the facilitate the offer and sale of securities registered offering and the resulting information to decide whether or not to without having to register with the ongoing reporting obligations under the fund the campaign based on the Commission as brokers. Securities Exchange Act of 1934 In the United States, crowdfunding in collective ‘‘wisdom of the crowd.’’ 2 (‘‘Exchange Act’’) that may arise as a its current form generally has not 11 Crowdfunding has been used to fund, result of the offering. Limitations involved the offer of a share in any for example, artistic endeavors, such as under existing regulations, including financial returns or profits that the restrictions on general solicitation and films and music recordings, where fundraiser may expect to generate from contributions or donations are rewarded general advertising and purchaser business activities financed through qualification requirements, have made with a token of value related to the crowdfunding.8 Such a profit or project (e.g., a person contributing to a private placement exemptions generally revenue-sharing model—sometimes unavailable for crowdfunding film’s production budget is rewarded referred to as the ‘‘equity model’’ of transactions, which are intended to be with tickets to view the film and is 9 crowdfunding —could trigger the made to a large number of potential identified in the film’s credits) or where application of the federal securities laws investors and not limited to investors contributions reflect the pre-purchase of because it likely would involve the offer that meet specific qualifications.12 a finished product (e.g., a music album). 10 and sale of a security. Under the Moreover, a third party that operates A number of entities operate Web sites Securities Act of 1933 (‘‘Securities a Web site to effect the purchase and that facilitate crowdfunding in its Act’’), the offer and sale of securities is 3 sale of securities for the account of current form, with some Web sites others generally would, under existing specializing in certain industries, such 6 To facilitate public input on JOBS Act regulations, be required to register with as computer-based gaming, music and initiatives, the Commission solicited comment on each title of the JOBS Act through its Web site at the Commission as a broker-dealer and the arts, and other Web sites focusing on http://www.sec.gov/spotlight/jobsactcomments. comply with the laws and regulations 4 particular types of entrepreneurs. shtml. The public comments we received on Title applicable to broker-dealers.13 A person III are available on our Web site at http:// The Jumpstart Our Business Startups www.sec.gov/comments/jobs-title-iii/jobs-title- that operates such a Web site only for Act (the ‘‘JOBS Act’’),5 enacted on April iii.shtml. Exhibit A of the release includes a citation the purchase of securities of startups 5, 2012, establishes the foundation for a key to the comment letters the Commission and small businesses, however, may regulatory structure for startups and received on Title III. find it impractical in view of the limited 7 See, e.g., 158 Cong. Rec. S1781 (daily ed. Mar. nature of that person’s activities and small businesses to raise capital through 19, 2012) (statement of Sen. Carl Levin) (‘‘Right securities offerings using the Internet now, the rules generally prohibit a company from business to register as a broker-dealer raising very small amounts from ordinary investors and operate under the full set of without significant costs.’’); 157 Cong. Rec. S8458– province of the specialized few.’’ See Jeff Howe, regulatory obligations that apply to 02 (daily ed. Dec. 8, 2011) (statement of Sen. Jeff The Rise of Crowdsourcing, Wired (Jun. 2006) Merkley) (‘‘Low-dollar investments from ordinary broker-dealers. (‘‘Howe’’). Crowdsourcing is an approach for Americans may help fill the void, providing a new problem solving that employs the ‘‘wisdom of B. Title III of the JOBS Act avenue of funding to the small businesses that are crowds,’’ where ‘‘the very success of a solution is the engine of job creation. The CROWDFUND Act dependent on its emergence from a large body of Title III of the JOBS Act (‘‘Title III’’) would provide startup companies and other small added new Securities Act Section solvers.’’ Daren C. Brabham, Crowdsourcing as a businesses with a new way to raise capital from Model for Problem Solving, 14 Convergence 75, 79– ordinary investors in a more transparent and 80 (2008) (‘‘Brabham’’). regulated marketplace.’’); 157 Cong. Rec. H7295–01 11 See Bradford, note 1 at 42. 2 See Stephenson Letter; Richard Waters, Startups (daily ed. Nov. 3, 2011) (statement of Rep. Patrick 12 But see Eliminating the Prohibition Against seek the ‘wisdom of crowds,’ Financial Times, Apr. McHenry) (‘‘[H]igh net worth individuals can invest General Solicitation and General Advertising in 3, 2012, available at http://www.ft.com/intl/cms/s/ in businesses before the average family can. And Rule 506 and Rule 144A Offerings, Release No. 33– 0/c1f1695c-7da8-11e1-9adc-00144feab49a.html# that small business is limited on the amount of 9415 (July 10, 2013) [78 FR 44771 (July 24, 2013)] axzz2b7QxIH5L (‘‘[T]he backers of [crowdfunding] equity stakes they can provide investors and limited (‘‘General Solicitation Adopting Release’’) (adopting argue that the hard work of making investment in the number of investors they can get. So, clearly, rules to implement Title II of the JOBS Act). Title decisions—filtering out the best investments and something has to be done to open these capital II of the JOBS Act directed the Commission to limiting fraud—can be solved by tapping the markets to the average investor[.]’’). amend Rule 506 of Regulation D to permit general ‘wisdom of crowds’ over the internet.’’). 8 See Bradford, note 1; Jenna Wortham, Start-Ups solicitation or general advertising in offerings made 3 Examples of current crowdfunding Web sites Look to the Crowd, N.Y. Times at B1 (Apr. 30, under Rule 506, provided that all purchasers of the include: www.indiegogo.com, www.kickstarter.com, 2012); Joan MacLeod Heminway and Shelden Ryan securities are accredited investors. Accredited www.kiva.com and www.rockethub.com. Hoffman, Proceed At Your Peril: Crowdfunding and investors include natural persons who meet certain 4 See Bradford, note 1 at 12–13 (citing ‘‘Unbound: the Securities Act of 1933, 78 Tenn. L. Rev. 879 income or net worth thresholds. Although this rule Books Are Now in Your Hands’’ (http:// (2011); Thomas Lee Hazen, Crowdfunding or facilitates the type of broad solicitation emblematic unbound.co.uk/), specializing in book publishing, Fraudfunding? Social Networks and the Securities of crowdfunding, crowdfunding is premised on ‘‘My Major Company’’ (http:// Laws—Why the Specially Tailored Exemption Must permitting sales of securities to any interested www.mymajorcompany.com/), specializing in be Conditioned on Meaningful Disclosure, 90 N.C.L. person, not just to investors who meet specific music, ‘‘Spot.us: Community-funded Reporting’’ Rev. 1735 (2012) (‘‘Hazen’’); C. Steven Bradford, qualifications, such as accredited investors. (http://spot.us/), specializing in journalism, and The New Federal Crowdfunding Exemption: 13 Exchange Act Section 15(a)(1) generally makes ‘‘Heifer International’’ (http://www.heifer.org/) Promise Unfulfilled, 40 Sec. Reg. L.J. 1 (2012). it unlawful for a broker or dealer to effect any specializing in agriculture and ranching). See also 9 See Bradford, note 1 at 33. transactions in, or induce the purchase or sale of, Liz Gannes, Crowdfunding for a Cause: Nonprofits 10 See Securities Act Section 2(a)(1) and Exchange any security unless that broker or dealer is Can Now Hold Fundraisers on Crowdtilt, Act Section 3(a)(10) (setting forth the definition of registered with the Commission pursuant to AllThingsD (Nov. 21, 2012), available at http:// a ‘‘security’’ under the Securities Act and the Exchange Act Section 15(b). 15 U.S.C. 78o(a). See allthingsd.com/20121121/crowdfunding-for-a- Exchange Act, respectively). See, e.g., Reves v. Ernst discussion in Section II.D.2 below. Because brokers cause-non-profits-can-now-hold-fundraisers-on- & Young, 494 U.S. 56 (1990) (outlining the and dealers both register as broker-dealers (i.e., crowdtilt/ (describing the use of crowdfunding for requirements for a note to be considered a security); there is no separate ‘‘broker’’ or ‘‘dealer’’ charitable purposes). SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (setting registration under Exchange Act Section 15(b)), we 5 Public Law 112–106, 126 Stat. 306 (2012). forth the definition of an investment contract). also use the term ‘‘broker-dealer’’ in this release.
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4(a)(6),14 which provides an exemption In this release, we are proposing new would require that intermediaries from the registration requirements of rules and forms to implement Securities provide communication channels to Securities Act Section 5 for certain Act Sections 4(a)(6) and 4A and facilitate the sharing of information that crowdfunding transactions. To qualify Exchange Act Sections 3(h) and 12(g)(6). will allow the crowd to decide whether for the exemption under Section 4(a)(6), The proposed rules are described in or not to fund the idea or business.19 crowdfunding transactions by an issuer detail below. Until we adopt rules The proposed rules further provide (including all entities controlled by or relating to crowdfunding transactions intermediaries a means by which to under common control with the issuer) and such rules become effective, issuers facilitate the offer and sale of securities must meet specified requirements, and intermediaries may not rely on the without registering as brokers. We are including the following: exemption provided under Section mindful of the timing and presentation • The amount raised must not exceed 4(a)(6). of information required to be disclosed $1 million in a 12-month period (this C. Approach to Proposed Rules to investors pursuant to the terms of the amount is to be adjusted for inflation at statute. The proposed rules would least every five years); We understand that Title III was require that this information be • individual investments in a 12- designed to help alleviate the funding provided to investors at various points month period are limited to: gap and accompanying regulatory in time in connection with an offering Æ the greater of $2,000 or 5 percent of concerns faced by startups and small and through various electronic means, annual income or net worth, if annual businesses in connection with raising such as through filings with the income or net worth of the investor is capital in relatively low dollar Commission and disclosures provided 15 less than $100,000; and amounts. The proposed rules are on the intermediary’s platform. We Æ 10 percent of annual income or net intended to align crowdfunding believe this approach would be most worth (not to exceed an amount sold of transactions under Section 4(a)(6) with practical and useful to investors in the $100,000), if annual income or net the central tenets of the original concept crowdfunding context. worth of the investor is $100,000 or of crowdfunding, in which the public— We understand that these proposed more (these amounts are to be adjusted or the crowd—is presented with an rules, if adopted, could significantly for inflation at least every five years); opportunity to invest in an idea or affect the viability of crowdfunding as a and business and individuals decide • capital-raising method for startups and transactions must be conducted whether or not to invest after sharing small businesses. Rules that are unduly through an intermediary that either is information about the idea or business burdensome could discourage with, and learning from, other members registered as a broker or is registered as participation in crowdfunding. Rules of the crowd.16 In this role, members of a new type of entity called a ‘‘funding that are too permissive, however, may the crowd are not only sharing portal.’’ increase the risks for individual In addition, Title III: information about the idea or business, investors, thereby undermining the • adds Securities Act Section 4A, but also are expected to help evaluate facilitation of capital raising for startups which requires, among other things, that the idea or business before deciding and small businesses.20 We have issuers and intermediaries that facilitate whether or not to invest.17 directed the Commission staff, transactions between issuers and At the same time, Congress provided accordingly, to develop a investors in reliance on Section 4(a)(6) important investor protections for comprehensive work plan to review and provide certain information to investors crowdfunding transactions under monitor the use of the crowdfunding and potential investors, take certain Section 4(a)(6), including individual other actions and provide notices and investment limits, required disclosures 19 See Mollick Letter (stating that allowing other information to the Commission; by issuers and the use of intermediaries. ongoing discussions between potential investors, • adds Exchange Act Section 3(h), The proposed rules would require that community members and issuers is a vital aspect which requires the Commission to adopt all crowdfunding transactions under of avoiding fraud and improving proposed projects). rules to exempt, either conditionally or Section 4(a)(6) be conducted through a 20 One press article, for example, described non- unconditionally, ‘‘funding portals’’ from registered intermediary on an Internet securities-based crowdfunding campaigns that successfully raised funds but have had problems having to register as brokers or dealers Web site or other similar electronic manufacturing and delivering the ‘‘perks’’ or pursuant to Exchange Act Section medium to help ensure that the offering products that were promised in exchange for 15(a)(1); is accessible to the public and that contributions. See Matt Krantz, Crowd-funding dark • includes disqualification provisions members of the crowd can share side: Sometimes investments go down drain, USA Today at B1 (Aug. 15, 2012). Investor confidence in under which an issuer would not be information and opinions. Registered crowdfunding could be eroded if such delays occur able to avail itself of the Section 4(a)(6) intermediaries are necessary to bring the with regularity in securities-based crowdfunding exemption if the issuer or other related issuer and potential investors together and compounded by any prevalence of fraud. See, parties, including an intermediary, was and to provide safeguards to potential e.g., Laws Provide Con Artists with Personal 18 Economic Growth Plan, North American Securities subject to a disqualifying event; and investors. The proposed rules also Administrators Association (Aug. 21, 2012) • adds Exchange Act Section 12(g)(6), (identifying crowdfunding and Internet-based offers which requires the Commission to adopt 15 See note 7. of securities as a threat to investors), available at rules to exempt from the registration 16 See notes 1 and 2. As discussed in Section http://www.nasaa.org/14679/laws-provide-con- II.C.5.c below, the proposed rules would require a artists-with-personal-economic-growth-plan/. See requirements of Section 12(g), either person to open an account with an intermediary also Adrianne Jeffries, This is What a Kickstarter conditionally or unconditionally, before posting comments on the intermediary’s Scam Looks Like, BetaBeat (Apr. 30, 2012), securities acquired pursuant to an platform. However, as discussed in Section II.C.5.a available at http://betabeat.com/2012/04/this-is- offering made in reliance on Section below, a person would not need to open an account what-a-kickstarter-scam-looks-like/. But see Olga with the intermediary in order to view the issuer’s Khazan, Kickstarter spies a sunglass start-up, 4(a)(6). disclosure materials. Washington Post at A14 (May 28, 2012) (discussing 17 See Hazen, note 8. a successful sunglasses company that used 14 Title III amended Securities Act Section 4 to 18 See 158 Cong. Rec. S1829 (daily ed. Mar. 20, crowdfunding for startup funds); Crowdfunding: add Section 4(6); however, Title II of the JOBS Act 2012) (statement of Sen. Jeff Merkley) (‘‘The Web Invested Central raises $120,000, Washington Post also amended Securities Act Section 4 and inserted sites are subject to oversight by the SEC and at A10 (Jul. 23, 2012) (mentioning a company that subsections (a) and (b). The U.S. Code implemented security regulators of their principal States . . . This was able to raise capital through crowdfunding the amendment by adding paragraph (6) at the end is a key predatory protection to prevent pump-and- when it could not otherwise secure traditional of subsection (a). dump schemes.’’). financing for an expansion of its business).
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exemption under Section 4(a)(6) and the 1. Limitation on Capital Raised under Regulation D 28 and Section rules the Commission adopts to 4(a)(6) without integration.29 implement crowdfunding. Upon The exemption from registration Section 4(a)(6) specifically provides adoption of final rules, the Commission provided by Section 4(a)(6) is available for a maximum aggregate amount of $1 to a U.S. issuer provided that ‘‘the staff will monitor the market for million sold in reliance on the aggregate amount sold to all investors by offerings made in reliance on Section exemption in any 12-month period. The the issuer, including any amount sold in 4(a)(6), focusing in particular on the only reference in the statute to changing reliance on the exemption provided types of issuers using the exemption, that amount is the requirement that the under [Section 4(a)(6)] during the 12- Commission update the amount not less the level of compliance with Regulation month period preceding the date of such frequently than every five years based Crowdfunding by issuers and transaction, is not more than on the Consumer Price Index. intermediaries and whether the $1,000,000.’’ 22 Under Section 4A(h), the Additionally, statements in the exemption is promoting new capital Commission is required to adjust the Congressional Record indicate that formation while at the same time dollar amounts in Section 4(a)(6) ‘‘not Congress believed that $1 million was a providing key protections for investors. less frequently than once every five substantial amount for a small These efforts will assist the Commission years, by notice published in the business.30 We do not believe that in evaluating the development of market Federal Register, to reflect any change Congress intended for us to modify the practices in offerings made in reliance in the Consumer Price Index for All maximum aggregate amount permitted on Section 4(a)(6). These efforts also Urban Consumers published by the to be sold under the exemption when will facilitate future Commission Bureau of Labor Statistics.’’ promulgating rules to implement the consideration of any potential Several commenters indicated that the statute.31 Therefore, we are not amendments to the rules implementing $1 million maximum aggregate amount proposing to increase the limitation on crowdfunding that would be consistent is too low.23 Several commenters the aggregate amount sold. with the Commission’s mission of requested that the Commission state that Title III provides that the $1 million protecting investors, maintaining fair, the $1 million aggregate limit pertains limitation applies to the ‘‘aggregate orderly and efficient markets and only to offerings under Section 4(a)(6) amount sold to all investors by the facilitating capital formation. We urge and does not include all exempt issuer, including any amount sold in commenters, as they review the offerings.24 Two commenters suggested, reliance on the exemption provided proposed rules, to consider and address however, that the calculation of the $1 under [Section 4(a)(6)].’’ Section 4A(g), the role that our oversight, enforcement million aggregate limit should include however, provides that ‘‘[n]othing in the and regulation should play once a all issuer transactions that were exempt exemption shall be construed as preventing an issuer from raising capital crowdfunding market under Section under Securities Act Section 4(a) during through means other than [S]ection 4(a)(6) begins to develop. the preceding 12-month period.25 4[(a)](6).’’ These two provisions create Another commenter requested statutory ambiguity because the first II. Discussion of Proposed Regulation clarification that the limitations and provision could be read to provide for Crowdfunding requirements of the offering exemption the aggregation of amounts raised in all under Section 4(a)(6) would not affect A. Crowdfunding Exemption exempt transactions, even those that do other methods of raising capital that do not involve crowdfunding, while the New Securities Act Section 4(a)(6) not involve the sale of securities, such second provision could be read to provides an exemption from the as contributions from friends and provide that nothing in the Section registration requirements of Securities family, donation crowdfunding, gifts, grants or loans.26 Several commenters Act Section 5 for certain crowdfunding 28 17 CFR 230.501 through 230.508. transactions. To qualify for the had concerns about the possible 29 See ABA Letter 1; Lingam Letter 2 (stating that exemption under Section 4(a)(6), integration 27 of an offering under offerings under Regulation D and Section 4(a)(6) crowdfunding transactions by an issuer Section 4(a)(6) with other exempt should not be integrated if: (1) No general offerings and suggested that the solicitation takes place; (2) the Section 4(a)(6) must meet specified requirements, offering closes prior to any general solicitation including requirements with regard to Commission should allow for related to a Regulation D offering; or (3) the the dollar amount of the securities that simultaneous or sequential offerings Regulation D and the Section 4(a)(6) offerings occur simultaneously and the offerings have the same may be sold by an issuer and the dollar economic terms, but the size of the Regulation D 22 amount that may be invested by an Securities Act Section 4(a)(6)(A). offering is greater than the size of the Section 4(a)(6) individual in a 12-month period. The 23 See High Tide Letter; TechnologyCrowdfund offering); CFIRA Letter 8 (stating that CFIRA’s Letter 3 (stating that a minimum of $5 million to crowdfunding transaction also must be members have opposing views on whether the $10 million is necessary to start any business other integration doctrine should be applied to conducted through a registered than a software business); EnVironmental Letter crowdfunded offerings); Liles Letter 1; CFIRA Letter intermediary that complies with (stating that the upper limit should be increased to 2; CommunityLeader Letter. See also Final Report specified requirements.21 Title III also $5 million or higher); VTNGLOBAL Letter (stating of the 2012 SEC Government-Business Forum on that Rule 506 of Regulation D permits an unlimited Small Business Capital Formation (April 2013) provides limitations on who may rely capital raise from accredited investors and that the (‘‘2012 SEC Government-Business Forum’’), on the exemption and establishes a same should apply to crowdfunding). available at http://www.sec.gov/info/smallbus/ liability scheme for improper use of the 24 See NSBA Letter (stating that the $1 million sbforumreps.htm (recommending that we consider exemption. As discussed below, the limitation should pertain only to offerings made in permitting concurrent offerings to be made to reliance on Section 4(a)(6)); ABA Letter 1; NCA accredited investors in excess of the $1 million rules we are proposing are designed to Letter. limit). aid issuers and investors in determining 25 See CommunityLeader Letter; Ohio Division of 30 158 Cong. Rec. S1829 (daily ed. Mar. 20, 2012) the applicable limitations on capital Securities Letter. (statement of Sen. Jeff Merkley) (‘‘[T]he amendment 26 raised and individual investments. See Crowdfunding Offerings Ltd. Letter 6. allows existing small businesses and startup 27 The integration doctrine seeks to prevent an companies to raise up to $1 million per year. That issuer from improperly avoiding registration by is a substantial amount for a small business.’’). 21 See Section II.C below for a discussion of the artificially dividing a single offering into multiple 31 Cf. Securities Act Section 4A(b)(1)(D)(iii) requirements on intermediaries. See also Section offerings such that Securities Act exemptions (giving the Commission discretion to increase the II.D below for a discussion of the additional would apply to multiple offerings that would not aggregate target offering amount that requires requirements on funding portals. be available for the combined offering. audited financial statements).
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4(a)(6) exemption should limit an on Section 4(a)(6) during the preceding For purposes of determining whether an issuer’s capital raising through other 12-month period, an issuer would not entity is ‘‘controlled by or under methods. We believe that the overall need to consider amounts received common control with’’ the issuer, an intent of providing the exemption under through methods that do not involve the issuer would be required to consider Section 4(a)(6) was to provide an offer or sale of securities (such as whether it has ‘‘control’’ based on this additional mechanism for capital raising donations it received from a separate definition.36 for startup and small businesses and not non-securities-based crowdfunding Under the proposed rules, the amount to affect the amount an issuer could effort, contributions from friends and of securities sold in reliance on Section raise outside of that exemption. Thus, family, gifts, grants or loans). 4(a)(6) also would include securities we believe the capital raised in reliance Further, in light of Section 4A(g) and sold by any predecessor of the issuer in on the exemption provided by Section the reasons discussed above, we believe reliance on Section 4(a)(6) during the 4(a)(6) should be counted toward the that an offering made in reliance on preceding 12-month period.37 We limitation. Capital raised through other Section 4(a)(6) should not be integrated believe this approach is necessary to means should not be counted in with another exempt offering made by prevent an issuer from exceeding the $1 determining the aggregate amount sold the issuer, provided that each offering million limit by reorganizing the issuer in reliance on Section 4(a)(6). The complies with the requirements of the into a new entity that would otherwise opposite approach—requiring applicable exemption that is being not be limited by previous sales made aggregation of amounts raised in any relied upon for the particular offering. by its predecessor. For example, if an exempt transaction—would be An issuer could complete an offering issuer reaches the $1 million limit made in reliance on Section 4(a)(6) that inconsistent with the goal of alleviating under Section 4(a)(6), we do not believe occurs simultaneously with, or is the funding gap faced by startups and the reorganization of the issuer into a preceded or followed by, another small businesses because it would place new entity should permit the successor exempt offering. An issuer conducting a a cap on the amount of capital startups to make additional offers and sales in concurrent exempt offering for which and small business could raise. An reliance on Section 4(a)(6) during the general solicitation is not permitted, issuer that already sold $1 million in relevant 12-month period. reliance on the exemption provided however, would need to be satisfied that under Section 4(a)(6), for example, purchasers in that offering were not Request for Comment would be prevented from raising capital solicited by means of the offering made through other exempt methods and, in reliance on Section 4(a)(6).33 1. Should we propose that the $1 conversely, an issuer that sold $1 Similarly, any concurrent exempt million limit be net of fees charged by million through other exempt methods offering for which general solicitation is the intermediary to host the offering on would be prevented from raising capital permitted could not include an the intermediary’s platform? Why or under Section 4(a)(6). advertisement of the terms of an offering why not? If so, are there other fees that In determining the amount that may made in reliance on Section 4(a)(6) that we should allow issuers to exclude be available to be offered and sold in would not be permitted under Section when determining the amount to be reliance on Section 4(a)(6) in light of the 4(a)(6) and the proposed rules.34 raised and whether the issuer has $1 million aggregate amount limitation, Under Section 4(a)(6), the amount of reached the $1 million limit? an issuer would include amounts sold securities sold in reliance on Section 2. As described above, we believe that by the issuer (including amounts sold 4(a)(6) by entities controlled by or under issuers should not have to consider the by entities controlled by the issuer or common control with the issuer must be amounts raised in offerings made under common control with the issuer, aggregated with the amount to be sold pursuant to other exemptions when as well as any amounts sold by any by the issuer in the current offering to determining the amount sold during the predecessor of the issuer) in reliance on determine the aggregate amount sold in preceding 12-month period for purposes Section 4(a)(6) during the preceding 12- reliance on Section 4(a)(6) during the of the $1 million limit in Section 4(a)(6). month period. The issuer would preceding 12-month period. The statute Should we require that certain exempt aggregate any amounts previously sold does not define the term ‘‘controlled by offerings be included in the calculation with the amount the issuer intends to or under common control with’’ the of the $1 million limit? If so, which raise in reliance on the exemption, and issuer; however, the term ‘‘control’’ is types of offerings and why? If not, why under the proposed rules, the combined defined in Securities Act Rule 405.35 not? As noted above, at this time the amount could not exceed $1 million. An Commission is not proposing to issuer would not include amounts sold 33 For example, if the prospective investor in a consider the amounts raised in non- in other exempt offerings during the concurrent private placement for which general securities-based crowdfunding efforts in solicitation is not permitted became interested in preceding 12-month period. For that private placement through some means other calculating the $1 million limit in example, if an issuer sold $800,000 than the offering made in reliance on Section Section 4(a)(6). Should the Commission pursuant to the exemption provided in 4(a)(6), such as through a substantive, pre-existing propose to require that amounts raised Regulation D during the preceding 12 relationship with the issuer or direct contact by the in non-securities-based crowdfunding issuer or its agents outside of the offering made in months, this amount would not be reliance on Section 4(a)(6), then the fact that the aggregated in an issuer’s calculation to offering made in reliance on Section 4(a)(6) was under common control with) means the possession, determine whether it had reached the posted publicly on the intermediary’s platform direct or indirect, of the power to direct or cause maximum amount for purposes of would not affect the availability of the other private the direction of the management and policies of a 32 placement exemption. On the other hand, if an person, whether through the ownership of voting Section 4(a)(6). In addition, in investor first discovers the issuer through a securities, by contract, or otherwise.’’). Exchange determining the amount sold in reliance solicitation in a Section 4(a)(6) offering, that Act Rule 12b–2 similarly defines the term investor would likely not be eligible to participate ‘‘control.’’ See 17 CFR 240.12b–2. 32 In contrast, if an issuer sold $800,000 in a in a concurrent private placement in which general 36 See proposed Instruction to paragraph (c) of crowdfunding transaction pursuant to Section solicitation is not permitted. proposed Rule 100 of Regulation Crowdfunding. 4(a)(6) during the preceding 12 months, the issuer 34 See proposed Rule 204 of Regulation 37 See proposed Rule 100(c) of Regulation would be required to count that amount toward the Crowdfunding. See also discussion in Section II.B.4 Crowdfunding (proposing to define issuer to $1 million aggregate amount and, thus, could only below. include all entities controlled by or under common offer and sell $200,000 more in reliance on Section 35 See 17 CFR 230.405 (‘‘The term control control with the issuer and any predecessor of the 4(a)(6). (including the terms controlling, controlled by and issuer).
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efforts be included in the calculation of 12-month period preceding the date of statute may be read to create potential the $1 million limit? Why or why not? such transaction, cannot exceed: ‘‘(i) conflicts or ambiguity between the two 3. As described above, we believe that The greater of $2,000 or 5 percent of the investment limits because paragraph (i) offerings made in reliance on Section annual income or net worth of such applies if ‘‘either’’ annual income or net 4(a)(6) should not necessarily be investor, as applicable, if either the worth is less than $100,000 and integrated with other exempt offerings if annual income or the net worth of the paragraph (ii) applies if ‘‘either’’ annual the conditions to the applicable investor is less than $100,000; and (ii) income or net worth is equal to or more exemptions are met. How would an 10 percent of the annual income or net than $100,000. Accordingly, in any alternative interpretation affect the worth of such investor, as applicable, situation in which annual income is less utility of crowdfunding as a capital not to exceed a maximum aggregate than $100,000 and net worth is equal to raising mechanism? Are there amount sold of $100,000, if either the or more than $100,000 (or vice versa), circumstances under which other annual income or net worth of the the language of the statute may be read exempt offers should be integrated with investor is equal to or more than to cause both paragraphs to apply. an offer made in reliance on Section $100,000.’’ Section 4A(h) further Paragraph (i) also fixes the maximum 4(a)(6)? If so, what are those provides that these dollar amounts shall annual investment by an investor at 5 circumstances? Should we prohibit an be adjusted by the Commission not less percent of ‘‘the annual income or net issuer from concurrently offering frequently than once every five years worth of such investor, as applicable’’ securities in reliance on Section 4(a)(6) based on the Consumer Price Index. As and paragraph (ii) fixes the maximum and another exemption? Why or why discussed in more detail below, Section annual investment by an investor at 10 not? Should we prohibit an issuer from 4A(h) also provides that the income and percent of ‘‘the annual income or net offering securities in reliance on Section net worth of a natural person who is worth of such investor, as applicable’’, 4(a)(6) within a specified period of time investing in a crowdfunding transaction but neither paragraph (i) nor paragraph after or concurrently with a Rule 506(c) pursuant to Section 4(a)(6) shall be (ii) explicitly states when that offering under Regulation D involving calculated in accordance with the percentage should be applied against general solicitation? Why or why not? Commission’s rules regarding the Should we prohibit an issuer from using the investor’s annual income and when calculation of income and net worth of the percentage should be applied general solicitation or general an accredited investor.38 advertising under Rule 506(c) in a against the investor’s net worth. Finally, Several commenters noted that paragraph (i) sets a floor for the manner that is intended, or could Sections 4(a)(6)(B)(i) and (ii) technically reasonably be expected, to condition the investment limit of $2,000 per year and subject some investors to two potential paragraph (ii) sets a ceiling for the market for a Section 4(a)(6) offering or investment limits.39 The language of the generate referrals to a crowdfunding investment limit of $100,000 per year, but the statutory language does not intermediary? Why or why not? Should 38 The definition of the term ‘‘accredited issuers that began an offering under investor’’ is set forth in Rule 501(a) of Regulation explicitly state whether the floor applies Section 4(a)(6) be permitted to convert D [17 CFR 230.501(a)] and includes any person who if the maximum is calculated under the offering to a Rule 506(c) offering? comes within one of the definition’s enumerated paragraph (ii) or whether the ceiling categories of persons, or whom the issuer applies if the maximum is calculated Why or why not? ‘‘reasonably believes’’ comes within any of the 4. Under the proposed rules, whether enumerated categories, at the time of the sale of the under paragraph (i). Accordingly, an entity is controlled by or under securities to that person. For natural persons, Rule discretion is required in interpreting common control with the issuer would 501(a) defines an accredited investor as a person: and applying this provision of the be determined based on whether the (1) Whose individual net worth, or joint net worth statute. with that person’s spouse, exceeds $1 million, issuer possesses, directly or indirectly, excluding the value of the person’s primary We believe that the appropriate the power to direct or cause the residence (the ‘‘net worth test’’); or (2) who had an approach to the investment limit direction of the management and individual income in excess of $200,000 in each of provision is to provide for an overall policies of the entity, whether through the two most recent years, or joint income with that person’s spouse in excess of $300,000 in each of investment limit of $100,000, but within the ownership of voting securities, by those years, and has a reasonable expectation of that overall limit, to provide for a contract or otherwise. This standard is reaching the same income level in the current year ‘‘greater of’’ limitation based on annual based on the definition of ‘‘control’’ in (the ‘‘income test’’). Although the Dodd-Frank Wall income and net worth. Under the Securities Act Rule 405. Is this approach Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376, 1577 (July 21, 2010), proposed rules, therefore, if both annual appropriate? Why or why not? Should (the ‘‘Dodd-Frank Act’’) did not change the amount income and net worth are less than we define control differently? If so, of the $1 million net worth test, it did change how $100,000, then a limit of $2,000 or 5 how? that amount is calculated—by excluding the value percent of annual income or net worth, 5. Under the proposed rules, the of a person’s primary residence. This change took effect upon the enactment of the Dodd-Frank Act. whichever is greater, would apply. If definition of issuer would include any In December 2011, we amended Rule 501 to either annual income or net worth predecessor of the issuer. Is this incorporate this change into the definition of exceeds $100,000, then a limit of 10 approach appropriate? Why or why not? accredited investor. See Net Worth Standard for percent of annual income or net worth, Should an issuer aggregate amounts sold Accredited Investors, Release No. 33–9287 (Dec. 21, 2011) [76 FR 81793 (Dec. 29, 2011)]. In addition, whichever is greater, but not to exceed by an affiliate of the issuer when Section 413(b) of the Dodd-Frank Act specifically $100,000, would apply. We believe that determining the aggregate amount sold authorizes us to undertake a review of the this clarification would give effect to the in reliance on Section 4(a)(6) during the definition of the term ‘‘accredited investor’’ as it provision and would be consistent with preceding 12-month period? Why or applies to natural persons, it and requires us to undertake a review of the definition in its entirety Congressional intent in providing why not? If so, how should we define every four years, beginning four years after investment limitations; however, we affiliate? enactment of the Dodd-Frank Act. Release No. 33– request comment below on whether to 9416 (July 10, 2013) requests public comments on calculate the investment limit based on 2. Investment Limitation the definition of ‘‘accredited investor.’’ Under Section 4(a)(6)(B), the aggregate 39 See RocketHub Letter 1 (stating that the Commission should clarify that the greater of requiring the lesser of the two investment limits); amount sold to any investor by an income or net worth will be used to determine the Ohio Division of Securities Letter (stating that the issuer, including any amount sold in investment limit); NASAA Letter (stating that the Commission should apply the stricter investment reliance on the exemption during the Commission should resolve the ambiguity by limitation); ABA Letter 1; Friedman Letter.
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the lesser of annual income or net bound by the same investment limits.47 investors and both U.S. and non-U.S. worth. Three commenters proposed that the citizens or residents. As required by Section 4A(h), the Commission create a two-tier regulatory Request for Comment proposed rules would require a natural system based on different investment person’s annual income and net worth limits to reduce the regulatory burden 6. While we acknowledge that there is to be calculated in accordance with the for small, local offerings.48 One of the ambiguity in the statutory language and Commission’s rules for determining commenters suggested that one of the there is some comment regarding a accredited investor status.40 Securities tiers could consist of a ‘‘small local contrary reading, we believe that the Act Rule 501 specifies the manner in offering’’ in which investment limits appropriate approach to the investment which annual income and net worth are would be up to $250 per investor.49 The limitations in Section 4(a)(6)(B) is to calculated for purposes of determining commenter asserted that smaller provide for an overall investment limit accredited investor status.41 One investments could be subject to of $100,000 and, within that limit, to commenter stated that Section 4(a)(6)(B) significantly reduced regulation because provide for a ‘‘greater of’’ limitation is unclear in regard to how to address a $250 investment is unlikely to pose based on an investor’s annual income or the joint net worth of spouses.42 The significant risk to an investor. The net worth. In light of ambiguity in the proposed rules would clarify that an second commenter suggested reducing statutory language, we are specifically investor’s annual income and net worth the anticipated personal disclosure asking for comment as to the question may be calculated jointly with the requirements for investors who invest of whether we should instead require income and net worth of the investor’s less than $500 through an intermediary investors to calculate the investment spouse.43 We believe that this approach that is a community development limitation based on the investor’s is consistent with the rules for financial institution.50 annual income or net worth at the five determining accredited investor status The limitations in Section 4(a)(6)(B) percent threshold of Section 4(a)(6)(B)(i) because the accredited investor apply to any investor seeking to if either annual income or net worth is definition contemplates both individual participate in a crowdfunding less than $100,000? Similarly, for those and joint income and net worth with a transaction. We believe that Congress investors falling within the Section spouse as methods of calculating annual intended for investment opportunities 4(a)(6)(B)(i) framework, should we income and net worth. through crowdfunding transactions require them to calculate the five We also are proposing to allow an relying on Section 4(a)(6) to be available percent investment limit based on the issuer to rely on efforts that an to all types of investors and established lower of annual income or net worth? intermediary takes in order to determine the investment limitations Should we require the same for the 51 that the aggregate amount of securities accordingly. The statute provides calculation of the 10 percent investment purchased by an investor will not cause specific investment limits, and the only limit within the Section 4(a)(6)(B)(ii) the investor to exceed the investor reference in the statute regarding framework? If we were to pursue any of limits,44 provided that the issuer does changing those investment limits is the these calculations, would we not have knowledge that the investor requirement that the Commission unnecessarily impede capital formation? had exceeded, or would exceed, the update the investment limits not less investor limits as a result of purchasing 7. The statute does not address how frequently than every five years based joint annual income or joint net worth securities in the issuer’s offering.45 on the Consumer Price Index. Therefore, In discussing the investment should be treated for purposes of the we do not believe it would be investment limit calculation. The limitations, one commenter requested appropriate to alter those limits for any that the Commission distinguish proposed rules clarify that annual particular type of investor or, at this income and net worth may be calculated between retail investors and time, to create a different exemption institutional or accredited investors and jointly with the annual income and net based on different investment limits. worth of the investor’s spouse. Is this allow institutional and accredited Issuers can rely on other exemptions to investors to invest in excess of the approach appropriate? Should we offer and sell securities to accredited distinguish between annual income and investment limitations included in the investors and institutional investors statute.46 Another commenter asked that net worth and allow only one or the (and, in some cases, investors that do other to be calculated jointly for the Commission clarify whether non- not meet the definition of accredited U.S. citizens or non-U.S. residents are purposes of calculating the investment investor). As discussed above, limit? Why or why not? Should the concurrent offerings to these types of 40 investment limit be calculated See proposed Instruction 1 to paragraph (a)(2) investors are possible if the conditions of proposed Rule 100 of Regulation Crowdfunding. differently if it is based on the spouses’ See also note 9. of the applicable exemption are met. joint income, rather than each spouse’s 41 See Securities Act Rule 501(a)(5) [17 CFR Therefore, as proposed, the limitations annual income? Why or why not? 230.501(a)(5)] (net worth) and Securities Act Rule would apply to all investors, including 8. We are proposing to permit an 501(a)(6) [17 CFR 230.501(a)(6)] (income). retail, institutional or accredited Consistent with these rules, the calculation of a issuer to rely on the efforts that an natural person’s net worth for purposes of the intermediary takes in order to determine investment limit would exclude the value of the 47 See TechnologyCrowdFund Letter 5. primary residence of such person. A natural 48 See ASBC Letter; City First Letter. See also that the aggregate amount of securities person’s income for purposes of the investment Spinrad Letter 1 (supporting the two-tier approach purchased by an investor will not cause limit calculation would be the lower of such described in the ASBC Letter). the investor to exceed the investor person’s income for each of the two most recent 49 See ASBC Letter. limits, provided that the issuer does not years as long as such person has a reasonable 50 See City First Letter. expectation of the same income level in the current have knowledge that the investor had 51 See 158 Cong. Rec. S1689 (daily ed. Mar. 15, year. exceeded, or would exceed, the investor 42 2012) (statement of Sen. Mark Warner) (‘‘There is See Friedman Letter. now the ability to use the Internet as a way for limits as a result of purchasing 43 See proposed Instruction 2 to paragraph (a)(2) small investors to get the same kind of deals that securities in the issuer’s offering. Is this of proposed Rule 100 of Regulation Crowdfunding. up to this point only select investors have gotten approach appropriate? Why or why not? 44 See discussion in Section II.C.5.b.i below. that have been customers of some of the best known 45 See proposed Instruction 3 to paragraph (a)(2) investment banking firms, where we can now use Should an issuer be required to obtain of proposed Rule 100 of Regulation Crowdfunding. the power of the Internet, through a term called a written representation from the 46 See CFIRA Letter 2. crowdfunding.’’). investor that the investor has not and
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will not exceed the limit by purchasing the concept of crowdfunding is We believe that other mechanisms from the issuer? Why or why not? presenting members of the crowd with would not offer this opportunity. The 9. Should institutional and accredited an idea or business so members of the proposed rules would require that an investors be subject to the investment crowd can share information and intermediary, in a transaction involving limits, as proposed? Why or why not? evaluate the idea or business. Allowing the offer or sale of securities in reliance Should we adopt rules providing for an issuer to conduct a single offering or on Section 4(a)(6), effect such another crowdfunding exemption with a simultaneous offerings in reliance on transactions exclusively through an higher investment limit for institutional Section 4(a)(6) through more than one intermediary’s platform.57 We propose and accredited investors? If so, how intermediary would diminish the ability to define the term ‘‘platform’’ to mean high should the limit be? Are there of the members of the crowd to an Internet Web site or other similar categories of persons that should not be effectively share information, because electronic medium through which a subject to the investment limits? If yes, essentially, there would be multiple registered broker or a registered funding please identify those categories of ‘‘crowds.’’ Also, because practices portal acts as an intermediary in a persons. If the offering amount for an among intermediaries may differ, were transaction involving the offer or sale of offering made in reliance on Section multiple intermediaries to conduct a securities in reliance on Section 4(a)(6) is not aggregated with the single offering or simultaneous 4(a)(6).58 The requirement that a offering amount for a concurrent offerings, this could result in significant transaction be conducted exclusively offering made pursuant to another differences among such offerings. through a platform does not preclude an exemption, as proposed, is it necessary Finally, allowing an issuer to conduct intermediary from performing back to exclude institutional and accredited an offering using more than one office and other administrative investors from the investment limits intermediary would make it more functions offline. Therefore, we propose since they would be able to invest difficult for intermediaries to determine to state that intermediaries may engage pursuant to another exemption in excess whether an issuer is exceeding the $1 in back office and other administrative of the investment limits in Section million aggregate offering limit. functions other than on their 4(a)(6)? Therefore, in addition to requiring the platforms.59 10. Should we adopt rules providing Examples of such functions use of an intermediary in connection for another crowdfunding exemption include document maintenance, with an offering made in reliance on with different investment limits (e.g., an preparation of notices and Section 4(a)(6), the proposed rules exemption with a $250 investment limit confirmations, preparing internal would prohibit an issuer from using and fewer issuer requirements), as one policies and procedures, defining and more than one intermediary to conduct approving business security commenter suggested,52 or apply an offering or concurrent offerings made requirements and policies for different requirements with respect to in reliance on Section 4(a)(6).54 information technology, and preparing individual investments under a certain information required to be filed or amount, such as $500, as another Although the statute does not otherwise provided to regulators. commenter suggested?53 Why or why expressly require it, we also believe that not? If so, should the requirements for in enacting Section 4(a)(6)(C), Congress The proposed rules would issuers and intermediaries also change? contemplated that crowdfunding accommodate other electronic media What investment limits and transactions made in reliance on Section that currently exist or may develop in requirements would be appropriate? 4(a)(6) and activities associated with the future. For instance, applications for Would adopting such an exemption be these transactions would occur over the mobile communication devices, such as consistent with the purposes of Section Internet or other similar electronic cell phones or smart phones, could be 4(a)(6)? medium that is accessible to the used to display offerings and to permit 11. Should we consider additional public.55 We believe that an ‘‘online- investors to make investment investment limits on transactions made only’’ requirement enables the public to commitments. In our releases in reliance on Section 4(a)(6) where the access offering information and share concerning the use of electronic media purchaser’s annual income and net information publicly in a way that will for delivery purposes, we discussed so- worth are both below a particular allow members of the crowd to decide called ‘‘electronic-only’’ offerings as threshold? If so, what should such whether or not to participate in the those in which investors are permitted threshold be and why? offering and fund the business or idea.56 to participate only if they agree to accept electronic delivery of all 3. Transaction Conducted Through an 54 See proposed Instruction 1 to paragraph (a)(3) documents and other information in Intermediary of proposed Rule 100 of Regulation Crowdfunding. connection with the offering.60 As Under Section 4(a)(6)(C), a transaction 55 In this regard, we note that Section 301 of the JOBS Act states that ‘‘[Title III] may be cited as the discussed below, the proposed rules in reliance on Section 4(a)(6) must be ‘Capital Raising Online While Deterring Fraud and would require that an intermediary, in ‘‘conducted through a broker or funding Unethical Non-Disclosure Act of 2012’ ’’. See its standard account opening materials, portal that complies with the Section 301 of the JOBS Act. See also 158 Cong. requirements of [S]ection 4A(a).’’ We Rec. S1689 (daily ed. March 15, 2012) (statement of Sen. Mark Warner) (‘‘There is now the ability to use 1 (citing James Surowiecki, The Wisdom of Crowds believe that requiring an issuer to use the Internet as a way for small investors to get the xix (2004)). only one intermediary, rather than same kind of deals that up to this point only select 57 See proposed Rule 100(a)(3) of Regulation allowing the issuer to use multiple investors have gotten . . ., where we can now use Crowdfunding. intermediaries, to conduct an offering or the power of the Internet, through a term called 58 See proposed Rule 100(d) of Regulation crowdfunding.’’); id. at S1717 (Statement of Sen. Crowdfunding. concurrent offerings in reliance on Mary Landrieu) (‘‘this crowdfunding bill—which is, 59 See proposed Instruction 2 to paragraph (a)(3) Section 4(a)(6) would help foster the in essence, a way for the Internet to be used to raise of proposed Rule 100 of Regulation Crowdfunding. creation of a crowd and better capital. . . .’’). 60 See, e.g., Use of Electronic Media by Broker- accomplish the purpose of the statute. 56 See note 2 and accompanying text. The Internet Dealers, Transfer Agents and Investment Advisers As discussed above, a central tenet of is considered to be a ‘‘perfect technology capable for Delivery of Information, Release No. 34–37182 of aggregating millions of disparate, independent (May 9, 1996) [61 FR 24644 (May 15, 1996)]; Use ideas in the way markets and intelligent voting of Electronic Media, Release No. 34–42728 (Apr. 28, 52 See ASBC Letter. systems do, without the dangers of ‘too much 2000) [65 FR 25843 (May 4, 2000)] (‘‘Use of 53 See City First Letter. communication’ and compromise.’’ Brabham, note Electronic Media’’).
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obtain from investors consent for such concern about some persons not being 4. Exclusion of Certain Issuers From electronic delivery.61 able to invest unless the offerings also Eligibility Under Section 4(a)(6) Some commenters appear to assume take place offline. Section 4A(f) excludes certain that all offers and sales made in reliance Request for Comment categories of issuers from eligibility to on Section 4(a)(6) would be conducted rely on Section 4(a)(6) to engage in 62 12. The proposed rules would online. One commenter recommended crowdfunding transactions. These prohibit an issuer from conducting an that the Commission expressly require issuers are: (1) Issuers that are not offering or concurrent offerings in that all disclosure and affirmations organized under the laws of a state or required for crowdfunding transactions reliance on Section 4(a)(6) using more territory of the United States or the take place online.63 In contrast, another than one intermediary. Is this proposed District of Columbia; (2) issuers that are commenter requested that we permit approach appropriate? Why or why not? subject to Exchange Act reporting some crowdfunding elements to take If issuers were permitted to use more requirements; 68 (3) investment place offline to encourage local than one intermediary, what companies as defined in the Investment community investments through entities requirements and other safeguards Company Act of 1940 (the ‘‘Investment such as community banks, community should or could be employed? Company Act’’) 69 or companies that are development companies and business 13. Should we define the term excluded from the definition of development companies.64 This ‘‘platform’’ in a way that limits investment company under Section 3(b) commenter stated that permitting crowdfunding in reliance on Section 4(a)(6) to transactions conducted or 3(c) of the Investment Company crowdfunding to take place offline also 70 will help persons without Internet through an Internet Web site or other Act; and (4) any other issuer that the access to invest. The proposed rules similar electronic medium? Why or why Commission, by rule or regulation, would, subject to certain conditions, not? determines appropriate. One commenter suggested that the separately permit outreach by third 14. Should we permit crowdfunding Commission’s rules should specify that parties and a third party’s promotion of transactions made in reliance on Section the crowdfunding exemption under an issuer’s offering through 4(a)(6) to be conducted through means Section 4(a)(6) is not available for blank communication channels provided by other than an intermediary’s electronic an intermediary.65 In addition, an issuer platform? If so, what other means check companies or hedge funds and may provide a notice, subject to the should we permit? For example, should noted that ‘‘permitting these kinds of conditions in the proposed rules, that we permit community-based funding in high-risk and often complex entities to directs potential investors to the reliance on Section 4(a)(6) to occur use the exemption is not consistent with intermediary’s platform through which other than on an electronic platform? 67 the statutory goal of deterring fraud and the issuer will conduct its offering.66 To foster the creation and development unethical non-disclosure in 71 Finally, we are not proposing to permit of a crowd, to what extent would such crowdfunding offerings.’’ The proposed rules would exclude offerings to be conducted through other means need to provide members of the crowd with the ability to observe the categories of issuers identified in the means other than the Internet or similar 72 electronic medium because we believe and comment (e.g., through discussion statute, as well as issuers that are that allowing other non-electronic boards or similar functionalities) on the disqualified from relying on Section means would be inconsistent with the issuer, its business or statements made 4(a)(6) pursuant to the disqualification in the offering materials? provisions of Section 302(d) of the JOBS underlying principles of crowdfunding 73 and the statute. Offerings made by other 15. Should we allow intermediaries to Act. The proposed rules also would means would not be widely accessible restrict who can access their platforms? exclude an issuer that has sold by the public, which would defeat the For example, should we permit securities in reliance on Section 4(a)(6) benefit of the collective wisdom of the intermediaries to provide access by if the issuer has not filed with the members of the crowd. We also believe invitation only or only to certain Commission and provided to investors, that Internet access may be available to categories of investors? Why or why to the extent required, the ongoing not? Would restrictions such as these annual reports required by Regulation the public, such as through local public 74 libraries, alleviating one commenter’s negatively impact the ability of Crowdfunding during the two years investors to get the benefit of the crowd immediately preceding the filing of the 75 61 See proposed Rule 302(a) of Regulation and its assessment of an issuer, business required new offering statement. We Crowdfunding. The proposed rules would require or potential investment? Would these believe that the ongoing reporting consent to electronic delivery because we believe kinds of restrictions affect the ability of requirement should benefit investors by Congress contemplated that crowdfunding would, enabling them to consider updated by its very nature, occur exclusively through small investors to access the capital electronic media. markets? If so, how? 68 62 See, e.g., MacDonald Letter (stating that 16. As noted above, the proposed These are issuers who are required to file readily-available information on the Internet rules would not require intermediaries’ reports with the Commission pursuant to Exchange Act Sections 13(a) (15 U.S.C. 78m(a)) or 15(d) (15 already provides a safeguard for crowdfunding back office or other administrative investors); NAASA Letter (stating that NASAA is U.S.C. 78o(d)). considering whether open Internet access to functions to be conducted exclusively 69 15 U.S.C 80a–1 et seq. funding portals would provide sufficient and on their platforms. Do the proposed 70 15 U.S.C. 80a–3(b) or (c). updated information to state regulators). rules require any clarification? Are there 71 Commonwealth of Massachusetts Letter. 63 See Cera Technology Letter. other activities in which an 72 See proposed Rules 100(b)(1)–(3) of Regulation 64 See Tally Letter. intermediary may engage that would not Crowdfunding. 73 65 See proposed Rule 205 of Regulation be considered back office or See proposed Rule 100(b)(4) of Regulation Crowdfunding (promoter compensation), proposed Crowdfunding. See also proposed Rule 503 of Rule 305 of Regulation Crowdfunding (payments to administrative functions and that Regulation Crowdfunding and Section II.E.6 below third parties) and proposed Rule 402(b)(6) of should be permitted to occur other than for a discussion of the disqualification provisions. Regulation Crowdfunding (conditional safe harbor), on a platform? If so, what activities are 74 See proposed Rules 202 and 203(b) of discussed below in Sections II.B.5, II.C.7 and II.D.3, they, and why should they be permitted Regulation Crowdfunding and Section II.B.2 below respectively. for a discussion of the ongoing reporting 66 See proposed Rule 204 of Regulation to occur other than on a platform? requirements. Crowdfunding (advertising) discussed below in 75 See proposed Rule 100(b)(5) of Regulation Section II.B.4. 67 See City First Letter and note 355. Crowdfunding.
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information about the issuer, thereby merger or acquisition with an Should an issuer be eligible to engage in allowing them to make more informed unidentified company or companies. As a crowdfunding transaction in reliance investment decisions. If issuers fail to described below, we do not expect that on Section 4(a)(6) if it is delinquent in comply with this requirement, we do a specific ‘‘business plan’’ requires a other reporting requirements (e.g., not believe that they should have the formal document prepared by updates regarding the progress of the benefit of relying on the exemption management or used for marketing to issuer in meeting the target offering under Section 4(a)(6) again until they investors.77 We understand that issuers amount)? 79 Why or why not? Should file, to the extent required, the two most engaging in crowdfunding transactions the exclusion be limited to a different recent annual reports. may have businesses at various stages of timeframe (e.g., filings required during The proposed rules also would development in differing industries, and the five years or one year immediately exclude an issuer that has no specific therefore, we believe that a specific preceding the filing of the required business plan or has indicated that its ‘‘business plan’’ could encompass a offering statement)? business plan is to engage in a merger wide range of project descriptions, 18. Is the proposed exclusion of or acquisition with an unidentified articulated ideas, and business models. issuers who fail to comply with certain company or companies. As described In particular, we recognize that the ongoing annual reporting requirements above, crowdfunding is a new and business plan for startups or small too broad? If so, how should it be evolving method to raise money that businesses seeking to rely on Section narrowed and why? Should the serves as an alternative source of capital 4(a)(6) may not be fully developed or exclusion cover issuers whose affiliates to support a wide range of ideas and highly specific and that for many it may have sold securities in reliance on ventures. We believe that the exemption be less defined or detailed than the plan Section 4(a)(6) if the affiliates have not under Section 4(a)(6) is intended to associated with larger issuers. complied with the ongoing annual provide an issuer with an early stage With respect to hedge funds, we reporting requirements? If so, should project, idea or business an opportunity believe that under Section 4A(f)(3), this encompass all affiliates? If not, to share it publicly with a wider range hedge funds would be excluded from which affiliates should it cover? Should of potential investors. Those potential eligibility to rely on Section 4(a)(6) we exclude any issuer with an officer, investors may then share information because hedge funds and other private director or controlling shareholder who with each other about the early stage funds typically rely on one of the served in a similar capacity with proposal and use that information to exclusions from the definition of another issuer that failed to file its decide whether or not to provide investment company under Section 3(c) annual reports? Why or why not? funding based on the ‘‘wisdom of the of the Investment Company Act.78 19. What specific risks do investors face with ‘‘idea-only’’ companies and crowd.’’ Under such circumstances, this Request for Comment mechanism requires the public to have ventures? Please explain. Do the sufficient information about the issuer’s 17. Section 4A(b)(4) requires that, proposed rules provide sufficient proposal to discuss its merit and ‘‘not less than annually, [the issuer] file protection against the inherent risks of flaws.76 with the Commission and provide to such ventures? Why or why not? At the same time, an early stage investors reports of the results of 20. Does the exclusion of issuers that proposal may not allow the operations and financial statements of do not have a specific idea or business crowdfunding mechanism to work the issuer. . . .’’ Should an issuer be plan from eligibility to rely on Section appropriately if the issuer does not excluded from engaging in a 4(a)(6) strike the appropriate balance describe a specific project, idea, or crowdfunding transaction in reliance on between the funding needs of small business, or is seeking funding for Section 4(a)(6), as proposed, if it has not issuers and the information unspecified corporate transactions. In filed with the Commission and provided requirements of the crowd? Why or why such cases, individuals reviewing the to investors, to the extent required, the not? Are there other approaches that proposal may not have sufficient ongoing annual reports required by would strike a better balance among information to formulate a considered proposed Regulation Crowdfunding those considerations? If the proposed view of the proposal, or the proposal during the two years immediately approach is appropriate, should we may be less likely to attract enough preceding the filing of the required define ‘‘specific business plan’’ or what perspectives to inform a crowd decision. offering statement? Why or why not? criteria could be used to identify them? How would any such criteria comport Investors who nonetheless choose to 77 participate may therefore be more likely See discussion below in Section II.B.1.a.i.(b) with the disclosure obligations below. described in Section II.B.1.a.i.(b) to be participating in an issuance that 78 Investment Advisers Act (‘‘Advisers Act’’) (description of the business) below? has not been reviewed by the crowd in Form PF defines a ‘‘hedge fund’’ generally as any 21. Are there other categories of the manner contemplated by the ‘‘private fund’’ (other than a securitized asset fund) that: (1) Pays a performance fee or allocation issuers that should be precluded from exemption under Section 4(a)(6). calculated by taking into account unrealized gains relying on Section 4(a)(6)? If so, what We are cognizant of the challenges (other than a fee or allocation the calculation of categories of issuers and why? associated with distinguishing between which may take into account unrealized gains early stage proposals that should solely for the purpose of reducing such fee or B. Requirements on Issuers allocation to reflect net unrealized losses); (2) may provide information sufficient to borrow an amount in excess of one-half of its net 1. Disclosure Requirements support the crowdfunding mechanism asset value (including any committed capital) or and those that cannot by their terms do may have gross notional exposure in excess of twice Section 4A(b)(1) provides that an so. We preliminarily believe that an its net asset value (including any committed issuer offering or selling securities in capital); or (3) may sell securities or other assets reliance on Section 4(a)(6) must file appropriate balance can be struck by short or enter into similar transactions (other than excluding an issuer that has no specific for the purpose of hedging currency exposure or specified disclosures, including business plan or that has indicated that managing duration). See Form PF: Glossary of financial disclosures, with the Terms at 4, available at http://www.sec.gov/rules/ Commission, provide these disclosures its business plan is to engage in a final/2011/ia-3308-formpf.pdf. A ‘‘private fund’’ is defined as any issuer that would be an investment to investors and the relevant broker or 76 See, e.g., Section 4A(b)(1)(C) (requiring a company as defined in Section 3 of the Investment description of the business of the issuer and the Company Act but for Section 3(c)(1) or 3(c)(7) of 79 See Section II.B.1.b below for a discussion of anticipated business plan of the issuer). that Act. Id. at 7. progress updates.
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funding portal and make these prohibitively expensive.88 We recognize permit filings by issuers under the disclosures available to potential these concerns and have considered proposed rules to be filed in the other investors. These disclosures include: them in determining the disclosure language? Why or why not? If we retain • The name, legal status, physical requirements that we should propose in the requirement to make filings only in address and Web site address of the this release. English, will this impose a issuer 80; The proposed rules generally describe disproportionate burden on issuers and • The names of the directors and the type of information that issuers potential investors who principally officers (and any persons occupying a would be required to disclose. We communicate in a language other than similar status or performing a similar expect, however, that an issuer, along English? What will be the impact on function), and each person holding with the intermediary, would determine capital formation for such issuers? more than 20 percent of the shares of the format that best conveys the the issuer 81; required disclosures and any other a. Offering Statement Disclosure • a description of the business of the information the issuer determines is Requirements issuer and the anticipated business plan material to investors.89 We recognize i. Information About the Issuer and the of the issuer 82; that there are numerous ways to achieve Offering • a description of the financial that goal and, as such, we are not (a) General Information About the condition of the issuer83; proposing to mandate a specific • Issuer, Officers and Directors a description of the stated purpose disclosure format.90 Similarly, to the and intended use of the proceeds of the extent some of the required disclosures Consistent with Sections 4A(b)(1)(A) offering sought by the issuer with overlap, issuers would not be required and (B), we are proposing to require an respect to the target offering amount 84; issuer to disclose information about its • to duplicate disclosures. the target offering amount, the As discussed further in Section II.B.3, legal status, directors, officers and deadline to reach the target offering we are proposing to require issuers to certain shareholders and how interested amount and regular updates regarding file the disclosures with the parties may contact the issuer. the progress of the issuer in meeting the Commission on Form C.91 As proposed, Specifically, an issuer would be target offering amount 85; Form C would be filed in the standard required to disclose: • the price to the public of the format of eXtensible Markup Language • Its name and legal status, including securities or the method for determining (XML). An XML-based fillable form its form of organization, jurisdiction in the price 86; and which it is organized and date of • would enable issuers to provide a description of the ownership and information in a convenient medium organization 92; 87 capital structure of the issuer. In without requiring the issuer to purchase • its physical address and its Web site addition, Section 4A(b)(1)(I) specifies or maintain additional software or address 93; and • that the Commission may require technology. This would provide the the names of the directors and additional disclosures for the protection Commission with data about offerings officers, including any persons of investors and in the public interest. made in reliance on Section 4(a)(6). occupying a similar status or performing Commenters expressed concerns Information not required to be provided a similar function, all positions and about the extent of the disclosure in text boxes would be filed as offices with the issuer held by such requirements and stated that overly attachments to Form C. persons, the period of time in which burdensome rules would make offers such person served in the position or and sales in reliance on Section 4(a)(6) Request for Comment office and their business experience 22. Rule 306 of Regulation S–T during the past three years,94 including: 80 Section 4A(b)(1)(A). requires that all electronic filings made Æ each person’s principal occupation 81 Section 4A(b)(1)(B). with the Commission, including the and employment, including whether 82 Section 4A(b)(1)(C). filings that would be required under the any officer is employed by another 83 Section 4A(b)(1)(D). This provision also proposed rules, be in English. Some employer; and establishes a framework of tiered financial Æ disclosure requirements based on aggregate offering startups and small businesses, and their the name and principal business of amounts for offerings under Section 4(a)(6) within potential investors, may principally any corporation or other organization in the preceding 12-month period. communicate in a language other than which such occupation and 84 Section 4A(b)(1)(E). English. Should we amend Rule 306 to employment took place. 85 Section 4A(b)(1)(F). Although the statute does not define 86 Section 4A(b)(1)(G). This provision also 88 ‘‘officer,’’ the term is defined in requires that ‘‘prior to sale, each investor shall be See Vim Funding Letter; ExpertBeacon Letter; 95 provided in writing the final price and all required CrowdFund Connect Letter. Securities Act Rule 405 and in disclosures, with a reasonable opportunity to 89 Section II.B.3 below further discusses the Exchange Act Rule 3b–2.96 We are rescind the commitment to purchase the proposed format of Form C and requests comments proposing to define ‘‘officer’’ consistent securities.’’ This provision is addressed in Sections on the format and presentation of the information. with these existing rules. Thus, an II.C.5 and II.C.6 below. 90 While the proposed rules do not mandate a 87 Section 4A(b)(1)(H). Specifically, Section specific disclosure format, Rule 306 of Regulation issuer would be required to disclose 4A(b)(1)(H) requires a description of: ‘‘(i) Terms of S–T (17 CFR 232.306) requires that all electronic information regarding its president, vice the securities of the issuer being offered and each filings made with the Commission, including the president, secretary, treasurer or other class of security of the issuer . . .; (ii) a filings that would be required under the proposed principal financial officer, comptroller description of how the exercise of the rights held rules, be in English. The proposed rules would not, by the principal shareholders of the issuer could however, prevent an issuer from providing to the or principal accounting officer and any negatively impact the purchasers of the securities relevant intermediary both an English and a foreign person routinely performing being offered; (iii) the name and ownership level of language version of the information for the corresponding functions with respect to each existing shareholder who owns more than 20 intermediary to make publicly available through its percent of any class of the securities of the issuer; platform. The anti-fraud and civil liability 92 See proposed Rule 201(a) of Regulation (iv) how the securities being offered are being provisions of the Securities Act would apply Crowdfunding. valued . . .; and (v) the risks to purchasers of the equally to both the English and the foreign language 93 securities relating to minority ownership in the version of the information. Id. issuer, the risks associated with corporate actions, 91 Issuers would use Form C to provide the 94 See proposed Rule 201(b) of Regulation including additional issuances of shares, a sale of required disclosures about the crowdfunding Crowdfunding. the issuer or of assets of the issuer, or transactions transaction and the information required to be filed 95 17 CFR 230.405. with related parties.’’ annually. See Section II.B.3 below. 96 17 CFR 240.3b–2.
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any organization, whether incorporated outstanding voting securities is about significant employees)? Is there or unincorporated, to the extent it has consistent with Section 4A(b)(1)(B). other general information about the individuals serving in these capacities. Section 4A(b)(1)(B) is not limited to issuer or its officers and directors that We are proposing to require voting equity securities, but we believe we should require to be disclosed? If so, disclosure of the business experience of the limitation would be necessary to what information and why? For directors and officers of the issuer clarify how beneficial ownership would example, should we require disclosure during the past three years. A three-year be required to be calculated since of any court orders, judgments or civil period is less than the five-year period issuers could potentially have multiple litigation involving any directors and that applies to issuers conducting classes of securities with different officers, including any persons registered offerings 97 or exempt voting powers. Assessing beneficial occupying a similar status or performing offerings pursuant to Regulation A.98 ownership based on ownership of total a similar function? Why or why not? If We believe that startups and small outstanding voting securities, rather so, what time period should this businesses that may seek to raise capital than based on ownership of any class of disclosure cover and why? in reliance on Section 4(a)(6) generally securities as potentially contemplated 25. The proposed rules would require would be smaller than the issuers by Section 4A(b)(1)(H)(iii), also should disclosure of the business experience of conducting registered offerings or ease the burden of compliance because directors and officers of the issuer exempt offerings pursuant to Regulation there would be fewer 20 Percent during the past three years. Is the three- A; 99 thus, we believe that the less Beneficial Owners to track. year period an appropriate amount of burdensome three-year period would Neither Section 4A(b)(1)(B) nor time? Why or why not? If not, please reduce the compliance cost for issuers Section 4A(b)(1)(H)(iii) states as of what discuss what would be an appropriate while still providing potential investors date the beneficial ownership should be amount of time and why. Should the with sufficient information about the calculated. The proposed rules would requirement to disclose the business business experience of directors and require issuers to calculate beneficial experience of officers and directors officers of the issuer to make an ownership as of the most recent include a specific requirement to informed investment decision. practicable date.102 This is the same disclose whether the issuer’s directors Section 4A(b)(1)(B) requires requirement that applies to issuers and officers have any prior work or disclosure of ‘‘the names of . . . each conducting registered offerings or business experience in the same type of person holding more than 20 percent of Exchange Act reporting companies.103 business as the issuer? Why or why not? the shares of the issuer.’’ In contrast, We believe that it is appropriate to 26. The proposed rules would require Section 4A(b)(1)(H)(iii) requires provide issuers relying on Section disclosure of the names of persons who disclosure of the ‘‘name and ownership 4(a)(6) the flexibility to calculate are beneficial owners of 20 percent or level of each existing shareholder who beneficial ownership as of the most more of the issuer’s outstanding voting owns more than 20 percent of any class recent practicable date, otherwise such equity securities, calculated on the basis of the securities of the issuer’’ (emphasis issuers would be subject to a more of voting power. Is this approach added). The proposed rules would burdensome standard than the one that appropriate? Why or why not? Should require disclosure of the names of applies to issuers conducting registered the proposed rules require disclosure of persons, as of the most recent offerings or Exchange Act reporting the names of beneficial owners of 20 practicable date, who are the beneficial companies. percent or more of any class of the owners of 20 percent or more of the issuer’s voting securities, even if such issuer’s outstanding voting equity Request for Comment beneficial ownership does not exceed 20 securities, calculated on the basis of 23. Under the proposed rules the percent of all of the issuer’s outstanding voting power.100 We refer to this group definition of the term ‘‘officer’’ is voting equity securities? Why or why of persons as ‘‘20 Percent Beneficial consistent with how that term is defined not? Should the proposed disclosure Owners.’’ We believe that the universe in Securities Act Rule 405 104 and in requirement apply to the names of of 20 Percent Beneficial Owners should Exchange Act Rule 3b–2.105 Should we beneficial owners of 20 percent or more, be the same for the disclosure instead define ‘‘officer’’ consistent with as proposed, or to more than 20 percent requirements and the disqualification the definition of ‘‘executive officer’’ in of the issuer’s outstanding voting equity provisions101 because this would ease Securities Act Rule 405 106 and in securities? Why or why not? the burden on issuers by requiring Exchange Act Rule 3b–7?107 Why or 27. The proposed rules would require issuers to only identify one set of why not? Which definition would be that beneficial ownership be calculated persons who would be the subject of more appropriate for the types of issuers as of the most recent practicable date. Is these rules. We believe that assessing that would be relying on the exemption? this approach appropriate? Why or why beneficial ownership based on total 24. Are these proposed disclosure not? Should beneficial ownership be requirements relating to the issuer and calculated as of a different date? For 97 See Item 401(e) of Regulation S–K [17 CFR its officers and directors appropriate? example, should the reported beneficial 229.401(e)]. Why or why not? Should we only ownership only reflect information as of 98 See Item 8(c) of Form 1–A [17 CFR 239.90]. require the disclosures specifically the end of a well-known historical 99 There is no cap on the amount of proceeds that called for by statute or otherwise modify may be raised in a registered offering, and period, such as the end of a fiscal year? Regulation A limits offerings to $5 million. or eliminate any of the proposed Please explain. Should there be a 100 See proposed Rule 201(c) of Regulation requirements? Should we require any maximum amount of time from this Crowdfunding. additional disclosures (e.g., disclosure calculation date to the filing to ensure 101 See proposed Rule 503 of Regulation that the information is current? If so, Crowdfunding and Section II.E.6 below for a 102 See proposed Rule 201(c) of Regulation what maximum amount of time would discussion of the proposed disqualification Crowdfunding. provisions. This approach also would be consistent be appropriate? 103 See Item 403 of Regulation S–K [17 CFR with how beneficial ownership is calculated for the 229.403]. 28. Should we provide additional Rule 506 disqualification rules. See Disqualification 104 guidance on how to calculate beneficial of Felons and Other ‘‘Bad Actors’’ from Rule 506 17 CFR 230.405. Offerings, Release No. 33–9414 (July 10, 2013) [78 105 17 CFR 240.3b–2. ownership on the basis of voting power? FR 44729 (July 24, 2013)] (‘‘Disqualification 106 17 CFR 230.405. If so, what should that guidance Adopting Release’’). 107 17 CFR 240.3b–7. include? Should the proposed rules
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require disclosure of the name of a 30. Would more specific line item purpose for repurchasing the securities. person who has investment power over, disclosures be more workable for issuers An issuer also should consider an economic exposure to or a direct relying on Section 4A or provide more disclosing how long the proceeds will pecuniary interest in the issuer’s useful guidance for such issuers? Would satisfy the operational needs of the securities even if that person is not a 20 such disclosures be more useful to business. If an issuer does not have Percent Beneficial Owner? Why or why investors? Why or why not? For definitive plans for the proceeds, but not? example, should we require issuers to instead has identified a range of provide a business description possible uses, then the issuer should (b) Description of the Business incorporating the information that a identify and describe each probable use Consistent with Section 4A(b)(1)(C), smaller reporting company would be and factors impacting the selection of we are proposing to require an issuer to required to provide in a registered each particular use.116 If an issuer disclose information about its business offering pursuant to Item 101(h) of indicates that it will accept proceeds in and business plan.108 One commenter Regulation S–K? 112 Why or why not? excess of the target offering amount,117 noted that the term ‘‘business plan’’ Should we require issuers to provide the issuer would be required to provide traditionally referred to a document information regarding their plan of a separate, reasonably detailed prepared by management for internal operations, similar to that required by description of the purpose and intended use only and more recently has been Item 101(a)(2) of Regulation S–K 113 in use of any excess proceeds with similar used to refer to a marketing document registered offerings by companies with specificity.118 used to solicit investors.109 We do not limited operating histories? Why or why Request for Comment expect issuers to provide those types of not? documents in response to this (c) Use of Proceeds 31. Are these proposed disclosure requirement.110 Although two requirements appropriate? Why or why commenters suggested that the The proposed rules, consistent with Section 4A(b)(1)(E), would require an not? Should we require any additional Commission clarify the term ‘‘business disclosures, including specifying items plan,’’ 111 the proposed rules would not issuer to provide a description of the purpose and intended use of the offering required to be disclosed? Is the specify the disclosures that an issuer 114 proposed standard sufficiently clear must include in the description of the proceeds. One commenter suggested that we require issuers to be specific such that it would result in investors business and the business plan. We being provided with an adequate understand that issuers engaging in and detailed when making this disclosure.115 We expect that such amount of information? If not, how crowdfunding transactions may have disclosure would provide a sufficiently should we change the disclosure businesses at various stages of detailed description of the intended use requirement? Should the rules include a development in differing industries, and of proceeds to permit potential investors non-exclusive list of examples that therefore, we believe that the proposed to evaluate the investment. For example, issuers should consider when providing rules should provide flexibility for an issuer may, among other uses, intend disclosure, similar to the examples issuers to disclose the information about to use the proceeds of an offering to discussed above? their businesses. acquire assets or businesses, 32. Under what circumstances, if any, Request for Comment compensate the intermediary or its own should an issuer be required to update employees or repurchase outstanding the use of proceeds disclosures? 29. Are these proposed disclosure securities of the issuer. In its requirements appropriate? Why or why 33. Is there other information description, an issuer should use its regarding the purpose of the offering not? Should we require any additional judgment regarding the level of detail in disclosures? Should we prescribe and use of proceeds that we should its disclosures regarding the assets or require to be disclosed? If so, what specific disclosure requirements about businesses that the issuer anticipates the business of the issuer and the information? Should any of the acquiring, if applicable. If the proceeds examples above be included as anticipated business plan of the issuer will be used to compensate the or provide a non-exclusive list of the requirements in the rules? Why or why intermediary, the issuer should disclose not? types of information an issuer should the amount to be used for such consider disclosing? Why or why not? If compensation. If the proceeds will be (d) Target Offering Amount and so, what specific disclosures about the used to compensate existing employees Deadline issuer’s business or business plans and/or to hire new employees, the should we require or include in a non- issuer should consider disclosing Consistent with Section 4A(b)(1)(F), exclusive list? For example, should we whether the proceeds will be used for the proposed rules would require explicitly require issuers to describe any salaries or bonuses and how many issuers to disclose the target offering material contracts of the issuer, any employees it plans to hire, as amount and the deadline to reach the material litigation or any outstanding applicable. If the issuer will repurchase target offering amount.119 In addition, court order or judgment affecting the outstanding issuer securities, it should an issuer would be required to disclose issuer or its property? Why or why not? consider disclosing its plans, terms and whether it will accept investments in excess of the target offering amount and, 108 See proposed Rule 201(d) of Regulation 112 17 CFR 229.101(h). if it will, the issuer would be required Crowdfunding. 113 17 CFR 229.101(a)(2). to disclose, at the commencement of the 109 See Ohio Division of Securities Letter. 114 See proposed Rule 201(i) of Regulation offering, the maximum amount it will 110 Companies filing a registration statement or Crowdfunding. other filings that require a description of the 115 See Williams Letter (stating that an issuer 116 See proposed Instruction to paragraph (i) of business include a description of the business should disclose how the issuer arrived at the proposed Rule 201 of Regulation Crowdfunding. without providing a formal business plan. See Item offering target, an itemization of expected expenses 117 101 of Regulation S–K [17 CFR 229.101]. Our within the intended use of the proceeds, a See Section II.B.1.a.i(d) below. approach under proposed Rule 201(d) of Regulation contingency plan for the use of the proceeds should 118 See proposed Instruction to paragraph (i) of Crowdfunding is consistent with that practice. circumstances change and what will be done with proposed Rule 201 of Regulation Crowdfunding. 111 See Cones Letter; Ohio Division of Securities any leftover proceeds upon completing the 119 See proposed Rule 201(g) of Regulation Letter. intended use). Crowdfunding.
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accept.120 For example, if the issuer sets • the intermediary will notify provided in writing the final price and a target offering amount of $200,000 but investors when the target offering all required disclosures.129 is willing to accept up to $750,000, the amount has been met; Request for Comment issuer would be required to disclose • if an issuer reaches the target both the $200,000 target offering amount offering amount prior to the deadline 36. Are these proposed disclosure and the $750,000 maximum offering identified in its offering materials, it requirements appropriate? Why or why amount that it will accept.121 In may close the offering early if it not? Should we modify or eliminate any addition, the issuer would be required provides notice about the new offering of the proposed requirements? Should to disclose, at the commencement of the deadline at least five business days prior we require any additional disclosures? offering, how shares in oversubscribed to that new deadline (absent another Please explain. 122 material change that would require an offerings would be allocated. If this (f) Ownership and Capital Structure disclosure is made, we do not believe it extension of the offering and would be necessary for us to prescribe reconfirmation of the investment Consistent with Section 4A(b)(1)(H), how oversubscribed offerings would be commitment); 126 and the proposed rules would require an allocated because this approach would • if an investor does not cancel an issuer to provide a description of its allow issuers the flexibility to structure investment commitment before the 48- ownership and capital structure.130 This the offering as they believe appropriate. hour period prior to the offering disclosure would include: • At the same time, this approach would deadline, the funds will be released to The terms of the securities being provide investors with the disclosure the issuer upon closing of the offering offered and each other class of security they need to make an informed and the investor will receive securities of the issuer, including the number of investment decision. in exchange for his or her investment. securities being offered and/or We believe that investors in a We also propose to require issuers to outstanding, whether or not such crowdfunding transaction would benefit disclose that if an investor does not securities have voting rights, any from clear disclosure about their right to reconfirm his or her investment limitations on such voting rights, how cancel, the circumstances under which commitment after a material change is the terms of the securities being offered an issuer may close an offering early made to the offering, the investor’s may be modified and a summary of the and the need to reconfirm the investment commitment will be differences between such securities and investment commitment under certain cancelled and committed funds will be each other class of security of the issuer, circumstances, so investors are more returned.127 The proposed rules also and how the rights of the securities aware of their rights to rescind an would require issuers to disclose that if being offered may be materially limited, investment commitment.123 As such, we the sum of the investment commitments diluted or qualified by the rights of any propose to require issuers to describe does not equal or exceed the target other class of security of the issuer; the process to cancel an investment offering amount at the time of the • a description of how the exercise of commitment or to complete the offering deadline, no securities will be the rights held by the principal transaction once the target amount is sold in the offering, investment shareholders of the issuer could affect met,124 including a statement that: commitments will be cancelled and the purchasers of the securities; • Investors may cancel an investment committed funds will be returned.128 • the name and ownership level of persons who are 20 Percent Beneficial commitment until 48 hours prior to the Request for Comment deadline identified in the issuer’s Owners; offering materials; 125 34. Are these proposed disclosure • how the securities being offered are requirements appropriate? Why or why being valued, and examples of methods 120 See proposed Rule 201(h) of Regulation not? Should we modify or eliminate any for how such securities may be valued Crowdfunding. of the proposed requirements? Should by the issuer in the future, including 121 The issuer in this case also would need to we require any additional disclosures? during subsequent corporate actions; disclose the intended use of the additional 35. The proposed rules would require • proceeds. See proposed Instruction to paragraph (i) the risks to purchasers of the of proposed Rule 201 of Regulation Crowdfunding. an issuer willing to accept investments securities relating to minority See also Section II.B.1.a.i(c) above. In addition, the in excess of the target offering amount ownership in the issuer and the risks issuer in this case would need to provide audited to provide, at the commencement of the associated with corporate actions financial statements at the commencement of the offering, the disclosure that would be offering, rather than financial statements reviewed including additional issuances of by an independent public accountant as would be required in the event the offer is securities, issuer repurchases of required for the lower target amount. See Section oversubscribed. Is this approach securities, a sale of the issuer or of II.B.1.a.ii below for a discussion of the financial appropriate? Why or why not? assets of the issuer or transactions with statements requirements. As another example, an (e) Offering Price related parties; and issuer that sets a target offering amount of $80,000 • and a maximum offering amount of $105,000 would a description of the restrictions on be required to provide financial statements Consistent with Section 4A(b)(1)(G), the transfer of the securities. reviewed by an independent public accountant the proposed rules would require an We believe that investors in (rather than tax returns for the most recently issuer to disclose the offering price of crowdfunding transactions would completed fiscal year and financial statements the securities or the method for benefit from clear disclosure about the certified by the principal executive officer). determining the price, provided that 122 See proposed Rule 201(h) of Regulation terms of the securities being offered and Crowdfunding. prior to the sale, each investor is each other class of security of the issuer. 123 Although not specifically required by Title III, The proposed rules would require Securities Act Section 4A(b)(1)(I) provides us with 126 Id. disclosure of the number of securities discretion to require issuers engaged in transactions 127 See proposed Rule 201(k) of Regulation in reliance on Section 4(a)(6) to provide additional Crowdfunding. being offered and/or outstanding, information for the protection of investors and in 128 See proposed Rule 201(g) of Regulation the public interest. Crowdfunding. See also Section 4A(a)(7) (requiring 129 See proposed Rule 201(l) of Regulation 124 See proposed Rule 201(j) of Regulation intermediaries to ‘‘ensure that all offering proceeds Crowdfunding. See also Sections II.C.5 and II.C.6 Crowdfunding. are only provided to the issuer when the aggregate below for a discussion of information that issuers 125 Section II.C.6 below further discusses the capital raised from all investors is equal to or would be required to provide to investors. proposed cancelation provisions and requests greater than a target offering amount . . . .’’) and 130 See proposed Rule 201(m) of Regulation comments on the proposed approach. discussion in Section II.C.6 below. Crowdfunding.
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whether or not such securities have • disclosure of exempt offerings The proposed rules also would voting rights, any limitations on such conducted within the past three require disclosure of certain related- voting rights and a description of the years; 140 and party transactions between the issuer restrictions on the transfer of the • disclosure of certain related-party and any director or officer of the issuer, securities.131 Although Section transactions.141 any person who is a 20 Percent 4A(b)(1)(H) does not specifically call for Requiring an issuer to identify the Beneficial Owner, any promoter of the this disclosure, we believe that such name, Commission file number and issuer (if the issuer was incorporated or disclosure would be necessary to CRD number (as applicable) of the organized within the past three years), provide investors with a more complete intermediary through which the offering or immediate family members of the picture of the issuer’s capital structure is being conducted should assist foregoing persons.144 For purposes of than would be obtained solely pursuant investors and regulators in obtaining this related-party transactions to the statutory requirements. We information about the offering and disclosure, ‘‘immediate family member’’ believe this would help investors better facilitate monitoring the use of the would have the same meaning that it evaluate the terms of the offer before exemption. It also could help investors has in Item 404 of Regulation S–K,145 making an investment decision. obtain background information on the which relates to the disclosure of related-party transactions for Exchange Request for Comment intermediary, for instance through filings made by the intermediary with Act reporting companies. This related- 37. Are these proposed disclosure the Commission as well as through the party transactions disclosure should requirements appropriate? Why or why Financial Industry Regulatory assist investors in obtaining a more not? Should we modify or eliminate any Authority’s (‘‘FINRA’’) BrokerCheck complete picture of the financial of the proposed requirements? Should system for brokers 142 or a similar relationships between certain related we require any additional disclosures? system, if created, for funding portals. parties and the issuer. Several commenters suggested that we Please explain. In addition, requiring an issuer to should model the disclosure form after disclose the amount of compensation (g) Additional Disclosure Requirements Securities Act Form 1–A 146 or the North paid to the intermediary for conducting In addition to the statutory disclosure American Securities Administrators the offering, including the amount of requirements,132 we propose to require: Association’s (‘‘NASAA’’) uniform • Disclosure of the name, referral or other fees associated with the Small Company Offering Registration Commission file number and Central offering, would permit investors and Form (U–7).147 The proposed disclosure Registration Depository number (‘‘CRD regulators to determine how much of requirements regarding risk factors and number’’) 133 (as applicable) of the the proceeds of the offering are used to related-party transactions are similar to intermediary through which the offering compensate the intermediary and to those in Form 1–A except that, with is being conducted; 134 facilitate the monitoring of respect to the disclosure about related- • disclosure of the amount of compensation paid to intermediaries. party transactions, the proposed rules compensation paid to the intermediary The requirement for an issuer to would require disclosure about for conducting the offering, including include in the offering statement certain transactions since the beginning of the the amount of any referral or other fees specified legends about the risks of issuer’s last full fiscal year, rather than associated with the offering; 135 investing in a crowdfunding transaction the two fiscal years required in Form 1– • disclosure of certain legends to be is intended to help investors understand A. Given the early stage of development included in the offering statement; 136 the general risks of investing in a of the small businesses and startups that • disclosure of the current number of crowdfunding transaction. In addition, we expect would seek to raise capital employees of the issuer; 137 the requirement that an issuer include pursuant to Section 4(a)(6), as well as • a discussion of the material factors in the offering statement certain legends the investment limitations prescribed by that make an investment in the issuer about the required ongoing reports, the proposed rules, we believe that speculative or risky; 138 including how those reports would be limiting the disclosure to related-party • a description of the material terms made available to investors and how an transactions since the beginning of the of any indebtedness of the issuer, issuer may terminate its ongoing issuer’s last full fiscal year will reduce including the amount, interest rate, reporting obligations, is intended to the burden on issuers while still maturity date and any other material help investors understand an issuer’s providing investors with sufficient terms; 139 ongoing reporting obligations and information to evaluate the relationship inform investors of how they will be between related parties and the issuer. 131 See proposed Rule 501 of Regulation able to access those reports. Also, the proposed rules only would Crowdfunding and Section II.E.2 below for a The proposed rules also would require disclosure of related-party discussion of restrictions on resales. require disclosure of the material factors 132 Section 4A(b)(1)(I) provides us with discretion transactions in excess of five percent of to require crowdfunding issuers to provide that make an investment in the issuer the aggregate amount of capital raised additional information for the protection of speculative or risky.143 We believe that by the issuer in reliance on Section investors and in the public interest. this risk factor information should help 4(a)(6) during the preceding 12-month 133 The Financial Industry Regulatory Authority, investors to better understand the risks period, inclusive of the amount the Inc. (‘‘FINRA’’) will issue the CRD number. of investing in a specific issuer’s 134 See proposed Rule 201(n) of Regulation issuer seeks to raise in the current Crowdfunding. offering. offering under Section 4(a)(6). For 135 See proposed Rule 201(o) of Regulation Crowdfunding. 140 See proposed Rule 201(q) of Regulation 144 See proposed Rule 201(r) of Regulation 136 See Item 2 of General Instruction III to Crowdfunding. Crowdfunding. proposed Form C. 141 See proposed Rule 201(r) of Regulation 145 17 CFR 229.404. See proposed Rule 201(r)(4) 137 See proposed Rule 201(e) of Regulation Crowdfunding. of Regulation Crowdfunding. Crowdfunding. 142 See FINRA, FINRA BrokerCheck, available at 146 17 CFR 239.90. Form 1–A is the form used for 138 See proposed Rule 201(f) of Regulation http://www.finra.org/Investors/ToolsCalculators/ securities offerings made pursuant to Regulation A. Crowdfunding. BrokerCheck/P015175. 147 See Commonwealth of Massachusetts Letter; 139 See proposed Rule 201(p) of Regulation 143 See proposed Rule 201(f) of Regulation Coan Letter; Liles Letter 1; Vim Funding Letter; Crowdfunding. Crowdfunding. NASAA Letter.
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example, an issuer seeking to raise $1 Request for Comment equivalents.155 Should the definition of million would be required to disclose immediate family member for purposes 38. Are these proposed disclosure related-party transactions in excess of of related-party transactions disclosure requirements appropriate? Why or why $50,000, which is the same threshold also expressly include spousal not? Should we modify or eliminate any required in Form 1–A. We believe that, equivalents, or would including spousal of the proposed requirements? If so, in light of the sizes and varieties of equivalents create confusion in light of how and why? issuers that may make offerings in the fact that the definition for purposes reliance on Section 4(a)(6), this scaled 39. To assist investors and regulators of related-party transactions already approach is more appropriate than the in obtaining information about the includes any persons (other than a fixed amount approach used in Form 1– offering and to facilitate monitoring the tenant or employee) sharing the same A, which might be disproportionate to use of the exemption, the proposed household? Please explain. the size of certain offerings and issuers. rules would require an issuer to identify 44. Is it appropriate to limit the the name, Commission file number and Two commenters suggested that the disclosure about related-party CRD number (as applicable) of the transactions to transactions since the Commission require the issuer to intermediary through which the offering disclose the total number of beginning of the issuer’s last full fiscal is being conducted. Is there a better year? Why or why not? Is it appropriate employees.148 The proposed rules approach? What other information to limit disclosure to those related-party would require disclosure of the issuer’s should be provided? If so, please transactions that exceed five percent of current number of employees.149 This describe it. the aggregate amount of capital raised information should assist investors and 40. Should we require disclosure of by the issuer in reliance on Section regulators in obtaining information the amount of compensation paid to the 4(a)(6)? Should we instead require about the size of the businesses using intermediary, as proposed? Why or why disclosure of all related-party the exemption. This information would not? Should we require issuers to transactions or all transactions in excess make data available that could be used separately disclose the amounts paid for of an absolute threshold amount? to evaluate whether the businesses conducting the offering and the amounts 45. Is it appropriate to require a using the exemption are creating paid for other services? Why or why 150 description of any prior exempt additional jobs. not? offerings conducted within the past The proposed rules also would 41. Should we require the issuer to three years, as proposed? Why or why require disclosure of the material terms include certain specified legends about not? Would another time period (e.g., of any indebtedness of the issuer, the risks of investing in a crowdfunding one year, five years, etc.) or no time including, among other items, the transaction and disclosure of the limit be more appropriate? amount, interest rate and maturity material factors that make an investment 46. Should we require any additional date.151 We believe this information in the issuer speculative or risky, as disclosures (e.g., should we require would be important to investors because proposed? Why or why not? Should we disclosure about executive servicing debt could place additional provide examples in our rules of the compensation and, if so, what level of pressures on an issuer in the early stages types of material risk factors an issuer detail should be required in such of development. should consider disclosing? Why or disclosure)? If so, what disclosures and In addition, the proposed rules would why not? If so, what should those why? examples be? require disclosure of exempt offerings ii. Financial Disclosure conducted within the past three 42. Should we require disclosure of years.152 For each exempt offering certain related-party transactions, as Section 4A(b)(1)(D) requires ‘‘a within the past three years, the proposed? Why or why not? The description of the financial condition of proposed rules would require a proposed rules would require the issuer.’’ It also establishes a framework of tiered financial disclosure description of the date of the offering, disclosures of certain transactions requirements based on aggregate target the offering exemption relied upon, the between the issuer and directors or offering amounts of the offering and all type of securities offered and the officers of the issuer, 20 Percent other offerings made in reliance on amount of securities sold and the use of Beneficial Owners, any promoter of the Section 4(a)(6) within the preceding 12- proceeds.153 We believe that it would be issuer, or relatives of the foregoing month period: important to investors to know of prior persons. Is this the appropriate group of • issuers offering $100,000 or less are offerings of securities. This information persons? Should we limit or expand the required to file with the Commission, would better inform investors about the list of persons? If so, how and why? provide to investors and the relevant capital structure of the issuer and would 43. As proposed, immediate family intermediary and make available to provide information about how prior member, for purposes of related-party potential investors income tax returns offerings were valued. transactions disclosure, would have the same meaning that it has in Item 404 of filed by the issuer for the most recently 154 completed year (if any) and financial 148 Regulation S–K. Is this the See NASAA Letter; Ohio Division of Securities statements that are certified by the Letter. appropriate approach? Why or why not? 149 See proposed Rule 201(e) of Regulation If not, what would be a more principal executive officer to be true Crowdfunding. appropriate definition and why? For and complete in all material respects; 150 Issuers would be required to disclose the • issuers offering more than $100,000, current number of employees in the offering purposes of restrictions on resales of securities issued in transactions made in but not more than $500,000, are document and the ongoing reports, which should required to file with the Commission, permit comparison of the number of employees reliance on Section 4(a)(6), ‘‘member of over different time periods. the family of the purchaser or the provide to investors and the relevant 151 See proposed Rule 201(p) of Regulation equivalent’’ would, as proposed, intermediary and make available to Crowdfunding. expressly include spousal 152 See proposed Rule 201(q) Regulation 155 See proposed Rule 501(c) of Regulation Crowdfunding. Crowdfunding and the related instruction thereto. 153 See proposed Instruction to paragraph (q) of 154 17 CFR 229.404. See proposed Rule 201(r)(4) See also Section II.E.2 below for a discussion of proposed Rule 201 of Regulation Crowdfunding. of Regulation Crowdfunding. spousal equivalent.
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potential investors financial statements compared to issuers conducting be made public.158 One commenter reviewed by a public accountant that is registered offerings or Exchange Act suggested that financial statements independent of the issuer; and reporting companies, we expect that the should cover the most recently • issuers offering more than $500,000 discussion would not generally need to completed fiscal year.159 Other (or such other amount as the be as lengthy or detailed as the MD&A commenters suggested that issuers Commission may establish) are required of Exchange Act reporting companies. offering $100,000 or less should provide to file with the Commission, provide to We are not proposing to prescribe financial statements prepared in investors and the relevant intermediary content or format for this information, accordance with generally accepted and make available to potential but rather to set forth principles of accounting principles (‘‘GAAP’’), investors audited financial statements. disclosure. To the extent these items of including explanatory notes, even Section 4A(h) further provides that disclosure overlap with the issuer’s though those financial statements would these dollar amounts shall be adjusted discussion of its business or business not be subject to an independent by the Commission not less frequently plan, issuers are not required to make accountant’s review or audit.160 than once every five years, by notice duplicate disclosures. While we are not For issuers offering more than published in the Federal Register, to proposing to mandate a specific $100,000, but not more than $500,000, reflect any change in the Consumer presentation, we expect issuers to one commenter suggested that the Price Index for All Urban Consumers present the required disclosures, Commission require the financial published by the Bureau of Labor including any other information that statement review to be done by Statistics. would be material to an investor, in a accountants in good standing for at least clear and understandable manner. 161 (a) Financial Condition Discussion five years. Another commenter stated Request for Comment that issuers in existence for less than 12 Consistent with Section 4A(b)(1)(D), months should not be required to the proposed rules would require an 47. Are these proposed requirements provide independently reviewed issuer to provide a narrative discussion for the discussion of the financial financial statements.162 156 of its financial condition. This condition of the issuer appropriate? Several commenters objected to the discussion should address, to the extent Why or why not? Should we modify or requirement for issuers to provide material, the issuer’s historical results of eliminate any of the requirements in the audited financial statements when operations in addition to its liquidity proposed rule or instruction? If so, offering more than $500,000 and and capital resources. If an issuer does which ones and why? Should we suggested alternatives.163 One not have a prior operating history, the require any additional disclosures? If so, discussion should focus on financial what disclosures and why? Should we 158 See RocketHub Letter 1 (stating that milestones and operational, liquidity prescribe a specific format or information can be taken from the issuer’s tax and other challenges. If an issuer has a presentation for the disclosure? Please return and entered digitally, by the issuer, for prior operating history, the discussion explain. inclusion in the offering materials). 159 should focus on whether historical 48. Should we exempt issuers with no See CompTIA Letter. 160 See Commonwealth of Massachusetts Letter; earnings and cash flows are operating history from the requirement NASAA Letter. representative of what investors should to provide a discussion of their financial 161 See Philipose Letter 1. expect in the future. An issuer’s condition? If so, why? Should we 162 See CFIRA Letter 2. discussion of its financial condition require such issuers to specifically state 163 See CFIRA Letter 2 (stating that the should take into account the proceeds of that they do not have an operating requirement to provide audited financial statements history, as proposed? Why or why not? should apply solely to issuers that have been the offering and any other known or engaged in their current business for more than 12 pending sources of capital. Issuers also 49. In the discussion of the issuer’s months and which are seeking to raise at least should discuss how the proceeds from financial condition, should we require $1,000,000); Vim Funding Letter (stating that the the offering will affect their liquidity issuers to provide specific disclosure statute gives the Commission the discretion to raise about prior capital raising transactions? the threshold at which audits are required, ‘‘in and whether these funds and any other theory all the way up to the $1,000,000 level’’ and additional funds are necessary to the Why or why not? Should we require asking that the Commission exercise its discretion); viability of the business. In addition, specific disclosure relating to prior RocketHub Letter 1 (stating that the threshold for issuers should describe the other transactions made pursuant to Section the audit requirement should be raised to an 4(a)(6), including crowdfunding amount in excess of $1,000,000 and audited available sources of capital to the financial statements should only be required for business, such as lines of credit or transactions in which the target amount issuers that have been in operation for more than required contributions by principal was not reached? Why or why not? two years); Parker Letter (stating that the audit requirement is an unnecessary expense); Cera shareholders. (b) Financial Disclosures We expect that the discussion Technology Letter (stating that the audit As noted above, Section 4A(b)(1)(D) requirement should be raised to $1,000,000); ABA required by the proposed rule and Letter 1 (stating that the Commission should instruction would inform investors establishes tiered financial statement consider a higher threshold, such as $750,000, or about the financial condition of the disclosure requirements that are based identify additional criteria, such as revenue levels, issuer in a manner similar to the on aggregate target offering amounts that would require audited financial statements); within the preceding 12-month period. Loofbourrow Letter (stating that the Commission management’s discussion and analysis should not impose an audit requirement); of financial condition and results of We received a range of comments on InitialCrowdOffering Letter (stating that the operations (‘‘MD&A’’) required by Item this requirement. requirement for audited financial statements should 303 of Regulation S–K 157 for registered In response to the requirement for be eliminated); Genedyne Letter 1 (stating that the Commission should not impose an audit offerings. Because issuers seeking to issuers offering $100,000 or less to file with the Commission, provide to requirement for offerings under $1,000,000); engage in crowdfunding transactions BrainThrob Laboratories Letter (stating that the would likely be smaller, less complex investors and the relevant intermediary Commission should defer imposing an audit and at an early stage of development and make available to potential requirement until further study can determine investors their income tax returns for whether it is economically beneficial to the investment community); Vogele Letter (stating that 156 See proposed Rule 201(s) of Regulation the most recently completed year, one obtaining audited financial statements takes time Crowdfunding. commenter suggested that, even if and new businesses do not have a lot of time). See 157 17 CFR 229.303. redacted, income tax returns should not also 2012 SEC Government-Business Forum, note
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commenter suggested that an issuer that $200,000 offering. We believe that considered proposing to require a third should not be required to provide this result would increase costs to year of financial statements, but we are audited financial statements if: (1) The issuers when those issuers were concerned that this could be overly target offering amount is not greater unsuccessful in prior offerings within burdensome for the types of issuers that than $100,000 (notwithstanding any the preceding 12-month period. likely would engage in crowdfunding other transactions made in reliance on Requiring issuers to aggregate amounts transactions.175 Section 4(a)(6) within the preceding 12- offered and sold should still prevent During the first 120 days of the month period); and (2) the issuer has issuers from circumventing the issuer’s fiscal year, an issuer would be not conducted a transaction in reliance framework of tiered financial disclosure able to conduct an offering in reliance on Section 4(a)(6) within the preceding requirements by structuring a larger on Section 4(a)(6) and the related rules six months.164 Another commenter offering as a series of smaller using financial statements for the fiscal suggested that issuers should be offerings.168 We do not propose to year prior to the most recently required to identify the accountant used prohibit issuers from providing completed fiscal year if the financial to certify or audit the financial financial statements that meet the statements for the most recently statements.165 requirements for a higher aggregate completed fiscal year are not otherwise Under the proposed rules, in target offering amount than the available or required to be filed.176 We determining the financial statements proposed rules would require.169 believe this accommodation is needed that would be required, an issuer would The proposed rules would require all because otherwise issuers would not be need to aggregate the amounts offered issuers to file with the Commission, able to conduct offerings in reliance on and sold in reliance on Section 4(a)(6) provide to investors and the relevant Section 4(a)(6) for a period of time within the preceding 12-month period intermediary and make available to between the end of their fiscal year and with the target offering amount (or the potential investors a complete set of the date when the financial statements maximum offering amount, including their financial statements (a balance for that period are available.177 The the aggregate amount of any possible sheet, income statement, statement of issuer could not do this, however, if it oversubscriptions if the issuer will cash flows and statement of changes in was otherwise required to provide accept oversubscriptions) of the offering owners’ equity), prepared in accordance updated financial statements by the for which disclosure is being with U.S. generally accepted accounting ongoing reporting requirements 178 or provided.166 The statute refers to principles (‘‘U.S. GAAP’’), covering the financial statements are otherwise 179 aggregate ‘‘offering amounts’’ within the shorter of the two most recently available. For example, if an issuer preceding 12-month period. We are completed fiscal years or the period that has a calendar fiscal year end proposing to require issuers to aggregate since inception of the business.170 In conducts an offering in April 2014, it only amounts offered and sold (rather proposing this requirement we would be permitted to include financial than all offered amounts, including considered commenters’ suggestions statements for the fiscal year ended those not sold) within the preceding 12- that we require financial statements December 31, 2012 if the financial month period with the amount the prepared in accordance with U.S. statements for the fiscal year ended issuer is seeking to raise in the GAAP,171 as well as the fact that the transaction.167 We do not believe that (Dec. 19, 2007) [73 FR 934 (Jan. 4, 2008)] (in the same requirement applies to offerings context of requiring two years, rather than just one this provision should require an issuer 172 under Regulation A. year, of audited balance sheet data for smaller to aggregate amounts offered in prior We considered proposing to require reporting companies, the Commission noted that offerings but not sold (for example, financial statements covering only the comparative balance sheets will provide a much because the target offering amount was more meaningful presentation for investors without most recently completed fiscal year, as a significant additional burden on smaller reporting not met). Otherwise, an issuer that 173 one commenter suggested, rather companies, since the earlier year data should be initially sought to raise $400,000, did than the two most recently completed readily available for the purposes of preparing the not complete the crowdfunding fiscal years; however, we believe that other financial statements). See also SEC Advisory transaction because the target offering requiring a second year will provide Committee on Smaller Public Companies, Final amount was not met, and would like to Report (Apr. 23, 2006), available at http:// investors with a basis for comparison www.sec.gov/info/smallbus/acspc.shtml. raise $200,000 in a second attempt against the most recently completed 175 Requiring a third year of financial statements would be required to provide audited period, without substantially increasing also would place a greater burden on issuers relying financial statements rather than the burden for the issuer.174 We also on Section 4(a)(6) than on emerging growth financial statements reviewed by a companies conducting registered offerings. See Section 102(b) of the JOBS Act. public accountant in connection with 168 For example, we believe aggregating 176 See proposed Instruction 8 to paragraph (t) of completed offerings within the preceding 12-month proposed Rule 201 of Regulation Crowdfunding. period is necessary to avoid having an issuer who 29 (recommending that the Commission consider 177 Issuers conducting a registered offering after seeks to raise more than $500,000, which requires raising the offering amount at which audited the end of their fiscal year also are permitted to use audited financial statements, structure the offering financial statements are required). financial statements for their prior period until the as a series of smaller offerings to circumvent this 164 See ABA Letter 1. 90th day after their fiscal-year end for non- requirement. 165 See RocketHub Letter 1 (stating that disclosure accelerated filers (or 75th day for accelerated filers 169 of the identity of the accountant used to review or See proposed Instruction 10 to paragraph (t) of and 60th day for large accelerated filers) if certain audit the financial statements would allow proposed Rule 201 of Regulation Crowdfunding. conditions are satisfied. See Rule 3–01(c) of investors to conduct diligence on the accountant 170 See proposed Instruction 2 to paragraph (t) of Regulation S–X [17 CFR 210.3–01(c)]. and permit the intermediary to track accountant proposed Rule 201 of Regulation Crowdfunding. 178 See Section II.B.2 below for a discussion of activities and block issuers on their platform from Financial statements prepared in accordance with ongoing reporting requirements. U.S. GAAP are generally self-scaling to the size and using accountants who produce poor quality or 179 Additionally, if the offering period remains complexity of the issuer, which should reduce the fraudulent work). open beyond 120 days after the end of the issuer’s burden of preparing financial statements for many 166 See proposed Instruction 1 to paragraph (t) of fiscal year (resulting in financial statements older issuers. proposed Rule 201 of Regulation Crowdfunding. than 485 days at the time the offering closes), then 171 167 See also Hutchens Letter (suggesting that the See Commonwealth of Massachusetts Letter; the issuer would be required to update the Commission ‘‘devise a rule that creates a NASAA Letter. disclosure in the offering statement to include relationship between the amount of capital actually 172 See Part F/S of Form 1–A. [17 CFR 239.90]. financial statements for the most recently raised by an issuer in a crowdfunding offering and 173 See CompTIA Letter. completed fiscal year. See proposed Instruction 8 to the degree of financial disclosure the issuer must 174 See Smaller Reporting Company Regulatory paragraph (t) of proposed Rule 201 of Regulation provide’’). Relief and Simplification, Release No. 33–8876 Crowdfunding.
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December 31, 2013 are not yet available. For offerings of more than $100,000, review of the financial statements. To Once more than 120 days have passed but not more than $500,000, Section implement this requirement, the since the end of the issuer’s most recent 4A(b)(1)(D)(ii) requires issuers to file proposed rules would require issuers to fiscal year, the issuer would be required with the Commission, provide to provide financial statements reviewed to include financial statements for its investors and the relevant intermediary in accordance with the Statements on most recent fiscal year.180 Regardless of and make available to potential Standards for Accounting and Review the age of the financial statements, an investors financial statements reviewed Services (‘‘SSARS’’) issued by the issuer would be required to include a by a public accountant who is Accounting and Review Services discussion of any material changes in ‘‘independent’’ of the issuer, using Committee of the American Institute of the financial condition of the issuer professional standards and procedures Certified Public Accountants during any time period subsequent to or standards and procedures established (‘‘AICPA’’).188 We are not proposing the period for which financial by the Commission for this purpose. new review standards for purposes of statements are provided, including The statute does not define the term these rules at this time because we do changes in reported revenue or net ‘‘independent.’’ We propose that to not believe it is necessary. The AICPA’s income, to inform investors of changes qualify as an independent public review standard is widely utilized, and to the financial condition of the accountant for purposes of this we are not aware of any other widely issuer.181 requirement, the accountant would need utilized standards for reviews. Many Section 4A(b)(1)(D)(i) requires issuers to comply with the Commission’s accountants reviewing financial to file with the Commission, provide to independence rules, which are set forth statements of crowdfunding issuers investors and the relevant intermediary in Rule 2–01 of Regulation S–X.185 We should be familiar with the AICPA’s and make available to potential believe that accounting professionals standards and procedures for review, investors income tax returns and could benefit from the guidance the which could make it less burdensome financial statements. As specified in the Commission and staff have provided for issuers. statute, we are proposing to require an about these independence rules. We The issuer would be required to file issuer that is conducting an offering of also believe that financial statement with the Commission, provide to $100,000 or less in reliance on Section reviews under these standards could investors and the relevant intermediary 4(a)(6) to provide its filed income tax provide investors with more confidence and make available to potential returns for the most recently completed regarding the reliability of the financial investors a copy of the public fiscal year, if any, and its financial statements.186 An issuer subject to this accountant’s review report.189 This statements certified by its principal requirement that seeks to eventually should benefit investors by giving them executive officer.182 Although one become an Exchange Act reporting the ability to consider any modification commenter suggested the Commission company may have an easier transition that may have been made to the review should provide otherwise,183 the statute because the issuer would already be report. It also would serve as a way to specifically calls for the Commission to complying with our independence identify the accounting firm used to require the filing of income tax returns. rules.187 review the financial statements. As one To address the privacy concerns raised The statute also gives the Commission commenter suggested,190 investors then by commenters with regard to the discretion to determine the professional could conduct due diligence on the requirement to provide tax returns, we standards and procedures used for the accounting firm by, for example, are proposing to require issuers to researching the other offerings made in redact personally identifiable 185 17 CFR 210.2–01. Rule 2–01 of Regulation S– reliance on Section 4(a)(6) in which the information, such as social security X is designed to ensure that auditors are qualified accounting firm was involved or and independent both in fact and in appearance. numbers, from their tax returns before The rule sets forth restrictions on, including but not reviewing the accounting firm’s filing. Issuers that offer securities in limited to, financial, employment, and business licensure status and any publicly- reliance on Section 4(a)(6) before filing relationships between an accountant and a client available disciplinary proceedings. their tax returns for the most recently and restrictions on an accountant providing certain For offerings of more than $500,000, non-audit services to a client. The general standard consistent with the threshold identified completed fiscal year would be allowed of independence is set forth in Rule 2–01(b). The to use the tax return filed for the prior rule does not purport to, and the Commission could in Section 4A(b)(1)(D)(iii), the proposed year, provided that the issuer discloses not, consider all the circumstances that raise rules would require issuers to file with any material changes since that prior independence concerns, and these are subject to the the Commission, provide to investors general standard in paragraph (b) of Rule 2–01. In and the relevant intermediary and make year. In addition, the issuer would be considering this standard, the Commission looks in required to provide the tax return for the the first instance to whether a relationship or the available to potential investors audited most recent fiscal year when filed with provision of a service: (a) Creates a mutual or financial statements. While Congress the U.S. Internal Revenue Service (if conflicting interest between the accountant and the authorized the Commission to establish client; (b) places the accountant in the position of filed during the offering period). With auditing his or her own work; (c) results in the a different threshold, we are not regard to the requirement to provide accountant acting as management or an employee proposing at this time to raise the financial statements that are certified to of the client; or (d) places the accountant in a threshold at which an issuer would be be true and complete in all material position of being an advocate for the client. required to provide audited financial 186 respects, we are proposing a form of the For example, under the Commission’s statements, as some commenters independence rules, an auditor cannot provide 191 certification that would be provided by bookkeeping services to an audit client, so investors suggested. We note that Congress the issuer’s principal executive would be able to rely on the benefits that specifically selected $500,000 as the officer.184 accompany the prohibition against an auditor threshold at which to require audited auditing its own work. See Rule 2–01(c)(4) of Regulation S–X [17 CFR 210.2–01(c)(4)]. 180 188 Id. 187 Using an accountant that is not independent See proposed Rule 201(t)(2) of Regulation 181 See proposed Instruction 9 to paragraph (t) of in accordance with our independence rules could Crowdfunding. proposed Rule 201 of Regulation Crowdfunding. result in increased expense and delay to the extent 189 See proposed Instruction 5 to paragraph (t) of 182 See proposed Rule 201(t)(1) of Regulation that an issuer seeking to become an Exchange Act proposed Rule 201 of Regulation Crowdfunding. Crowdfunding. reporting company would need to obtain an audit 190 See RocketHub Letter 1. 183 See RocketHub Letter 1. of the financial statements by an accountant 191 See CFIRA Letter 2; Vim Funding Letter; 184 See proposed Instruction 4 to paragraph (t) of complying with the Commission’s independence RocketHub Letter 1; Cera Technology Letter; proposed Rule 201 of Regulation Crowdfunding. standards. Genedyne Letter 1; Schwartz Letter.
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financial statements. If we were to raise diligence by, for example, researching business development and may not have the threshold to $1 million, as suggested other offerings made in reliance on an operating history. In many instances, by some commenters,192 it would Section 4(a)(6) in which the accounting these issuers will have no more than a eliminate the requirement for issuers firm was involved or reviewing the business plan for which they are seeking ever to provide audited financial accounting firm’s licensure status and investors to help fund. We are not statements because the maximum any publicly-available disciplinary proposing to exempt these issuers (or offering amount under Section 4(a)(6) is proceedings. issuers that have been in existence for $1 million. Leaving the $500,000 An issuer that received an unqualified less than 12 months, as one commenter threshold unchanged also would or a qualified audit opinion would be in suggested) 201 from the requirement to provide the Commission, investors and compliance with the audited financial provide financial statements based on issuers an opportunity to become statement requirements.196 An issuer the tiered offering amounts. Financial familiar with the new offering that received an adverse opinion or a statements prepared in accordance with exemption before considering possible disclaimer of opinion, however, would U.S. GAAP are generally self-scaling to changes to the threshold. not be in compliance with the audited the size and complexity of the issuer, Under the proposed rules, the auditor financial statement requirements,197 which reduces the burden of preparing conducting the audit of the financial because the auditor determined that the financial statements for many early statements would be required to be financial statements of the issuer do not stage issuers. We would not expect that independent of the issuer and the audit present fairly its financial position, the required financial statements would would have to be conducted in results of operations or cash flows in be long or complicated for issuers that accordance with the auditing standards conformity with U.S. GAAP, or that the are recently formed and have limited issued by either the AICPA or the Public auditor does not express an opinion on operating histories. We preliminarily Company Accounting Oversight Board the financial statements. believe, nevertheless, that financial (‘‘PCAOB’’).193 The proposed Under Rule 2–01 of Regulation S–X, statements for such issuers would be instructions to the rules would provide the Commission does not recognize as a useful for investors, particularly when that the auditor would be required to be public accountant any person who: (1) presented along with a description of independent of the issuer based on the Is not duly registered and in good the issuer’s financial condition. This Commission’s independence standard standing as a certified public accountant would give investors a more complete in Rule 2–01 of Regulation S–X.194 under the laws of the place of his picture of the issuer and would Providing issuers with a choice of residence or principal office; or (2) is highlight its early stage of development. auditing standards could provide a not in good standing and entitled to benefit in a number of ways. If an issuer practice as a public accountant under Request for Comment currently has audited financial the laws of the place of his residence or 50. Under the statute and the statements using one of the specified principal office.198 We believe that this proposed rules, issuers are required to standards, the issuer would not need to rule promotes the use of qualified file with the Commission, provide to obtain a new audit or engage a different accountants that are in compliance with investors and the relevant intermediary auditor to conduct an audit in order to the requirements for their profession for and make available to potential engage in a crowdfunding transaction in the review or audit of the financial investors financial statements. The reliance on Section 4(a)(6). If an issuer statements with respect to all offerings, proposed rules would require all issuers chooses to have an audit conducted in including offerings in reliance on to provide a complete set of financial accordance with PCAOB auditing Section 4(a)(6).199 We are not proposing statements (a balance sheet, income standards, it generally would not need to require that the public accountant be statement, statement of cash flows and to obtain a new audit in order to file a in good standing for at least five years, statement of changes in owner’s equity) registration statement with the as one commenter suggested,200 because prepared in accordance with U.S. Commission for a registered offering or that could unnecessarily restrict the GAAP. Should we define financial to register a class of securities under the pool of available public accountants by, statements differently than under U.S. Exchange Act and become an Exchange for example, excluding accountants who GAAP? If so, what changes would be Act reporting company. The proposed are in good standing but who have been appropriate and why? What costs or rules would not require the audit to be in business for fewer than five years. challenges would be associated with the conducted by a PCAOB-registered firm. We believe that many issuers use of a model other than U.S. GAAP This should mean that a greater number engaging in crowdfunding transactions (e.g., lack of comparability)? What of accountants would be eligible to in reliance on Section 4(a)(6) are likely would be the benefits? Please explain. audit the issuers’ financial statements, to be at a very early stage of their 51. Should we exempt issuers with no which may reduce issuers’ costs. operating history or issuers that have An issuer would be required to file 196 Id. been in existence for fewer than 12 with the Commission, provide to 197 Id. months from the requirement to provide investors and the relevant intermediary 198 See 17 CFR 210.2–01(a). financial statements, as one commenter and make available to potential 199 Accountants also would be subject to Rule suggested? 202 Why or why not? investors a copy of the audit report.195 102(e) of the Rules of Practice and Investigations. See 17 CFR 201.102(e). Under Rule 102(e), the Specifically, what difficulties would This should benefit investors by serving Commission can censure, suspend or bar issuers with no operating history or as a way to identify the accounting firm professionals who appear or practice before it if it issuers that have been in existence for used to audit the financial statements. finds such professionals, after notice and an fewer than 12 months have in providing Investors then could conduct due opportunity for hearing: (1) Not to possess the requisite qualifications to represent others; or (2) to financial statements? Please explain. be lacking in character or integrity or to have 52. If we were to exempt issuers with 192 See CFIRA Letter 2; Vim Funding Letter; Cera engaged in unethical or improper professional little or no operating history from the Technology Letter; Genedyne Letter 1. conduct; or (3) to have willfully violated, or requirement to provide financial 193 See proposed Rule 201(t)(3) of Regulation willfully aided and abetted the violation of, any Crowdfunding. provision of the Federal securities laws or the rules statements, should we require 194 17 CFR 210.2–01. and regulations thereunder. See 17 CFR 195 See proposed Instruction 6 to paragraph (t) of 201.102(e)(1)(i), (ii) and (iii). 201 See CFIRA Letter 2. proposed Rule 201 of Regulation Crowdfunding. 200 See Philipose Letter 1. 202 Id.
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additional discussion of the fact that the days, etc.)? What quantitative and in good standing as a certified public issuer does not have an operating qualitative factors should we consider accountant under the laws of the place history? If so, what additional in setting the period? Should issuers be of his or her residence or principal discussion should we require? required to describe any material office; or (2) in good standing and 53. Section 4A(b)(1)(D) establishes changes in their financial condition for entitled to practice as a public tiered financial statement requirements any period subsequent to the period for accountant under the laws of his or her based on aggregate target offering which financial statements are place of residence or principal office? Is amounts within the preceding 12-month provided, as proposed? Please explain if there another independence standard period. Under the proposed rules, you do not believe this description that would be appropriate? If so, please issuers would not be prohibited from should be required. identify the standard and explain why. voluntarily providing financial 58. The proposed rules would require Alternatively, should we create a new statements that meet the requirements issuers offering $100,000 or less to independence standard for purposes of for a higher aggregate target offering provide financial statements that are Section 4(a)(6)? If so, what would be an amount (e.g., an issuer seeking to raise certified by the principal executive appropriate standard? Please explain. $80,000 provides financial statements officer to be true and complete in all 62. As proposed, the accountant reviewed by a public accountant who is material respects. Should we require reviewing or auditing the financial independent of the issuer, rather than issuers offering more than $100,000, but statements must be independent based the required income tax returns and a not more than $500,000, and/or issuers on the independence standard in Rule certification by the principal executive offering more than $500,000 to provide 2–01 of Regulation S–X. Are there any officer). Is this approach appropriate? financial statements that are certified by requirements under Rule 2–01 that Why or why not? the principal executive officer to be true should not apply to the accountant 54. Should we allow issuers to and complete in all material respects? reviewing or auditing the financial prepare financial statements using a Why or why not? statements that are filed pursuant to the comprehensive basis of accounting 59. Have we adequately addressed the proposed rules? Why or why not? Are other than U.S. GAAP? For example, privacy concerns raised by the there any that would not apply, but should issuers be allowed to provide requirement to provide income tax should? For example, should the financial statements prepared on an returns? Should we require issuers to accountant reviewing or auditing the income tax basis, a cash basis or a redact personally identifiable financial statements of issuers in modified cash basis of accounting? Why information from any tax returns, as transactions made in reliance on Section or why not? If so, should we allow all proposed? Is there additional 4(a)(6) be subject to the partner rotation issuers to use a comprehensive basis of information that issuers should be requirements of Rule 2–01(c)(6)? Why or accounting other than U.S. GAAP, or required or allowed to redact? In why not? only issuers seeking to raise $100,000 or responding, please specify each item of 63. As proposed, an issuer with a less, or $500,000 or less? Why or why information that issuers should be target offering amount greater than not? required or allowed to redact and why. $100,000, but not more than $500,000, 55. Should we require issuers to Under the statute and proposed rules, would be required to file with the provide two years of financial an issuer must be a business Commission, provide to investors and statements, as proposed? Should this organization, rather than an individual. the relevant intermediary and make time period be one year, as one Does this requirement alleviate some of available to potential investors financial commenter suggested,203 or three years? the potential privacy concerns? Please statements reviewed by an independent Please explain. explain. public accountant in accordance with 56. Should we require some or all 60. If an issuer has not yet filed its tax the review standards issued by the issuers also to provide financial return for the most recently completed AICPA. Is this standard appropriate, or statements for interim periods, such as fiscal year, should we allow the issuer should we use a different standard? quarterly or semi-annually? Why or why to use the tax return filed for the prior Why or why not? If so, what standard not? If so, which issuers and why? year and require the issuer to update the and why? Alternatively, should we Should we require these financial information after filing the tax return for create a new review standard for statements to be subject to public the most recently completed fiscal year, purposes of Section 4(a)(6)? If so, what accountant or auditor involvement? If as proposed? Should the same apply to would be an appropriate standard and so, what level of involvement is an issuer that has not yet filed its tax why would it be more appropriate than appropriate? return for the most recently completed the one proposed? What costs would be 57. As proposed, subject to certain fiscal year and has requested an involved for companies and accountants conditions, issuers would be able to extension of the time to file? Should in complying with a new review conduct an offering during the first 120 issuers be required, as proposed, to standard? How should the Commission days of the issuer’s fiscal year if the describe any material changes that are administer and enforce a different financial statements for the most expected in the tax returns for the most standard? recently completed fiscal year are not recently completed fiscal year? Please 64. Section 4A(b)(1)(D)(iii) requires yet available. For example, an issuer explain. audited financial statements for could raise capital in April 2014 by 61. As proposed, the accountant offerings of more than $500,000 ‘‘or providing financial statements from reviewing or auditing the financial such other amount as the Commission December 2012, instead of a more recent statements would have to be may establish, by rule.’’ Should we period. Is this an appropriate approach? independent, as set forth in Rule 2–01 increase the offering amount for which If the issuer is a high growth company of Regulation S–X. Should we require audited financial statements would be subject to significant change, would this compliance with the independence required? If so, to what amount (e.g., approach result in financial statements standards of the AICPA instead? Why or $600,000, $750,000, etc.)? Please that are too stale? Should the period be why not? If so, similar to the provide a basis for any amount shorter or longer (e.g., 90 days, 150 requirement in Rule 2–01 of Regulation suggested. Should we identify S–X, should we also require an additional criteria other than the 203 See CompTIA Letter. accountant to be: (1) Duly registered and offering amount, as one commenter
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suggested,204 that could be used to deemed to have satisfied this amount of securities sold in the determine when to require an issuer to requirement? Should certain offering.209 If, however, multiple provide audited financial statements? If qualifications (e.g., non-compliance progress updates are triggered within so, what should those criteria be? with U.S. GAAP) result in the financial the same five-business-day period (e.g., 65. Should financial statements be statements not satisfying the the issuer reaches one-half of the target required to be dated within 120 days of requirement to provide audited offering amount on November 5 and 100 the start of the offering? If so, what financial statements while other types of percent of the target offering amount on standard should apply? Should those qualifications would be acceptable? If November 8), the issuer could financial statements be reviewed or so, which qualifications would be consolidate such progress updates into audited? Why or why not? acceptable and why? one Form C–U, so long as the Form C– 66. Under Rule 502(b)(2)(B)(1)–(2) of 71. Should we require that the U discloses the most recent threshold Regulation D, if an issuer, other than a certified public accountant reviewing or that was met and the Form C–U is filed limited partnership, cannot obtain auditing the financial statements be in with the Commission and provided to audited financial statements without good standing for at least five years, as investors and the relevant intermediary unreasonable effort or expense, then one commenter suggested? 205 Why or by the day on which the first progress only the issuer’s balance sheet must be why not? Should we require that the update would be due.210 The proposed audited. Should we include a similar public accountant be in good standing rules also would require the provision in the proposed rules? Why or for a lesser period of time? If so, for how intermediary to make these updates why not? Should we provide any long? Would such a requirement restrict available to investors and potential guidance as to what would constitute the pool of available public investors through the intermediary’s unreasonable effort or expense in this accountants? If so, by how much? platform.211 context? If so, please describe what Would such a requirement reduce We believe that this information should be considered to be an investor protections? If so, how? would be important to investors by unreasonable effort or expense. If we b. Progress Updates allowing them to gauge whether interest were to require an issuer’s balance sheet in the offer has increased gradually or Consistent with Section 4A(b)(1)(F), to be dated within 120 days of the start whether it was concentrated at the the proposed rules would require an of the offering, should we allow the beginning or at the end of the offering issuer to prepare regular updates on its balance sheet to be unaudited? Why or period. In addition, we believe that the progress in meeting the target offering why not? final progress update would be amount.206 These updates would be 67. As proposed, an issuer with a necessary to inform investors of the total filed with the Commission on EDGAR, target offering amount greater than amount of securities sold by the issuer, under cover of Form C, provided to $500,000 could select between the especially in cases where an issuer may auditing standards issued by the AICPA investors and the relevant intermediary and made available to potential have sold more than the target offering or the PCAOB. Should we instead amount. The proposed rules do not mandate one of the two standards? If so, investors. The issuer would check the box for ‘‘Form C–U: Progress Update’’ include an exemption from this which standard and why? Alternatively, requirement when progress updates are should we create a new audit standard on the cover of the Form C and provide the required update in the space provided solely on the intermediary’s for purposes of Section 4(a)(6)? If so, platform. We believe that proposing to what would be an appropriate standard? provided. One commenter suggested that issuers should be exempted from require that the progress updates be What costs would be involved for filed with the Commission would create companies and auditors in complying issuing status updates and/or reports so long as the funding portal publicly a central repository for this with a new audit standard? information—information that 68. Should we require that all audits displays the progress of the issuer in meeting the target offering amount.207 otherwise might no longer be available be conducted by PCAOB-registered on the intermediary’s platform after the firms? Why or why not? As proposed, the rules would require an issuer to file with the Commission offering terminated. The progress 69. Should we consider the updates filed with the Commission also requirement to file with the and provide investors and the relevant intermediary regular updates regarding would make data available that could be Commission, provide to investors and used to evaluate the effects of the the relevant intermediary and make the issuer’s progress in meeting the target offering amount no later than five Section 4(a)(6) exemption on capital available to potential investors financial formation. statements subject to a review to be business days after the issuer reaches satisfied if the review report includes particular intervals—i.e., one-half and Request for Comment 100 percent—of the target offering modifications? Why or why not? Would 72. Views about what constitutes a amount.208 If the issuer will accept your response differ depending on the ‘‘regular update’’ may vary, particularly proceeds in excess of the target offering nature of the modification? Please when considering the length of the amount, the issuer also would be explain. offering. Is the requirement to file an required to file with the Commission 70. As proposed, an issuer receiving update when the issuer reaches one-half and provide investors and the relevant an adverse audit opinion or disclaimer and 100 percent of the target offering intermediary a final progress update, no of opinion would not satisfy its amount appropriate? Is the proposed later than five business days after the requirement to file with the requirement to file a final update in offering deadline, disclosing the total Commission, provide to investors and offerings in which the issuer will accept the relevant intermediary and make proceeds in excess of the target offering available to potential investors audited 205 See Philipose Letter 1. 206 See proposed Rules 201(v) and 203(a)(3) of amount appropriate? Why or why not? financial statements. Should an issuer Regulation Crowdfunding. receiving a qualified audit opinion be 207 See RocketHub Letter 1 (also stating that if the 209 Id. Commission mandates the filing of status updates, 210 See proposed Instruction 2 to paragraph (a)(3) 204 See ABA Letter 1 (stating that revenue could it should not mandate a particular form of update). of proposed Rule 203 of Regulation Crowdfunding. be a criteria for determining when audited financial 208 See proposed Rule 203(a)(3) of Regulation 211 See proposed Rule 303(a) of Regulation statements would be required). Crowdfunding. Crowdfunding and Section II.C.5.a below.
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Should we require the progress updates securities.213 For example, we believe change to the information required by to be filed at different intervals (e.g., that a material change to financial Section 4A(b)(1) to be a material one-third, two-thirds or some other condition or to the intended use of change? Why or why not? intervals)? Why or why not? proceeds would require an amendment 79. Should we require issuers to Alternatively, should the progress to an issuer’s disclosure. Also, in those amend Form C to reflect all changes, updates be filed after a certain amount instances in which an issuer has additions or updates regardless of of the offering time has elapsed (e.g., previously disclosed only the method materiality so that the Form C filed with weekly or monthly until the target or for determining the price, and not the us would reflect all information maximum is reached or until the final price, of the securities offered, we provided to investors through the offering closes)? Should the progress believe that determination of the final intermediary’s platform? Why or why updates be based on reaching other price would be considered a material not? milestones or on some other basis? If so, change to the terms of the offer and what milestones or other basis and why? would have to be disclosed. These are 2. Ongoing Reporting Requirements not, however, the only possible material 73. As proposed, issuers would have Section 4A(b)(4) requires, ‘‘not less changes that would require amended five business days from the time they than annually, [the issuer to] file with disclosure. In addition, as discussed reach the relevant threshold to file a the Commission and provide to further in Section II.C.6 below, if any progress update. Is this time period investors reports of the results of change, addition or update constitutes a appropriate? Why or why not? If not, operations and financial statements of material change to information what would be an appropriate time the issuer, as the Commission shall, by previously disclosed, the issuer shall rule, determine appropriate, subject to period? Please explain. Should issuers check the box indicating that investors be allowed to consolidate multiple such exceptions and termination dates must reconfirm their investment as the Commission may establish, by progress updates into one Form C–U if commitments. Investors would have five rule.’’ multiple progress updates are triggered business days to reconfirm their within a five-business-day period, as investment commitments, or the One commenter suggested that the proposed? Why or why not? investment commitments would be Commission should create a 74. Should issuers be required to cancelled.214 standardized form or template for this certify that they have filed all the Issuers would be permitted, but not ongoing disclosure.216 The same required progress updates prior to the required, to amend the Form C to commenter suggested that this ongoing close of the offering? Why or why not? provide information with respect to disclosure should be publicly available and shared with other regulators. 75. Should we exempt issuers from other changes that are made to the information presented on the Another commenter noted that the the requirement to file progress updates requirement to file reports not less than with the Commission as long as the intermediary’s platform and provided to 215 annually could be difficult to enforce intermediary publicly displays the investors and potential investors. Issuers amending the Form C to provide and that it is unclear who would be progress of the issuer in meeting the responsible for enforcing the target offering amount? Why or why information that it considers not material would not check the box requirement.217 The same commenter not? If so, should the Commission noted that this provision seems to establish standards about how indicating that investors must reconfirm their investment commitments. presume the success of every business prominent the display would need to that raises capital through be? Request for Comment crowdfunding and questioned what c. Amendments to the Offering 76. Should we specify that an would happen when an issuer goes out Statement amendment to an offering statement of business. One commenter suggested must be filed within a certain time that financial statements included in an We are proposing to require that an period after a material change occurs? annual report should be required to be issuer amend its disclosure for any Why or why not? What would be an reviewed or audited only if the issuer’s material change in the offer terms or appropriate time period for filing an total assets exceeded a specified amount disclosure previously provided to amendment to an offering statement to at the last day of the issuer’s fiscal investors. The amended disclosure reflect a material change? Why? year.218 One commenter suggested that would be filed with the Commission on 77. If an issuer amends its Form C, annual reports should be required to be Form C, provided to investors and the should the intermediary be required to reviewed by a qualified accountant in relevant intermediary and made notify investors? If so, should we good standing for at least five years.219 available to potential investors.212 The specify the method of notification, such Two commenters noted that compliance issuer would check the box for ‘‘Form as via email or other electronic means? with the exemption would not be C–A: Amendment’’ on the cover of the 78. Should establishment of the final known at the time of the transaction if Form C and explain, in summary price be considered a material change the annual reports are a condition to the manner, the nature of the changes, that would always require an additions or updates in the space amendment to Form C and 216 See Commonwealth of Massachusetts Letter. provided. An issuer would determine reconfirmation, as proposed? Would it 217 See Crowdfunding Offerings Ltd. Letter 5. whether changes in the offer terms or be appropriate to require disclosure of 218 See ABA Letter 1 (suggesting that financial disclosure are material based on the the final price but not require statements reviewed by an independent accountant reconfirmation? Should we consider any be required only if the issuer’s total assets as of the facts and circumstances. Information is end of its fiscal year exceeded $300,000 and that material if there is a substantial audited financial statements be required only if the likelihood that a reasonable investor 213 See Basic Inc. v. Levinson, 485 U.S. 224 (1988) issuer’s total assets exceeded $750,000 because (i) would consider it important in deciding (quoting TSC Indus., Inc. v. Northway, Inc., 426 public reporting pursuant to Exchange Act Section U.S. 438 (1976)). 12(g) is based, in part, on an asset test and (ii) this whether or not to purchase the 214 See proposed Rule 203(a)(2) of Regulation would offer a reasonable predicate for balancing the Crowdfunding. relative costs to very small, early-stage issuers and 212 See proposed Rule 203(a)(2) of Regulation 215 See proposed Instruction to paragraph (a)(2) of the informational benefits to investors). Crowdfunding. proposed Rule 203 of Regulation Crowdfunding. 219 See Philipose Letter 2.
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exemption under Section 4(a)(6).220 One email addresses for investors are and its financial condition, as was commenter suggested that the available to issuers, an issuer could refer required in connection with the offer Commission should require a failed investors to the posting of the annual and sale of the securities.228 This should business that issued securities pursuant report via email. minimize the disclosure burden for to Section 4(a)(6) to file a final annual When filing the annual report with issuers to the extent they would be able report, in the year of the failure, that the Commission, an issuer would check to use the offering materials as a basis provides final financial statements and the box for ‘‘Form C–AR: Annual to prepare the ongoing disclosure. discloses to investors the material Report’’ on the cover of the Form C. The Investors should benefit from receiving reasons for the liquidation, dissolution, issuer would be required to disclose annual updates to the information they wind-down or bankruptcy.221 information similar to the information received when making the decision to To implement the ongoing reporting required in the offering statement, invest in the issuer’s securities, which requirement in Section 4A(b)(4), the including disclosure about its financial should allow them to continue to be proposed rules would require an issuer condition that meets the financial informed about issuer developments. that sold securities in reliance on statement requirements that were Under the statute and the proposed Section 4(a)(6) to file a report on EDGAR applicable to its offering statement. The rules, the securities will be freely annually, no later than 120 days after issuer also would be able to voluntarily tradable after one year and, therefore, the end of the most recent fiscal year provide financial statements that meet this information also would benefit covered by the report.222 Although the the requirements for a higher aggregate potential future holders of the issuer’s statute provides that an ‘‘issuer who target offering amount than it was securities and help them to make more offers or sells securities’’ in reliance on required to provide in its offering informed investment decisions. Section 4(a)(6) shall provide ongoing statement. If an issuer undertakes We are proposing to require issuers to reports, we do not believe the intent was multiple offerings, which individually file the annual report until one of the to require ongoing reports from a require different levels of financial following events occurs: (1) The issuer company that has not completed a statements, the issuer would be required becomes a reporting company required crowdfunding transaction and thus did to provide financial statements that to file reports under Exchange Act not issue any securities. meet the highest standard previously Sections 13(a) or 15(d); (2) the issuer or To implement the statutory provided. We believe that investors who another party purchases or repurchases requirement that issuers provide the purchased on the basis of the higher all of the securities issued pursuant to report to investors, we propose to level of financial statements should Securities Act Section 4(a)(6), including require issuers to post the annual report continue to receive that level of 223 any payment in full of debt securities or on their Web sites. We believe that disclosure, and investors in other any complete redemption of redeemable investors in this type of Internet-based offerings of the issuer should receive the securities; or (3) the issuer liquidates or offering would be familiar with 226 same information. Although an issuer dissolves its business in accordance obtaining information on the Internet would not be required to provide the with state law.229 In these situations, we and that providing the information in offering-specific information that it filed believe it is appropriate to terminate an this manner would be cost-effective for at the time of the offering (because the issuer’s reporting obligations because it issuers. As discussed above, we believe issuer will not be offering or selling will either be required by other Congress contemplated that securities),227 it would be required to provisions of the securities laws to crowdfunding would, by its very nature, disclose information about the company provide investors with necessary occur over the Internet or other similar information or it will no longer have electronic media accessible to the obtain those email addresses from the intermediary, investors. Any issuer terminating its public,224 so we are not proposing to since it would be the intermediary that would annual reporting obligations would be require issuers to provide physical collect that information when a potential investor copies of the report to investors. We also opens an account. In order for the issuer to have required to file on EDGAR, within five email addresses after the shares issued pursuant to business days from the date of the are not proposing to require issuers to Section 4(a)(6) are traded, an issuer would need to provide a copy of the annual report, or terminating event, a notice to investors collect that information from each new investor in and the Commission that it will no refer investors to the posting of the connection with any sale of the issuer’s securities annual report, via email because we in a secondary market. longer file and provide annual reports believe that many issuers may not have 226 For example, if an issuer had previously pursuant to the requirements of 230 email addresses for the investors, completed an offering with a $200,000 target and Regulation Crowdfunding. The issuer an offering with a $700,000 target, the issuer would would check the box for ‘‘Form C–TR: especially after the shares issued be required to provide audited financial statements pursuant to Section 4(a)(6) are traded by rather than reviewed financial statements. This Termination of Reporting’’ on the cover the original purchasers.225 To the extent would be the case even if the $200,000 offering was of Form C. conducted more recently than the $700,000 offering. Request for Comment 220 See Ohio Division of Securities Letter; 227 An issuer would not be required to provide 80. Should we require ongoing annual Whitaker Letter (suggesting that the filing of the information about: (1) The stated purpose and annual report should not be a condition to intended use of the proceeds of the offering; (2) the reports, as proposed? Why or why not? satisfying the exemption under Section 4(a)(6)). target offering amount and the deadline to reach the Should we require ongoing reporting 221 See Ohio Division of Securities Letter. target offering amount; (3) whether the issuer will more frequently than annually? Why or 222 See proposed Rule 202(a) of Regulation accept investments in excess of the target offering Crowdfunding. See also proposed Rule 203(b) of amount; (4) whether, in the event that the offer is Regulation Crowdfunding and proposed Instruction oversubscribed, shares will be allocated on a pro- 228 Issuers would be required to provide to paragraph (b)(1) thereof. rata basis, first come-first served basis, or other disclosure about its directors and officers, business, 223 We are not proposing to require issuers to post basis; (5) the process to complete the transaction or current number of employees, financial condition the annual report on the intermediary’s platform cancel an investment commitment once the target (including financial statements), capital structure, because issuers may not necessarily have an amount is met; (6) the price to the public of the significant factors that make an investment in the ongoing relationship with the intermediary securities being offered; (7) the terms of the issuer speculative or risky, material indebtedness following an offering. See discussion in Section securities being offered; (8) the name, Commission and certain related-party transactions. II.C.4.b below. file number and CRD number (as applicable) of the 229 See proposed Rule 202(b) of Regulation 224 See note 55. intermediary through which the offering is being Crowdfunding. 225 We believe that in order for the issuer to have conducted; and (9) the amount of compensation 230 See proposed Rule 203(b)(2) of Regulation email addresses for the investors, it would need to paid to the intermediary. Crowdfunding.
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why not? If so, how often (e.g., semi- the same as in the offering statement? appropriate percentage (greater than 50 annually or quarterly)? Why or why not? If not, what should percent, 75 percent or some other 81. Two commenters noted that they be? percentage)? Should an issuer be compliance with the exemption would 86. Should we require that reviewed allowed to terminate its reporting not be known at the time of the or audited financial statements be obligation if the securities issued in transaction if the annual reports are a provided only if the total assets of the reliance on Section 4(a)(6) are held by condition to the exemption under issuer at the last day of its fiscal year less than a specified number of holders Section 4(a)(6).231 Should the exceeded a specified amount, as one of record, as suggested by a requirement to provide ongoing annual commenter suggested? 232 Why or why commenter? 234 Why or why not? If so, reports be a condition to the exemption not? If so, what level of total assets what would be an appropriate number under Section 4(a)(6)? If so, for how would be appropriate (e.g., $1 million, of holders of record (less than 500, 300 long (e.g., until the first annual report is $10 million, or some other amount)? Are or some other number)? filed, until the termination of an issuer’s there other criteria (other than total 89. If an issuer files a petition for reporting obligations or some other assets) that we should consider? Please bankruptcy, what effect should that period)? Please explain. explain. filing have on the issuer’s reporting 82. Should we require that the annual 87. The proposed rules would require obligations? Please explain. reports be provided to investors by any issuer terminating its annual 90. Should issuers be required to file posting the reports on the issuer’s Web reporting obligations to file on EDGAR, reports to disclose the occurrence of site and filing them on EDGAR, as within five business days from the date material events on an ongoing basis? proposed? Should we require issuers of the terminating event, a notice to What events would be material and also to directly notify investors of the investors and the Commission that it therefore require disclosure? Should we availability of the annual report, such as will no longer file and provide annual identify a list of material events that by email or other electronic means? reports. Is this approach appropriate? would trigger a report, similar to the list Should we instead require issuers to Why or why not? Should we require in Form 8–K 235 (such as changes in deliver the annual reports directly to issuers to file the notice earlier (e.g., control, bankruptcy or receivership, investors? If so, should we specify the within two business days of the event) material acquisitions or dispositions of method of delivery (e.g., email or other or later (e.g., within 10 business days of assets, issuances of securities and electronic means, U.S. mail or some the event)? If so, what would be an changes to the rights of security other method)? Would investors have an appropriate amount of time after the holders)? Or should we require that all electronic relationship with the issuer event and why? material events be reported without after the offering terminates? If not, how 88. Should an issuer be able to specifying any particular events? How would an issuer notify or deliver a copy terminate its annual reporting obligation many days after the occurrence of the of the annual report to the investor? in circumstances other than those material event should the issuer be Would issuers continue to have an provided in the proposed rules? For required to file the report? Please ongoing relationship with example, should an issuer be allowed to explain. intermediaries once the offering is terminate its reporting obligation after 91. We have the authority to include completed? If so, should we also require filing a certain number of annual exceptions to the ongoing reporting that the issuer post its annual report on reports, as one commenter suggested,233 requirements in Section 4A(b)(4). the intermediary’s platform? Why or so long as the issuer does not engage in Should we consider excepting certain why not? additional transactions in reliance on issuers from ongoing reporting 83. After completion of the offering, Section 4(a)(6) (e.g., after filing one obligations (e.g., those raising a certain should we require that investors be annual report, two annual reports or amount, such as $100,000 or less)? represented by a nominee or other party some other number of annual reports)? Should any exception always apply or who could help to facilitate physical Why or why not? If so, what would be only after a certain number of reports delivery of the annual report to an appropriate number of annual have been filed? Please explain. reports? Should all issuers be allowed to investors? Why or why not? Should the 3. Form C and Filing Requirements nominee or other party have other terminate their reporting obligations or responsibilities, such as speaking on only issuers that have not sold more Section 4A(b)(1) does not specify a behalf of and representing the interests than a certain amount of securities in format that issuers must use to present of investors (e.g., when the issuer reliance on Section 4(a)(6)? If so, what the required disclosures and file these wishes to take certain corporate actions would be an appropriate amount of disclosures with the Commission. that could impact or dilute the rights of securities (e.g., $100,000, $500,000, or Several commenters stated that the investors, distribution of dividend some other amount)? Should an issuer Commission should require the payments, etc.)? If a nominee or other be allowed to terminate its reporting disclosure on a form modeled after, or party should be required, what structure obligation following the issuer’s or should this arrangement take and why? another party’s purchase or repurchase 234 See ABA Letter 1. 84. Are the proposed ongoing of a significant percentage of the 235 17 CFR 249.308. Form 8–K is a report that securities issued in reliance on Section public companies must file to announce major disclosure requirements appropriate? events that shareholders should know about on a Why or why not? Should we modify or 4(a)(6) (including any payment of a more current basis. Form 8–K includes a specific eliminate any of the proposed significant percentage of debt securities list of the types of events that trigger a public requirements? or redemption of a significant company’s obligation to file a current report, percentage of redeemable securities), or including matters relating to the company’s 85. Should the discussion of the business and operations, financial information, issuer’s financial condition address receipt of consent to cease reporting securities and trading markets, accountants and changes from prior periods? Why or from a specified percentage of the financial statements, corporate governance and why not? Should the number of years unaffiliated security holders? Why or management, asset-backed securities, exhibits and why not? If so, what would be an other matters that are not specifically called for by covered by the financial statements be Form 8–K that the company considers to be of importance to security holders. Generally, a Form 231 See Ohio Division of Securities Letter; 232 See ABA Letter 1. 8–K must be filed within four business days from Whitaker Letter. 233 See Schwartz Letter. the date of the event that triggered the report.
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require the use of NASAA’s Small issuers engaged in crowdfunding indicate the purpose of the Form C Company Offering Registration Form transactions in reliance on Section filing: (U–7).236 One commenter suggested 4(a)(6) would encompass a wide variety • ‘‘Form C: Offering Statement’’ for using Form 1–A, which is used for of industries at different stages of issuers filing the initial disclosures securities offerings made pursuant to business development. required for an offering made in reliance Regulation A,237 as a model.238 One We propose to require issuers to use on Section 4(a)(6); commenter requested that we create a an XML-based fillable form to input • ‘‘Form C–A: Amendment’’ for form for issuers that ‘‘simplifies the certain information.245 This XML-based issuers seeking to amend a previously- process and provides legal certainty for fillable form would support the filed Form C for an offering; investors, intermediaries and assembly and transmission of those • ‘‘Form C–U: Progress Update’’ for issuers,’’ 239 while another commenter required disclosures to EDGAR on Form issuers filing a progress update required suggested that we adopt a ‘‘simple, C.246 It also would help the Commission by Section 4A(b)(1)(H) and the related uniform, easy-to-understand yet to collect certain key information about rules; comprehensive template prospectus that each offering to monitor the • ‘‘Form C–AR: Annual Report’’ for is similar in principle to the mutual implementation of the crowdfunding issuers filing the annual report required fund industry’s summary exemption under Section 4(a)(6). For by Section 4A(b)(4) and the related prospectus.’’ 240 Another commenter example, the Commission could rules; and • recommended that disclosure be simple, monitor the types of issuers using the ‘‘Form C–TR: Termination of allow for standardization and take into exemption, including the issuers’ size, Reporting’’ for issuers terminating their account the size and stage of location, securities offered and offering reporting obligations pursuant to development of the issuer.241 One amounts and the intermediaries through Section 4A(b)(4) and the related rules. commenter suggested we create a which the offerings are taking place. We believe that the use of one form disclosure template that would allow Monitoring the implementation of the would be more efficient than requiring issuers to complete certain fields by crowdfunding exemption also would multiple forms and would simplify the inserting the required disclosure.242 give the Commission more information filing process for issuers and their Another commenter suggested we to evaluate whether the rules include preparers. EDGAR would automatically require a single offering document appropriate investor protections and provide each filing with an appropriate incorporating disclosures that facilitate capital formation. Issuers tag depending on which box the issuer intermediaries and issuers are required could customize the presentation of the checks so that investors could to make.243 rest of their disclosures and file those distinguish between the different We are proposing to require issuers to disclosures as exhibits to the Form C. filings.248 file the mandated disclosure on EDGAR For example, an issuer could provide Section 4A(b)(1) requires issuers to using new Form C.244 As proposed, the required disclosures by uploading to file the offering information with the Form C would require certain EDGAR, as an exhibit to Form C, a text Commission, provide it to investors and disclosures to be presented in a version of the relevant information the relevant intermediary and make it specified format, while allowing the presented on the intermediary’s available to potential investors.249 issuer to customize the presentation of platform, including a transcript of any Under the proposed rules, issuers would other disclosures required by Section video presentation and a description of satisfy the requirement to file the 4A(b)(1) and the related rules. This any charts or graphs. information with the Commission by approach should provide key offering Under the proposed rules, Form C filing the Form C: Offering Statement, information in a standardized format would be used for all of an issuer’s including any amendments and progress and give issuers flexibility in the filings with the Commission.247 The updates, on EDGAR. To satisfy the presentation of other required issuer would check one of the following requirement to provide the disclosures disclosures. We believe this flexibility is boxes on the cover of the Form C to to the relevant intermediary, we propose important given that we expect that that issuers provide to the relevant 245 See proposed Instruction to paragraph (a)(1) of intermediary a copy of the disclosures 236 See Coan Letter; Liles Letter 1; Vim Funding proposed Rule 203 of Regulation Crowdfunding. filed with the Commission on Letter; NASAA Letter. Issuers would input in the proposed XML-based EDGAR.250 To satisfy the requirement to 237 17 CFR 230.251 et seq. filing the following information: name, legal status and contact information of the issuer; name, 238 See Commonwealth of Massachusetts Letter. Commission file number and CRD number (as 248 EDGAR would tag the offering statement as 239 CFIRA Letter 2. applicable) of the intermediary through which the ‘‘Form C,’’ any amendments to the offering 240 The Motley Fool Letter. offering will be conducted; the amount of statement as ‘‘Form C–A,’’ progress updates as 241 See 2012 SEC Government-Business Forum, compensation paid to the intermediary to conduct ‘‘Form C–U,’’ annual reports as ‘‘Form C–AR’’ and note 29. the offering, including the amount of referral and termination reports as ‘‘Form C–TR.’’ 242 See ABA Letter 1. other fees associated with the offering; type of 249 Section 4A(b)(4) requires issuers to file with 243 See Ohio Division of Securities Letter. security offered; number of securities offered; the Commission and provide to investors, not less 244 An issuer that does not already have EDGAR offering price; target offering amount and maximum than annually, reports of the results of operations filing codes, and to which the Commission has not offering amount (if different from the target offering and financial statements of the issuer. As discussed previously assigned a user identification number, amount); whether oversubscriptions will be above in Section II.B.2, to satisfy this requirement, which we call a ‘‘Central Index Key (CIK)’’ code, accepted and, if so, how they will be allocated; the proposed rules would require an issuer to post would need to obtain the codes by filing deadline to reach the target offering amount; current the annual report on its Web site and file it on electronically a Form ID [17 CFR 239.63; 249.446; number of employees of the issuer; and selected EDGAR. See proposed Rule 202(a) of Regulation 269.7 and 274.402] at https:// financial data for the prior two fiscal years. Crowdfunding. www.filermanagement.edgarfiling.sec.gov. The 246 The Commission would disseminate the 250 See proposed Instruction 1 to paragraph (a) of applicant also would be required to submit a information in a format that provides normal text proposed Rule 203 of Regulation Crowdfunding. We notarized authenticating document as a Portable for reading and XML-tagged data for analysis. anticipate that issuers seeking to engage in an Document Format (PDF) attachment to the Currently the Commission’s OnlineForms Web site offering in reliance on Section 4(a)(6) may likely electronic filing. The authenticating document (https://www.onlineforms.edgarfiling.sec.gov) work with an intermediary to prepare the disclosure would need to be manually signed by the applicant supports the assembly and transmission of XML that would be provided on the intermediary’s over the applicant’s typed signature, include the filings required by Exchange Act Section 16 (15 platform and filed on EDGAR. In some cases, information contained in the Form ID and confirm U.S.C. 78p). intermediaries may offer, as part of their service, to the authenticity of the Form ID. See 17 CFR 247 See proposed Rule 203 of Regulation file the disclosure on EDGAR on behalf of the 232.10(b)(2). Crowdfunding. issuer.
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provide the disclosures to investors and the filing of the information as an place of business.261 Alternatively, the make them available to potential exhibit to Form C on EDGAR? If not, commenter suggested an issuer should investors, we propose that issuers how should the rules address these be permitted to include such notice in provide the information to investors types of materials? correspondence to its customers or electronically by referring investors to 95. Should we require different forms mailing list subscribers.262 the information on the intermediary’s for each type of required filing? Would Another commenter stated that the platform.251 Issuers could refer investors the use of one form with different advertising prohibition should not be through a posting on the issuer’s Web EDGAR tags for each type of filing create read to restrict notices that: (1) Alert the site or by email.252 We believe that confusion among investors who review public to the issuer’s project or investors in this type of Internet-based the issuer’s filings? Would it create company; (2) state that the public may offering would be familiar with confusion for issuers that are filing the participate in the fundraising; or (3) obtaining information on the Internet forms? Please explain. direct the public to the funding platform.263 Another commenter and that providing the information in 96. Should we allow issuers to refer this manner would be cost-effective for suggested notices should be allowed to investors and potential investors to the include: (1) The type of security being issuers. As discussed above, we believe information on the intermediary’s Congress contemplated that offered; (2) the offering amount; (3) the platform? Are the proposed methods opening and closing date of the offering; crowdfunding would, by its very nature, (Web site posting or email) to refer occur over the Internet or other similar and (4) the issuer’s line of business or investors effective and appropriate? whether the offering will fund a new electronic medium that is accessible to Would issuers have access to the 253 line of business.264 One commenter the public, so we are not proposing investors’ email addresses? Are there to require issuers to provide physical suggested that, given the limitations on other methods we should consider? If the number of characters allowed by copies of the information to investors. so, what methods and why? We propose to allow issuers to refer some social media sites, we should investors to the information on the 4. Prohibition on Advertising Terms of allow notices that do not require lengthy intermediary’s platform through a the Offering legends or disclosure.265 Another posting on the issuer Web site or by commenter suggested that we define the Section 4A(b)(2) provides that an email, rather than requiring email, term ‘‘advertising’’ and provide a model issuer shall ‘‘not advertise the terms of because we believe that many issuers form that can be used by issuers to the offering, except for notices which 266 may not have email addresses for direct investors to the intermediary. direct investors to the funding portal or investors.254 Another commenter suggested that we broker.’’ We received a number of require issuers to file all advertising and Request for Comment comments regarding this provision. One other materials that the issuers create 92. Should we require a specific commenter stated that the inability to relating to offerings made in reliance on format that issuers must use to disclose market an offering will prevent startups Section 4(a)(6).267 One commenter 256 the information required by Section from reaching their desired goal. One suggested that we allow advertising of 4A(b)(1) and the related rules? commenter suggested that we should non-financial elements of a transaction 93. Should issuers be required to file allow issuers unrestricted use of in the case of offerings conducted the Form C with the Commission in advertising, both on the Internet and through an intermediary that is a electronic format only, as proposed? through conventional forms of community development financial Alternatively, should we permit issuers advertising.257 Another commenter institution.268 to file the Form C in paper format? What suggested that communications between Under the proposed rules, an issuer are the relative costs and benefits of the issuer and investors should be could publish a notice advertising the permitting the filing of the Form C in limited to communication channels terms of an offering in reliance on paper format? Should issuers be controlled by the intermediary and that Section 4(a)(6), provided that the notice precluded from relying on the hardship direct communications between an includes the address of the exemptions in Rules 201 and 202 of issuer and investors should be intermediary’s platform on which Regulation S–T? 255 Why or why not? discouraged.258 Another commenter additional information about the issuer 94. In what format would the stated that it is unclear what constitutes and the offering may be found.269 information about an issuer be a notice for these purposes and that Consistent with Section 4A(b)(2), an presented on an intermediary’s issuers should be able to promote their issuer would not otherwise be permitted platform? Will there be written text, offerings as long as investors register to advertise, directly or indirectly, the graphics, charts or graphs, or video with the intermediary and participate in terms of an offering made in reliance on testimonials by the founder or other key the offering through that Section 4(a)(6). While we understand stakeholders? Will the information be intermediary.259 Another commenter presented in a way that would allow for suggested that issuers should be able to 261 See NCA Letter (stating that the Commission promote their offerings through ‘‘their should clarify whether the rules will permit notices to state the offering period, whether investors may 251 See proposed Instruction 2 to paragraph (a) of own platforms’’ as long as all such contact the issuer’s management to discuss the proposed Rule 203 of Regulation Crowdfunding. notices include a link directly to the offering or whether the notices may include names 252 Id. registered intermediary.260 One of accredited investors participating in the offering). 253 See note 55. commenter suggested that an issuer 262 Id. 254 See note 225. To the extent that intermediaries 263 See RocketHub Letter 1. have the email addresses of investors and potential should be permitted to place a notice 264 See NSBA Letter. investors (e.g., as a result of investors and potential consisting of the basic terms of the 265 investors opening an account with the offering on the issuer’s Web site or at its See CFIRA Letter 1 (providing examples of intermediary), intermediaries could provide an notices varying in length from zero to 1,500 issuer’s disclosures to investors and potential characters). 256 investors through email. See VTNGLOBAL Letter. 266 See CompTIA Letter. 257 255 17 CFR 232.201 and 232.202. These hardship See Loofbourrow Letter. 267 See Commonwealth of Massachusetts Letter. exemptions allow filers, under certain conditions, 258 See CommunityLeader Letter. 268 See City First Letter. to submit their filings and exhibits in paper form 259 See Crowdfunding Offerings Ltd. Letter 5. 269 See proposed Rule 204 of Regulation instead of electronically. 260 See CFIRA Letter 2. Crowdfunding.
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the importance that potential issuers by limiting the ability of issuers to directing investors to the intermediary’s likely will place on the ability to advertise the terms of the offering platform? Why or why not? advertise, the statute specifically without providing the required 98. The proposed rules would define restricts the ability of issuers to disclosures. ‘‘terms of the offering’’ to include: (1) advertise the terms of offerings made in The proposed rules also would allow The amount of securities offered; (2) the reliance on Section 4(a)(6). Limiting the an issuer to communicate with investors nature of the securities; (3) the price of advertising of the terms of the offering and potential investors about the terms the securities; and (4) the closing date to the information permitted in the of the offering through communication of the offering period. Is this definition notice is intended to direct investors to channels provided by the intermediary appropriate? Why or why not? Should the intermediary’s platform and to make on the intermediary’s platform, so long the definition be modified to eliminate investment decisions with access to the as the issuer identifies itself as the or include other items? If so, which ones disclosures necessary for them to make issuer in all communications. We and why? Should we provide further informed investment decisions. believe that one of the central tenets of guidance as to the meaning of ‘‘terms of The proposed rules would allow the concept of crowdfunding is that the the offering?’’ Please explain. notices advertising the terms of the members of the crowd decide whether 99. Should we restrict the media that offering to include no more than the or not to fund an idea or business after may be used for the advertising of following: (1) A statement that the sharing information with each other. As notices (e.g., prohibit advertising via issuer is conducting an offering, the part of those communications, we television, radio or phone calls)? If so, name of the intermediary through which believe it is important for the issuer to why and what media should we restrict? the offering is being conducted and a be able to respond to questions about What media should we permit? Please link directing the potential investor to the terms of the offering or even explain. the intermediary’s platform; (2) the challenge or refute statements made 100. Should we require a specific terms of the offering; and (3) factual through the communication channels format for issuer notices? Should we information about the legal identity and provided by the intermediary. provide examples of notices that would business location of the issuer, limited Therefore, we have not proposed to comply with the requirements? 101. Should we further restrict or to the name of the issuer of the security, restrict issuers from participating in specify the information that could be the address, phone number and Web those communications. site of the issuer, the email address of The proposed rules would not restrict included in a notice of the offering? If a representative of the issuer and a brief an issuer’s ability to communicate other so, how and why? Is the information description of the business of the information that does not refer to the that we have proposed to permit in issuer.270 Under the proposed rules, terms of the offering. We believe that notices sufficient to inform potential ‘‘terms of the offering’’ would include: this is consistent with the statute investors of an offering? Should we (1) The amount of securities offered; (2) because Section 4A(b)(2) only appears permit the issuer to include any the nature of the securities; (3) the price to impose a restriction on the additional information in the notice if, of the securities; and (4) the closing date advertising of the terms of the offer. To for example, the offering aims to of the offering period.271 prohibit communications that do not promote a particular social cause, such The permitted notices would be refer to the terms of the offering would as driving economic growth in similar to the ‘‘tombstone ads’’ underinvested communities, as one place a greater burden on issuers relying 277 permitted under Securities Act Rule on Section 4(a)(6) than on issuers in commenter suggested? If so, what 134,272 except that the notices would be registered offerings. For example, information and why? Should we allow required to direct investors to the Securities Act Rule 169 275 permits non- any additional information to be intermediary’s platform through which Exchange Act reporting issuers engaged included in the notices for all offerings the offering is being conducted,273 such in an initial public offering to continue made in reliance on Section 4(a)(6)? as by including a link directing the to publish, subject to certain exclusions Please explain. Should we impose potential investor to the platform.274 We and conditions, regularly released restrictions on the timing or frequency are not proposing to impose limitations factual business information that is of notices? Why or why not? If so, what on how the issuer distributes the intended for use by persons other than restrictions would be appropriate? 102. Should we limit the issuer’s notices. For example, issuers could in their capacity as investors or participation in communication place notices in newspapers or could potential investors.276 We believe that channels provided by the intermediary post notices on social media sites. We permitting issuers to continue to engage on the intermediary’s platform? Why or believe this approach would allow in communications that do not refer to why not? If so, what limitations would issuers to leverage social media to the terms of the offering during the attract potential investors, while at the be appropriate? pendency of offering made in reliance 103. The proposed rules would allow same time protecting potential investors on Section 4(a)(6) would increase the an issuer to communicate with investors likelihood of the success of an issuer’s and potential investors about the terms 270 See proposed Rule 204(b) of Regulation business because the issuer could of an offering through communication Crowdfunding. While notices would not be continue to advertise its products or required to include all of this information, they channels provided by the intermediary would be required to, at a minimum, direct services, so long as it does so without on the intermediary’s platform, so long investors and potential investors to the discussing the terms of the offering. as the issuer identifies itself as the intermediary’s platform on which additional information about the issuer and the offering may Request for Comment issuer in all communications. Is this be found. See proposed Rule 204(a) of Regulation 97. Should we require issuers to file approach appropriate? Why or why not? Crowdfunding. with the Commission or provide to the If not, why not? 271 See proposed Instruction to proposed Rule 204 104. The proposed rules would not intermediary a copy of any notice of Regulation Crowdfunding. restrict an issuer’s ability to 272 17 CFR 230.134. communicate information that does not 273 See proposed Rule 204(a) of Regulation 275 17 CFR 230.169. Crowdfunding. 276 Id. See also Securities Offering Reform, refer to the terms of the offering. Is this 274 See proposed Rule 204(b)(1) of Regulation Release No. 33–8591 (July 19, 2005) [70 FR 44722 Crowdfunding. (Aug. 3, 2005)]. 277 See City First Letter.
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approach appropriate? Why or why not? issuer from compensating, or hired specifically to promote the If not, what limitations should we committing to compensate, directly or offering, as well as to individuals who include on an issuer’s communications indirectly, any person to promote the are otherwise employed by the issuer or that do not refer to the terms of the issuer’s offering through communication who undertake promotional activities offering and why? channels provided by the intermediary on behalf of the issuer. A founder or an unless the issuer takes reasonable steps employee of the issuer who engages in 5. Compensation of Persons Promoting to ensure that the person clearly promotional activities on behalf of the the Offering discloses the receipt (both past and issuer through the communication Section 4A(b)(3) provides that an prospective) of compensation each time channels provided by the intermediary issuer shall ‘‘not compensate or commit the person makes a promotional would be required to disclose, with each to compensate, directly or indirectly, communication.283 In this regard, we posting, that he or she is engaging in any person to promote its offerings anticipate that an issuer could, for those activities on behalf of the issuer. through communication channels example, contractually require any The proposed rules also would provided by a broker or funding portal, promoter to include the required specify that the issuer shall not without taking such steps as the statement about receipt of compensate or commit to compensate, Commission shall, by rule, require to compensation, confirm that the directly or indirectly, any person to ensure that such person clearly promoter is adhering to the promote its offerings outside of the discloses the receipt, past or intermediary’s terms of use that require communication channels provided by prospective, of such compensation, promoters to affirm whether or not they the intermediary, unless the promotion upon each instance of such promotional are compensated by the issuer, monitor is limited to notices that comply with communication.’’ communications made by such persons the advertising rules discussed above in We received comments offering and take the necessary steps to have any Section II.B.4.284 This prohibition varying views on this provision. One communications that do not have the should prevent issuers from commenter noted that it is unclear required statement removed promptly circumventing the restrictions on precisely what this provision attempts from the communication channels, or advertising by compensating a third to prohibit or protect against.278 retain a person specifically identified by party to do what the issuer cannot do Another commenter suggested the rules the intermediary to promote all issuers directly. should distinguish between an issuer on its platform. We anticipate that Request for Comment hiring an individual or entity for communication channels provided by promotion, where investors may not be the intermediary would provide a forum 105. The proposed rules would aware of the commercial relationship through which potential investors could prohibit an issuer from compensating or between the parties, and more standard share information to help the members committing to compensate, directly or web-based advertising, including of the crowd decide whether or not to indirectly, any person to promote its through search engines or trending fund the issuer. offering outside of the communication topics.279 This commenter suggested We believe that it would be important channels provided by the intermediary, that we should not adopt rules that may for potential investors to know whether unless the promotion is limited to interfere with promotional persons using these communication notices that direct investors to the compensation, but rather, we should channels are the issuer, persons acting intermediary’s platform. Is this require simple disclosure of a on behalf of the issuer or persons approach appropriate? Why or why not? commercial relationship when it would receiving compensation from the issuer 106. The proposed rules would not otherwise be apparent. One to promote the issuer’s offering because require issuers to take reasonable steps commenter suggested that the rules of the potential for self-interest or bias to ensure that persons promoting the should provide that a clear statement of in communications by these persons. As issuer’s offering through communication the compensation amount paid to such, the proposed rules would apply channels provided by the intermediary promoters (or a formula for determining broadly to persons acting on behalf of disclose the receipt (both past and the same) in the disclosure document the issuer, regardless of whether or not prospective) of direct or indirect would satisfy this disclosure they are compensated or they receive compensation each time they make a obligation.280 Another commenter compensation specifically for the promotional communication. Is this an suggested that if the issuer will use any promotional activities. For example, the appropriate approach to the statutory promoters in connection with the proposed rules would apply to persons requirement for issuers to ensure that offering, the issuer should identify the promoters make the required promoters and disclose the amount and communication channels of certain compensation disclosures? If not, what standard and promotional activities. 281 should we apply and why? structure of promoter compensation. 283 The receipt of transaction-based compensation 107. Should we require that any Consistent with the statute, the in connection with the offer and sale of a security proposed rules 282 would prohibit an could cause a person to be a broker required to person who receives compensation from register with us under Exchange Act Section the issuer to promote an issuer’s offering 15(a)(1) [15 U.S.C. 78o(a)(1)]. Issuers also would 278 See Crowdfunding Offerings Ltd. Letter 5 through communication channels need to consider the application of Securities Act (asking a number of questions about what Section 17(b) [15 U.S.C. 77q] to these activities. provided by the intermediary register constitutes direct or indirect compensation, Section 17(b) provides that ‘‘[i]t shall be unlawful with, or otherwise provide notice to, the whether it is acceptable to promote offerings if no for any person, by the use of any means or compensation is paid and whether the provision intermediary? If so, should we require instruments of transportation or communication in covers third parties who may have an interest in the that person to disclose the amount of interstate commerce or by the use of the mails, to offering and who pay for the promotion). publish, give publicity to, or circulate any notice, the compensation and the structure of 279 See RocketHub Letter 1. circular, advertisement, newspaper, article, letter, the compensation arrangement to the 280 See Schwartz Letter. investment service, or communication which, intermediary? Why or why not? If so, 281 See Commonwealth of Massachusetts Letter. though not purporting to offer a security for sale, what would be the purpose of such a 282 See proposed Rule 205 of Regulation describes such security for a consideration received Crowdfunding. See also proposed Rule 303(c)(4) or to be received, directly or indirectly, from an requirement? and the discussion in Section II.C.5.c below for issuer, underwriter, or dealer, without fully requirements on intermediaries as they relate to disclosing the receipt, whether past or prospective, 284 See proposed Rule 205(b) of Regulation disclosure in intermediary-provided of such consideration and the amount thereof.’’ Crowdfunding.
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108. Should the issuer provide Request for Comment markets and securities may evolve.293 disclosure of any person who receives 109. Should we require that Instead, the commenter urged the compensation from the issuer to oversubscribed investments be allocated Commission to set forth minimum promote an issuer’s offering? Why or using a pro-rata, first-come, first-served disclosure requirements for issuers and why not? or other method, rather than leaving that intermediaries to use when communicating the price and structure 6. Other Issuer Requirements decision up to the issuer? Please explain. of offered securities. Another Some commenters addressed issues 110. Should we limit the maximum commenter suggested that the relating to oversubscriptions, the oversubscription amount to a certain Commission require issuers to disclose offering price, the type of securities that percentage of the target offering their valuation and the factors they may be offered and how those securities amount? If so, what should the limit be considered when determining such 285 294 should be valued. and why? valuation. Another commenter suggested that the Commission should a. Oversubscriptions 111. Should we allow issuers to accept commitments in excess of the $1 prescribe a maximum valuation and ban Two commenters suggested that we million limitation so that if an investor certain dilution practices.295 Another should permit an issuer to raise capital withdraws his or her investment commenter suggested that if an offering in excess of the target offering amount, commitment prior to the closing of the exceeds certain valuation limitations 286 subject to certain conditions. The offering, the issuer would still be able to (based, for instance, on company proposed rules would not limit an raise $1 million? If so, should we financial ratios), then the Commission issuer’s ability to accept investments in require that investments in excess of $1 should require that the shares held by excess of the target offering amount, million be allocated using a pro-rata, company insiders be subject to a lock- subject to the $1 million annual first-come, first-served or other method, up that would terminate after a period 287 limitation. Issuers, however, would or should we leave that decision up to of time or after the company meets 296 be required to provide disclosure to the issuer? Please explain. certain financial benchmarks. investors concerning this possibility.288 Another commenter indicated that there Some commenters suggested that the b. Offering Price are significant costs to properly rules require a defined range for One commenter suggested that the ascertaining future valuations and that permissible oversubscriptions.289 We Commission should require issuers to such a requirement could only be believe, however, that limits on set a fixed price for the offering and applied to corporations.297 oversubscriptions are not necessary if an prohibit any dynamic pricing (e.g., The proposed rules would neither issuer discloses how much it would be pricing per share that increases with the limit the type of securities that may be willing to accept in oversubscriptions, passage of time) because dynamic offered in reliance on Section 4(a)(6) nor how the oversubscriptions would be pricing schemes may apply time prescribe a method for valuing the allocated and the intended purpose of pressure on the investment decision.291 securities. In this regard, we note that those additional funds.290 We believe We are not proposing to require issuers the statute refers to ‘‘securities’’ and that this approach would provide to set a fixed price or prohibit dynamic does not limit the types of securities investors, prior to the sale, with useful pricing because we believe that the that could be offered pursuant to the information to make an informed statute contemplated flexible pricing by exemption. In addition, the statute does investment decision about an issuer that providing that issuers may disclose the not require the use of a specific is seeking investments in excess of the method for determining the price valuation method or ban any dilution target offering amount. provided that the final price and practices. Issuers would be required to required disclosures are provided to describe the terms of the securities and 285 Securities Act Section 4A(b)(5) states that each investor prior to the sale. We also the valuation method in their offering issuers shall ‘‘comply with such other requirements believe that the proposed cancellation materials.298 We believe this approach as the Commission may, by rule, prescribe, for the rights would address the concerns about is consistent with the statute and will protection of investors and in the public interest.’’ provide flexibility to issuers to 286 See ABA Letter 1 (stating that if the maximum time pressure on the investment amount exceeds the target offering amount, the decision because investors would have determine the types of securities that issuer should be required to disclose: (1) The a reasonable opportunity to cancel the they offer to investors and how those maximum amount that it could raise; (2) the total investment commitment after the price securities are valued, while providing amount of securities that would be issued should 292 investors with the information they the maximum amount be raised; (3) the anticipated is fixed. use of proceeds should the maximum amount be raised; and (4) financial statements that would have Request for Comment 293 See RocketHub Letter 1. been required had the target offering amount been 112. Should we require issuers to set 294 See Sjogren Letter. equal to the maximum amount); Hutchens Letter a fixed price at the commencement of an 295 See The Motley Fool Letter (stating that the (stating that issuers should be allowed to raise Commission should specify a maximum valuation capital in excess of the target offering amount so offering or prohibit dynamic pricing? for issuers, perhaps at two, five, or 10 times the long as the amount raised does not fall within a Why or why not? aggregate issue limit and should implement a rule higher tier of financial statement requirements). to protect investors from issuers that might sell a 287 See proposed Rule 201(h) of Regulation c. Types of Securities Offered and special class of shares to the crowdfunding public Crowdfunding. Valuation that they eventually dilute in future offerings). 288 Id. Issuers also would need to allow investors We received comments about the 296 See Commonwealth of Massachusetts Letter to cancel the commitment to purchase the securities (stating that the Commission should require in the same way as it would have done had it not types of securities that could be offered disclosure about the risks of buying securities of an accepted oversubscriptions. See Section II.C.6 and the valuation of securities offered. early-stage company at a high valuation). below for a discussion of the right to cancel the One commenter suggested that the 297 See CrowdFund Connect Letter (stating that purchase commitment. Commission should not prescribe the Commission should clarify that an issuer would 289 See RocketHub Letter 1; CFIRA Letter 5; satisfy the requirement to describe how the Hutchens Letter. eligible types of securities because securities being offered are being valued by 290 See Section II.B.1.a.i(d) above for a discussion providing an operating and management statement of the disclosure requirements if the issuer will 291 See Spinrad Letter 1. that clearly defines capital distributions). accept investments in excess of the target offering 292 See Section II.C.6 below for a discussion of 298 See proposed Rule 201(m) of Regulation amount. cancellation rights. Crowdfunding.
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need to make an informed investment may be structured. Are there any issues engage, other than those identified in decision. in particular that our rules should the statute.309 The proposed rules do not limit the address in the context of such The proposed rules would not only types of securities that may be offered simultaneous crowdfunding offerings? apply to funding portals, but also to in reliance on Section 4(a)(6), and thus, Please explain. their associated persons in many debt securities may be offered and sold 115. Should we require or prohibit a in crowdfunding transactions. In instances. The proposed rules would specific valuation methodology? If so, define the term ‘‘person associated with general, the issuance of a debt security what method and why? Should we raises questions about the applicability a funding portal or associated person of specify a maximum valuation allowed a funding portal’’ to mean any partner, of the Trust Indenture Act of 1939 305 299 as suggested by one commenter? officer, director or manager of a funding (‘‘Trust Indenture Act’’). The Trust Why or why not? Indenture Act applies to any debt portal (or any person occupying a security sold through the use of the C. Requirements on Intermediaries similar status or performing similar mails or interstate commerce, including functions), any person directly or 1. Brokers and Funding Portals debt securities sold in transactions that indirectly controlling or controlled by a are exempt from Securities Act Securities Act Section 4(a)(6)(C) funding portal, or any employee of a registration. A debt security sold in requires a crowdfunding transaction to funding portal, but would exclude any reliance on Section 4(a)(6) would need be conducted through a broker or persons whose functions are solely to be issued under a qualified funding portal that complies with the clerical or ministerial.310 The rules indenture 300 or under an indenture that requirements of Securities Act Section would provide, however, that excluded is exempt from qualification.301 The 4A(a). The term ‘‘broker’’ is generally persons nevertheless would be subject Trust Indenture Act and related rules defined in Exchange Act Section 3(a)(4) to our authority under Exchange Act provide exemptions in some as any person that effects transactions in Sections 15(b)(4) and 15(b)(6) because circumstances. For example, Trust securities for the account of others. they are associated with a broker.311 Indenture Act Section 304(b) provides Exchange Act Section 3(a)(80),306 as This definition is consistent with, and an exemption for any transaction that is added by Section 304 of the JOBS Act, modeled on, the definition of ‘‘person exempted from the provisions of defines the term ‘‘funding portal’’ as any associated with a broker or dealer or Securities Act Section 5 by Section 4 person acting as an intermediary in a associated person of a broker or dealer’’ thereof.302 We believe an issuer offering transaction involving the offer or sale of under Exchange Act Section 3(a)(18).312 debt securities in reliance on Section securities for the account of others, 4(a)(6) would be able to rely on this solely pursuant to Securities Act Request for Comment 303 exemption. Based on the availability Section 4(a)(6), that does not: (1) Offer 116. Are there other funding portal of this exemption from the requirements investment advice or recommendations; activities, other than those in Exchange of the Trust Indenture Act, we are not (2) solicit purchases, sales or offers to Act Section 3(a)(80), that we should proposing a specific exemption from the buy the securities offered or displayed requirements of the Trust Indenture Act on its platform or portal; (3) compensate prohibit? If so, which activities and for offerings of debt securities made in employees, agents or other person for why? Are there any prohibitions that reliance on Section 4(a)(6). such solicitation or based on the sale of should be modified or removed? If so, which ones and why? Request for Comment securities displayed or referenced on its 117. Do we need to provide further 113. Should we limit the types of platform or portal; (4) hold, manage, securities that may be offered and sold possess or otherwise handle investor guidance concerning which provisions in reliance on Section 4(a)(6) (e.g., funds or securities; or (5) engage in such of the Exchange Act and the rules and should the exemption be limited to other activities as the Commission, by regulations thereunder would apply to offers and sales of equity securities)? If rule, determines appropriate. funding portals? If so, what further so, to what securities should Because a funding portal would be guidance is necessary and why? crowdfunding be limited and why? engaged in the business of effecting Should we create a separate exemption securities transactions for the accounts 309 In proposing Regulation Crowdfunding, we for certain types of offerings of limited of others through crowdfunding, it propose requirements that are tailored to the limited brokerage activities in which funding types of securities, as one commenter would meet the Exchange Act definition portals may engage. Even where requirements proposed? 304 of broker.307 The proposed rules would proposed for funding portals are the same as those 114. Is it anticipated that issuers may define ‘‘funding portal’’ consistent with imposed on brokers, such as the AML requirements want to conduct crowdfunding offerings the statutory definition of ‘‘funding discussed in Section II.D.4 below, due to the limited nature of funding portals’ activities, the of securities under Section 4(a)(6) portal,’’ substituting the word ‘‘broker’’ compliance burden on funding portals should be alongside non-securities-based for the word ‘‘person,’’ 308 to state less extensive than those applicable to full service crowdfunding, such as a crowdfunding explicitly and make clear that funding brokers under the existing regulatory regime for campaign for donations or rewards? If portals are brokers under the federal broker-dealers. so, please describe how these offerings 310 See proposed Rule 300(c)(1) of Regulation securities laws. We are not proposing at Crowdfunding. this time to exercise our discretion 311 Exchange Act Section 15(b)(4) (15 U.S.C. 299 15 U.S.C. 77aaa et seq. under Section 3(a)(80)(E) to prohibit any 78o(b)(4)) authorizes the Commission to bring 300 See Trust Indenture Act Section 309 [15 U.S.C. activities in which a funding portal may administrative proceedings against a broker when 77iii]. the broker violates the federal securities laws (and 301 See Trust Indenture Act Section 304 [15 U.S.C. for other misconduct) and provides for the 77ddd]. 305 See The Motley Fool Letter. imposition of sanctions, up to and including the 302 15 U.S.C. 77ddd(b). 306 The JOBS Act inadvertently created two revocation of a broker’s registration. Exchange Act 303 Trust Indenture Act Section 304(a)(8) [15 Sections 3(a)(80) in the Exchange Act, the other Section 15(b)(6) (15 U.S.C. 78o(b)(6)) provides U.S.C. 77ddd(a)(8)] and Rule 4a–1 [17 CFR 260.4a– being the definition of ‘‘emerging growth company’’ similar enforcement authority against the persons 1] also provide an exemption to issue up to $5 (added by Section 101(b) of Title I of the JOBS Act). associated with a broker, including barring persons million of debt securities without an indenture in 307 See discussion in Section II.D.2 below. from associating with any Commission registrant. any 12-month period. 308 See proposed Rule 300(c)(2) of Regulation See note 559. 304 See City First Letter. Crowdfunding. 312 15 U.S.C. 78c(a)(18).
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2. Requirements and Prohibitions As discussed above, Section 4A(a)(1) the only registered national securities a. Registration and SRO Membership requires an intermediary that facilitates association. crowdfunded issuances of securities to One commenter generally objected to Securities Act Section 4A(a)(1) register with us either as a broker or as the requirement for an intermediary to requires that a person acting as an a funding portal. Facilitating be a member of a registered national intermediary in a crowdfunding crowdfunded transactions alone would securities association.323 As we noted transaction register with the not require an intermediary to register above, the statute clearly requires a Commission as a broker or as a funding as an exchange or as an alternative funding portal to be a member of a portal. The proposed rules would trading system (i.e., registration as a registered national securities implement this requirement by broker-dealer subject to Regulation association. Likewise, under Section providing that a person acting as an ATS). To the extent that an intermediary 15(b)(8) of the Exchange Act, a broker- intermediary in a transaction involving facilitates secondary market activity in dealer that is engaged in crowdfunding the offer or sale of securities made in securities issued in reliance on Section activities must be a member of a reliance on Section 4(a)(6) must be 4(a)(6), the intermediary would be national securities association.324 We registered with the Commission as a required to register as an exchange or as believe that requiring intermediary broker under Exchange Act Section an alternative trading system if it met membership in a registered national 15(b) or as a funding portal pursuant to the criteria in Exchange Act Rule 3b– securities association should help to Securities Act Section 4A(a)(1) and 16.319 We note, however, that a funding ensure consistent regulation of proposed Rule 400 of Regulation portal, by definition, is limited to acting Crowdfunding.313 intermediaries with fewer opportunities as an intermediary in transactions One commenter requested for regulatory gaps. In regulating broker- involving the offer or sale of securities transparency in the registration process, dealers that effect securities transactions for the account of others solely pursuant with members of the public, FINRA has stating that intermediaries’ completed 320 registration materials should be to Section 4(a)(6), which are primary the most members and is responsible for accessible to the public.314 Brokers issuances of securities. Thus, a funding conducting broker-dealer examinations currently register with the Commission portal could not effect secondary market of its members, mandating disclosures using Form BD. Information on that transactions in securities. by its members, writing rules governing form regarding the broker’s credentials, Exchange Act Section 4A(a)(2) the conduct of its members and including current registrations or requires an intermediary to register with associated persons 325 and informing licenses and employment and any applicable self-regulatory and educating the investing public.326 disciplinary history, is publicly organization (‘‘SRO’’), as defined in FINRA investigates and brings 321 available on FINRA’s BrokerCheck.315 Exchange Act Section 3(a)(26). enforcement actions against FINRA As discussed below, we are proposing to Exchange Act Section 3(h)(1)(B) members and their associated persons make the information that a funding separately requires, as a condition of the who are suspected of violating its rules portal provides on proposed Form exemption from broker registration, a and the federal securities laws.327 While Funding Portal, other than personally funding portal to be a member of a FINRA has primary responsibility for identifiable information or other national securities association that is examining its members,328 the information with a significant potential registered with the Commission under Commission staff generally examines for misuse, accessible to the public.316 Exchange Act Section 15A. The broker-dealers if specific firm or One commenter urged the Commission proposed rules would implement these industry risks have been identified or to grant funding portals a one-year provisions by requiring an intermediary when fraud and rule violations may moratorium from having to register.317 in a transaction involving the offer or have occurred. Because the statute We are not proposing such a sale of securities made in reliance on requires a national securities association moratorium because the statute clearly Section 4(a)(6) to be a member of FINRA to write rules expressly for funding states that a person acting as an or any other national securities intermediary in a crowdfunding association registered under Exchange the terms ‘‘intermediary’’ and ‘‘SRO’’ in proposed transaction made in reliance on Section Act Section 15A.322 Today, FINRA is Rule 300(c)(3) and 300(c)(5) of Regulation Crowdfunding, respectively. Intermediary would 4(a)(6) must be registered with the mean a broker registered under Section 15(b) of the Commission either as a broker or as a 319 See 17 CFR 240.3b–16 (subject to the exceptions provided in part (b) of the rule, an Exchange Act or a funding portal registered under funding portal. organization, association or group of persons would proposed Rule 400 and would include, where Another commenter requested generally be considered a market place or facility relevant, an associated person of the registered clarification on whether a person acting for bringing together purchasers and sellers of broker or registered funding portal. SRO is proposed to have the same meaning as in Section as an intermediary in a transaction securities or for otherwise performing, with respect to securities, the functions commonly performed by 36(a)(26) of the Exchange Act. See also Section under Section 4(a)(6) would be required a stock exchange, ‘‘if such organization, association, II.D.1 below for a discussion regarding proposed to register with us as an exchange, as or group of persons (1) Brings together the orders Rule 400 of Regulation Crowdfunding, which defined in Exchange Act Section 3(a)(1), for securities of multiple buyers and sellers; and (2) addresses registration requirements for funding portals. or as an alternative trading system.318 Uses established, non-discretionary methods (whether by providing a trading facility or by 323 See Priore Letter. setting rules) under which such orders interact with 324 The statute also permits brokers-dealers to be 313 See proposed Rule 300(a)(1) of Regulation each other, and the buyers and sellers entering such members of a national securities exchange if the Crowdfunding. orders agree to the terms of a trade.’’). broker-dealer effects transactions in securities 314 See Commonwealth of Massachusetts Letter. 320 See Section II.C.1 above. solely on that exchange. See also Schwartz Letter (stating that the 321 15 U.S.C. 78c(a)(26). Exchange Act Section 325 15 U.S.C. 78o–3. registration document should be made public 3(a)(26) defines an ‘‘SRO’’ to mean ‘‘any national 326 FINRA, Inc., http://www.finra.org/ because it would likely include many relevant securities exchange, registered securities AboutFINRA/P125239 (last visited Oct. 15, 2012). disclosures, which would make it possible for the association, or registered clearing agency, or (solely 327 See, e.g., 15 U.S.C. 78o–3(b)(2); Testimony intermediary to file a single document to satisfy for the purposes of [S]ections [19(b), 19(c), and 23 Before the Senate Subcommittee on Securities, both the registration and disclosure requirements). of the Exchange Act]) the Municipal Securities Insurance, and Investment Committee on Banking, 315 See FINRA, note 142. Rulemaking Board established by [S]ection [15B of Housing, and Urban Affairs, 111th Cong. 8 (2010) 316 See discussion in Section II.D.1 below. the Exchange Act.]’’ Id. (testimony of Stephen Luparello, Vice Chairman, 317 See Loofbourrow Letter. 322 See proposed Rule 300(a)(2) of Regulation FINRA). 318 See ABA Letter 1. Crowdfunding. We have proposed definitions for 328 15 U.S.C. 78o–3.
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portals,329 we anticipate that funding Exchange Act Section 19(b) 334 and Rule 121. The proposed rules do not portals would be subjected to 19b–4.335 In general, the Commission independently establish licensing or requirements targeted to their limited reviews proposed SRO rules and rule other qualification requirements for business model and not the more changes, publishes them for comment, intermediaries and their associated comprehensive requirements applicable approves or disapproves them, or the persons. The applicable registered to brokers. We anticipate that the rules become effective immediately or national securities associations may or regulatory framework FINRA creates for by operation of law. may not seek to impose such funding portals would play an requirements. Should the Commission Request for Comment important role in the oversight of these consider establishing these entities and, through the information 118. We have named FINRA expressly requirements? Should the Commission that FINRA shares with the in the proposed rules as an applicable consider establishing requirements only Commission, the Commission’s ability registered national securities association if the associations do not? Would to effectively regulate registered funding for crowdfunding intermediaries. Is this licensing or other qualifications for portals’ activities.330 helpful? Is this appropriate? Why or intermediaries and their associated In response to commenters’ requests why not? Are there other entities persons be necessary, for example, to that we clarify the applicable SRO for considering applying to become provide assurances that those persons crowdfunding intermediaries, and to registered national securities are sufficiently knowledgeable and address any confusion about which associations? qualified to operate a funding portal? entity or entities may serve as an SRO 119. The proposed rules would Why or why not? If so, what types of for crowdfunding brokers and funding require that an intermediary be a licensing or other qualifications should portals, we are expressly identifying member of FINRA or of any other we consider? FINRA as a registered national securities applicable national securities b. Financial Interests association within the meaning of the association. Is this an appropriate statute.331 While FINRA currently is the approach? At present, FINRA is the only Exchange Act Section 4A(a)(11) only registered national securities registered national securities requires an intermediary to prohibit its association, we are not foreclosing the association. If we were in the future to directors, officers or partners (or any possibility that another national approve the registration of another person occupying a similar status or securities association could register national securities association under performing a similar function) from with us in the future. In that event, the Exchange Act Section 15A, would it be having any financial interest in an proposed rule would permit funding appropriate for us to require issuer using its services. The proposed portals to become members of the new membership in both the existing and rules would implement this prohibition association (should one become new association? Why or why not? by importing the language of the statute, established in the future) instead of, or 120. No intermediary can engage in and also by extending this prohibition in addition to, FINRA.332 crowdfunding activities without being to the intermediary itself. The proposed FINRA currently provides licensing registered with the Commission and rules would add that these persons are and qualification requirements for becoming a member of FINRA or not only prohibited from having any associated persons of brokers. While we another registered national securities financial interest in an issuer using its are not proposing any such requirement association. We recognize that while services, but also would specifically be for persons associated with a funding there is an established framework for prohibited from receiving a financial portal, FINRA (or any other registered brokers to register with the Commission interest in the issuer as compensation national securities association) could and become members of FINRA, no for services provided to, or for the such framework is yet in place for benefit of, the issuer, in connection with propose such requirements, as well as 338 requirements dealing with supervision funding portals. We do not intend to the offer and sale of its securities. of funding portal personnel and create a regulatory imbalance that The proposed rules would interpret appropriate compliance structures.333 would unduly favor either brokers or ‘‘any financial interest in an issuer,’’ for FINRA, like all SROs, is required to file funding portals.336 Are there steps we purposes of Securities Act Section all proposed rules with us under should take to ensure that we do not 4A(a)(11), to mean a direct or indirect create a regulatory imbalance? 337 Please ownership of, or economic interest in, any class of the issuer’s securities. 329 See Exchange Act Section 3(h)(2) [15 U.S.C. explain. 78c(h)(2)]. One commenter sought clarification of 330 Id. 334 15 U.S.C. 78s(b). whether Section 4A(a)(11) prohibits an 331 See NCA Letter; NSBA Letter. 335 17 CFR 240.19b–4. intermediary—as an entity—from 332 For requirements to register as a national 336 We note, however, that a registered broker accepting equity from an issuer as securities association, see Exchange Act Section could nonetheless have a competitive advantage to compensation for its services.339 In the 15A [15 U.S.C. 78o–3]. the extent it would be able to provide a wider range commenter’s view, Section 4A(a)(11) 333 Exchange Act Section 15(b)(7) (15 U.S.C. of services than a registered funding portal could 78o(b)(7)) requires that natural persons associated provide in connection with crowdfunding should be interpreted as prohibiting an with brokers and dealers that are registered under transactions made in reliance on Section 4(a)(6). intermediary from having a financial Exchange Act Section 15(a)(1) (15 U.S.C. 78o(a)(1)) Unlike a funding portal, a registered broker-dealer interest in an issuer only at the time of meet such standards of training, experience, could make recommendations, engage in the offering and not thereafter. Another competence and such other qualifications as the solicitations and handle investor funds and Commission finds necessary or appropriate in the securities. In addition, a registered broker-dealer, commenter stated that permitting a public interest. The Commission historically has but not a funding portal, could potentially facilitate funding portal to have a financial not exercised this authority but instead has relied a secondary market for securities sold pursuant to interest in an issuer would align the on and deferred to the ‘‘substantive content of the Section 4(a)(6). See Exchange Act Section 3(a)(80) funding portal’s interests with those of SROs’ entry requirements imposed on securities [15 U.S.C. 78c(a)(80)] (providing that a funding personnel in the various qualification categories.’’ portal may act as an intermediary solely in See Requirement of Broker-Dealers to Comply with securities transactions effected pursuant to activities until funding portals also become SRO Qualification Standards, Release No. 34– Securities Act Section 4(a)(6), which are offerings registered with, and members of, SROs). 32261 (May 4, 1993). See also Sections II.D.1 and by issuers and not resales). 338 See proposed Rule 300(b) of Regulation II.D.2 below for a discussion regarding proposed 337 See NCA Letter (stating that registered brokers Crowdfunding. Rules 400 and 401 of Regulation Crowdfunding. should not be permitted to engage in crowdfunding 339 See NCA Letter.
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potential investors and that full interest in, any class of the securities of consulting services to the issuer after disclosure of any financial interest an issuer.344 the offering? Should it include an should quell any potential concerns.340 As discussed above, one commenter arrangement under which the Another commenter stated that Section suggested that an investor’s and intermediary is a creditor of an issuer? 4A(a)(11) does not expressly prohibit an intermediary’s interests may be aligned Should it include any carried interest or intermediary, as an entity, from having if an intermediary were allowed to take other arrangement that provides the a financial interest in an issuer and that a financial interest in an issuer. We are intermediary or its associated persons this should be permitted under certain concerned that the promise of a with an interest in the financial or circumstances.341 financial stake in the outcome could operating success of the issuer, other We believe the prohibition in Section give an intermediary an incentive to than fixed or flat-rate fees for services 4A(a)(11) is designed to protect ensure the success of its own performed? Should any other interests investors from the conflicts of interest investment in the issuer, to the or arrangements be specified in the term that may arise when the persons disadvantage of investors and other ‘‘financial interest in an issuer?’’ If so, facilitating a crowdfunding transaction issuers using the intermediary’s what are they and what concerns do have a financial stake in the outcome. platform, particularly if the financial they raise? The proposed rules would extend the interest is provided to the intermediary prohibition on holding a financial 126. In light of the reasons for the on different terms than to other prohibition, should there be a de interest to the intermediary itself,342 investors. because we believe that the same minimis exception? Why or why not? If concerns apply to the intermediary as to Request for Comment so, what would be an appropriate de its directors, officers or partners (or any 122. Should we permit an minimis amount? For example, would a person occupying a similar status or intermediary to receive a financial one percent holding be an appropriate performing a similar function). The interest in an issuer as compensation for amount? Would another amount be existence of a financial interest in an the services that it provides to the more appropriate? Please explain. issuer may create an incentive to issuer? Why or why not? If we were to Should there be disclosure requirements advance that issuer’s fundraising efforts permit this arrangement, the proposed for any de minimis exception? Why or over those of other issuers, which could rules on disclosure requirements for why not? potentially adversely affect investors. issuers would require the arrangement 127. Should we impose any other For similar reasons, the proposed rules to be disclosed to investors in the requirements or prohibitions on also would prohibit receipt of a offering material. Are there other intermediaries? If so, what requirements financial interest in an issuer as conditions that we should require? If so, or prohibitions and why? compensation for services provided to please identify those conditions and 3. Measures To Reduce Risk of Fraud or on behalf of an issuer.343 The explain. proposed rules would define ‘‘financial 123. If an intermediary receives a Securities Act Section 4A(a)(5) interest in an issuer’’ to mean a direct financial interest in an issuer, should it requires an intermediary to ‘‘take such or indirect ownership of, or economic be permitted to provide future services measures to reduce the risk of fraud as long as it retains the interest? Why or with respect to [transactions made in 340 See Dex Offshore Letter 1. See also Dex why not? reliance on Section 4(a)(6)], as Offshore Letter 2 (stating that allowing funding 124. One commenter suggested that portals to have an equity interest in an issuer would established by the Commission, by rule, align the funding portals with investors, much like an intermediary should be able to including obtaining a background and venture capital or private equity models, and that receive a financial interest under the securities enforcement regulatory transparent disclosure would quell any concerns same terms as other investors related to portals maintaining equity interests in history check on each officer, director, participating in an offering made in and person holding more than 20 issuers). 345 341 See EarlyShares Letter 2 (stating that the reliance on Section 4(a)(6). We percent of the outstanding equity of following principles should govern a funding request comment on this suggestion. every issuer whose securities are offered portal’s financial interest in an issuer: first, to How could an intermediary address by such person.’’ The proposed rules prevent any potential unfair advantage, an potential conflicts of interest that may intermediary should only be able to invest on the would implement this provision by same terms under which the crowd invests; second, arise from this practice? Would requiring an intermediary to have a any material nonpublic information that the disclosure of the arrangement be reasonable basis for believing that the intermediary (or any person acting on behalf of the sufficient? Please explain. issuer is in compliance with relevant intermediary) possessed prior to and/or after taking 125. The proposed rules define regulations and has established means a financial interest in an issuer must be disclosed ‘‘financial interest in an issuer,’’ for on the platform in a secure manner, consistent with to keep accurate records of holders of the disclosure of other material nonpublic purposes of Securities Act Section the securities it offers, and by requiring information that investors will receive through the 4A(a)(11), to mean a direct or indirect that the intermediary deny access if it issuer’s profile page on an intermediary’s platform; ownership of, or economic interest in, believes the issuer or its offering would third, because under Securities Act Section 4A(e), any class of the issuer’s securities. an intermediary will be bound by the same one-year present a potential for fraud.346 restriction on sales period as any other investor, Should we define the term more broadly there would be no risk that investors would be to include other potential forms of a Specifically, the proposed rules misled by a ‘‘false start’’ or ‘‘pump-and-dump’’ financial interest? For example, should would require an intermediary to have scheme; and finally, an intermediary’s interest the term include a contract between an a reasonable basis for believing that an should remain anonymous throughout the issuer seeking to offer and sell securities investment campaign, to avoid having the intermediary and an issuer or the intermediary’s interest be considered ‘‘investment issuer’s directors, officers or partners (or in reliance on Section 4(a)(6), through advice or recommendations,’’ in violation of the any person occupying a similar status or the intermediary’s platform, complies prohibitions in the definition of funding portal). performing a similar function), for the with the requirements in Securities Act 342 See proposed Rule 300(b) of Regulation Section 4A(b) and the related Crowdfunding. See also Securities Act Section intermediary to provide ancillary or 4A(a)(12) (granting us discretionary authority to requirements in Regulation include other requirements on intermediaries for 344 See proposed Rule 300(b) of Regulation the protection of investors and the public interest). Crowdfunding. 346 See proposed Rule 301 of Regulation 343 See id. 345 See EarlyShares Letter 2. Crowdfunding.
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Crowdfunding.347 While an issuer has Another commenter suggested that have not required in connection with an independent obligation to comply the Commission should require the use any types of securities offerings, and with these requirements, we believe it of registered transfer agents, which are thus we are not proposing to require it would help to reduce the risk of fraud already subject to SEC regulations and here. Similarly, we are not proposing to if an intermediary were to also have an examinations, to maintain records of require the use of a registered transfer obligation to have a reasonable basis to share ownership and transfers in agent. While requiring a registered believe that the issuer is in connection with crowdfunding transfer agent to be involved after the compliance.348 The proposed rules transactions.352 This commenter stated offering could introduce a regulated would permit intermediaries to that small issuers may not have the entity with experience in maintaining reasonably rely on representations of the resources to properly execute the accurate shareholder records, a transfer issuer, absent knowledge or other routine services that registered transfer agent is not necessary for accurate information or indications that the agents provide, including procedures to: recordkeeping. Issuers and other third representations are not true. While we record and balance registered parties can also be well-positioned to do not propose to specify particular shareowner positions; follow keep accurate records of the holders of actions an intermediary must take in shareholder instructions (and retain the securities an issuer would offer and satisfying this requirement, we records of the instruction) to change an sell through an intermediary’s anticipate that in the course of its address or transfer their interests as a platform.356 interactions with potential issuers, an result of death, divorce or sale In satisfying this requirement that an intermediary may determine whether it (including signature guarantees where intermediary have a reasonable basis to could in fact reasonably rely on an necessary); escheat unclaimed assets believe that an issuer has established issuer’s representations and have a under state laws; or address lost or means to keep accurate records of the reasonable basis to believe the issuer is stolen certificates. securities it would offer and sell in compliance. We are not proposing to require a through the intermediary’s platform, the The proposed rules also would particular form or method of intermediary may rely on an issuer’s require an intermediary to have a recordkeeping of securities, nor are we representations concerning the means it reasonable basis for believing that an proposing to require that an issuer use has established, unless the intermediary issuer has established means to keep a transfer agent or any other third party. has reason to question the reliability of accurate records of the holders of the We recognize the importance of accurate the representations.357 To keep accurate securities it would offer and sell recordkeeping for investors and issuers, records, an issuer may need to have through the intermediary’s platform.349 and that the failure to accurately record established means to perform a range of The ability to keep track of the or maintain shareholder records of an functions with respect to shareholder ownership of an issuer’s securities is issuer, or to prevent fraudulent records. The precise scope of the needed necessary to protect investors and transfers, can have significant negative functions will depend on the nature of critical for maintaining the integrity of impacts for both investors and the issuer and its securities. Such securities transactions made in reliance issuers.353 Among other things, functions could include, for example, on Section 4(a)(6), both with respect to investors without accurate records of the ability to (1) monitor the issuance of the initial offering and any subsequent their ownership of shares can find it the securities the issuer would offer and transfers of the securities. The statute difficult to prove such ownership in sell through the intermediary’s platform, does not assign responsibility in this connection with a sale of their shares or (2) maintain a master security holder list regard but intermediaries would be execution of a corporate transaction. We reflecting the owners of those securities, well-positioned to make this believe that accurate recordkeeping can (3) maintain a transfer journal or other determination, given that they would be be accomplished by diligent issuers or such log recording any transfer of interacting with the issuer, and through a variety of third parties. ownership, (4) effect the exchange or particularly if they are advising the Accordingly, under the proposed rules, conversion of any applicable securities, issuer to some extent about the the recordkeeping function may be (5) maintain a control book 350 offering. One commenter stated that a provided by the issuer, a broker, a demonstrating the historical registration direct registration system provides the transfer agent or some other (registered of those securities, and (6) countersign best solution to policing transfers at a or unregistered) person.354 In certain or legend physical certificates of those low cost and that, to the extent physical business models, for example, it may be securities. For some issuers, not all of certificates are issued, they should possible for other regulated entities, these functions may be needed. include legends similar to those such as banks, to provide this There are a number of ways by which 351 required for restricted securities. function.355 an issuer could demonstrate or Requiring a direct registration system represent that it has established the 347 See proposed Rule 301(a) of Regulation to monitor transfers could create necessary recordkeeping means. The Crowdfunding. 348 See Section II.E.5 below for a discussion additional costs to implement that we issuer itself may have capabilities to relating to intermediaries’ potential statutory maintain accurate records of its liability for statements made by issuers and 352 See STA Letter. intermediaries’ policies and procedures. Proposed 353 See, e.g., STA Letter. 356 Transfer agent registration is required with Rule 403(a) of Regulation Crowdfunding would 354 An intermediary that is a funding portal could respect to securities registered under Exchange Act require funding portals to have policies and not provide these services, however, because by Section 12 (15 U.S.C. 78l). Because securities issued procedures designed to achieve compliance with statute, it cannot ‘‘hold, manage, possess, or pursuant to a transaction relying on Section 4(a)(6) federal securities laws, while intermediaries that otherwise handle investor funds or securities.’’ See will not be registered under Exchange Act Section are brokers would be subject to FINRA rules Exchange Act Section 3(a)(80)(D) [15 U.S.C. 12, as explained above, we are not proposing to requiring similar policies and procedures. See 78c(a)(80)]. require the use of transfer agents on the transfers discussion in Section II.D.4 below. 355 See City First Letter (indicating that there was of these securities. Nevertheless, issuers relying on 349 See proposed Rule 301(b) of Regulation interest in leveraging resources of Community Section 4(a)(6) could choose to engage a registered Crowdfunding. Development Financial Institutions, which are transfer agent to provide these services. See 350 See discussion in Section II.D.3 below relating certified by the U.S. Department of Treasury and Exchange Act Section 17A(c)(1) [15 U.S.C. 78q–1]. to proposed Rule 402(b)(5) of Regulation include community development banks, credit See also id. Crowdfunding. unions, loan funds, and venture capital funds, with 357 See proposed Rule 301(b) of Regulation 351 See RocketHub Letter 1. See also STA Letter. crowdfunded capital). Crowdfunding.
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securities and, as noted above, may conduct.360 One commenter suggested proposed rules would require an represent such capabilities to the that the background check should intermediary to deny access to an issuer intermediary. The intermediary also consist of: A review of credit reports, if it has information that is not may be able to establish a reasonable verification of necessary business or necessarily the basis for a belief, for example, if the issuer has professional licenses, evidence of disqualification under proposed rules, engaged a broker, transfer agent, or other corporate good standing, uniform but that the intermediary nevertheless third party that can provide the commercial code checks and a CRD 361 believes presents the potential for fraud requisite recordkeeping services, snapshot report.362 Another stated that or otherwise raises concerns regarding including a third party providing such the scope of the background and investor protection.366 For this services tailored to crowdfunding securities enforcement regulatory particular proposed requirement to deny issuers. history check should be commensurate access, the intermediary would not be with the size of the transaction and that required to have a reasonable basis for The proposed rules would require an we should establish a minimum level of its belief. This is because we believe it intermediary to deny access to its diligence that an intermediary must is important to provide intermediaries platform, if the intermediary has a undertake to promulgate an effective discretion in taking steps to reduce the reasonable basis for believing that an mechanism against fraud.363 The risk of fraud as Congress intended, issuer, or any of its officers, directors (or commenter further stated that such which would strengthen investor any person occupying a similar status or minimum level should be below that protection. The proposed rules also performing a similar function) or 20 required of registered broker-dealers.364 require that if this information becomes Percent Beneficial Owners, is subject to Other commenters requested guidance known to the intermediary after it has a disqualification under the proposed on the actions that an intermediary granted the issuer access to its platform, rules or if the intermediary believes that should take with respect to information the intermediary must promptly remove the issuer or the offering presents the uncovered during a background the offering from its platform, cancel the potential for fraud or otherwise raises check.365 offering and return to investors any concerns regarding investor We are not proposing to establish funds they may have committed. Under protection.358 The rules would require specific procedures for intermediaries to the proposed rules, an intermediary an intermediary to conduct a follow to reduce the risk of fraud would also be required to deny access background and securities enforcement beyond conducting the prescribed to an issuer if it believes that it is unable regulatory history check on each issuer background and securities enforcement to adequately or effectively assess the whose securities are to be offered by the regulatory history checks. We believe risk of fraud of the issuer or its potential intermediary, as well as on each of its that this proposed approach would offering. For example, if certain officers officers, directors (or any person allow an intermediary to use its of the issuer reside in a jurisdiction occupying a similar status or performing experience and judgment, as well as its where background checks and securities a similar function) and 20 Percent concern for the reputational integrity of enforcement regulatory history checks Beneficial Owners. While the statute its platform and crowdfunding pursuant are not readily available to the requires that these checks be conducted to Section 4(a)(6) in general, to design intermediary, the intermediary may on persons holding more than 20 systems and processes to help reduce determine that it is unable to assess the percent of the outstanding equity of the the risk of fraud in securities-based risk of fraud of the issuer, and thus must issuer, the proposed rules would extend crowdfunding. In this regard, the deny the issuer access to its platform. this requirement to apply to the 20 Some commenters stated that Percent Beneficial Owners. This 360 See CompTIA Letter; NASAA Letter; background checks could help reduce proposed requirement is consistent with CrowdFund Connect Letter. fraud if intermediaries were required to the issuer disclosure requirements and 361 CRD is a central licensing and registration prominently display the results of the system for the U.S. securities industry and its with the issuer disqualification regulators. It includes a computerized database of background checks on their provisions.359 Using the same standard registration records, as well as qualification, platforms.367 We believe that requiring here would be consistent with and employment and complaint histories. intermediaries to conduct the checks reinforce the disclosure requirements 362 See NASAA Letter (stating that these types of and deny access to persons subject to and disqualification provisions checks and reviews are necessary to ensure bad disqualification satisfies the statutory actors are not permitted to raise money in lightly applicable to issuers and would provide regulated public offerings). Compare RocketHub requirement and achieves the investors with protections and Letter 1 (stating that intermediaries should query underlying goal of the provision, which additional comfort when making commonly-used databases for criminal background is to restrict the ability of certain parties investment decisions. At this time, we checks, bankruptcy filings and tax liens, as well as to use the exemption. We do not believe cross reference against the Department of Treasury’s believe that requiring these background (‘‘Treasury’’) Office of Foreign Asset Control it would be necessary to make publicly checks would be sufficient to meet the sanctions lists and Specially Designated Nationals available the results of the background aims of Section 4A(a)(5) without and Blocked Persons lists). imposing an undue burden, which 363 See CFIRA Letter 2 (stating that because there 366 For example, in conducting the background could in turn discourage the use of the is no mandated infrastructure that intermediaries checks on the officers and directors of an issuer, an are required to use, each intermediary should intermediary may learn that an officer or director exemption provided in Section 4(a)(6). utilize an infrastructure that incorporates some type misrepresented his or her experience or A number of commenters requested of fraud deterrence and fraud detection system, background. In this situation, an intermediary may whether proprietary or licensed through a third determine that the misrepresentation was guidance on the acceptable scope of party; that, in order to deter fraud, funding portals intentional or material (e.g., it was not the result of background and securities enforcement should have a video interface ‘‘whereby each issuer an inadvertent clerical error) and is an indication regulatory history checks that an is required to give a short presentation on their that an offering by the issuer would present intermediary would be required to business which is capable of being viewed live and potential for fraud or otherwise raises concerns saved for later viewing at any time by a potential regarding investor protection. The intermediary investor;’’ and that in terms of detecting fraud, we would then be required to deny access to its 358 See proposed Rule 301(c) of Regulation should require intermediaries to build certain fraud platform to the issuer. Crowdfunding. detection systems into the functionality of their 367 See Arctic Island Letter; The Motley Fool 359 See proposed Rules 201 and 503 of Regulation platforms). Letter (stating the information should be displayed Crowdfunding, as well as the discussion in Section 364 See id. insofar as it bears on the honesty of the individual II.B.1 above and Section II.E.6 below. 365 See NSBA Letter; Arctic Island Letter. checked).
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checks, especially as such a requirement Request for Comment background and securities enforcement could add to the cost of administration 128. We are not proposing to require regulatory history check aimed at and could expose the individuals in that an issuer relying on Section 4(a)(6) determining whether an issuer or any of question to harm, for example, if there engage a transfer agent due, in part, to its officers, directors (or any person were errors in the information made the potential costs we believe such a occupying a similar status or performing publicly available. Therefore, we are not requirement would impose on issuers. a similar function) or 20 Percent proposing to require intermediaries to What would be the potential benefits Beneficial Owners is subject to a make publicly available the results of and costs associated with having a disqualification, presents potential for background checks. Other commenters regulated transfer agent for small fraud or otherwise raises concerns suggested creating an online database of issuers? Are there other less costly regarding investor protection. Is this securities law violators,368 or otherwise means by which an issuer could rely on approach appropriate? Why or why not? making certain information available so a qualified third party to assist with the If not, why not? Would another that investors could conduct their own recordkeeping related to its securities? approach be more appropriate? Why or background checks on officers and 129. The proposed rules incorporate a why not? directors of an issuer,369 which could ‘‘reasonable basis’’ standard for 132. Should we require intermediaries help lower costs on intermediaries and, intermediaries to determine whether to make the results of the proposed indirectly, on issuers, associated with issuers comply with the requirements in background checks publicly available? conducting an offering pursuant to Securities Act Section 4A(b) and the Why or why not? Would doing so raise Section 4(a)(6). We are not persuaded at related requirements of Regulation privacy concerns? this time that the administrative costs of Crowdfunding, as well as for satisfying 133. Should we specify the steps that posting the information, which the the requirement that the issuer has an intermediary must take in obtaining intermediary might not be able to verify, established means to keep accurate background and securities enforcement would be justified. records of the holders of the securities regulatory history checks on the issuer Some commenters expressed concern it would offer and sell through the its and its officers, directors (or any person over the costs and burdens associated platform.374 Is a ‘‘reasonable basis’’ the occupying a similar status or performing with conducting background and appropriate standard for intermediaries a similar function) and 20 Percent securities enforcement regulatory making such determinations? Why or Beneficial Owners? Should we require, history checks.370 One commenter why not? Is it appropriate for one for example, an intermediary to check stated that it is important to control the determination but not the other? If so, publicly-available databases, such as expense of background checks to avoid please explain which one and why. FINRA’s BrokerCheck and the making the cost of raising capital What other standard would be more Commission’s Investment Adviser prohibitive to the issuer.371 While we appropriate, and why? What Public Disclosure program? Why or why are mindful of the costs associated with circumstances in the crowdfunding not? Are there third parties who would conducting these checks, the statutory context should not be considered to be in a position to provide these types requirement is clear. To help mitigate constitute a reasonable basis? Should of services? Please discuss. 134. Should we require intermediaries the costs, however, the proposed rules we permit an intermediary to reasonably to conduct specific checks or other steps provide intermediaries with flexibility rely on the representation of an issuer (such as a review of credit reports, in how they would meet this with respect to one or both verification of necessary business or requirement, while still helping to determinations? professional licenses, evidence of reduce the risk of fraud. 130. The proposed rules incorporate a We anticipate that an intermediary ‘‘reasonable basis’’ standard for corporate good standing, Uniform Commercial Code checks or a CRD may use the services of a third party to intermediaries to determine whether an snapshot report)? Why or why not? gather the information to conduct the issuer would be subject to a Separately, should we specify a required background and regulatory disqualification. In contrast, there is no minimum or baseline level of due checks on issuers and their control reasonableness standard for diligence to help establish a reasonable persons.372 The intermediary, of course, intermediaries’ requirement under the basis? Why or why not? If so, what would remain responsible for proposed rules to deny access to an should that level include? For instance, compliance with the requirements of issuer if it believes the issuer or the should it include a review or a Section 4A(a)(5) and proposed Rule offering presents potential for fraud or verification of certain publicly available 301(c).373 otherwise raises concerns regarding information about an issuer and its investor protection. Is it appropriate to officers, directors (or any person 368 See CrowdFund Connect Letter. have these two different standards occupying a similar status or performing 369 See Cera Technology Letter. under the proposed rules? Why or why 370 a similar function) and 20 Percent See CrowdFund Connect Letter; Cera not? If one of these standards is not Technology Letter; Schwartz Letter (stating that the Beneficial Owners? Should it include Commission should not add to the costs of appropriate, please explain what would searches related or tailored to their background and securities enforcement regulatory be a more appropriate standard and location or place of incorporation, assets history checks by tacking on additional antifraud why. including real property and liens on measures). 131. The proposed rules would 371 those assets? Are there items it should See CrowdFund Connect Letter (further stating implement Section 4A(a)(5) by requiring that the requirement should be worded in a way ‘‘as or should not include? Please explain. to be compatible with the numerous online sites the intermediary to conduct a 135. Are there resources available to that currently provide criminal background checks an intermediary that enable it to collect and that only felonies be reported’’). the meaning of the term associated person of a 372 See discussion in Sections III.B.4 and IV.C broker or dealer in Exchange Act Section 3(a)(18) the information necessary for making a below. (15 U.S.C. 78c(a)(18)). See also National Association determination regarding disqualification 373 An intermediary should investigate and of Securities Dealers (‘‘NASD’’ n/k/a FINRA), or the potential for fraud or potential understand the procedures used by the third party Outsourcing, Notice to Members 05–48 (July 2005), concerns as to investor protection? If so, to determine the reasonableness of the reliance on available at http://www.finra.org/Industry/ a third party. Furthermore, depending on how an Regulation/Notices/2005/p014736. which resources? Are there aspects of arrangement is structured or the services provided, 374 See proposed Rule 301(a) of Regulation the proposed issuer disqualification rule a third-party service provider could come within Crowdfunding. that would make it difficult for an
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intermediary to assess whether the require that investors consent to proposed rules, offerings made in issuer is subject to a disqualification? If electronic delivery.377 reliance on Section 4(a)(6) would be so, please explain. Are there additional The proposed rules also would ‘‘electronic-only,’’ such that all events or factors relevant to reducing require an intermediary to provide all information to be provided by the risk of fraud that intermediaries information it is required to provide intermediaries must be provided should be required to check? Please under Subpart C, such as educational electronically, and investors would be explain. materials, notices and confirmations, permitted to participate only if they 136. Section 4A(a)(5) authorizes the through electronic means.378 We also agree to accept electronic delivery of all Commission to specify measures to propose to require that, unless documents in connection with the reduce the risk of fraud, in addition to otherwise permitted, an intermediary offering.380 must provide the information through background checks. Are there other Request for Comment risks of fraud which are not an electronic message that contains the contemplated by the proposed rules? information, through an electronic 138. Should we specify the types of Are there any additional measures that message that includes a specific link to information that an intermediary must we should specifically require? Please the information as posted on the obtain from an investor as part of the discuss any suggested measures, and intermediary’s platform, or through an account-opening process? If so, what explain. For example, should we require electronic message that provides notice information and why? How would this intermediaries to monitor investment of what the information is and that it is information differ from what commitments and cancellations or take located on the intermediary’s platform intermediaries would be required to any other actions to detect potential or on the issuer’s Web site. The obtain to fulfill their anti-money 381 attempts to promote an issuer’s proposed rules would state that laundering obligations? securities? If so, which actions and electronic messages include, but are not 139. Should we permit any exceptions why? limited to, email messages. According to to the proposed requirements to obtain consent to electronic delivery? If so, 137. Should the intermediary be the proposed rule, for example, in why and under what circumstances? If required to report to the Commission (or complying with requirements to provide an investor does not receive materials another agency) issuers that are denied notices to investors under proposed electronically, how would he or she be access? Why or why not? Rule 304(b), the intermediary must provide those notices electronically to able to participate fully in an offering 4. Account Opening investors, such as through an email made in reliance on Section 4(a)(6)? 140. Are there any other means of Under the proposed rules, an investor message containing or attaching the notice. With respect to the provision of providing information electronically by seeking to invest in an offering an intermediary that are not covered in conducted in reliance on Section 4(a)(6) issuer materials as required under proposed Rule 303(a), however, the the proposed rules but that should be would need to open an account with an covered? Are there any means proposed intermediary and provide consent to proposed rule specifies that the intermediary must make the information to be included that should be eliminated electronic delivery of materials. The or modified? If so, what means are they? intermediary also would be required to publicly available on its platform. Therefore, the intermediary would only For example, should intermediaries be deliver to the investor educational permitted to post information in an materials, as discussed below. need to post the information on its platform in a manner complying with investor’s account on its platform, a. Accounts and Electronic Delivery proposed Rule 303(a) and would not be without sending a notification that it is required to send any electronic posted there? Why or why not? Should The proposed rules would prohibit an different types of information be intermediary or its associated persons messages with regard to its posting. We believe that requiring consent to required to be provided through from accepting an investment electronic delivery of documents different means? Please explain. commitment unless the investor has relating to the offering, and requiring opened an account with the b. Educational Materials that intermediaries provide information intermediary and the intermediary has electronically, would facilitate the Section 4A(a)(3) states that an obtained from the investor consent to ability of the investor, intermediary and intermediary must ‘‘provide such electronic delivery of materials.375 We issuer to comply with, and act in a disclosures, including disclosures are not proposing to specify any timely manner, with respect to certain related to risks and other investor particular type or form of information proposed requirements of Regulation education materials, as the Commission that an intermediary must obtain from Crowdfunding (such as the requirement shall, by rule, determine appropriate,’’ an investor in order to open an account; for investors to reconfirm investment but it does not elaborate on the scope of however, we anticipate that at a commitments within five business days minimum the intermediary would of receiving notice of material rather, the intermediary would need to deliver the obtain basic identifying and contact notice or material to the investor, such as by email changes).379 As such, under the information, such as full name, physical or other electronic delivery methods. See Use of 376 Electronic Media, note 60 at 25853 (discussing the address and email address. Because 377 See Use of Electronic Media, note 60 (citing ‘‘access equals delivery’’ concept). we believe that Congress contemplated Use of Electronic Media for Delivery Purposes, 380 See proposed Rule 100(a)(3) of Regulation that crowdfunding would, by its very Release No. 34–36345 (Oct. 6, 1995) [60 FR 53548, Crowdfunding. See also discussion in Section II.A.4 nature, occur exclusively through 53454 (Oct. 13, 1995)]). above, particularly the text accompanying note 55, electronic media, the proposed rules 378 See proposed Rule 302(a)(2) of Regulation regarding the requirement that crowdfunding Crowdfunding. transactions made in reliance on Section 4(a)(6) be 379 See discussion in Section II.C.6 below and conducted exclusively through an intermediary’s 375 See proposed Rule 302(a)(1) of Regulation proposed Rule 304(c) of Regulation Crowdfunding. platform. See also Use of Electronic Media, note 60 Crowdfunding. We also note that, to the extent intermediaries are (citing Use of Electronic Media for Delivery 376 Intermediaries also are subject to anti-money required to provide notices or other material to Purposes, Release No. 34–36345 [60 FR 53548, laundering obligations, including those relating to investors, it would not be sufficient for the 53454 (Oct. 13, 1995)]). customer identification. See discussion in Section intermediary simply to make the notice or material 381 See Section II.D.4.b below for a discussion of II.D.4 below regarding proposed Rule 403(b) of available for investors to access, such as by posting the anti-money laundering provisions applicable to Regulation Crowdfunding. it on its platform or through social media sites; intermediaries.
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this requirement. As described in information are basic terms, relevant to she complies with the investment limits further detail below, the proposed rules transactions conducted in reliance on after being presented with an would require the intermediary to Section 4(a)(6), of which all investors explanation of what those limits are, deliver to investors, at account opening, should be aware before making an how they apply and how they are educational materials that are in plain investment commitment. The calculated. language and otherwise designed to circumstances in which an investor can In addition, we are proposing to cancel an investment commitment and communicate effectively specified require that intermediaries provide, in obtain a return of his or her funds are information. Intermediaries also would the educational materials, a notice that be required to make the current version particularly important to an investor’s the intermediary may or may not of the educational materials available on understanding of the investment continue to have a relationship with the their platforms and to make revised process. Information on resale issuer following completion of the materials available to all investors restrictions could affect an investor’s offering.388 We believe that persons before accepting any additional decision to consider any offerings made opening an account with an investment commitments or effecting pursuant to Section 4(a)(6). any further transactions in securities We are proposing to require intermediary, for instance because they offered and sold in reliance on Section intermediaries to provide educational are interested in the offering of a 4(a)(6).382 material about the types of securities particular issuer, could mistakenly The proposed rules would require the available for purchase on their platforms assume that the intermediary will have materials to include: and the risks associated with each type an ongoing relationship with the issuer. • The process for the offer, purchase of security, including the risk of having Such persons also could assume that, and issuance of securities through the limited voting power as a result of following an offering conducted through intermediary; dilution.384 As one commenter noted, the intermediary’s platform through • the risks associated with investing some forms of securities may have which they purchased securities, the in securities offered and sold in reliance limited rights with respect to voting, intermediary would be the primary on Section 4(a)(6); input into management decisions or contact for investors wishing to obtain • the types of securities that may be redemption, among others, and also may information about, or wishing to offered on the intermediary’s platform be subject to dilution.385 Because we are communicate with, the issuer or and the risks associated with each type not restricting the types of securities wishing to participate in secondary of security, including the risk of having that an issuer may offer through Section trading of the issuer’s securities. limited voting power as a result of 4(a)(6) transactions, this requirement Because intermediaries may not dilution; would help investors understand the necessarily have an ongoing • the restrictions on the resale of various types of securities that could be relationship with the issuer following securities offered and sold in reliance available on the platform and their an offering, and funding portals would on Section 4(a)(6); associated risks. not be permitted to be involved in • the types of information that an We also are proposing to require secondary trading, we believe it would issuer is required to provide in annual intermediaries to provide educational be helpful to require intermediaries to reports, the frequency of the delivery of material regarding the limitation on the alert investors about this limitation the that information, and the possibility that amounts investors may invest pursuant time they open accounts. the issuer’s obligation to file annual to Section 4(a)(6)(B) and the proposed 386 One commenter suggested that the reports may terminate in the future; rules. We believe it is important that user experience for investors engaging • the limitations on the amounts investors are made aware of and investors may invest, as set forth in understand the limits to which they in crowdfunding transactions should be Section 4(a)(6)(B); would be subject, prior to making any a ‘‘painless process’’ and that investors • the circumstances in which the investment commitments. As noted should be subject to mandatory investor 389 issuer may cancel an investment above, we are proposing to permit education prior to investing. Another commitment; intermediaries to reasonably rely on commenter suggested that, in order to • the limitations on an investor’s investors’ representations concerning protect investors, intermediaries should right to cancel an investment compliance with the investment be required to provide a glossary commitment; limitation requirements.387 We believe explaining each type of security • the need for the investor to consider providing these educational materials available for purchase in each of the whether investing in a security offered should enhance the accuracy of investor offerings on its portal.390 We are and sold in reliance on Section 4(a)(6) representations, because an investor proposing to require intermediaries to is appropriate for him or her; and may be less likely to inadvertently make provide educational material about the • that following completion of an an inaccurate representation that he or types of securities available for purchase offering, there may or may not be any on their platforms and the risks ongoing relationship between the issuer 384 See proposed Rule 302(b)(1)(ii) of Regulation associated with each type of security; Crowdfunding. however, in order to provide and intermediary. 385 See Commonwealth of Massachusetts Letter The proposed disclosures relating to the (stating that the investor education materials and intermediaries with flexibility in how risks of investing in securities offered other disclosures should make clear to investors the they present or format this information, and sold in reliance on Section 4(a)(6), risks of their crowdfunding investments, including we are not proposing to require that it that investors may not have any meaningful voting be presented as a glossary. One investors’ cancellation rights, resale power as minority shareholders and that their restrictions and issuer reporting are investment may not be readily liquid). See also commenter suggested that a warning on generally drawn from the statutory 2012 SEC Government-Business Forum, note 29 the front page of an issuer’s offering 383 (recommending that certain investor education materials should suffice for the requirements. These items of materials, such as those relating to dilution, may need to be mandated by the Commission). 382 See proposed Rule 302(b) of Regulation 386 See proposed Rule 100(a)(2) of Regulation 388 See proposed Rule 302(b)(1)(viii) of Regulation Crowdfunding. Crowdfunding. Crowdfunding. 383 See Securities Act Sections 4A(a)(4), 4A(a)(7), 387 See proposed Rule 303(b)(1) of Regulation 389 See Vim Funding Letter. 4A(e), and 4A(b)(4). Crowdfunding. 390 See CFIRA Letter 2.
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purposes of Section 4A(a)(3).391 We do Because the proposed rules require 142. Should any of the proposed not believe that a disclaimer in isolation that the educational materials convey requirements be modified or deleted, would be sufficient information to the specified pieces of information and if so, which requirements and why? satisfy the statutory educational accurately, an intermediary would be 143. Should we prescribe the text or requirement.392 required to update these materials over content of educational materials for Other commenters requested that the time as, for instance, the types of intermediaries to use? Why or why not? Commission prepare and make available offerings on its platform change. For Should we provide models that investor educational material or model example, if an intermediary decides to intermediaries could use? Why or why text for use by intermediaries.393 Other expand the types of securities it offers not? commenters requested that the through its platform, the intermediary 144. Should we specifically prohibit Commission clarify whether educational would be required to update its certain types of electronic media from materials may be provided to investors educational materials. Similarly, an being used to communicate educational through electronic means, such as intermediary would be required to material? If so, which ones and why? through the Internet or email.394 One periodically review and update other 145. Should we require intermediaries commenter requested that aspects of its educational materials, to submit the educational materials to intermediaries be given ‘‘wide latitude’’ such as the discussion of risk factors, as us or FINRA (or other applicable to experiment with different methods of necessary. The proposed rules would national securities association) for investor education.395 We are not require an intermediary to keep its review? Why or why not? If we should proposing to require a particular format educational materials accurate and thus require submission of materials, should or manner of presentation, other than current, which would require it to make we require submission before or after the requirement that the materials be the most current version of its use, when they are first used, when the provided electronically.396 Rather than educational materials available on its intermediary changes them or at some requiring specific text or a particular platform. In addition, to the extent an other point(s) in time? Please explain. format or presentation, we believe that intermediary makes a material revision 146. Should we require intermediaries the better approach is to provide each to its educational materials, it would be to provide educational material at intermediary with sufficient flexibility required to make the revised additional or different specified points to prepare educational materials in a educational materials available to all in time, rather than only when the manner reasonably designed to provide investors before accepting any investor begins to open an account or the required information, based on the investment commitments.399 We believe make an investment commitment? Why types of offerings on the intermediary’s that this requirement is consistent with or why not? If so, why would that be platform and the types of investors the Internet-based nature of preferable to requiring updates on an as- drawn to its platform.397 Under the crowdfunding. We also believe that this needed basis? For example, should proposed rules, the educational requirement would benefit investors, by educational material be provided on a materials may be in any electronic helping to ensure that they have quarterly, semi-annual, or annual basis? format, including electronic and video information about key aspects of Should this material be provided again format, that the intermediary determines investing through the intermediary’s to investors who have not logged onto is effective in communicating the platform that may have changed since or accessed an intermediary’s platform contents of the educational material.398 the last time they received the materials, for a specified period of time? Why or prior to making investment why not? If so, what should that period 391 See InitialCrowdOffering Letter (stating that commitments, as those key aspects of time be? the following type of language should be used: ‘‘you could influence their investment should purchase these shares only if you can afford c. Promoters a complete loss of your investment’’). decisions. Because these materials must 392 See also discussion in Section II.C.5.b below be accurate, and thereby current, a Section 4A(b)(3) provides that an and proposed Rule 303(b)(2)(i) of Regulation change in the types of offerings issuer shall ‘‘not compensate or commit Crowdfunding. conducted on an intermediary’s to compensate, directly or indirectly, 393 See, e.g., NASAA Letter (providing model any person to promote its offerings language for use in investor education material and platform would trigger an update. We recommending that the material state that: (1) believe requiring intermediaries to through communication channels Investments in small businesses and start-up provide updated material on this basis, provided by a broker or funding portal, companies are often risky; (2) according to the U.S. rather than at any regular intervals, without taking such steps as the Small Business Administration, half of all new Commission shall, by rule, require to businesses fail within five years; (3) because of should help to minimize the ongoing these risks, investors should only invest if they can burden on intermediaries. ensure that such person clearly afford to lose the entire investment; and (4) an discloses the receipt, past or Request for Comment investor should not invest if the investor has an prospective, of such compensation, immediate need for the return of the funds). See 141. Is the scope of information upon each instance of such promotional also Tri Valley Law Letter; NSBA Letter. But see 2012 SEC Government-Business Forum, note 29 proposed to be required in an communication.’’ As discussed above, (recommending that while some investor education intermediary’s educational materials the proposed rules would include this materials may need to be mandated by the appropriate? Why or why not? Is there prohibition.400 Commission, the industry should work together to other information that we should We also propose to require the standardize educational materials). require an intermediary to provide as 394 See RocketHub Letter 1; Spinrad Letter 1. intermediary to inform investors, at the 395 See Schwartz Letter. part of the educational materials? If so, account opening stage, that any person 396 See proposed Rule 302(a)(2) of Regulation what information and why? who promotes an issuer’s offering for Crowdfunding and discussion in Section II.C.4.a compensation, whether past or above. require that an intermediary obtain an investor’s prospective, or who is a founder or an 397 See 2012 SEC Government-Business Forum, consent to such electronic delivery. employee of an issuer that engages in note 29 (recommending that the market for 399 Pursuant to proposed Rule 303(b)(2)(i) of transactions in reliance on Section 4(a)(6) should be Regulation Crowdfunding, the intermediary would promotional activities on behalf of the permitted to develop best practices wherever be required to obtain, from each investor, a possible). representation that the investor has reviewed these 400 See proposed Rule 205 of Regulation 398 As discussed in Section II.C.3 above, proposed educational materials before accepting an Crowdfunding and the discussion in Section II.B.5 Rule 302(a) of Regulation Crowdfunding would investment commitment from the investor. above.
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issuer on the intermediary’s platform, issuer’s offering, or who is a founder or there is some information about must clearly disclose in all an employee of an issuer that engages in investors which might not be required communications on the platform the promotional activities on behalf of the to be collected but which, without receipt of the compensation and the fact issuer on the intermediary’s platform. involving disclosure of any personally that he or she is engaging in Should the obligations apply to other identifiable information of investors, promotional activities on behalf of the classes of persons as well, such as could help us and the applicable issuer.401 We believe that requiring affiliates of the issuer, regardless of national securities association to better intermediaries to inform investors about whether they are engaged in understand the level of investor these disclosure obligations at the outset promotional activities? Why or why sophistication in this market and of their relationship should help to not? investor protection needs, among other ensure and monitor issuers’ compliance d. Compensation Disclosure things. For instance, connecting certain with Section 4A(b)(3) and the proposed demographic information to offering rules, as it would alert investors that The proposed rules would require the characteristics and outcomes could help information about the participation of intermediary, when establishing an in the evaluation of the effectiveness of issuers or representatives of issuers account for an investor, to clearly crowdfunding in raising capital for would have to be disclosed at a later disclose the manner in which it will be startups and small businesses. The time. Promoters also would need to compensated in connection with information that could be collected disclose this information 402 each time offerings and sales of securities made in includes, for example, demographic they post a comment in the reliance on Section 4(a)(6).404 This information about investors that communication channels on the requirement would help to ensure excludes any personally identifiable platform.403 investors are aware of any potential information and is aggregated on a per conflicts of interest of an intermediary Request for Comment offering basis, indicating characteristics that arise from the manner in which the such as education level, income, wealth, 147. Should the proposed rules intermediary is compensated. While the geographic distance from the issuer and require intermediaries to take any JOBS Act does not require this professional affiliations. At the same different or additional steps to help disclosure, we believe that providing time, we recognize that requiring the achieve compliance with the this information to investors before they collection of this data could likely requirement for promoters to disclose invest would help to ensure that they increase the burden on investors and the receipt of compensation? If so, what are making informed investment intermediaries participating in other steps would be appropriate and decisions.405 transactions conducted pursuant to why? Section 4(a)(6). Should we require 148. Should the proposed disclosures Request for Comment intermediaries to collect and provide to investors be required to be made at 150. Is the requirement for an some or all of this information to us and some time other than at account intermediary to disclose how it is the applicable national securities opening? For instance, should the compensated an appropriate association? Should some or all of this reminder about disclosure obligations requirement? Why or why not? Would information be made more widely be made each time an investor accesses a time other than at account opening be available? Why or why not? If so, which the intermediary’s platform or the more appropriate for this disclosure? metrics should we require, and in what communication channels provided by Please explain. format, if any, should we require it be the intermediary? Why or why not? 151. Should the proposed rules provided? To what extent do brokers 149. The proposed rules would include any additional requirements already collect this information for require disclosure be made to investors, with regard to disclosure of offerings in which they are involved? Is in relation to obligations of any person compensation? If so, what other there a particular point in time or who receives compensation, whether in requirements would be appropriate and method that would be more appropriate the past or prospectively, to promote an why? 152. While the proposed rules do not or convenient for intermediaries to collect this information? Would a 401 See proposed Rule 302(c) of Regulation specify the types of information that an Crowdfunding. intermediary must obtain from an requirement for intermediaries to collect 402 In addition to the information proposed Rule investor at the account opening stage, this information at the account opening 302(c) requires, promoters would also be required we recognize that this stage provides an stage discourage investors from opening to disclose the amount of compensation pursuant to accounts with intermediaries, and Section 17(b) of the Securities Act (15 U.S.C. opportunity for intermediaries to collect 77q(b)). certain demographic information about ultimately limit the ability of issuers to 403 See proposed Rule 303(c)(4) of Regulation investors. Although some information raise capital in reliance on the Crowdfunding. We recognize that after opening an intermediaries would collect from exemption in Section 4(a)(6)? Please account, an investor may come to be compensated explain. by, or become an employee of, an issuer or potential investors might already be required issuer. For this reason, proposed Rule 303(c)(4) under their anti-money laundering 5. Requirements With Respect to would require an intermediary to require that any obligations or pursuant to registered Transactions person, when posting a comment in the national securities association rules, communication channels, clearly disclose with a. Issuer Information each posting whether he or she is a founder or an employee of an issuer engaging in promotional 404 See proposed Rule 302(d) of Regulation Section 4A(a)(6) requires each activities on behalf of the issuer, or receives Crowdfunding. See also proposed Rule 303(f) of intermediary to make available to the compensation, whether in the past or prospectively, Regulation Crowdfunding. Commission and potential investors, not to promote an issuer’s offering. We anticipate that 405 See Staff of the U.S. Securities and Exchange an intermediary could comply with this Commission, Study on Investment Advisers and later than 21 days prior to the first day requirement in part by, for example, establishing a Broker-Dealers: As Required by Section 913 of the on which securities are sold to any ‘‘pop-up’’ window which reminds the investor of Dodd-Frank Wall Street Reform and Consumer investor (or such other period as the the requirement each time the investor accesses, or Protection Act (Jan. 2011) (‘‘Study on Investment Commission may establish), any attempts to post a comment on, the communication Advisers and Broker-Dealers’’), available at http:// channels on the intermediary’s platform. See www.sec.gov/news/studies/2011/913studyfinal.pdf, information provided by the issuer discussion in Section II.C.5 below. See also for more information about how compensation pursuant to Section 4A(b). The proposed Rule 205 of Regulation Crowdfunding. disclosure impacts investment decisions. proposed rules would implement this
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provision by requiring each him or her.410 Finally, we do not believe benefits associated with any such intermediary in a transaction involving that any person should be required to requirement? the offer or sale of securities in reliance open an account with, or otherwise 154. Section 4A(a)(6) requires an on Section 4(a)(6) to make available to provide personal information to, an intermediary to make available the the Commission and to potential intermediary before reviewing the information that an issuer is required to investors any information required to be materials related to an offering or the provide under Section 4A(b). Should we provided by the issuer under Rules 201 educational materials provided by the require an intermediary to make efforts and 203(a) of proposed Regulation intermediary. to ensure that an investor who has made Crowdfunding.406 The proposed rules One commenter expressed the view an investment commitment has actually would further require that: (1) An that an intermediary should not be reviewed the relevant issuer intermediary make this information required to send information to the information? Why or why not? If so, publicly available on the intermediary’s Commission before listing an offering on how could we implement this? platform, in a manner that reasonably its platform.411 The proposed rules 155. Instead of, or in addition to, permits a person accessing the platform would permit an intermediary to make requiring that intermediaries make to save, download or otherwise store the issuer information available to both the issuer information available on their information; 407 (2) this information be Commission and potential investors platforms, should we require that made publicly available on the simultaneously through its platform. intermediaries deliver this information intermediary’s platform for a minimum Another commenter recommended that to investors? Why or why not? If so, of 21 days before any securities are sold the private placement memorandum should we specify a particular medium, in the offering, during which time the provided by the issuer should be such as email or a screen the investor intermediary may accept investment reviewed by a properly qualified must click through? commitments; 408 and (3) this securities representative prior to the 156. Should we consider timeframes information, including any additional intermediary providing the information other than the minimum 21 days from information provided by the issuer,409 to potential investors.412 We are not the time an issuer offers securities on an remain publicly available on the proposing at this time to impose such a intermediary’s platform, during which intermediary’s platform until the offer requirement. Although review by a the offering information should be made and sale of securities is completed or securities professional could provide available? cancelled. An intermediary would be some degree of additional investor 157. Should some or all of the issuer’s prohibited from requiring any person to protection, we are mindful of Congress’ offering materials be required to remain establish an account with the intent that these offerings present a cost- on an intermediary’s platform after the intermediary in order to access this effective method of raising capital. close of an offering? Why or why not? information. Further, the proposed rules would If so, for how long? We believe that this approach also provide a safeguard for investors by would satisfy the requirement under requiring an intermediary to have a b. Investor Qualification Section 4A(d) for the Commission to reasonable basis for believing that an i. Compliance With Investment ‘‘make [available to the states], or . . . issuer complies with the requirements Limitations cause to be made [available] by the of Section 4A(b) and Regulation Section 4(a)(6)(B) imposes certain relevant broker or funding portal, the Crowdfunding, and to deny access to an limitations on the aggregate amount of information’’ issuers are required to issuer or cancel its offering, if the securities that can be sold to an investor provide under Section 4A(b) and the intermediary believes that the issuer or in reliance on Section 4(a)(6) during a rules thereunder. This approach should the offering presents the potential for 12-month period. Section 4A(a)(8) help investors, the Commission, FINRA fraud or otherwise raises concerns 413 further imposes an obligation on (and any other applicable registered regarding investor protection. intermediaries to ensure that no investor national securities association) and Request for Comment exceeds those limits. The proposed other interested parties, such as state 153. Should we require intermediaries rules would implement this latter regulators, to access information requirement by providing that, before without impediment. The proposed to continue to display issuer materials for some period of time after completion permitting an investor to make an rules should help to ensure that an investment commitment on its platform, investor has an adequate opportunity to of the offering? Why or why not? If such a requirement were used, which time an intermediary must have a reasonable evaluate the investment opportunity basis to believe that the investor and determine whether it is suitable for period would be appropriate? Why? What would be the potential costs and satisfies the investment limitations under Section 4(a)(6)(B) and Regulation 406 See proposed Rule 303(a) of Regulation 414 Crowdfunding. 410 See proposed Rule 303(a)(1) of Regulation Crowdfunding. 407 While we are not requiring that intermediaries Crowdfunding. See also proposed Rules 303(a)(2) Three commenters stated that it make the relevant information available in any and 303(a)(3) of Regulation Crowdfunding. would be difficult for an intermediary to particular format, we note that issuers would be Intermediaries have broad recordkeeping determine whether an investor has required to file the information on EDGAR. See obligations that would include any written exceeded the investment limitations proposed Rule 203 of Regulation Crowdfunding. materials that are used as part of an intermediary’s See also Section II.B.3 above for a discussion of the business, which include issuer materials made because an investor may not always use filing requirements applicable to issuers. available on its platform. Registered brokers would the same intermediary.415 Another 408 Accordingly, the offering could not close at have to maintain records pursuant to Exchange Act commenter stated that it is unclear how any time before the end of the 21st day after the Section 17 and the rules thereunder. 15 U.S.C. 78q; an intermediary will be able to verify issuer disclosure materials are made available on 17 CFR 240.17a et seq. Funding portals would be the intermediary’s platform. subject to the recordkeeping requirements of the investment limits, unless the 409 Additional information could include, for proposed Rule 406 of Regulation Crowdfunding. example, information required to be filed with the See discussion in Section II.D.5 below. 414 See proposed Rule 303(b)(1) of Regulation Commission in a specific format (e.g., on EDGAR) 411 See Crowdfunding Offerings Ltd. Letter 2. Crowdfunding. See also Section II.A.2 above for a under proposed Rules 201 and 203(a) of Regulation 412 See Arctic Island Letter. further discussion of the limitations on Crowdfunding, but prepared in a different 413 See proposed Rule 302 of Regulation investments. presentation format, for example on slides, on the Crowdfunding and discussion in Section II.C.3 415 See Cera Technology Letter; Crowdfunding intermediary’s platform. above. Offerings Letter 3; Schwartz Letter.
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intermediary is permitted to rely upon requirement by providing a function on certain educational materials in an investor’s representations regarding its platform that prompts investors to connection with the opening of an his or her prior crowdfunding enter amounts of their annual income, account.420 The proposed rules would investments.416 Another commenter net worth, and the amount of total further require an intermediary, each raised concerns that an investor may be investments made over the past 12 time before accepting an investment able to establish multiple user accounts months on all intermediaries’ platforms, commitment, to obtain from the investor with a single intermediary and thereby that would then generate the amount of a representation that the investor has exceed the maximum investment limit, investment the investor would be reviewed the intermediary’s educational despite the best efforts of the permitted to make at that time pursuant materials, understands that the entire intermediary.417 Another commenter to the investment limitations. The amount of his or her investment may be suggested that each intermediary should intermediary could not rely on an lost and is in a financial condition to be required to monitor investor activity investor’s representations if the bear the loss of the investment.421 The only on its own platform.418 The intermediary had reason to question the intermediary also must ensure each time commenter further stated that before reliability of the representation. In this before accepting an investment completing an investment through an regard, it would not be reasonable for an commitment that each investor answers intermediary, investors should be intermediary to ignore other questions demonstrating the investor’s required to make representations to an investments made by an investor in understanding that there are restrictions intermediary regarding any investments securities sold in reliance on Section on the investor’s ability to cancel an made through another intermediary 4(a)(6) through an account with that investment commitment 422 and obtain a within the last year. Another commenter intermediary or other information or return of his or her investment, that it suggested that the Commission should facts about an investor within its may be difficult for the investor to resell permit intermediaries to create and use possession. the securities, and that the investor a centralized database for aggregate should not invest any funds in a Request for Comment checks.419 crowdfunding offering unless he or she We recognize that it would be 158. Is the proposed approach for can afford to lose the entire amount of difficult for intermediaries to monitor or establishing compliance with his or her investment. independently verify whether each investment limits appropriate? Why or A commenter requested guidance on investor remains within his or her why not? Is there another approach that the steps intermediaries must take to investment limits for each particular we should consider? Please explain. ensure that an investor understands the offering in which he or she intends to 159. As mentioned above, we are educational materials intermediaries are participate. While the proposed rules proposing that an intermediary may rely required to provide.423 One commenter would permit reliance on a centralized on the representations of a potential expressed concern that the requirements database providing information about investor. Is this an appropriate in Section 4A(a)(4) could be particular investors, if it could help approach? Why or why not? Is there intimidating to potential investors and provide an intermediary with a another approach we should consider? recommended that we require very short reasonable basis for a conclusion, we Please explain. affirmations that could easily be understand that none currently exists. 160. Should we require an understood.424 Another commenter For these reasons, the proposed rules intermediary to avail itself of readily stated that the level of understanding provide that an intermediary may rely available information concerning that an investor can prove is too on an investor’s representations investor limits, such as a centralized concerning compliance with investment database containing information relating 420 See proposed Rule 302(b) of Regulation limitation requirements based on the to whether particular investors were in Crowdfunding and discussion in Section II.C.4.b investor’s annual income and net worth compliance with the investment limits, above. 421 should one become established? Why or See proposed Rule 303(b)(2) of Regulation and the amount of the investor’s other Crowdfunding. investments in securities sold in why not? 422 We proposed this requirement under reliance on Section 4(a)(6) through other 161. Should we require intermediaries discretionary authority granted in Section intermediaries. For example, an to request other intermediary accounts 4A(a)(4)(C)(iii). As discussed in Section II.C.4.b intermediary may choose to satisfy this that an investor may have before above, in relation to the educational materials, we believe that it is important for investors to receive accepting an investment commitment? this information before making any investment 416 See NSBA Letter. See also 2012 SEC Why or why not? commitments. Government-Business Forum, note 30 423 ii. Acknowledgement of Risk See CFIRA Letter 2. (recommending that investors should be permitted 424 See Cera Technology Letter (stating that a to self-certify as to their statutory investment limits Section 4A(a)(4) requires an check-the-box type approach could be used, as well and that funding portals should be permitted to rely intermediary to ensure that each as the following draft text: ‘‘I understand that I on certifications made by third parties as to could easily lose all of the money I invest in this investment limits). investor: (1) Reviews the educational company,’’ or ‘‘I understand that X% of start-ups in 417 See Grow VC Letter (stating that the materials discussed above; (2) positively this category fail’’). See also Liles Letter 2 (stating Commission should require the following measures: affirms that the investor understands that asking potential investors to take a test to ‘‘closely monitoring investment activity in any user that he or she is risking the loss of the demonstrate understanding of risks would be account; requiring each user account to provide unorthodox and awkward at best and that a signed unique bank account details which are not used by entire investment and that the investor acknowledgement by investors that they understand any other user account; and requiring the investor could bear such a loss; and (3) answer each enumerated warning about the specific risks to represent and warrant that such investor questions demonstrating an in the investment would suffice for compliance understands the maximum investment limit and understanding of the level of risk with the risk disclosure requirement); Verdant will not exceed such limits’’). Ventures Letter (stating that a check-the-box type of 418 See RocketHub Letter 1. generally applicable to investments in approach could be used on funding portal Web sites 419 See Spinrad Letter 1 (stating that the startups, emerging businesses and small to acknowledge the understanding of risk underlying database would consist of information issuers, the risk of illiquidity and such specifically for investors who are making low representing users, offerings, transactions and other other matters as the Commission investments of $100 to $500 and that the regulation elements of the market, and it would be used to levels should be adjusted proportionally to larger ensure that investors do not purchase beyond the determines appropriate. As discussed individual dollar investments, and therefore, low annual limits, even from multiple issuers across above, the proposed rules would require contribution amounts should be subject to less multiple intermediaries). an intermediary to provide to investors regulation).
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subjective to be useful and that an required under the proposed rules.430 design its own compliance program in intermediary could not design a system As one commenter suggested, an a manner that is effective for it in light to guarantee that an investor intermediary could design a multiple of its business model, types of offerings understands a disclosure.425 We agree choice quiz that would not permit an and any other relevant that it would not be possible for an investor to successfully make an considerations.434 intermediary to ensure that all investors investment commitment until the Request for Comment understand the risk disclosure. The investor has correctly answered a requirements of the proposed rules are specific number of questions.431 Other 162. Should we require intermediaries intended to require intermediaries to formats that could be used are questions to have investors acknowledge issuer- provide investors with meaningful that must be answered ‘‘Yes’’ or ‘‘No,’’ specific or security-specific risks as part disclosures concerning the risks of any or ‘‘True’’ or ‘‘False.’’ Any format used of the transaction process? Why or why potential investment and obtain answers must be reasonably designed to not? If so, to what extent? demonstrating an understanding of the demonstrate receipt and understanding 163. Are there considerations relating required statutory elements.426 The of the information. Thus, the to investor acknowledgments we should questionnaire required under the requirements of proposed Rule 303(b) take into account, other than those proposed rules should help to address would not be satisfied if, for example, discussed above? Is the proposed concerns of commenters that Section an intermediary were to pre-select requirement to obtain an 4A(a)(4) requires more than a mere self- answers for an investor. We propose to acknowledgement as to investors’ certification.427 give intermediaries flexibility in how understanding of their ability to cancel One commenter requested that the they fulfill this requirement because we investment commitments appropriate? Commission develop a model form of do not want to foreclose viable Why or why not? Should we require acknowledgment that intermediaries alternatives. There are many ways, acknowledgement of investors’ can use and retain to satisfy the especially on a web-based system, to understanding of any other matters? requirements of Section 4A(a)(4).428 convey information to, and obtain Why or why not? If so, which ones and Another commenter suggested that effective acknowledgement from, why? intermediaries should have flexibility to investors. 164. Are there any matters apart from try different methods of obtaining this The proposed rules would require an the risks identified above that we acknowledgement.429 We are not intermediary to obtain an investor should require to be addressed in the proposing a model form of representation and completed investor acknowledgements? If so, acknowledgement or questionnaire. questionnaire before accepting any which ones, and why? How should they Rather, the proposed rules would permit investment commitment. Accordingly, be addressed? an intermediary to develop the the intermediary would be required to 165. Should we provide a representation and questionnaire in any obtain these items each time an investor recommended form of questions and format that is reasonably designed to seeks to make an investment representations? Why or why not? If so, demonstrate the investor’s receipt of the commitment.432 This proposed should the Commission provide the information and compliance with the requirement is intended to help ensure form as a starting point, and not a safe other requirements under the proposed that investors engaging in transactions harbor, so that intermediaries can adapt rules. As with the educational material made in reliance on Section 4(a)(6) are the questions and representations to requirements, we believe that an fully informed and reminded of the particular offerings? Why or why not? intermediary’s familiarity with its risks associated with their particular c. Communication Channels business and likely investor base would investment before making any make it best able to determine the investment commitment. The proposed rules would require an format in which to present the material Another commenter suggested that intermediary to provide, on its platform, intermediaries should be required to channels through which investors can 425 See Crowdfunding Offerings Ltd. Letter 2. designate a key person who will bear communicate with one another and 426 See proposed Rule 303(b)(2) of Regulation the responsibility to ensure that all with representatives of the issuer about Crowdfunding. investors demonstrate an understanding offerings made available on the 427 See proposed Rule 303(b)(2)(ii) of Regulation of the level of risks applicable to intermediary’s platform, subject to Crowdfunding. See, e.g., Spinrad Letter 1; NASAA investments.433 We are not proposing certain conditions.435 While the JOBS Letter (stating that intermediaries ‘‘should [at a minimum] be required to design their web portals this requirement at this time. Although Act does not impose this requirement, to require investors to click through a page that Section 4A(a)(4) requires an we believe that Congress contemplated indicates they have read the investor-education intermediary to ensure that each that there would be such a mechanism information and to require investors to correctly investor positively affirms that he or she in place for offerings made in reliance answer a series of specific questions that are 436 controlled by the Commission,’’ and further stating understands the risks of investing in on Section 4(a)(6). Some commenters that such requirements should be a precondition for securities sold in reliance on Section membership or registration of an investor with a 4(a)(6), at this time, we believe that each 434 FINRA (or any other applicable registered funding portal); The Motley Fool Letter (stating that intermediary should have flexibility to national securities association) could seek to a more involved process than a simple check-the- impose a compliance structure that may require box type approach should be used to verify that such designation. Any proposed requirement by investors acknowledge and understand the risks 430 See proposed Rule 303(b)(2)(i) of Regulation FINRA (or any other applicable registered national and that multiple choice questions should be used Crowdfunding. securities association) would be filed with us and tailored to testing whether potential investors 431 See Spinrad Letter 1 (stating that if an investor pursuant to the Exchange Act and the rules understand the nature of crowdfunding risk, the were to answer a question incorrectly, an issuer thereunder. 17 CFR 240.19b–4. potential for fraud, their legal rights and could, for example, push the investor education 435 See proposed Rule 303(c) of Regulation responsibilities and the probability of losing their material to investors for further review, or Crowdfunding. entire investment). See also TechnologyCrowdFund alternatively could, through a pop-up feature, 436 See 158 Cong. Rec. S2231 (daily ed. Mar. 29, Letter 1 (stating that the Commission should require explain the correct answer and then permit the 2012) (statement of Sen. Scott Brown) (‘‘In addition each individual seeking to invest more than $2,000 investor to choose the right answer). See also note to facilitating communication between issuers and to take an on-line course with a quiz on the possible 427. investors, intermediaries should allow fellow pitfalls of crowdfunding). 432 See proposed Rule 303(b)(2) of Regulation investors to endorse or provide feedback about 428 See CompTIA Letter. Crowdfunding. issuers and offerings, provided that these investors 429 See Schwartz Letter. 433 See Commonwealth of Massachusetts Letter. Continued
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refer to communication channels as an example, a funding portal could in the communication channels to integral part of crowdfunding. For establish guidelines pertaining to the clearly and prominently disclose with example, one commenter suggested that length or size of individual postings in each posting whether he or she is a intermediaries should provide a the communication channels and could founder or an employee of an issuer mechanism for communication between remove postings that include offensive engaging in promotional activities on issuers and investors, without or incendiary language. Intermediaries behalf of the issuer, or is otherwise necessarily requiring the that are funding portals are prohibited compensated, whether in the past or communication itself to take place.437 from providing investment advice or prospectively, to promote the issuer’s Others have urged us to encourage recommendations. In contrast, offering. This disclosure would apply to dialogue among potential investors and intermediaries that are brokers may officers, directors and other issuers as a key component of the provide investment advice and representatives of the issuer, and also crowdfunding model, suggesting that it recommendations, subject to certain would be required of an intermediary would contribute to low levels of conditions.443 that is a broker or its associated persons. fraud.438 One commenter also The proposed rules would require the Although the statute requires issuers, maintained that there is value in intermediary to make the but not intermediaries, to disclose allowing interested parties generally, communications on the channels compensation to promoters of an such as experts and journalists, to publicly available for viewing. For offering, we believe that intermediaries, participate in these discussions, as well instance, an intermediary could not as the hosts of the communication as maintaining transparency regarding restrict viewing of the communications channels, would be well placed to take the identity of those participating in the to only those investors who have measures to ensure that promoters are discussions.439 opened accounts with it. We believe clearly identified in their The communication channels we are that this requirement is consistent with communication channels, in accordance proposing would provide a centralized the concept of crowdfunding, as it with Section 4A(b)(3).444 This and transparent means for members of provides transparent crowd discussions requirement would be consistent with the public that have opened an account about a potential investment Section 4A(b)(3), which requires issuers with an intermediary to share their opportunity. The proposed rule would, to take steps required by the views about investment opportunities however, require the intermediary to Commission and established by rule, to and to communicate with permit only those persons who have ensure disclosure of compensation or representatives of the issuer to better opened accounts with it to post promotional activity ‘‘upon each assess the issuer and investment comments. While we recognize that this instance of such promotional opportunity. Also, though requirement could narrow the range of communication.’’ communications among investors could views represented by excluding posts by occur outside the intermediary’s anyone who has not opened an account Request for Comment platform, communications by an with the intermediary, we believe that 166. Should we require intermediaries investor with a crowdfunding issuer or this proposed requirement would help to provide communication channels, as its representatives about the terms of the to establish accountability for comments proposed, on their platforms? Why or offering would be required to occur made in the communication channels. 440 why not? If not, what other methods of through these channels, on the single Among other things, the records communication could, or should, be platform through which the offering is required to be kept by intermediaries used and why? conducted.441 This requirement should should help to track the origins of any 167. Are the proposed conditions provide transparency and abusive or potentially fraudulent imposed on the requirement to provide accountability, and thereby further the comments made through the communication channels appropriate? protection of investors. communication channels. Without this Why or why not? For example, should Under the proposed rules, an measure, we believe there could be intermediary that is a funding portal the communications on the channels be greater risk of the communications available for public viewing or would be prohibited from participating including unfounded, potentially in any communications in these participation? Why or why not? What abusive, biased statements aimed other restrictions, if any, should channels, apart from establishing unjustifiably to promote or discredit the guidelines for communication and communication channels be subject to, issuer and improperly influence the and why? For example, should we removing abusive or potentially investment decisions of members of the fraudulent communications.442 For require more specific actions for crowd. intermediaries to take in order to ensure The proposed rules also would adequate disclosure of issuers’ and are not employees of the intermediary. Investors’ require any person posting a comment credentials should be included with their promoters’ communications? If so, what comments to aid the collective wisdom of the actions and why? 443 The Investment Advisers Act of 1940 excludes crowd.’’). 168. Under the proposed rules, we 437 See RocketHub Letter 1. from the definition of investment adviser any broker or dealer whose performance of investment limit the ability to post in the 438 See Mollick Letter, Lucas Letter. One advisory services is ‘‘solely incidental’’ to the commenter raised a concern about communications communication channels to only those conduct of its business as a broker or dealer and being construed as investment advice by funding persons who have opened accounts with who receives no ‘‘special compensation’’ for those portals. See Grow VC Letter. See also Section II.D.3 advisory services. See Advisers Act Section the intermediaries and thereby below for a discussion of the proposed safe harbor 202(a)(11)(C) [15 U.S.C. 80b–2(a)(11)(C)]. See also identified themselves to the for funding portals. Study on Investment Advisers and Broker-Dealers, 439 intermediaries. Is this restriction See Mollick Letter. note 405 at 15–16 (discussing the terms used in this 440 adequate? Why or why not? Would it be See proposed Rule 204 of Regulation exclusion). As such, brokers that are not registered Crowdfunding and discussion in Section II.B.4 as investment advisers are able to provide appropriate to permit anyone, including above. investment advice, provided they meet these two persons who have not identified 441 See proposed Rule 100(a)(3) of Regulation requirements. Subject to applicable rules, brokers themselves in any way, to post Crowdfunding and discussion in Section II.A.3 also can make recommendations concerning comments in intermediaries’ above. securities, if they have a reasonable basis to believe 442 See proposed Rule 303(c) of Regulation that the recommendations are suitable. See, e.g., Crowdfunding. FINRA Rule 2111 (‘‘Suitability’’). 444 See discussion in Section II.B.5 above.
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communication channels? Why or why investors? Why or why not? Should we The proposed rules would establish not? provide further specificity as to when separate requirements for an 169. The proposed rules would notice must be provided? intermediary that is a funding portal.451 require any person posting a comment 172. Are there any other Because a funding portal cannot receive in the communication channels to circumstances under which an investor any funds, it would be required to direct disclose with each posting whether he should receive a notice? If so, under investors to transmit money or other or she is a founder or an employee of what other circumstances? consideration directly to a qualified 452 an issuer engaging in promotional e. Maintenance and Transmission of third party that has agreed in writing activities on behalf of the issuer, or is Funds to hold the funds for the benefit of the otherwise compensated, whether in the investors and the issuer and to promptly past or prospectively, to promote the Securities Act Section 4A(a)(7) transmit or return the funds to the issuer’s offering. Should we impose this requires that an intermediary ‘‘ensure persons entitled to such funds.453 The requirement on other types of persons as that all offering proceeds are only proposed rules would define ‘‘qualified well, such as affiliates of the issuer, provided to the issuer when the third party’’ to mean a bank 454 that has regardless of whether they are engaging aggregate capital raised from all agreed in writing either (i) to hold the in promotional activities? Why or why investors is equal to or greater than a funds in escrow for the persons who not? target offering amount, . . . as the have the beneficial interests in the funds 170. Should we require the Commission shall, by rule, determine and to transmit or return the funds intermediary to maintain the appropriate.’’ The proposed rules would directly to the persons entitled to them communication channels of its platform implement this provision and address when the appropriate event or during the post-offering period, in order the maintenance and protection of contingency has occurred; or (ii) to to permit communication between investor funds, pending completion of a establish a bank account (or accounts) investors and the issuer after the transaction made in reliance on Section 447 for the exclusive benefit of investors and offering has completed? Why or why 4(a)(6). the issuer. We have chosen to specify The proposed rules would require an not? If so, for how long after the offering that the qualified third party would be intermediary that is a registered broker is completed (e.g., for one month, for six a bank because investors, as well as to comply with established months, for one year, or longer) should intermediaries and issuers, would then requirements in Exchange Act Rule the intermediary be required to be afforded the protections of existing 15c2–4 448 for the maintenance and maintain the channels? regulations that apply to banks, in transmission of investor funds.449 particular those pertaining to the d. Notice of Investment Commitment Application of Exchange Act Rule 15c2– safeguarding of customer funds.455 4(b) to an intermediary that is a broker The proposed rules would require an The proposed rules also would in the crowdfunding context, would intermediary, upon receipt of an require an intermediary that is a funding require, in relevant part, that money or investment commitment from an portal to promptly direct transmission other consideration received is investor, to promptly give or send to the of funds from the qualified third party promptly deposited in a separate bank investor a notification disclosing: (1) to the issuer when the aggregate amount account, as agent or trustee for the The dollar amount of the investment of investment commitments from all persons who have the beneficial interest commitment; (2) the price of the investors is equal to or greater than the therein, until the appropriate event or securities, if known; (3) the name of the target amount of the offering and the contingency has occurred, and then the issuer; and (4) the date and time by cancellation period for each investor has funds would be promptly transmitted or which the investor may cancel the expired,456 but no earlier than 21 days returned to the persons entitled thereto; investment commitment.445 This after the date on which the intermediary or all such funds would be promptly notification would be required to be makes publicly available on its platform transmitted to a bank, which has agreed provided by email or other electronic the information required to be provided in writing to hold such funds in escrow media, and to be documented in by the issuer such as information about for the persons who have the beneficial accordance with applicable the issuer and the offering pursuant to interests therein and to transmit or recordkeeping rules.446 The proposed Rules 201 and 203(a) of proposed return such funds directly to the notification is intended, among other Regulation Crowdfunding.457 We persons entitled thereto when the things, to provide the investor with a believe that this approach is consistent written record of the basic terms of the appropriate event or contingency has occurred. Under Section 4A(a)(7), transaction, as well as a reminder 451 See proposed Rule 303(e)(2) of Regulation regarding his or her ability to cancel the proceeds are to be transmitted to the Crowdfunding. investment commitment. issuer only if the target offering amount 452 This written agreement would be required to is met or exceeded. As explained in the be maintained by the funding portal pursuant to Request for Comment adopting release to Rule 15c2–4, this proposed Rule 404 of Regulation Crowdfunding. rule was designed to prevent fraud See discussion in Section II.D.5 below. 171. Would the notifications we are 453 In the crowdfunding context, it is expected proposing to require be useful to ‘‘either upon the person on whose that the intermediary would be making the behalf the distribution is being made or determination as to whether the contingency, i.e., 445 See proposed Rule 303(d) of Regulation upon the customer to whom the the target offering amount, has been met. Crowdfunding. The statutory requirements for payment is to be returned if the 454 See Exchange Act Section 3(a)(6) [15 U.S.C. intermediaries do not expressly address an distribution is not completed.’’ 450 78c(a)(6)] (defining ‘‘bank’’). intermediary’s obligation to notify an investor of 455 For example, protections afforded to bank receipt of the investor’s commitment, although the accounts include FDIC deposit insurance. See statutory provision provides us with authority to do 447 See proposed Rule 303(e) of Regulation Federal Deposit Insurance Corp., FDIC Deposit so in our rules. See Section 4A(a)(12). Crowdfunding. Insurance Coverage, http://www.fdic.gov/deposit/ 446 Intermediaries that are brokers would be 448 17 CFR 240.15c2–4. deposits/dis/. subject to the recordkeeping requirements of 449 See proposed Rule 303(e)(1) of Regulation 456 See Section II.C.6 below for a discussion of the Exchange Act Rules 17a–3 and 17a–4, and Crowdfunding. cancellation period. intermediaries that are funding portals would be 450 Adoption of Rule 15c2–4 under the Securities 457 See proposed Rule 303(e)(3)(i) of Regulation subject to recordkeeping requirements under Exchange Act of 1934, Release No. 34–6737 (Feb. Crowdfunding. See also Exchange Act Rule 10b–9 proposed Rule 404 of Regulation Crowdfunding. 21, 1962) [27 F.R. 2089 (Mar. 3, 1962)]. [17 CFR 240.10b–9].
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with the requirements in (1) Section limit or require a particular payment designed to create the appearance of a 4A(a)(7) providing for the transfer of mechanism, so as to provide both successful completion of the funds to an issuer when the issuer’s intermediaries and investors with offering.’’ 470 As we have said in other target offering amount has been met, (2) flexibility in the means of payment, but contexts, non-bona fide purchases Section 4A(a)(6) providing that issuer we note that under the statute and the would include ‘‘purchases by the issuer information be made available to proposed rules, an intermediary that is through nominee accounts or purchases investors for at least 21 days prior to the a funding portal may not hold, manage, by persons whom the issuer has agreed first day on which securities are sold in possess or otherwise handle investor to guarantee against loss.’’ 471 Although the offering, and (3) Section 4A(b)(1)(G) funds or securities.463 One commenter we are not restricting directors and providing that investors must be urged us not to permit the use of credit officers of an issuer from purchasing allowed a reasonable opportunity to cards to fund an investment because securities in an offering, we expect rescind their investment commitment. investors could claim charge-backs 464 intermediaries to scrutinize any Under our proposed rules, an after a security is sold.465 Two purchases by these individuals for ‘‘red intermediary could permit a minimum- commenters 466 advocated permitting flags,’’ such as repeated investment maximum offering, for example, in the use of credit cards for certain types commitments and cancellations, that which the minimum would serve as the of crowdfunding offerings, with one would indicate that the purchase was target offering amount.458 noting that this payment method designed to create an impression that The proposed rules also would involves customary Internet disclosures the offering has reached, or will reach, require an intermediary that is a funding on the part of the investor.467 Again, we its target amount.472 portal to promptly direct the return of are not proposing to limit payment Several commenters urged us to adopt funds to an investor when an mechanisms, but we note that an net capital standards for funding investment commitment has been intermediary could, in its discretion, portals.473 We are not proposing net cancelled (including when there has decline to accept certain payment capital standards for funding portals been a failure to obtain effective methods, such as credit cards, or accept primarily because they are prohibited reconfirmation when there has been a them only in certain circumstances.468 from handling, managing or possessing 459 material change). The proposed rules One commenter recommended that investor funds or securities. We believe also would require an intermediary that we prohibit purchases by an issuer or its that the requirements relating, in is a funding portal promptly to direct officers, directors, control persons and particular, to transmission of proceeds the return of funds to investors when an other affiliates from counting toward under the proposed rules would help 460 issuer does not complete an offering. meeting the target offering amount and ensure that investor funds are protected, This could occur if an issuer does not obtaining a release of the funds held in without requiring funding portals to 469 receive investment commitments that escrow. The commenter expressed maintain net capital. We are, however, meet its minimum target amount during concern that, without this prohibition, proposing to require funding portals to the offering period. There also may be issuers that are unable to attract obtain fidelity bonds, as discussed other circumstances in which an issuer sufficient interest from unaffiliated below.474 chooses to cancel its offering.461 investors could ‘‘game’’ the system by Some commenters suggested that accepting affiliated investor funds in an Request for Comment investors should be able to transmit offering that otherwise would have 173. Are the proposed requirements funds for an investment commitment failed. We believe that this commenter’s for fund maintenance and transmission through a mechanism such as those concern is reflected in the purpose and appropriate? Are there other types of provided by Automated Clearing House intent of the JOBS Act’s crowdfunding custody arrangements that we should (‘‘ACH’’), PayPal, Inc. or a linked bank provisions. In particular, we believe it specifically permit? Why or why not? If account.462 We are not proposing to would be contrary to the intent and so, what types of arrangements should purpose of the statute and the proposed we permit and how would they protect 458 In a minimum-maximum offering, a minimum rules to declare an offering ‘‘sold’’ on amount of securities must be sold within the investor funds? offering period in order for a contingency to be the basis of ‘‘non-bona fide sales 174. Should we prohibit any satisfied, and the amount of securities sold may not variations of a contingency offering, like exceed a pre-determined maximum. See Vim 463 See Exchange Act Section 3(a)(80)(D) [15 minimum-maximum offerings? Why or Funding Letter (suggesting that minimum and U.S.C. 78c(a)(80)(D)] and discussion in Section maximum offerings will allow issuers to focus on II.D.3 below. why not? Should we require that achieving ‘‘funding milestones’’ and the amount of 464 In the United States, credit card customers offerings made in reliance on Section funding they believe they need, while an ‘‘all or have charge reversal rights under Regulation Z (12 nothing’’ offering will likely incentivize issuers to CFR 226.13) of the Truth in Lending Act (15 U.S.C. 470 See Requirements of Rules 10b–9 and 15c2–4 seek smaller raises because of the possibility of 1666) and debit card holders are afforded such under the Securities Exchange Act of 1934 Relating failing at raising a larger amount). Compare rights under Regulation E (12 CFR 205.6) of the AppleSeedz Letter (stating that an ‘‘all or nothing’’ to Issuers, Underwriters and Broker-Dealers Electronic Fund Transfer Act (15 U.S.C. 1693(b)). offering would best protect investors). See also Engaged in an ‘‘All or None’’ Offering, Release No. 465 Section II.B.1.a.i(c) above for a discussion of the See RocketHub Letter 1. 34–11532, 7 SE.C. Docket 403, 1975 WL 163128, at issuer’s disclosure requirements about the use of 466 See City First Letter; RFPIA Letter 5. 1 (July 11, 1975). proceeds in a minimum-maximum offering. 467 See City First Letter. 471 Id. 459 See proposed Rule 303(e)(3)(ii) of Regulation 468 We note that an investor’s use of his or her 472 Intermediaries are required to cancel an Crowdfunding. right to dispute credit card charges could inhibit the offering if they believe the issuer or offering 460 See proposed Rule 303(e)(3)(iii) of Regulation ability of an issuer to meet its target or to provide presents the potential for fraud or otherwise raises Crowdfunding. accurate disclosures to investors and the concerns regarding investor protection. See 461 See proposed Rule 304(d) and discussion in Commission regarding the progress it has made proposed Rule 301(c)(2) of Regulation Section II.C.6 below regarding offerings that are not toward, and whether it has, reached the target Crowdfunding and discussion in Section II.C.3 completed. offering amount. This potential impact would affect above. 462 See Vim Funding Letter (stating that investors offerings conducted through brokers and funding 473 See, e.g., Risingtidefunding.com Letter (stating should be able to authorize an intermediary to save portals alike. We also note that pursuant to that capital standards should be limited); Arctic investor banking information, in much the same Exchange Act Section 3(a)(80)(D) (15 U.S.C. Island Letter (stating that funding portals should be way that consumers today can link a bank account 78c(a)(80)(D)), a funding portal would be statutorily required to maintain net capital that is at least to their online brokerage account); Arctic Island prohibited from extending credit or margin to equivalent to that of broker-dealers that handle Letter (stating that funds should be transferred only customers. customer funds). to a bank in the United States). 469 See NASAA Letter. 474 See discussion in Section II.D.1.c below.
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4(a)(6) be conducted on an ‘‘all-or-none’’ completion of a transaction made confirmation terms are similar to, but basis? Why or why not? pursuant to Section 4(a)(6), give or send not as extensive as, those under Rule 175. Instead of a requirement to to each investor a notification 10b–10. We believe that this difference transmit funds ‘‘promptly,’’ as disclosing: (1) The date of the is appropriate given the more limited proposed, should we establish fixed transaction; (2) the type of security that scope of an intermediary’s role in deadlines for transmission, such as the investor is purchasing; (3) the crowdfunding transactions. For three business days? Why or why not? identity, price and number of securities example, Rule 10b–10 requires 176. Should we expressly incorporate purchased by the investor, as well as the disclosure regarding such matters as into the rules prior Commission, SRO number of securities sold by the issuer payment for order flow,484 riskless and staff guidance regarding Exchange in the transaction and the price(s) at principal transactions,485 payment of Act Rule 15c2–4 on, among other things: which the securities were sold; (4) odd-lot differentials 486 and asset-backed (1) The meaning of the phrase certain specified terms of the security, if securities.487 These items generally ‘‘distribution’’; 475 (2) the meaning of it is a debt or callable security; and (5) would not be relevant to crowdfunding ‘‘prompt transmittal’’; 476 (3) the the source and amount of any securities transactions or an payment mechanics for escrow remuneration received or to be received intermediary’s participation in such arrangements; 477 (4) ‘‘receipt of offering by the intermediary in connection with transactions, and their inclusion in a proceeds’’ in the context of payment by the transaction, whether from the issuer crowdfunding securities confirmation check; 478 (5) ‘‘prompt deposit,’’ as it or from other persons.480 This may be confusing to investors. We applies to the use of segregated deposit notification would be required to be believe, therefore, that if an accounts; and (6) specifics as to who provided by email or other electronic intermediary satisfies the notification could act as the ‘‘agent or trustee’’ media, and to be documented in requirements of the proposed rules, the maintaining the segregated deposit accordance with applicable intermediary would have provided account? 479 Why or why not? Should recordkeeping rules.481 As the investors with sufficient relevant any other specific guidance regarding Commission has long stated, transaction information regarding the crowdfunding Rule 15c2–4 be explicitly incorporated confirmations serve an important and security, and so would not be required into the rules? Please explain. basic investor protection function by, to meet the additional requirements of 177. Should we expand the definition among other things, conveying Rule 10b–10. of ‘‘qualified third party’’ to include information and providing a reference Request for Comment entities other than a bank? Why or why document that allows investors to verify not? If so, which ones? Please explain the terms of their transactions, acting as 180. Are the proposed items of how other entities could adequately a safeguard against fraud and providing disclosure appropriate? Should we safeguard customers’ funds and investors a means by which to evaluate require more or less disclosure? Please securities? the costs of their transactions.482 Each of explain. Should the disclosure items 178. Should we require funding the transaction items of information differ from those in Rule 10b–10? Are portals to maintain a certain amount of proposed to be required is intended to there any proposed disclosures that net capital? Why or why not? If so, what assist investors in memorializing and should be modified or deleted? Why or would be an appropriate amount, and assessing their transactions. The why not? If so, what different items how should that amount be determined? requirement for an intermediary to should be included and why? Should 179. Should we require or prohibit disclose to an investor the source and the proposed notification requirements certain methods of payments for the amount of any remuneration received or purchase of securities under Section to be received should help to highlight Specifically, Rule 10b–10 requires the disclosure of 4(a)(6)? Why or why not? Are there any potential conflicts of interest the the date, time, identity, prices and number of securities bought or sold; the capacity in which the particular concerns raised by different intermediary may have. broker-dealer acted (e.g., as agent or principal); methods? Would it depend upon An intermediary that gives or sends to yields on debt securities; and under specified whether a broker-dealer or funding each investor the notification described circumstances, the amount of remuneration the portal is facilitating the transaction? above would be exempt from the broker-dealer will receive from the customer and any other parties. With regard to the specified Why or why not? requirements of Exchange Act Rule 10b– circumstances mentioned above, the remuneration 483 10 for the subject transaction. The disclosures of Rule 10b–10 generally are required, f. Confirmation of Transaction but certain exclusions apply. For example, the The proposed rules would require 480 See Proposed Rule 303(f)(1) of Regulation remuneration disclosures are generally required that an intermediary, at or before the Crowdfunding. The statutory requirements for where a broker or dealer is acting as agent for a intermediaries do not expressly address an customer or some other person. In the case where intermediary’s obligation to provide investors remuneration is received or to be received by the 475 See, e.g., Baikie & Alcantara, Inc., Release No. confirmation of a transaction, but the statute broker from such customer in connection with the 34–19410 (Jan. 6, 1983). See also Letter from Larry provides us with authority to do so in our rules. See transaction, the disclosures are not required where E. Bergmann, Assistant Director, Division of Market Section 4A(a)(12). the remuneration paid by such customer is Regulation, Securities and Exchange Commission to 481 Intermediaries that are brokers would be determined pursuant to written agreement with Linda A. Wertheimer, Chairman, Subcommittee on subject to the recordkeeping requirements of such customer, otherwise than on a transaction Partnerships, Trusts and Unincorporated Exchange Act Rules 17a–3 and 17a–4, and basis. 17 CFR 240.10b–10(a)(2)(i)(B). In contrast, the Associations, Federal Regulation of Securities intermediaries that are funding portals would be remuneration disclosures of proposed Rule Committee, American Bar Association (Oct. 16, subject to recordkeeping requirements under 303(f)(2)(vi) would be required across all 1984) (explaining that a ‘‘distribution’’ is any proposed Rule 404 of Regulation Crowdfunding. crowdfunding transactions where remunerations offering of securities, whether or not registered, that 482 See Confirmation of Transactions, Release No. are received or are to be received. Given the ‘‘is distinguished from ordinary trading transactions 34–34962 (Nov. 10, 1994) [59 FR 59612, 59613 limitations on the dollar amount of securities that by the magnitude of the offering and the presence (Nov. 17, 1994)]. could be offered, as well as the limits on individual of special selling efforts and selling methods.’’). investment amounts, in transactions relying on 483 See proposed Rule 303(f)(2) of Regulation 476 Section 4(a)(6), we would not expect investors or See NASD (n/k/a FINRA), Notice to Members Crowdfunding. Exchange Act Rule 10b–10 (17 CFR potential investors to negotiate individualized 84–64 (Nov. 26, 1984). See also NASD, Notice to 240.10b–10) generally requires a broker-dealer compensation agreements. Members 84–7 (Jan. 30, 1984). effecting a customer transaction in securities (other 484 477 Id. than U.S. savings bonds or municipal securities) to 17 CFR 240.10b–10(a)(2)(i)(C). 478 See NASD (n/k/a FINRA), Notice to Members provide a notification to its customer, at or before 485 17 CFR 240.10b–10(a)(2)(ii). 94–7 (Jan. 24, 1994). completion of a securities transaction, that discloses 486 17 CFR 240.10b–10(a)(3). 479 Id. certain information specific to the transaction. 487 17 CFR 240.10b–10(a)(7).
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be deemed to be satisfied if an permitting investors to cancel a commenters, described above, could intermediary complies with Rule 10b– commitment for up to three days before either terminate the cancellation right 10? Why or why not? If we take this the target date.491 Another commenter too early, so that investors would not be approach, would this confuse investors? suggested that an investor should be able to benefit from the views of the 181. As mentioned above, we do not permitted to cancel a commitment until crowd and other information they expect that investors would negotiate the moment that the target offering obtain, or too late, so that the issuer individualized compensation amount is reached, but not thereafter.492 would be subject to uncertainty as to agreements with intermediaries in the Another commenter recommended a whether it had met the target offering crowdfunding context. Is this ten-day window, after a target offering amount. We believe that the proposed expectation appropriate? Why or why amount is met, during which investors rules strike an appropriate balance not? Should the proposed rules require could cancel a commitment to invest.493 between giving investors the continuing disclosure of these arrangements, and if Another commenter recommended that benefit of the collective views of the so, in a way that would be similar to or an investor be permitted to cancel a crowd and then, if desired, to cancel different from what is required under commitment until the date the offering their investment commitments, while Rule 10b–10? Please explain. closes.494 In contrast, one commenter providing issuers with certainty about 6. Completion of Offerings, recommended that an investor be their ability to close an offering at the Cancellations and Reconfirmations permitted to cancel a commitment only end of the offering period. if the offering fails to meet the target Pursuant to the proposed rules, if an Section 4A(a)(7) requires an amount or for other limited purposes.495 issuer reaches the target offering amount intermediary to allow investors to We believe that the principles prior to the deadline identified in its cancel their commitments to invest as underlying crowdfunding indicate that offering materials, it may close the the Commission shall, by rule, investors should have the full benefit of offering once the target offering amount determine appropriate. As discussed the views of other potential investors is reached, provided that: (1) The above, Section 4A(b)(1)(G) requires regarding offerings made in reliance on offering will have remained open for a issuers to provide investors, ‘‘prior to Section 4(a)(6), even after they have minimum of 21 days; (2) the sale, . . . a reasonable opportunity to made investment commitments.496 The intermediary provides notice about the rescind the commitment to purchase the proposed rules, therefore, would give new offering deadline at least five securities.’’ investors an unconditional right to business days prior to the new offering Commenters suggested a range of cancel an investment commitment for deadline; (3) investors are given the approaches to these statutory any reason until 48 hours prior to the requirements. Some commenters opportunity to reconsider their deadline identified in the issuer’s investment decision and to cancel their favored a ‘‘rolling’’ rescission right, 497 offering materials. Under this investment commitment until 48 hours similar to the three business day approach, an investor could reconsider rescission right provided in the Truth in prior to the new offering deadline; and his or her investment decision with the (4) at the time of the new offering Lending Act,488 under which an benefit of the views of the crowd and investor could cancel an investment deadline, the issuer continues to meet or other information, until the final 48 498 commitment within 24 489 or 48 exceed the target offering amount. We hours of the offering. Thereafter, an believe these conditions are appropriate, hours 490 of making the initial investor would not be able to cancel any commitment. Other commenters as they would result in adequate notice investment commitments made within being provided to investors and are suggested permitting investors to cancel the final 48 hours (except in the event their investment commitments at any consistent with the statutory provisions of a material change to the offering, as that offering materials are made time prior to a specified date. For discussed below). We believe that the example, one commenter recommended available for at least 21 days before any other approaches suggested by securities can be sold to an investor,499
488 that proceeds be provided to the issuer 15 U.S.C. 1601 et seq.; 12 CFR 226. 491 See RFPIA Letter 3 (further stating that the 489 See RocketHub Letter 1 (stating that: (1) A Commission should impose penalties on issuers if only once the target offering amount has system could be used whereby commitments to they abuse this provision). been met 500 and that investors are invest would be considered ‘‘pending’’ for 24 hours, 492 See Cera Technology Letter (stating that provided an opportunity to cancel their during which an investor would be able to cancel permitting investors to cancel a commitment to commitments.501 his or her investment commitment; after the 24- invest after the funding goal is reached could cause hour period expires, an investor’s commitment an entire fundraising round to collapse). If there is a material change to the 502 status would be changed from ‘‘pending’’ to 493 See Crowdfunding Offerings Ltd. Letter 2 terms of an offering or to the ‘‘committed,’’ and the investor’s funds would be (stating that funding portals should be permitted to held in escrow until transferred to the issuer; (2) if have an open and closed period for rescinding a 498 See proposed Rule 304(b) of Regulation an offering did not reach its target offering amount commitment to invest; that this option is necessary Crowdfunding. Consistent with the cancellation before a specific deadline, an investor’s funds in the event that an investor cancels his or her provision for an offering that does not close prior should be returned; (3) a short rescission period commitment to invest during the window; and that to the deadline identified in its offering materials, will protect investors from ‘‘pump & dump’’ a competitor could commit to invest and then an investor would not be able to cancel any schemes and minimize an issuer’s exposure to the cancel that commitment at a critical moment during investment commitments made within the final 48 risk of a funding ‘‘short fall’’; (4) a longer rescission the fundraising effort, causing the offering to fall hours prior to the new offering deadline (except in period is unnecessary because Title III requires a short of the target offering amount). the event of a material change to the offering). minimum offering period of 21 days, giving 494 499 potential investors enough time to review an See CFIRA Letter 9. See Section 4A(a)(6). offering before making an investment commitment; 495 See Schwartz Letter. 500 See Section 4A(a)(7). and (5) because Title III contemplates that issuers 496 See, e.g., 158 Cong. Rec. S5474–03 (daily ed. 501 See id. could raise capital ‘‘greater than a target offering July 26, 2012) (statement of Sen. Jeff Merkley) 502 We note that in those instances where an amount,’’ the issuer also must establish an offering (‘‘Two important investor protections in the issuer has previously disclosed in its offering cap that would limit oversubscriptions). Crowdfund Act are the public review period and materials only the method for determining the price 490 See NCA Letter (stating that this will prevent withdrawal rights. They are designed to allow of the securities offered and not the final price of commitments from being made solely for the investors the chance to carefully consider offerings, those securities, setting of the final price would be purpose of attracting new investors (i.e., ‘‘pumping’’ permitting the ‘wisdom of the crowd’ to develop, considered a material change. See Section II.B.2 the offering) and that cancellation should be rather than perhaps just the ‘excitement of the above. We also note if the material change is to permitted when there is a change in investment crowd.’ ’’). close the offering once the target offering amount terms or materially adverse information is 497 See proposed Rule 304(a) of Regulation is reached, which would be prior to the deadline subsequently disclosed). Crowdfunding. identified in the offering materials, then the
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information provided by the issuer accordance with applicable 186. Under the proposed rules, in the regarding the offering, the proposed recordkeeping rules.506 event of a cancellation an intermediary rules would require the intermediary to would be required to provide a notice to Request for Comment give or send to any potential investors prospective investors within five who have made investment 182. Are the proposed requirements business days. Is this requirement commitments notice of the material for cancellations and notifications appropriate? Should the time period be change, stating that the investor’s appropriate? Why or why not? Should longer or shorter, such as 3 business investment commitment will be investors be permitted to withdraw days or 10 business days? Why or why cancelled unless the investor reconfirms commitments at any time until the not? Should we include any other his or her commitment within five offering closes? Should investors be notification requirements in the event business days of receipt of the notice.503 provided with additional time to cancel an offering is canceled? If so, what We recognize that complying with this their commitments after the closing of requirement should we include and requirement could result in certain the offering if the commitment was why? offerings being extended beyond the made within 48 hours of the offering 7. Payments to Third Parties offering period specified in the offering deadline? Would some time period statement. If the investor fails to other than 48 hours be more Section 4A(a)(10) provides that an reconfirm his or her investment within appropriate? Do the proposed rules, intermediary in a transaction made in those five business days, the proposed whereby an investor cannot cancel reliance on Section 4(a)(6) shall not rules would require an intermediary, commitments made within 48 hours of compensate ‘‘promoters, finders, or lead within five business days thereafter, to: the offering deadline, strike the generators for providing the broker or (1) Provide or send the investor a appropriate balance between (1) giving funding portal with the personal notification disclosing that the investors the ability to cancel identifying information of any potential investment commitment was cancelled, commitments in light of new views investor.’’ the reason for the cancellation and the expressed in the crowd and (2) One commenter noted that the terms refund amount that the investor should providing issuers with certainty about ‘‘promoters,’’ ‘‘finders’’ and ‘‘lead expect to receive; and (2) direct the generators’’ are not defined in the their ability to close an offering by 507 refund of investor funds. We believe meeting the target offering amount? statute. The commenter also that when material changes arise during Please explain. What are the advantages expressed concern that promoters, the course of an offering, an investor and disadvantages of any alternative finders and lead generators could who had made a prior investment time period? Should no new investment provide a broker or funding portal with commitment should have a reasonable commitments be permitted after a date potential investors’ personally period during which to review the new that is two full business days prior to identifiable information as long as the information and to decide whether to broker or funding portal did not directly the beginning of the 48-hour period 508 invest. This notification would be when investments are no longer compensate them. Another commenter stated that required to be provided by email or cancellable? Why or why not? other electronic media, and to be ‘‘personal identifying information’’ 183. Should an investor be required to should be clearly defined.509 While documented in accordance with reconfirm his or her commitment to applicable recordkeeping rules.504 agreeing that funding portals should not invest when a material change has be permitted to compensate third parties Finally, if an issuer does not complete occurred? Why or why not? Is the five an offering because the target is not for personally identifiable information business day period for reconfirmation reached or the issuer decides to of potential investors, the commenter after material changes appropriate? terminate the offering, the proposed asserted that funding portals, but not Would another time period be more rules would require an intermediary, registered brokers, should be allowed to appropriate? If so, what time period and within five business days, to: (1) Give or compensate promoters, finders or lead why? send to each investor who had made an generators for directing potential issuers investment commitment a notification 184. The proposed rules provide a or investors to view either the portal disclosing the cancellation of the mechanism by which existing itself or specific offerings.510 The offering, the reason for the cancelation, disclosure materials can be modified in commenter further stated that revenue and the refund amount that the investor the event of a material change, with the sharing arrangements should not be should expect to receive; (2) direct the original offering remaining open. restricted when these relationships are refund of investor funds; and (3) prevent Should the proposed rules require that not promoter-, finder- or lead generator- investors from making investment an offering be cancelled in the event of based.511 commitments with respect to that a material change, and then, if the issuer The proposed rules would broadly offering on its platform.505 This desires, reopened in a new offering that prohibit an intermediary from notification would be required to be includes the revised disclosure? Why or compensating any person for providing provided by email or other electronic why not? it with the personally identifiable media, and to be documented in 185. Are there any other information of any investor or potential circumstances under which an investor investor.512 The term ‘‘personally procedures required under proposed Rule 304(b), should receive a notification? If so, identifiable information’’ would be and not 304(c), would apply. See discussion in this under what other circumstances? defined to mean any information that Section II.C.6 above. Should we provide further specificity 503 See proposed Rule 304(c)(1) of Regulation on when notifications must be 507 Crowdfunding. See Crowdfunding Offerings Letter 2. 508 504 Intermediaries that are brokers would be provided? See id. (stating that there could be subject to the recordkeeping requirements of circumstances in which a third party stands to gain in some way by a successful crowdfunding effort). Exchange Act Rules 17a–3 and 17a–4, and 506 Intermediaries that are brokers would be 509 intermediaries that are funding portals would be subject to the recordkeeping requirements of See RocketHub Letter 1. subject to recordkeeping requirements under Exchange Act Rules 17a–3 and 17a–4, and 510 See id. proposed Rule 404 of Regulation Crowdfunding. intermediaries that are funding portals would be 511 See id. 505 See proposed Rule 304(d) of Regulation subject to recordkeeping requirements under 512 See proposed Rule 305(a) of Regulation Crowdfunding. proposed Rule 404 of Regulation Crowdfunding. Crowdfunding.
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can be used to distinguish or trace an the prohibition on transaction-based limited in some additional way? Please individual’s identity, either alone or compensation in the proposed rules explain. when combined with other personal or would help to remove the incentive for D. Additional Requirements on Funding identifying information that is linked or high-pressure sales tactics and other Portals linkable to a specific individual.513 abusive practices.515 Under the Personally identifiable information proposed rules, an intermediary could 1. Registration Requirement 516 could include, for example, any pay a person a flat fixed fee to direct a. Generally information, such as name, social other persons to the intermediary’s security number, date or place of birth, platform through, for example, Securities Act Section 4A(a)(1) mother’s maiden name or biometric hyperlinks or search term results, if the requires that an intermediary facilitating records, that can be used to identify an intermediary received no personally a transaction made in reliance on individual, as well as any other identifiable information. Although the Section 4(a)(6) register with the information that is linked directly to an statute is clear that an intermediary Commission as a broker or a funding individual, such as financial, cannot pay for the personally portal. The statute does not, however, employment, educational or medical identifiable information of potential prescribe the manner in which a information. We believe that any person investors, we do not believe Congress funding portal would register with the compensated for providing the intended to disrupt current practices, Commission.518 Securities Act Section personally identifiable information of such as paying for advertising based on 4A(a)(12) requires intermediaries to potential investors would be acting as a Internet search rankings. It would be comply with requirements as the promoter, finder or lead generator acceptable under the proposed rules, Commission may, by rule, prescribe for within the meaning of Section therefore, for an intermediary to make the protection of investors and in the 4A(a)(10). Thus, the proposed rules payments to advertise its existence, public interest. Exchange Act Section would prohibit compensation broadly to provided that in doing so, it does not 3(h)(1)(C) also permits us to impose, as ‘‘any person.’’ pay for the personally identifiable part of our authority to exempt funding The proposed rules would, however, information of investors or potential portals from broker registration, ‘‘such permit an intermediary to compensate a investors.517 other requirements under [the Exchange person for directing issuers or potential Act] as the Commission determines investors to the intermediary’s platform Request for Comment appropriate.’’ if (1) the person does not provide the 187. Should we permit an Some commenters asked specifically intermediary with the personally intermediary to compensate a third for clarification on the nature of a identifiable information of any potential party for directing potential investors to funding portal’s registration investor, and (2) the compensation, the intermediary’s platform under the requirements.519 One commenter unless it is paid to a registered broker limited circumstances described above? suggested that we permit a funding or dealer, is not based, directly or Why or why not? Should any portal to have multiple intermediary indirectly, on the purchase or sale of a disclosures be required? Why or why Web sites under a single registration security offered in reliance on Section not? Please identify reasonable application.520 The commenter argued 4(a)(6) on or through the intermediary’s alternatives to this approach, if any. that this will permit a registered funding platform.514 The proposed rules would 188. What other concerns may be portal to offer issuers the opportunity to not permit a funding portal to relevant in the context of third parties offer their securities on a funding portal compensate third parties by commission referring others to intermediaries, and Web site that is specific as to parameters or other transaction-based compensation how could they be addressed? For such as industry, geography, community unless that third party is a registered example, should compensation be and affinity group, which would result broker or dealer and thereby subject to in a better organized market for both an established regulatory and oversight 515 See Persons Deemed Not to Be Brokers, issuers and investors. regime that provides important Release No. 34–22172 (June 27, 1985) [50 FR One commenter asked us to consider 27,940, 27942 (July 9, 1985)] (‘‘Compensation based the creation of a ‘‘Registered Portal- safeguards to investors. We believe that on transactions in securities can induce high pressure sales tactics and other problems of investor Check,’’ similar to the BrokerCheck 513 See proposed Rule 305(c) of Regulation protection that require application of broker-dealer system maintained by FINRA, to Crowdfunding. The proposed definition is regulation.’’). See also 158 Cong. Rec. S5474–03 provide greater transparency to consistent with those used in other government (daily ed. July 26, 2012) (statement of Sen. Jeff participants in Section 4(a)(6) agency reports that discuss strategies for protecting Merkley) (‘‘[T]he limitation on off-platform transactions.521 Another commenter personally identifiable information. See, e.g., advertising is intended to prohibit issuers— Government Accountability Office (‘‘GAO’’), including officers, directors, and 20 percent Privacy: Alternatives Exist for Enhancing Protection shareholders—from promoting or paying promoters 518 Compare Exchange Act Section 15(b) [15 of Personally Identifiable Information, GAO–08– to express opinions outside the platform that would U.S.C. 78o(b)] (prescribing the manner of 536, at 1 n.1 (May 2008); GAO, Information go beyond pointing the public to the funding portal. registration of broker-dealers). Security: Protecting Personally Identifiable Such paid testimonials and manufactured 519 See NSBA Letter; RocketHub Letter 1. See also Information, GAO–08–343, at 5 n.9 (Jan. 2008). See excitement would represent a prohibited form of Applied Dynamite Letter (stating that the also Erika McCallister, Tim Grance and Karen off-site advertising if those disclosures were not requirements for those who wish to be Scarfone, Guide to Protecting the Confidentiality of present. Whether on or off the platform, paid intermediaries in offerings pursuant to Rule 506 of Personally Identifiable Information (PII): advertising must clearly be disclosed as such. In Regulation D should be harmonized with those for Recommendations of the National Institute of short, the investor deserves a transparent medium funding portals, and that we should provide for a Standards and Technology, U.S. Department of for making healthy decisions.’’). common registration process for the two). We note, Commerce, National Institute of Standards and 516 A flat fixed fee is one that is not based on the however, that Securities Act Section 4(b)(1) Technology, Special Publication 800–122, at ES–1 success of the offering, and so would not be provides an exemption from broker-dealer (Apr. 2010). transaction-based compensation. As noted above, registration for certain portals facilitating 514 See proposed Rule 305(b) of Regulation receipt of transaction-based compensation would transactions pursuant to Rule 506 of Regulation D, Crowdfunding. We note that the receipt of direct or strongly indicate that the recipient is acting as a as revised by Section 201 of the JOBS Act. indirect transaction-based compensation would broker, and the party receiving this kind of 520 See NCA Letter. strongly indicate that the recipient is acting as a compensation needs to consider whether it would 521 See CFIRA Letter 2 (further stating that the broker. As such, the party receiving the be required to register as a broker. system should ‘‘clearly identify the registration compensation in the scenario described needs to 517 See also proposed Rule 402 of Regulation status of a funding portal and its management, consider whether it would be required to register Crowdfunding and discussion in Section II.D.3 display any regulatory actions against such portal as a broker below. and provide a hyperlink to its Web site’’).
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asked us to require that funding portals, national securities association before it or facilitate the transfer of a ‘‘shell’’ like issuers engaged in crowdfunding can engage in business with the public. organization that does not conduct a transactions in reliance on Section We also are proposing to require a funding portal business. To require that 4(a)(6), be organized under and subject funding portal to file an amendment to there be a legitimate connection to the laws of a State or territory of the Form Funding Portal within 30 days of between the predecessor and the United States or the District of any of the information previously successor, the instructions to the Columbia.522 submitted on Form Funding Portal proposed Form Funding Portal would We are proposing to establish a becoming inaccurate for any reason.525 limit the term ‘‘successor’’ to an entity streamlined registration process under The proposed rules would permit a that assumes or acquires substantially which a funding portal would register funding portal that succeeds to and all of the assets and liabilities of the with the Commission by filing a form continues the business of a registered predecessor funding portal’s business. with information consistent with, but funding portal to also succeed to the In addition, the proposed rule would less extensive than, the information registration of the predecessor on Form not apply where the predecessor required for broker-dealers on Form Funding Portal.526 The registration funding portal intends to continue to BD.523 Under the proposed rules, a would be deemed to remain effective as engage in funding portal activities.530 funding portal would register by the registration of the successor, if the In certain circumstances, the completing a Form Funding Portal, successor, within 30 days after such proposed rule would allow the which includes information concerning succession, files a registration on Form successor to file an amendment to the the funding portal’s principal place of Funding Portal and the predecessor files predecessor’s Form Funding Portal. business, its legal organization and its a withdrawal on Form Funding 527 Successions by amendment would be disciplinary history, if any; business Portal. The rule would further limited to those successions that result activities, including the types of provide that, if succession is based from a formal change in the structure or compensation the funding portal would solely on a change of the predecessor’s legal status of the funding portal but do receive; control affiliates of the funding date or state of incorporation, form of not result in a change in control.531 portal and disclosure of their organization or composition of a Assuming that there is no change in partnership, the successor may, within disciplinary history, if any; FINRA control, succession by amendment 30 days after the succession, amend the membership or membership with any would be available for changes in the notice registration of the predecessor on other registered national securities form of organization, in legal status and Form Funding Portal to reflect these association; and the funding portal’s in composition of a partnership. Web site address(es) or other means of changes. Form Funding Portal would require the successor to provide certain In all other successions, the successor access.524 We also are proposing, as would be able to operate under the discussed in greater detail below, not to information, such as the name and Commission file number of the registration of the predecessor for a permit nonresident entities to register as predecessor. The successor also would limited period of time only if it files its funding portals unless they comply with be required to briefly describe details of own completed application for certain conditions designed to provide the succession, including any assets or registration on Form Funding Portal the Commission and FINRA (or any liabilities not assumed by the successor. within 30 days after such succession. other registered national securities The proposed rules are intended to Examples of the types of successions association) with appropriate tools for provide an efficient registration that would require this type of supervising such entities. mechanism for a person that becomes a application filing would include, but The funding portal’s registration successor to a funding portal.528 The not be limited to, acquisitions and would become effective the later of: (1) provisions on succession are intended consolidations. 30 calendar days after the date that the to be used only when there is a direct The proposed rules would require a registration is received by the and substantial business nexus between funding portal to promptly file a Commission; or (2) the date the funding the predecessor and the successor.529 withdrawal of registration on Form portal is approved for membership in The proposed rules would not be Funding Portal upon ceasing to operate FINRA or any other registered national designed for use by a funding portal in as a funding portal.532 The withdrawal securities association. This approach is order to sell its registration, eliminate would be effective on the later of 30 intended to help ensure that a funding substantial liabilities, spin off personnel days after receipt by the Commission, portal is subject to regulation by the after the funding portal is no longer Commission and FINRA or any other 525 See proposed Rule 400(b) of Regulation operational, within such longer period Crowdfunding. A similar process exists for of time as to which the funding portal 522 See Liles Letter 2 (stating that this requirement registered broker-dealers under Exchange Act Rule consents or within such period of time would strengthen the ability of the Commission and 15b3–1 (17 CFR 240.15b3–1). other U.S. authorities to make surprise audits or 526 See proposed Rule 400(c) of Regulation as to which the Commission, by order, investigations of, or bring enforcement action Crowdfunding. may determine as necessary or against, a funding portal). 527 Under the proposed rules, the registration of appropriate in the public interest or for 523 See 158 Cong. Rec. S2230–31 (daily ed. Mar. the predecessor funding portal would be deemed the protection of investors.533 This 29, 2012) (statement of Sen. Scott Brown) (‘‘As the withdrawn 45 days after the notice registration on Securities and Exchange Commission works to Form Funding Portal is filed by the successor. A implement this new law, it is my hope that it will similar process exists for registered broker-dealers 530 See proposed Rule 400(c)(1) of Regulation recognize that the funding portal registration under Exchange Act Rule 15b1–3 (17 CFR Crowdfunding, which requires the predecessor process is meant to be more streamlined and less 240.15b1–3). funding portal to file a withdrawal on Form burdensome than traditional broker-dealer 528 We are proposing to treat funding portal Funding Portal as a condition of the successor registration’’); 158 Cong. Rec. S1817–29 (daily ed. successions in a manner consistent with broker- registration. Mar. 20, 2012) (statement of Sen. Jeff Merkley) dealer successions. See Registration of Successors 531 See proposed Rule 400(c)(2) of Regulation (‘‘Our amendment provides two pathways: The first to Broker-Dealers and Investment Advisers, Release Crowdfunding. pathway is for a portal to register as a broker-dealer. No. 34–31661 (Dec. 28, 1992) [58 FR 7 (Jan. 4, 532 See proposed Rule 400(d) of Regulation The second is streamlined funding portal 1993)]. Crowdfunding. registration.’’). 529 We are proposing that a direct and substantial 533 A similar process exists for registered broker- 524 See proposed Rule 400(a) of Regulation nexus exist between a predecessor and successor dealers under Exchange Act Section 15(b)(5) (15 Crowdfunding. We discuss below the information funding portal to be consistent with the applicable U.S.C. 78o(b)(5)) and Rule 15b6–1 (17 CFR required to be included in the form. rules for broker-dealer successions. 240.15b6–1) thereunder.
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delaying provision would provide time the Commission’s Web site or other purpose for which the funding portal is to evaluate whether a withdrawal is the such electronic system, as determined filing the form: result of a legitimate winding down of by the Commission in the future, subject • To register as a funding portal with a funding portal’s business or whether to the redaction of certain personally the Commission, through an initial there are additional factors to consider identifiable information, or other application; in connection with the funding portal’s information with a significant potential • to amend any part of the funding withdrawal that are relevant to the for misuse, of the contact person(s) or portal’s most recent Form Funding protection of investors. Based on such other identified individuals of the Portal, including a successor information, we would determine funding portal. registration; or whether any actions, including • to withdraw from registration as a enforcement proceedings, should be Request for Comment funding portal with the Commission. taken against the withdrawing funding 189. Is the proposed method for If the funding portal is submitting an portal. registration appropriate? Why or why amendment or withdrawing from The proposed rules 534 provide that not? Are there methods that would be registration, it also would be necessary each application for registration, less burdensome to potential funding to provide the Commission file number amendment thereto, successor portals while not impairing investor assigned to the funding portal at the registration or withdrawal would be protection? If so, what are those time of its initial application to register. considered filed when a complete Form methods? This information would be used to cross-reference amendments and Funding Portal is submitted with the 190. Should we impose other Commission or its designee. The withdrawals to the original registration, restrictions or prohibitions on thus allowing Form Funding Portal to be proposed rules also require duplicate affiliations of the funding portal, such as originals of the application to be filed used for the initial application to affiliation with a registered broker- register, amendments to registration and with surveillance personnel designated dealer or registered transfer agent? If so, by the registered national securities withdrawal from registration. what are they and why? We intend proposed Form Funding association of which the funding portal 191. Should the Commission, as is a member. Portal to be a streamlined version of proposed, permit a funding portal to Form BD. We believe Form BD is an Under the approach to registration have multiple intermediary Web sites that we are proposing, and as described appropriate model for Form Funding under a single registration application? Portal, because funding portals are by the requirements of proposed Form Why or why not? Funding Portal (discussed below), a limited purpose brokers that are funding portal would be able to operate b. Form Funding Portal conditionally exempt from registration as broker-dealers. There are certain multiple Web site addresses under a A funding portal seeking to register single funding portal registration, questions on Form BD that we believe with the Commission would need to file are not applicable to funding portals. provided the funding portal discloses on a completed Form Funding Portal with Form Funding Portal all the Web sites For example, a funding portal is the Commission.537 We propose to make prohibited from holding or maintaining and names under which it does a blank Form Funding Portal available business. Allowing for multiple Web customer funds or securities; therefore, through the Commission’s Web site or proposed Form Funding Portal, unlike site addresses might allow a funding such other electronic database, as Form BD, does not include any portal to customize each address to fit determined by the Commission in the questions about holding customer funds its specific needs, such as appealing to future. and securities. Funding portals also are certain industries or investors while To access the registration system and restricted in their activities in ways that reducing regulatory costs. We recognize enter information on Form Funding broker-dealers are not; thus, proposed that permitting multiple Web site Portal, a funding portal would have to Form Funding Portal includes particular addresses by a single registrant could first establish an account and obtain questions that address these differences. result in investors being confused about credentials (i.e., username and For example, because a funding portal is the identity of the registrant. We password). We propose that an prohibited from holding and believe, however, that the potential for applicant would need to fill out general maintaining customer funds, proposed confusion is justified by the value of the user information fields, including name, Form Funding Portal would request additional flexibility afforded to address, phone number, email address, information about a funding portal’s intermediaries.535 One commenter requested that we organization name and employer escrow arrangements. As funding implement a system similar to the identification number, and user account portals also are subject to certain BrokerCheck system operated by FINRA information (i.e., username and compensation restrictions, Form for registered funding portals.536 We are password), and select and answer a Funding Portal would require a not proposing that the Commission security question. Once accepted by the description of the funding portal’s create such a system at this time registration system, the applicant would compensation arrangements. Form Funding Portal seeks to strike a because, as discussed below, the receive an email notification that the balance between efficiency in information in a funding portal’s account has been established, and the completing the form and requesting completed Form Funding Portal would applicant would be able to access and sufficient information from funding be available for public viewing through complete Form Funding Portal. We anticipate that applicants ordinarily portals. The proposed form consists of 534 See proposed Rule 400(e) of Regulation would obtain access credentials the eight sections, including items related Crowdfunding. same day that they are requested. to: identifying information, form of 535 We note that brokers are currently required to In order to complete Form Funding organization, successions, control prominently disclose in any retail communications Portal, a funding portal would be persons, disclosure information, non- their name, or the name under which their broker- securities related business, escrow, and dealer business is primarily conducted as disclosed required to check a box indicating the on their registration form. See FINRA Rule compensation arrangements, and 2210(d)(3). 537 See proposed Rule 400(a) of Regulation withdrawal. These items would require 536 See CFIRA Letter 2. Crowdfunding. an applicant to provide certain basic
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identifying and contact information amended, such information is currently readily accessible to the public? If so, concerning its business; list its direct accurate and complete.542 The funding what types of information and why? owners and executives; identify persons portal also would be required to consent 195. Should we require the that directly or indirectly control the that service of any civil action brought identifying and contact information funding portal, control the management by, or notice of any proceeding before, requested on Form Funding Portal, or or policies of the funding portal and the Commission or any national should it be modified in any way? persons the funding portal controls; and securities association of which it is a Should additional information be supply information about its litigation member, in connection with the funding required? If so, which information and and disciplinary history and the portal’s investment-related business, why? litigation and disciplinary history of its may be given by registered or certified 196. Are the proposed disclosures in associated persons.538 In addition, an mail to the funding portal’s contact Form Funding Portal unduly applicant would be required to describe person at the main address, or mailing burdensome? Are there certain any non-securities related business address, on the form.543 requirements that should be eliminated activities and supply information about We believe that this information is or modified? Which requirements and its escrow arrangements, compensation important for our oversight of funding why? Would such changes be consistent arrangements with issuers and fidelity portals, including, among other things, with investor protection? bond.539 Upon a filing to withdraw from assessing a funding portal’s application 197. Should proposed Form Funding registration, a funding portal would be and performing examinations of funding Portal be modified to request from required to provide certain books and portals, and that it is pertinent to funding portals a narrative description records information. In addition, as investors and issuers. We propose to of their compliance programs and due discussed in detail below,540 applicants make all current Forms Funding Portal, diligence procedures with respect to that are incorporated in or organized including amendments and registration issues? Would some other form of under the laws of a jurisdiction outside withdrawal requests, immediately reporting be more useful? Why or why of the United States or its territories, or accessible and searchable by the public, not? whose principal place of business is not with the exception of certain personally 198. Are the proposed representations in the United States or its territories, identifiable information or other required of a person who executes Form would be required to complete Schedule information with significant potential Funding Portal appropriate? Should the C to Form Funding Portal, which for misuse (including the contact Commission require attestations? If so, requires information about the employee’s direct phone number and from whom? applicant’s arrangements to have an email address and any IRS Employer 199. Should we require any other agent for service of process in the Identification Number, social security information from a funding portal that United States, as well as an opinion of number, date of birth, or any other is withdrawing from registration? counsel addressing the ability of the similar information).544 Making these c. Fidelity Bond applicant to provide the Commission documents publicly available and and the national securities association searchable would enhance transparency The proposed rules would require, as of which it is a member with prompt of the registration process and the a condition of registration, that a access to its books and records and to funding portal industry as it develops, funding portal have in place, and submit to onsite inspection and while the limited redactions would thereafter maintain for the duration of examination by the Commission and the appropriately protect the privacy of the such registration, a fidelity bond 545 national securities association. individuals involved. that: (1) Has a minimum coverage of We propose that a person duly $100,000; (2) covers any associated authorized to bind the funding portal be Request for Comment person of the funding portal unless required to sign Form Funding Portal in 192. What type of web-based otherwise excepted in the rules set forth order to execute the documents.541 A registration should the Commission use by FINRA or any other registered person executing Form Funding Portal for accessing Form Funding Portal? national securities association of which and Schedule C (if applicable) would be Would a system like EDGAR be it is a member; and (3) meets any other required to represent that the person has appropriate, or would a different type of applicable requirements, as set forth by executed the form on behalf of, and is system be preferable? Why? FINRA or any other registered national duly authorized to bind, the funding 193. Should we consider alternatives securities association of which it is a portal; the information and statements to creating a new form for funding member.546 contained in the form and other portal registration? Should we amend Although not mandated by the statute, information filed are current, true and the existing Form BD to provide for we believe that a fidelity bond complete; and if the person is filing an funding portal registration? Why or why requirement would help insure against amendment, to the extent that any not? Which questions on Form BD the loss of investor funds that might information previously submitted is not would be relevant to funding portals occur if, for example, a funding portal and why? Are there other questions we were to violate the prohibition set forth 538 This information would be used to determine should include for funding portals that in Section 304(b) of the JOBS Act on whether to approve an application for registration, are not on the proposed Form Funding holding, managing, possessing or to decide whether to revoke registration, to place limitations on the applicant’s activities as a funding Portal or in existing Form BD? If so, otherwise handling investor funds or portal and to identify potential problem areas on which questions and why? securities. This is a meaningful which to focus during examinations. If an applicant 194. Are there types of information or its associated person has a disciplinary history, (other than personally identifiable 545 A fidelity bond is a type of insurance that aims then the applicant could be required to complete information) required by proposed Form to protect its holder against certain types of losses, the appropriate Disclosure Reporting Page (‘‘DRP’’), Funding Portal that should not be made including but not limited to those caused by the either Criminal, Regulatory, Civil Judicial, malfeasance of the holder’s officers and employees, Bankruptcy, Bond or Judgment. and the effect of such losses on the holder’s capital. 539 See Section II.D.1.c. below. 542 See id. See Release No. 34–63961 (Feb. 24, 2011) [76 FR 540 See Section II.D.1.d. below. 543 See id. 11542 (Mar. 2, 2011)]. 541 See execution statement of proposed Form 544 See the proposed Instructions to Form 546 See proposed Rule 400(f) of Regulation Funding Portal. Funding Portal. Crowdfunding.
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protection because funding portals 203. Are there other specific terms of portal. The proposed rules would would not be members of the Securities a fidelity bond that we should consider further require a nonresident funding Investor Protection Corporation requiring? If so, what terms and why? portal to (1) obtain a written consent (‘‘SIPC’’). If a firm is a SIPC member and 204. Apart from requiring a funding and power of attorney appointing an goes out of business, then the cash and portal to have a fidelity bond, is there agent for service of process in the securities held for each customer by that some other requirement that could be United States (other than the firm are generally protected up to imposed on funding portals, like Commission or a Commission member, $500,000, including a $250,000 limit for insurance or something similar to SIPC, official or employee), upon whom may cash.547 Because funding portals are which would further protect investors? be served any process, pleadings, or non-SIPC members,548 funding portal If so, what type of requirement and other papers in any action; (2) furnish customers would not receive this SIPC why? the Commission with the name and protection. Furthermore, given that we d. Requirements for Nonresident address of its agent for services of are not proposing to require, pursuant to Funding Portals process on Schedule C of Form Funding our discretionary authority, that funding Portal; (3) certify that it can, as a matter portals be subject to minimum net Although there is no statutory of law, provide the Commission and any capital requirements, a fidelity bond requirement that funding portals be national securities association of which would provide a single layer of domestic entities, we are mindful of our it is a member with prompt access to its protection, in the event of such losses. ability to effectively oversee this new books and records and can, as a matter While the proposed rule imposes this category of registrants—as well as more of law, submit to onsite inspection and requirement as a condition to generally the development of the new examination by the Commission; and (4) registration, we anticipate that, like the crowdfunding market and role of provide the Commission with an fidelity bond requirement registered intermediaries in that market—given the opinion of counsel and certify on broker-dealers are currently subject to greater challenges entailed in Schedule C on Form Funding Portal that pursuant to SRO rules, specific supervising, examining, and enforcing the firm can, as a matter of law, provide requirements of the fidelity bond for the requirements that would be the Commission and such national funding portals would be set forth in applicable to activities of intermediaries securities association with prompt rules of FINRA or any other registered based outside the United States.550 At access to its books and records and can, national securities association. In the same time, we recognize that the use as a matter of law, submit to onsite recognition of the limits on the amounts of funding portals located outside the inspection and examination by the investors may invest, and the amounts United States could provide more Commission and the national securities issuers may raise, through choices for U.S. issuers seeking to association.552 crowdfunding, as provided in Section engage an intermediary to facilitate a In general, the requirements for 4(a)(6), we propose to require that crowdfunding offering, and potentially nonresident funding portals that we are funding portals’ fidelity bonds have an expand those issuers’ access to investors proposing are consistent with those we amount of coverage that is equivalent to located abroad. In seeking to strike an have proposed for other nonresident the minimum amount of coverage appropriate balance among these entities subject to our regulation.553 registered broker-dealers are required to considerations, we propose not to These requirements aim to ensure that have under FINRA Rule 4360, which is permit nonresident entities to register as funding portals that are not based in the $100,000.549 Furthermore, we believe funding portals unless they comply with United States, or that are subject to laws that fidelity bond coverage would be certain conditions designed to provide other than those of the United States, most effective if it covers actions by not the Commission and FINRA (or any would nevertheless be accessible to us only the funding portal entity, but also other registered national securities and other relevant regulators for all of its associated persons. association) with appropriate tools for purposes of accessing the books and records of, conducting examinations Request for Comment supervising such entities. Under the proposed rules, registration and inspections of, and enforcing U.S. 200. Is it appropriate for us to require pursuant to Rule 400 of Regulation laws and regulations with respect to, a funding portal to have a fidelity bond? Crowdfunding by a nonresident funding these entities. Why or why not? portal (a funding portal incorporated in Requirements for a nonresident 201. With respect to the fidelity bond or organized under the laws of any funding portal to obtain an agent for requirement, is the proposed coverage of jurisdiction outside of the United States service of process in the United States, $100,000 appropriate for funding or its territories, or having its principal and to furnish the Commission with the portals? If not, what other amount or place of business outside the United name and address of this agent, are formula for calculating the required States or its territories) 551 would be first important to facilitate enforcement of amount would be more appropriate and conditioned upon there being an the federal securities laws and the rules why? information sharing arrangement in thereunder by the Commission and 202. Is it appropriate to require the place between the Commission and the fidelity bond to cover associated competent regulator in the jurisdiction 552 See proposed Rule 400(g) of Regulation Crowdfunding. Exchange Act Section 3(h)(1)(C) persons of the funding portal? Why or under the laws of which the nonresident why not? permits us to impose, as part of our authority to funding portal is organized or where it exempt funding portals from broker registration, ‘‘such other requirements under [the Exchange Act] 547 has its principal place of business that See the Securities Investor Protection Act of is applicable to the nonresident funding as the Commission determines appropriate.’’ 1970, Pub. L. No. 91–598 (1970). 553 See, e.g., Registration of Security-Based Swap 548 Membership in SIPC applies only to persons Dealers and Major Security-Based Swap registered as brokers or dealers under Section 15(b) 550 The exemption under Section 4(a)(6) is not Participants, Release No. 34–65543 (Oct. 12, 2011) of the Exchange Act. See 15 U.S.C. 78ccc(a)(2). available for a transaction involving the offer or sale [76 FR 65784 (Oct. 24, 2011)], at 65799–65801. See 549 See FINRA Rule 4360. Introducing brokers, of securities by an issuer that is not organized under also Cross-Border Security-Based Swap Activities; like funding portals, do not hold customer funds and subject to the laws of a State or territory of the Re-Proposal of Regulation SBSR and Certain Rules and securities. Introducing brokers are required to United States or the District of Columbia. See and Forms Relating to the Registration of Security- maintain a minimum bond of $100,000 under Section 4A(f), discussed in Section II.A.3 above. Based Swap Dealers and Major Security-Based current SRO rules, and we are proposing the same 551 See proposed Rule 400(g)(1) of Regulation Swap Participants, Release No. 34–69490 (May 1, minimum amount for funding portals. Crowdfunding. 2013) [78 FR 30968 (May 23, 2013)].
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others (e.g., the U.S. Department of nonresident funding portal. The home agent for purposes of all potential legal Justice and any other agency or entity country regulator may possess proceedings, including those from with law enforcement authority). The information concerning, for example, nongovernmental entities? Why or why proposed rules also would require a the funding portal’s affiliations, not? registered nonresident funding portal to contractual relationships with issuers, 210. Should we require the opinion of promptly appoint a successor agent if it and the nature and extent of measures counsel if it might contradict the laws discharges its identified agent for taken to protect investors. In this of a jurisdiction where an intermediary service of process or if its agent for context, particularly in the event that is incorporated? Why or why not? If not, service of process is unwilling or unable evidence arises of potential fraudulent should we impose an alternative to accept service on its behalf. A or other unlawful activity by a requirement? registered funding portal must promptly nonresident funding portal, the ability 211. Should we specify that the amend Schedule C to its Form Funding to obtain information and secure the opinion of counsel contain any Portal if its agent, or the agent’s name cooperation of the home country additional information? For instance, or address, changes. Finally, the regulator according to established should we require the opinion to proposed rules would require the practices and protocols should help to reference the applicable local law or, in registered nonresident funding portal to address the increased challenges that the case of an amendment, the manner maintain, as part of its books and may arise from oversight of entities in which the local law was amended? records, the agreement with the agent located outside the United States. Please explain. for service of process for at least three A registered nonresident funding 2. Exemption From Broker-Dealer years after termination of the agreement. portal also would be required to re- Registration The proposed rules would require certify, on Schedule C to Form Funding that each nonresident funding portal Portal, within 90 days after any relevant Exchange Act Section 3(h)(1) directs provide an opinion of counsel and changes in its legal or regulatory the Commission to exempt, certify, as a matter of law, that it can framework, and provide a revised conditionally or unconditionally, a provide the Commission, and the opinion of counsel confirming that, as a registered funding portal from the national securities association of which matter of law, the entity will continue requirement to register as a broker or it is a member, with prompt access to to meet its obligations to provide the dealer under Exchange Act Section its books and records and submit to Commission and the national securities 15(a), provided that the funding portal: onsite inspections and examinations. association with prompt access to its (1) Remains subject to the examination, We believe that this proposed books and records and to be subject to enforcement and other rulemaking certification and supporting opinion of inspection and examination. Failure to authority of the Commission; (2) is a counsel are important to confirm that make this certification or provide an member of a registered national each nonresident funding portal is in opinion of counsel may be a basis for securities association; and (3) is subject the position to provide the Commission the Commission to revoke the to other requirements that the and the national securities association nonresident funding portal’s Commission determines appropriate. with information that is necessary for us registration. The proposed rules would exempt a and the national securities association registered funding portal from the to effectively fulfill our regulatory Request for Comment broker registration requirements of oversight responsibilities.554 205. Is the term nonresident funding Exchange Act Section 15(a)(1), in Commenters have previously brought to portal defined appropriately? If not, connection with its activities as a our attention that it may conflict with how should it be modified? Please funding portal.556 the laws of certain jurisdictions to explain. But for the exemption from provide such an opinion.555 Failure to 206. Should the Commission impose registration Congress directed, a funding make this certification or provide an additional or different conditions for portal would be required to register as 557 opinion of counsel would provide a nonresident funding portals than those a broker under the Exchange Act. The basis to deny an application for proposed? If so, what conditions, and obligations imposed under the JOBS Act registration. why? Should any be eliminated? Why or on an entity acting as an intermediary The requirement for an information why not? What effect might such in a crowdfunding transaction would sharing agreement is designed to conditions have on the development of bring that entity within the definition of provide the Commission greater the industry and the market, and on ‘‘broker’’ under Exchange Act Section assurance that it will be able to obtain issuers and investors? Please explain. 3(a)(4). A funding portal would be the information about a nonresident 207. If, as a matter of law, it would be ‘‘effecting transactions in securities for funding portal necessary for the impossible or impractical for a the account of others’’ by, among other Commission’s oversight of the nonresident funding portal to obtain the things, ensuring that investors comply required opinion of counsel, what other with the conditions of Securities Act 554 See Exchange Act Section 3(h)(1)(A). actions or requirements could address 555 See comment letter from Sarah A. Miller, our concern that we and the national 556 See proposed Rule 401(a) of Regulation Chief Executive Officer, Institute of International securities association would be able to Crowdfunding. Bankers, dated August 21, 2013, available at 557 See Exchange Act Section 3(a)(4)(A) [15 U.S.C. https://www.sec.gov.edgekey.net/comments/s7-34- have direct access to books and records 78c(a)(4)(A)] (defining ‘‘broker’’ as ‘‘any person 10/s73410.shtml. See also comment letters from and adequately examine and inspect the engaged in the business of effecting transactions in Patrick Pearson, European Commission, dated funding portal? securities for the account of others’’). An entity August 21, 2013, and Kenneth E Bentsen, Jr., 208. Should any of the proposed acting as an intermediary in the offer and sale of Executive Vice President, Public Policy and securities pursuant to Section 4(a)(6), as Advocacy, Securities Industry and Financial requirements be more specific? For contemplated in Title III of the JOBS Act, would not Markets Association, dated December 16, 2011, example, should only certain types of come within the meaning of ‘‘dealer,’’ which is available at https://www.sec.gov.edgekey.net/ entities (such as law firms) be allowed defined in Exchange Act Section 3(a)(5)(A) (15 comments/s7-34-10/s73410.shtml; comment letter to act as U.S. agents for service of U.S.C. 78c(a)(4)(A)), because it would not be from Carlos Tavares, Vice-Chairman, European engaging in the business of buying and selling Securities and Markets Authority, dated January 17, process? Please explain. securities for its own account. See also Exchange 2011, available at http://www.sec.gov/comments/ 209. Should a nonresident funding Act Section 15(a) [15 U.S.C. 15o(a)] and proposed s7-35-10/s73510-19.pdf. portal be required to appoint a U.S. Rule 300(b) of Regulation Crowdfunding.
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Section 4A(a)(4) and (8), making the would impose certain recordkeeping 3. Safe Harbor for Certain Activities 561 securities available for purchase through requirements. Exchange Act Section 3(a)(80) the funding portal, and ensuring the The proposed rules would provide provides that a funding portal may not proper transfer of funds and securities that, notwithstanding this exemption offer investment advice or make as required by Securities Act Section from broker registration, for purposes of recommendations; solicit purchases, 4A(a)(7).558 In addition, a funding Chapter X of Title 31 of the Code of sales or offers to buy the securities portal’s receipt of compensation linked Federal Regulations, a funding portal offered or displayed on its platform or to the successful completion of the would be deemed to be ‘‘required to be portal; compensate employees, agents or offering also would be indicative of registered’’ as a broker with the other persons for such solicitation or acting as a broker in connection with Commission under the Exchange Act, based on the sale of securities displayed these transactions. thereby requiring funding portals to or referenced on its platform or portal; comply with Chapter X, including Pursuant to Exchange Act Section hold, manage, possess or otherwise certain anti-money laundering (‘‘AML’’) 3(h)(1), as stated above, we are handle investor funds or securities; or provisions thereunder.562 engage in such other activities as the proposing rules that would exempt an Commission, by rule, determines intermediary that is registered as a Request for Comment appropriate. funding portal from the requirement to 212. Is the proposed exemption for We received a number of comments register as a broker-dealer under funding portals from broker registration concerning the scope and definition of Exchange Act 15(a)(1). Consistent with appropriate? Why or why not? permissible activities for a funding the JOBS Act, the funding portal would portal. A number of commenters sought remain subject to the full range of our 213. Should the exemption be conditioned on the funding portal guidance on services they might be examination and enforcement permitted to provide consistent with the authority.559 In this regard, the remaining in compliance with Subpart D of the proposed rules? Why or why prohibition on offering investment proposed rules would require that a 563 not? advice or recommendations. We also funding portal permit the examination received comments seeking clarification and inspection of all of its business and 214. Is it appropriate to propose to about the prohibitions on funding business operations that relate to its require funding portals to comply with portals soliciting investors and handling activities as a funding portal, such as its the same requirements for purposes of funds and securities.564 premises, systems, platforms and Chapter X of Title 31 of the Code of One commenter asked us to clarify Federal Regulations as imposed on a records, by representatives of the what activities would constitute person required to be registered as a Commission, and of the national prohibited investment advice and broker or a dealer? Why or why not? securities association of which it is a suggested that the Commission should member.560 The proposed rules also 215. Should the proposed exemption establish ‘‘bright lines’’ that would make from broker registration be conditioned it clear how a funding portal can avoid upon a funding portal’s compliance 558 At the same time, there are statutory being viewed as giving prohibited 565 restrictions on the scope of services that a funding with applicable Subpart C and D rules investment advice. This commenter portal could provide. Among other things, a of proposed Regulation Crowdfunding? and others provided numerous funding portal could act as an intermediary only in Why or why not? Should the failure to examples of potential funding portal transactions involving the offer or sale of securities comply with certain requirements cause activities, including: pursuant to Securities Act Section 4(a)(6). Further, a funding portal, by definition, could not offer a funding portal to lose its exemption? • Advising issuers on the structure and investment advice or recommendations; solicit If so, which requirements and why? contents of their offerings; 566 purchases, sales, or offers to buy the securities Under what circumstances should the • providing access to the portal’s offered or displayed on its Web site or portal; Commission consider revoking the compensate persons for such solicitation or based platform to certain issuers and on the sale of securities displayed or referenced on exemption of a funding portal that fails rejecting or removing others, based on its Web site or portal; or hold manage, possess or to comply with these requirements? criteria such as the ‘‘type’’ or ‘‘market otherwise handle investor funds or securities. See characteristics’’ of the offerings (e.g., generally Exchange Act Section 3(a)(80). 561 See proposed Rule 404 of Regulation 559 film production securities, women- or See Exchange Act Section 3(h)(1)(C). See also Crowdfunding. See also discussion in Section II.D.5 Securities Act Section 20 [15 U.S.C. 77t] and minority-owned businesses or below. businesses in specific geographical Exchange Act Sections 21 and 21C [15 U.S.C. 78u 562 See 31 CFR 1010.100(h) and 1023.100(b) 567 and 78u–3]. In addition, we highlight that Exchange (defining broker or dealer for purposes of the areas); Act Sections 15(b)(4) and 15(b)(6) (15 U.S.C. applicability of AML requirements). See Currency • removing an offering before the end of 78o(b)(4) and 78o(b)(6)) apply to brokers (including and Foreign Transactions Reporting Act of 1970 the offering period for lack of investor funding portals) regardless of whether or not they (commonly referred to as the Bank Secrecy Act interest; 568 are registered with the Commission as brokers. (‘‘BSA’’)) [12. U.S.C. 1829b, 12 U.S.C. 1951–1959, • Exchange Act Section 15(b)(4) authorizes the 31 U.S.C. 5311–5330]. See also proposed Rule removing an issuer for failing to Commission to bring administrative proceedings 403(b) of Regulation Crowdfunding and discussion provide documents responsive to the against a broker when the broker violates the federal in Section II.D.4 below. Securities Act Section funding portal’s due diligence or securities laws (and for other misconduct) and 4A(a)(12) requires intermediaries to comply with qualification standards, including provides for the imposition of sanctions, up to and requirements as the Commission may, by rule, including the revocation of a broker’s registration. prescribe for the protection of investors and in the standards other than those established Exchange Act Section 15(b)(6) provides similar public interest. As discussed in Sections II.C.1 and by our rules,569 or the portal’s belief enforcement authority against the persons II.D.2 above, a funding portal is a broker that, in the associated with a broker, including barring persons absence of the exemption from the requirement to 563 See, e.g., NCA Letter; NSBA Letter; CFIRA from associating with any Commission registrant. register as a broker or dealer provided for under the Letter 2. See Section II.D.3 below for further discussion, in JOBS Act in Exchange Act Section 3(h)(1), would 564 See, e.g., CFIRA Letter 2; NCA Letter; Wright response to commenters’ concerns, about the scope otherwise be required to register as a broker under Letter 1; RocketHub Letter 1; Grow VC Letter. of permissible activities in which funding portals Section 15(a) (15 U.S.C. 78o) of the Exchange Act, 565 See CFIRA Letter 2. may engage under the safe harbor of proposed Rule and by being so registered, would be subject to the 566 402. full range of BSA obligations applicable to See id. 560 See proposed Rule 403 of Regulation registered broker-dealers. As discussed further in 567 See NCA Letter; NSBA Letter. Crowdfunding. See also discussion in Section II.D.4 Section II.D.4.b below, we believe such obligations 568 See id. below. also should be imposed on funding portals. 569 See id.
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that an offering or the issuer may be One commenter stated that a fiduciary In proposing the safe harbor, we are fraudulent or abusive; 570 would likely hold the funds for mindful that, while Section 304 of the • highlighting, or otherwise making disposition as instructed by the funding JOBS Act directs us to exempt a more prominent, the offering(s) of one portal and asked whether this registered funding portal, conditionally or more issuers; 571 instruction would constitute an or unconditionally, from broker-dealer • organizing issuers listed on the impermissible handling of the funds.582 registration and associated regulatory funding portal’s platform into groups Another commenter stated that an requirements, the statutory provisions based on the funding portal’s view of intermediary should be authorized by also make clear that the activities in the riskiness of the investment; 572 the issuer and investors to operate as an which a funding portal may engage are • providing information management escrow agent to facilitate far more limited than those of a tools (i.e., search functions and transactions.583 One commenter registered broker-dealer.587 At the same automatic notification mechanisms) asserted that funding portals need the time, we recognize that the statutory on the funding portal’s platform; 573 ability to temporarily hold customer • prohibitions could be read so broadly as providing a ‘‘valuation framework’’ funds to properly clear and settle a to limit the utility of funding portals. that could guide investors in securities transaction.584 The The proposed rule seeks to strike an determining a fair valuation for commenter further contended that, to appropriate balance by identifying securities listed on the funding ensure issuers are not overwhelmed certain limited activities in which a portal’s platform, while also creating with thousands of new shareholders, funding portal may engage, consistent a ‘‘negotiation space’’ for an issuer intermediaries, including funding with the statutory prohibitions.588 These and its potential investors; 574 and portals, should be able to act as • hosting on the funding portal’s activities relate to: nominees of the investors who are the • Limiting offerings made on or platform: Æ beneficial owners of the securities. through the funding portal’s platform third-party market and news In light of these questions and updates; 575 based on eligibility requirements; Æ comments, we are proposing to provide • highlighting and displaying third-party opinions (including a non-exclusive, conditional safe harbor those of investors) on message offerings on the platform; for funding portals that engage in • providing communication channels boards and other information certain limited activities.585 Failure of a for potential investors and issuers; exchanges moderated by the funding portal to meet the conditions of • providing search functions on the funding portal; 576 or this non-exclusive safe harbor would platform; Æ judgments about issuers made by a not create a presumption that the • advising issuers on the structure or funding portal or its vendors or 577 funding portal is in violation of the content of offerings; partners. • compensating others for referring With regard to the prohibition on statutory prohibitions of Exchange Act persons to the funding portal and for solicitation, one commenter noted that Section 3(a)(80) or the rules in proposed 586 other services; and the mere act of having a web platform Regulation Crowdfunding. • advertising the funding portal’s available to the public on which issuers 582 existence. can list their offerings could be viewed See Crowdfunding Offerings Ltd. Letter 4. 583 See RocketHub Letter 1 (further stating that 578 In addition, the proposed rules would as impermissible solicitation. the intermediary should be permitted to hold clarify that, consistent with other Another commenter asked whether investor funds in an escrow account that is segregated from the operating funds of the provisions of Regulation funding portals would be permitted to Crowdfunding,589 funding portals may compensate employees and agents to intermediary and that withdrawals from the account only be permitted for: ‘‘payments to deny access to issuers in certain solicit issuers by commission, referral offerings that have successfully closed (having circumstances, accept investment fee or otherwise.579 Another commenter reached or exceeded their funding goals); payments commitments and direct the asked that we preserve the ability of to investors requesting refunds of uncommitted funds; or payment of established intermediary transmission of funds, in connection funding portals to pay for search listings fees’’). with offerings conducted on their or advertisements in online social 584 See Grow VC Letter. platforms. networks.580 585 See proposed Rule 402 of Regulation Commenters requested that we Crowdfunding. The term ‘‘investment advice’’ is not D Limiting Offerings defined in the crowdfunding provisions of the JOBS identify the kinds of third parties that We anticipate that some funding could hold, manage, possess or Act or otherwise in the federal securities laws, and we do not include a definition of that term in our portals may wish to limit, to some otherwise handle investor funds and proposal. In the context of interpreting the term extent, the scope of their businesses by, securities in connection with an offering ‘‘investment adviser,’’ the determination of whether for example, specializing in offerings by made in reliance on Section 4(a)(6).581 a particular communication rises to the level of investment advice depends on the facts and issuers in certain industries or circumstances and is construed broadly. To the geographic locations. In some 570 See CFIRA Letter 3. extent a funding portal limits its securities activities 571 See RocketHub Letter 1; Wright Letter 1. to those permitted by the proposed rules, including 587 572 See id. the safe harbor, we preliminarily believe that it See Exchange Act Section 3(a)(80). See also 158 Cong. Rec. S5474–03 (daily ed. July 26, 2012) 573 See CFIRA Letter 3. would not come within the meaning of the term (statement of Sen. Jeff Merkley) (‘‘The Crowdfund 574 A ‘‘negotiation space’’ would provide some investment adviser under the Advisers Act. If it Act is designed so that funding portals will be ability for investors to set or influence the price of conducts other activities, such as advising an issuer subject to fewer regulatory requirements than the securities, which would not necessarily depend concerning the investment of proceeds in securities, broker-dealers because they will do fewer things on a specific valuation of the securities. See however, it would need to consider whether it than broker-dealers. Among other limits, the law Pearfunds Letter. comes within the meaning of that term under the prohibits funding portals from engaging in 575 See RocketHub Letter 1; Wright Letter 2. Advisers Act. See Advisers Act Section 202(a)(11) [15 U.S.C. 80b–2(a)(11)]. See also 2012 SEC solicitation, making recommendations, and 576 See CFIRA Letter 3; Applied Dynamite Letter; Government-Business Forum, note 29 (stating that providing investment advice. Relative passivity and Grow VC Letter. there is a need for safe harbors that explicitly neutrality, especially with respect to the investing 577 See Applied Dynamite Letter. permit certain activities that may otherwise be seen public, are touchstones of the funding portal 578 See Crowdfunding Offerings Ltd. Letter 2. as indicia of broker-dealer status or activities that streamlined treatment.’’). 579 See NCA Letter. are prohibited or otherwise subject to separate 588 See proposed Rule 402 of Regulation 580 See Cera Technology Letter. regulation). Crowdfunding. 581 See Crowdfunding Offerings Ltd. Letter 2; 586 See proposed Rule 402(a) of Regulation 589 See, e.g., proposed Rules 303(d) and 303(e) of NSBA Letter. Crowdfunding. Regulation Crowdfunding.
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circumstances, these limitations could addition, we recognize that a funding made; and the progress in meeting the be viewed as providing investment portal may seek to limit the number of target offering amount or, if applicable, advice. To accommodate reasonable issuers or offerings on its platform at the maximum offering amount, and limitations, the proposed safe harbor any given time, including for resource minimum or maximum investment would permit a funding portal to apply reasons. The application of the objective amount.597 A potential investor, for objective criteria to limit the offerings criteria could, in practice, result in the example, may have a strong interest in on its platform, without being deemed number of issuers or offerings displayed supporting a small issuer that is within to be providing investment advice.590 on the platform being very small, such the potential investor’s geographic Those criteria would be required to be as, for example, in the period soon after vicinity. Other potential investors may reasonably designed to result in a broad a funding portal begins operations. be interested in offerings that are about selection of issuers offering securities Nevertheless, we would not consider to close soon, that have particular through the funding portal’s platform the funding portal to be providing maximum investment amounts or that and be applied consistently to all investment advice if the objective have generated significant interest from potential issuers and offerings, so as not criteria are designed to result in a broad users of the funding portal’s platform. to recommend or implicitly endorse one selection of issuers. Some investors may only be interested issuer or offering over others. The To qualify for the safe harbor, a in offerings in which a significant criteria also would be required to be funding portal may not use criteria percentage of the target amount has clearly displayed on the funding portal’s based on an assessment of the merits or been committed.598 We believe that the platform. the shortcomings of a particular issuer listed criteria are sufficiently objective, The requirements that the objective or offering. In particular, a funding so as to reduce the risk of a funding criteria be reasonably designed to result portal may not deny access to an issuer portal applying them to advance a in a broad selection of issuers, and be based on the advisability of investing in particular bias or subjective assessment applied consistently, are intended to the issuer or its offering.593 As noted of the issuers or offerings. ensure that the funding portal does not above, one commenter stated that the Consistent with the prohibition on provide impermissible investment prohibition on investment advice could investment advice and advice by, for example, applying criteria potentially preclude a funding portal recommendations, the criteria must be that would so limit the number of from denying access to a fraudulent reasonably designed to highlight a broad 594 issuers that the funding portal could be offering or issuer. This would place selection of issuers, so as not to viewed as providing an implicit investors at unnecessary risk and would recommend or implicitly endorse one endorsement or recommendation of be contrary to the funding portal’s issuer or offering over another, and must those issuers’ offerings. An issuer that obligation under the proposed rules to be applied consistently to all potential meets these criteria, and is not deny access to its platform if it believes issuers and offerings. The selection otherwise disqualified, would, subject that the issuer or its offering presents criteria may not be based on an to the funding portal’s measures to potential for fraud or otherwise raises assessment of the merits of a particular reduce the risk of fraud under proposed concerns regarding investor 591 595 issuer or offering and must be clearly Rule 301, be eligible to list its protection. Thus, as described above, displayed on the funding portal’s offering on the funding portal’s a funding portal must deny access if it platform, to permit investors to platform. believes that the issuer or its offering comprehend on what basis certain One criterion could include the type has potential for fraud or otherwise issuers are being highlighted, and, of security being offered (such as raises concerns regarding investor thereby, to help prevent them from common stock, preferred stock or debt protection.596 misconstruing the highlighting as a securities). We believe that this criterion D would be appropriate because potential Highlighting Issuers and Offerings recommendation or implicit investors may be interested in certain Under the proposed rules, a funding endorsement of any issuer or offering. types of securities as a consideration portal may highlight particular offerings The funding portal may not highlight an separate from the identity of issuers. of securities made in reliance on Section issuer or offering based on the Other criteria also could include the 4(a)(6) on its platform based on advisability of investing in the issuer or geographic location of the issuer or the objective criteria that may include: the offering. To help prevent conflicts of industry or business segment of the type of securities being offered (e.g., interest and incentives for funding issuer. We believe that these criteria common stock, preferred stock or debt portals to favor certain issuers over would be appropriate because a funding securities); the geographic location of others, the proposed rules would portal may wish to specialize and focus the issuer; the industry or business prohibit a funding portal from receiving its efforts on facilitating offerings in segment of the issuer; the number or any special or additional compensation particular areas or industries.592 The amount of investment commitments for highlighting (or offering to highlight) proposed rule would require funding one or more issuers or offerings on its 599 portals to disclose to investors the 593 Of course, a funding portal would be required platform. criteria they use to limit the offerings to deny access to the issuer if the funding portal has Some commenters sought clarification a reasonable basis for believing that issuer is subject whether funding portals could available on their platforms. This to a disqualification or if the funding portal believes should help investors better appreciate that the issuer or the offering presents the potential distinguish offerings based on any niche focus of a funding portal and for fraud or otherwise raises concerns regarding riskiness.600 We are not proposing a safe the scope of the offerings available on investor protection. See proposed Rule 301(c) of harbor for this type of distinction at this Regulation Crowdfunding. time, because we preliminarily believe the funding portal’s platform. In 594 See CFIRA Letter 3. that an assessment of risk necessarily 595 See proposed Rule 301 of Regulation 590 See proposed Rule 402(b)(1) of Regulation Crowdfunding. 597 Crowdfunding. 596 Consistent with proposed Rule 301, proposed See proposed Rule 402(b)(2) of Regulation 591 See discussion in Section II.C.3 above. Rule 402(b)(10) of Regulation Crowdfunding would Crowdfunding. 592 See, e.g., CrowdFund Connect Letter (stating clarify that a funding portal may deny access to an 598 See Howe, note 2. that rural communities could build new local based issuer if the funding portal believes that the issuer 599 See proposed Rule 402(b)(2)(iii) of Regulation co-operatives similar to the electric and telephone or its offering has potential for fraud or otherwise Crowdfunding. cooperatives for new technologies). raises concerns regarding investor protection. 600 See RocketHub Letter 1; Wright Letter 1.
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involves the exercise of judgment offerings. The proposed rules are As suggested by commenters, the indicative of the giving of investment intended to be sufficiently broad to proposed rule would permit a funding advice. cover any number of combinations of portal to create a ‘‘negotiation space’’ in implementing tools or mechanisms for a which those who have opened accounts D Providing Search Functions search, while limiting the search with the funding portal and issuers The proposed rules would permit a parameters to objective criteria. could discuss and potentially negotiate funding portal to provide, on its D Providing Communication Channels certain aspects of the issuer’s offering, platform, search functions or other tools including the price of the issuer’s that users could use to search, sort or The proposed rules would permit a securities.609 categorize the offerings available on the funding portal to provide, on its funding portal’s platform according to platform, communication channels by D Advising Issuers objective criteria.601 Search functions which investors could communicate The proposed rules would permit a could help potential investors to more with one another and with funding portal to advise an issuer about efficiently search for offerings that focus representatives of the issuer about the structure or content of the issuer’s on a specific industry, funding goal or offerings of securities displayed on the offering, including preparing offering other criteria. Under the proposed rules, funding portal’s platform, in accordance documentation.610 This advice is not the a funding portal also would be able to with the conditions set out in proposed type of advice that we believe should be categorize offerings into general subject Rule 303(c).605 The safe harbor would impermissible.611 We also believe that areas, so that a potential investor could specify that a funding portal (including funding portals and brokers could readily find those offerings on the its associated persons, such as its provide certain services to issuers in funding portal’s platform. The proposed employees) may not participate in these order to facilitate the offer and sale of rules would also permit more granular communications, other than to establish securities in reliance on Section 4(a)(6), tools that, for example, could provide a guidelines about communication and to and without this kind of advice to potential investor the ability to sort remove abusive or potentially issuers, crowdfunding as a method to offerings based on a combination of fraudulent communications. For the raise capital would not be viable. In different criteria, such as by the reasons discussed above, a funding particular, to the extent that the issuers percentage of the target offering amount portal would be required to make that may choose to conduct offerings in that has been met, geographic proximity communication channels available to reliance on Section 4(a)(6) would to the investor and number of days the general public and to restrict the include startups and small businesses, remaining before an offering is to posting of comments on those channels we expect that these issuers would seek close.602 The objective criteria specified to those who have accounts.606 In in many cases to obtain advice on the in the proposed rules are consistent addition, the funding portal would need structure of the offering from with those in the proposed safe harbor to require persons posting comments to intermediaries. Funding portals would for highlighting issuers and offerings.603 disclose, in the channel, whether they be in a position to provide this type of Consistent with the activities receive or would receive any assistance relatively efficiently, together specifically prohibited by statute, compensation for promoting an issuer. with the other services under the funding portals would not be permitted Communication channels should proposed rules that they would be to use criteria that search, sort or facilitate the access to information permitted to provide to issuers. categorize offerings based on the among members of the public and The proposed safe harbor would advisability of investing in the issuer or provide potential investors with the permit funding portals to advise an its offering or an assessment of any crowd’s insight as to the merits of an issuer about the structure and content of characteristic of the issuer, its business issuer or business plan.607 Restricting the issuer’s offering in a number of plan, its management, or risks funding portal participation should help ways. A funding portal could, for associated with an investment. One to ensure that funding portals do not example, provide pre-drafted templates commenter questioned whether a provide impermissible or forms for an issuer to use in its funding portal could give potential recommendations or investment advice. offering that would help it comply with investors the ability to create automated Moreover, requiring potential investors its proposed disclosure obligations.612 email notifications, based on criteria to have accounts with the funding portal they have provided to identify before posting a comment should credentials should be included with their provide a control that could aid in comments to aid the collective wisdom of the particular offerings on the funding crowd.’’) See also discussion in Section II.C.5.c 604 portal’s platform. The proposed rules promoting accountability for comments above. would permit funding portals to do so. made and help ensure that interested 609 See Pearfunds Letter; CFIRA Letter 3. We recognize that there are many persons, such as those associated with 610 See proposed Rule 402(b)(5) of Regulation potential ways that a tool or mechanism the issuer or receiving compensation to Crowdfunding. can be used to search, sort or categorize promote the issuer, are properly 611 Compare Registration of Municipal Advisors, identified.608 Release No. 34–63576 (Dec. 10, 2010) [76 FR 824 (Jan. 6, 2011)] (noting that Commission staff has 601 See proposed Rule 402(b)(3) Regulation taken the position that financial advisors that limit Crowdfunding. See also 158 Cong. Rec. 2231 (daily 605 See proposed Rule 402(b)(4) of Regulation their advisory activities to advising municipal ed. Mar. 29, 2012) (statement of Sen. Scott Brown) Crowdfunding. issuers as to the structuring of their financings, (‘‘Funding portals should be allowed to organize 606 See discussion in Section II.C.5.c above and rather than providing advice for compensation and sort information based on certain criteria. This proposed Rule 303(c)(2) of Regulation regarding the investment of assets, may not need to will make it easier for individuals to find the types Crowdfunding. register as investment advisers). of companies in which they can potentially invest. 607 See, e.g., Bradford, note 1. See also Howe, note 612 See, e.g., 158 Cong. Rec. S2231 (daily ed. Mar. This type of capability—commonly referred to as 2. 29, 2012) (statement of Sen. Scott Brown) curation—should not constitute investment 608 See 158 Cong. Rec. S2231 (daily ed. Mar. 29, (‘‘Similarly, funding portals should be allowed to advice.’’). 2012) (statement of Sen. Scott Brown) (‘‘In addition engage in due diligence services. This would 602 See proposed Rule 402(b)(3) of Regulation to facilitating communication between issuers and include providing templates and forms, which will Crowdfunding. investors, intermediaries should allow fellow enable issuers to comply with the underlying 603 See proposed Rule 402(b)(2)(ii) of Regulation investors to endorse or provide feedback about statute. In crafting this law, it was our intent to Crowdfunding. issuers and offerings, provided that these investors allow funding portals to provide such services.’’); 604 See CFIRA Letter 3. are not employees of the intermediary. Investors’ Continued
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Other examples of permissible similar constraints.617 For example, a receipt of compensation from a assistance could include, as commenters registered broker-dealer could, among registered broker-dealer, under these have suggested, advice about the types other things, recommend securities arrangements, be compliant with of securities the issuer can offer, the offered on the funding portal’s platform Regulation Crowdfunding. In particular, terms of those securities and the or provide services involving the these arrangements would have to be procedures and regulations associated handling of investor funds and compliant with proposed Rule 305 with crowdfunding.613 securities. Conversely, funding portals which prohibits, with certain may wish to offer certain services, exceptions, an intermediary from D Paying for Referrals including information technology compensating any person for providing The proposed rules would clarify that, services, to a broker-dealer, for a fee. the intermediary with the personally consistent with proposed Rule 305, a Each party to this type of arrangement identifiable information of any investor funding portal could compensate a third would, because it is a regulated entity, or potential investor.621 These proposed party for referring a person to the need to comply with all applicable provisions, taken as a whole, are funding portal if the third party does not regulations, including the rules of the intended to facilitate intermediaries’ provide the funding portal with registered national securities association cooperation with each other and personally identifiable information of of which it is a member. promote the use of the Section 4(a)(6) any potential investor. For example, a Proposed Rule 402(b)(7) would permit exemption to raise capital, while third party could provide hyperlinks to a funding portal to pay or offer to pay maintaining a clear audit trail. compensation to a registered broker or a funding portal in order to inform D Advertising potential investors learn about securities dealer for services in connection with offerings made in reliance on Section the funding portal’s offer or sale of The proposed rules would permit a 4(a)(6). Any compensation, unless paid securities in reliance on Section 4(a)(6). funding portal to advertise its existence to third party that is a registered broker Proposed Rule 402(b)(8) would permit a and engage in certain other limited 622 or dealer, could not be based, directly or funding portal to provide services to advertising activities. The proposed indirectly, on the purchase or sale of a and receive compensation from a rule does not limit the manner in which security offered in reliance on Section registered broker-dealer in connection a funding portal could advertise its 4(a)(6) on or through the funding with the funding portal’s offer or sale of existence. A funding portal may, for portal’s platform.614 Otherwise, such securities in reliance on Section example, choose to advertise through transaction-based compensation could 4(a)(6).618 Compensation could include social media, internet advertisements or trigger broker-dealer registration any monetary form of payment, such as traditional sources of advertising like requirements. We also believe that this fees, discounts, commissions, print media. prohibition on transaction-based concessions, reimbursement of expenses In addition, funding portals could identify issuers and offerings in the compensation would help to remove the and other allowances. The proposed advertisements on the basis of criteria incentive for high-pressure sales tactics safe harbor would not, however, permit that are reasonably designed to identify and other abusive practices.615 a funding portal to receive transaction- based compensation for referrals of a broad selection of issuers (so as not to D Compensation Arrangements With potential investors in other types of recommend or implicitly endorse one Registered Broker-Dealers offerings being effected by a registered issuer or offering over others) and are The proposed rules would specify broker-dealer, such as a Rule 506 applied consistently to all potential that a funding portal could enter into offering.619 The proposed rules would issuers and offerings. The criteria, certain arrangements with a registered require the funding portal to provide consistent with those described above with regard to highlighting issuers and broker-dealer, through which they could any services pursuant to a written offerings on the platform and the ability compensate each other for services.616 agreement with the registered broker- to provide investors with search In speaking with industry participants, dealer, and they also would require the functions, could include the type of we understand that because the statute payments to be compliant with, and not securities being offered, the geographic narrowly defines the permissible prohibited by, the rules of the registered location of the issuer, the industry or activities in which funding portals may national securities association of which 620 business segment of the issuer, the engage, funding portals may wish to the funding portal is a member. The number or amount of investment contract or affiliate with registered proposed rules would require that a commitments made, the progress in broker-dealers, which are not subject to funding portal’s offers to pay, and payments made to, a registered broker- meeting the issuer’s target offering amount and, if applicable, the 158 Cong. Rec. S5474–03 (daily ed. July 26, 2012) dealer, as well as a funding portal’s (statement of Sen. Jeff Merkley) (‘‘Subject to such maximum offering amount and the limits as the SEC determines necessary for the 617 Exchange Act Section 3(a)(80) limits the minimum or maximum investment protection of investors and the crowdfunding permissible securities activities of a funding portal amount.623 Of course, a funding portal issuers, funding portals should be able to provide to those in connection with the offer and sale of is subject to the statutory prohibition on (or make available through service providers) securities in reliance on Securities Act Section providing investment advice and services to assist entrepreneurs utilizing 4(a)(6). crowdfunding, including, for example, providing 618 See also FINRA, Payments to Unregistered recommendations, and soliciting, and so basic standardized templates, models, and Persons: FINRA Request Comment on Proposed checklists. Enabling them to help small businesses Consolidated FINRA Rule Governing Payments to 621 See proposed Rule 305 of Regulation construct simple, standard deal structures will Unregistered Persons, Regulatory Notice 09–69 Crowdfunding and discussion in Section II.C.7 facilitate quality, low-cost offerings.’’). (Dec. 2009), available at http://www.finra.org/web/ above. 613 See CFIRA Letter 2. groups/industry/@ip/@reg/@notice/documents/ 622 See proposed Rule 402(b)(9) of Regulation 614 See proposed Rule 402(b)(6) of Regulation notices/p120480.pdf. Crowdfunding. Crowdfunding. See also discussion in Section II.C.7 619 Receipt of transaction-based compensation in 623 As a funding portal could be subject to above. Proposed Rule 305 of Regulation connection with such referrals could cause a liability for fraud, it would need to consider Crowdfunding would implement the prohibition in funding portal to be a broker required to register whether its advertisements are not misleading or Section 4A(a)(10). with us under Exchange Act Section 15(a)(1) (15 otherwise fraudulent, such as by implying that past 615 See note 515. U.S.C. 78o(a)(1)). performance of offerings on its platform is 616 See proposed Rules 402(b)(7) and 402(b)(8) of 620 See, e.g., FINRA Rule 4311 (‘‘Carrying indicative of future results. See Exchange Act Rule Regulation Crowdfunding. Agreements’’). 10b–5 [17 CFR 240.10b–5].
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the safe harbor would not permit a consistent with the statutory directive in 218. Exchange Act Section 3(a)(80) funding portal to advertise in such a Exchange Act Section 3(a)(80). In our provides that a funding portal may not way that expresses that any of the view, a funding portal acting as offer investment advice, and the offerings offered on its platform are of custodian for securities through a book proposed rules would provide a a higher quality, are safer, or are more entry system likely would be engaged in conditional safe harbor for certain worthy investments compared to any handling or managing securities in activities that funding portals may others, whether offered on its platform violation of the statutory prohibition in engage in without violating the statutory or those of other intermediaries. Section 3(a)(80).629 prohibition on providing investment The proposed rule would also specify advice. Is the safe harbor sufficient, or D that the funding portal could not receive Directing Transmission of Funds should we provide additional guidance special or additional compensation for The proposed rules would provide regarding the status of funding portals identifying an issuer or offering in its that a funding portal could fulfill its under the Investment Advisers Act of advertisement, because this could create obligations with respect to the 1940? Why or why not? Please discuss. an incentive for the funding portal to maintenance and transmission of funds 219. Should the proposed safe harbor promote one issuer over another. This and securities, as set forth in proposed permit a funding portal to limit the prohibition should help to limit the Rule 303, without violating the offerings on its platform? If so, are the dissemination of information that may prohibition in Exchange Act Section criteria set forth in the proposed rules be misleading or easily misconstrued.624 3(a)(80)(D).630 Thus, subject to other appropriate? Why or why not? If not, what other criteria or conditions would D Denying Access Based on Potential applicable rules, a funding portal could be appropriate? Fraud or Investor Protection Concerns direct investors where to transmit funds or remit payment in connection with the 220. Are there any additional criteria In light of the comments received, the purchase of securities offered and sold that a funding portal should be proposed rules would require a funding in reliance on Section 4(a)(6).631 It also permitted to use when highlighting portal to deny access to its platform to, could direct a qualified third party to issuers and offerings on its platform? If or cancel an offering of, an issuer that release the proceeds of an offering to the so, which ones and why? Should a the funding portal believes may present issuer upon completion of the offering funding portal be permitted to highlight the potential for fraud or otherwise or to return investor proceeds when an issuers and offerings based on criteria raises concerns regarding investor investment commitment or offering is that specifically relate to the activities of protection, as is required under 632 users on its site, such as offerings that 625 cancelled. We believe that these proposed Rule 301(c). discrete activities would facilitate have been viewed by the largest number D Accepting Investor Commitments crowdfunding transactions without of visitors to the platform over a exceeding the scope of permissible particular time period? Why or why The proposed rules would permit a not? funding portal, on behalf of an issuer, to activities, and without unduly raising investor protection concerns. 221. As a condition of the proposed accept investment commitments from safe harbor, should we require funding potential investors for securities offered Request for Comment portals to clearly display, on their in reliance on Section 4(a)(6) by that platforms, the objective criteria they use issuer on the funding portal’s 216. Does the proposed safe harbor appropriately define the actions in in limiting or highlighting offerings? platform.626 Given the breadth of the Why or why not? statutory prohibition on holding, which a funding portal may engage? Are there other activities that should be 222. Under the proposed safe harbor, managing, possessing or otherwise should we permit a funding portal to handling investor funds or securities, addressed in the safe harbor? Are there activities included in the proposed safe post news, such as market news and we believe that it is important to clarify news about a particular issuer or the activities, in this area, in which a harbor that should be modified or eliminated? If so, which activities and industry, on its platform? Why or why funding portal may permissibly engage, not? If so, what restrictions, conditions including with regard to accepting why? 217. Are there any additional or other safeguards should apply, in investment commitments.627 particular so that a funding portal Although some commenters conditions that should apply to the activities covered under the proposed would not be providing impermissible expressed the view that funding portals investment advice? For example, are should be permitted to handle investor safe harbor? If so, which conditions, and why? there certain types of news or news funds and securities in a limited feeds that should or should not be capacity as the issuer’s transfer agent or permitted, or should we restrict a 628 629 to be the holder of record, we do not Cf. Exchange Act Section 3(a)(23) [15 U.S.C. funding portal from posting only believe that these activities would be 78c(a)(23)] (defining ‘‘clearing agency’’ as an intermediary who ‘‘acts as a custodian of securities positive news coverage? Should a in connection with a system for the central funding portal be able to freely select 624 In response to one commenter, we note that handling of securities’’ where the securities may be the news stories it posts, or should there this would preserve the ability of funding portals administered ‘‘by bookkeeping entry without to pay for search listings or advertisements in physical delivery of securities certificates’’). be some objective criteria? Please online social networks. See Cera Technology Letter. 630 We believe the statutory requirements, and the explain. 625 See proposed Rule 402(b)(10) of Regulation rules we are proposing to implement such 223. Are the proposed limitations on Crowdfunding. See also discussion in Section II.C.3 requirements, provide clear requirements for the a funding portal advertising its past above. protection of investor funds. In addition, the offerings appropriate? Should we 626 See proposed Rule 402(b)(11) of Regulation requirement for the funding portals to maintain a Crowdfunding. fidelity bond under proposed Rule 400(f) provides consider other advertising limitations? 627 As described above, we are proposing other an additional protection with respect to investor Should the proposed advertising rules measures that would prescribe the requirements for funds. See discussion in Section II.D.1 above. See be modified in any other way? funding portals with respect to the maintenance also proposed Rule 400(f) of Regulation 224. Should we permit a funding and transmission of funds, including the use of a Crowdfunding. portal to receive transaction-based qualified third party to hold and transmit investor 631 See proposed Rule 402(b)(12) of Regulation funds. See discussion in Section II.C.5.d above. Crowdfunding. compensation for referring potential 628 See Crowdfunding Offerings Ltd. Letter 4; 632 See proposed Rule 402(b)(13) of Regulation investors to a registered broker-dealer? RocketHub Letter 1. Crowdfunding. Why or why not? If so, should we
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impose disclosure requirements or other opened an account with the funding AML provisions,636 as set forth in measures to mitigate potential conflicts? portal? 634 Chapter X of Title 31 of the Code of What should those requirements be and Federal Regulations.637 We 4. Compliance why? Should we permit a funding portal preliminarily believe that funding to receive transaction-based a. Policies and Procedures portals could play a critical role in compensation from an affiliate? Why or The proposed rules would require a detecting, preventing, and reporting why not? funding portal to implement written money laundering and other illicit financing, such as market manipulation 225. In addition to transaction-based policies and procedures reasonably and fraud. As discussed in more detail compensation, are there other types of designed to achieve compliance with below, we believe it is important for compensation that we should prohibit the federal securities laws and funding portals to comply with BSA funding portals from paying to persons regulations thereunder, relating to its requirements, because they would be who are not registered broker-dealers? business as a funding portal.635 Under engaged in a similar business as a the proposed rules, a funding portal Should we permit, as proposed, funding category of registered broker-dealers— would have discretion to establish, portals to enter into compensation introducing brokers—which have BSA implement, maintain and enforce those arrangements with registered broker- obligations.638 Specifically, while a policies and procedures based on its dealers or with any other regulated funding portal is prohibited by statute relevant facts and circumstances. We entities? Why or why not? If so, what from handling, managing or possessing types of regulated entities should be believe that it is important to provide customer funds or securities, which included? Please explain. this flexibility in order to accommodate means it cannot accept cash from 226. Are there circumstances in the various business models funding customers or maintain custody of which a funding portal could provide portals may have while at the same time customer securities—and an introducing transfer agent services without handling accomplishing the Commission’s broker typically does not accept cash or investor funds or securities? If so, please investor protection goals. We also maintain custody of customer describe. recognize that FINRA or any other securities—we believe that a funding registered national securities association portal, like an introducing broker, is in 227. Should the proposed safe harbor may have separate requirements in this permit a funding portal to engage in any the best position to ‘‘know its regard. Inherent in the notion of customers,’’ and to identify and monitor other activities in connection with the reasonably designed compliance required communication channels? Why for suspicious and potentially illicit policies and procedures is that a activity at the individual customer level, or why not? If so, which activities and funding portal would promptly update why? as compared to the qualified third party, its policies and procedures to reflect which may not see such activity given 228. Should the proposed safe harbor changes in applicable rules and its less direct contact with individual include other types of activities that regulations, as well as its business customers.639 We also believe it is potentially could be construed as practices and the changing marketplace. important for funding portals to comply investment advice? If so, which ones Request for Comment with BSA requirements because they and why? Would an exemption from the would be in engaged in the same Investment Advisers Act of 1940 or 231. Should we specify requirements business of effecting securities other regulatory relief be appropriate in for funding portals’ compliance policies transactions for the accounts of others as connection with such activities? Are and procedures? Why or why not? If so, registered broker-dealers, which have there types of advice an issuer may seek what requirements and why? BSA obligations. To require otherwise from a funding portal, that would not be 232. Should we require funding could inadvertently steer potential considered advice about the structure or portals to update their policies and money launders to funding portals. content of the issuer’s offering? Please procedures to reflect changes in Moreover, we expect that funding explain. applicable rules and regulations within portals would often facilitate offerings 229. Should the agreed-upon terms of a specified time period after the change of microcap or low-priced securities, an arrangement with a funding portal be occurs? If so, what time period would be which may be more susceptible to fraud required to be documented in a written appropriate (e.g., 30 days, 60 days, six and market manipulation.640 We believe agreement with the issuer? Are there months)? certain terms that should be included? 636 See proposed Rule 403(b) of Regulation b. Anti-Money Laundering Crowdfunding. See also proposed Rule 401(b) and 230. Should the proposed safe harbor The proposed rules require that discussion in Section II.D.2 above, which discusses permit funding portals to provide a how funding portals fall within the scope of funding portals comply with certain Chapter X of Title 31 of the Code of Federal mechanism by which investors can rate Regulations. an issuer or an offering? If so, what 634 Any person who promotes an issuer’s offering 637 See note 562. safeguards, if any, should be for compensation, whether past or prospective, or 638 See 31 C.F.R 1023.100 et seq. required? 633 Should the Commission, as who is a founder or an employee of an issuer that 639 See, e.g., NASD (n/k/a FINRA), NASD a condition of the safe harbor, limit the engages in promotional activities on behalf of the Provides Guidance To Member Firms Concerning issuer on the intermediary’s platform, must clearly Anti-Money Laundering Compliance Programs ability to rate to persons who have disclose in all communications on the Required by Federal Law, Special Notice to intermediary’s platform, respectively, the receipt of Members 02–21 (Apr. 2002), available at https:// 633 An intermediary that is a registered broker compensation and that he or she is engaging in www.finra.org/Industry/Regulation/Notices/2002/ could provide a mechanism for investors to rate an promotional activities on behalf of the issuer. See p003703 (stating that ‘‘introducing brokers issuer or offering. But see Social Media Web sites proposed Rule 302(c) of Regulation Crowdfunding. generally are in the best position to ‘know the and the Use of Personal Devices for Business 635 See proposed Rule 403(a) of Regulation customer,’ and thus to identify potential money Communications, FINRA Regulatory Notice 11–39 Crowdfunding. As a condition to exempting laundering concerns at the account opening stage, (Aug. 2011), available at http://www.finra.org/web/ funding portals from the requirement to register as including verification of the identity of the groups/industry/@ip/@reg/@notice/documents/ a broker or a dealer under Exchange Act Section customer and deciding whether to open an account notices/p124186.pdf (noting that a firm is 15(a)(1) (15 U.S.C. 78o(a)(1)), Exchange Act Section for a customer.’’). responsible under NASD Rule 2210 for third-party 3(h)(1)(C) provides that registered funding portals 640 A number of the Commission’s enforcement site content if the firm has adopted or has become must comply with such other requirements as the actions in the BSA area have involved broker- entangled with the site’s content). Commission determines appropriate. dealers failing to report suspicious activity
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that imposing the monitoring and laundering.644 We believe that Congress dealer in securities, registered or reporting requirements of the BSA on was aware of these risks, which is why, required to be registered with the funding portals would establish a in part, it chose to require that securities Securities and Exchange Commission valuable oversight, prevention and offered and sold in reliance on Section under the Securities Exchange Act of detection mechanism. The Financial 4(a)(6) be sold through a regulated 1934, except persons who register Action Task Force (‘‘FATF’’), an inter- intermediary.645 pursuant to [S]ection 15(b)(11) of the governmental body whose objective is to The BSA 646 and its implementing Securities Exchange Act of 1934.’’ 653 As set standards and promote effective regulations establish the basic discussed above in Section II.D.2.a, for implementation of legal, regulatory and framework for AML obligations imposed purposes of Chapter X of Title 31 of the operational measures for combating on financial institutions.647 The BSA is Code of Federal Regulations, a funding money laundering, terrorist financing intended to facilitate the prevention, portal is ‘‘required to be registered’’ as and other related threats to the integrity detection and prosecution of money a broker or dealer with the Commission of the international financial system, laundering, terrorist financing and other under the Exchange Act. has also identified low-priced and financial crimes. Below, we clarify Finally, we note that while other privately-placed securities as potential which aspects of these regulations we parties involved in transactions vehicles for laundering money.641 As anticipate would be relevant to funding conducted pursuant to Section 4(a)(6) explained by FATF, these securities portals, given the limited scope of their through a funding portal (such as a bank pose a money laundering risk because activities.648 acting as a qualified third party to hold they are often used to generate illicit Among other things, the BSA and its investor funds) have their own BSA assets through market manipulation, implementing regulations require a obligations, again, as noted above, we insider trading and fraud.642 In ‘‘broker or dealer in securities’’ believe that the funding portal, like an addition, unlawfully acquired assets can (sometimes referred to in the regulations introducing broker, is in the best be used to purchase these securities in as a ‘‘broker-dealer’’) to: (1) Establish position to ‘‘know its customers,’’ and to order to resell them and create the and maintain an effective AML program identify and monitor for suspicious and 649 appearance of legitimately sourced (‘‘AML Program Requirement’’); (2) potentially illicit activity at the funds.643 We believe that securities establish and maintain a Customer individual customer level. offered and sold in reliance on Section Identification Program (‘‘CIP 650 While a funding portal would be 4(a)(6) could be susceptible to money Requirement’’); (3) monitor for and required to comply with all of the laundering because they are low priced, file reports of suspicious activity (‘‘the 651 provisions in the BSA and its are placed in an offering that is exempt SAR Requirement’’); and (4) comply implementing regulations that are from registration and not subject to the with requests for information from the applicable to broker-dealers, the filing review process of a registered Financial Crimes Enforcement Network Commission anticipates that, as a (‘‘FinCEN’’) (the ‘‘Section 314(a) offering. In addition, we expect that practical matter, a funding portal’s BSA Requirements’’).652 For purposes of the many of the issuers relying on the obligations would typically be limited, BSA obligations, a ‘‘broker or dealer in exemption in Section 4(a)(6) may be based on the relatively limited securities securities’’ is defined as a ‘‘broker or shell companies, which have been activities in which funding portals associated with a high risk of money would be permitted to engage. For a 644 See, e.g., Joint Release, Guidance on Obtaining and Retaining Beneficial Ownership Information, typical transaction involving an involving microcap securities fraud. See, e.g., In the FIN–2010–G001 (Mar. 5, 2010) (noting that Matter of Gilford Securities, Incorporated, Ralph individual U.S. investor, funding portal criminals, money launderers, tax evaders and Worthington, IV, David S. Kaplan, and Richard W. activities, for example, would not terrorists may exploit the privacy and Granahan, Release No. 34–65450 (Sept. 30, 2011); confidentiality surrounding some business entities, involve the maintenance of In the Matter of Elizabeth Pagliarini, Release No. including shell companies and other vehicles ‘‘correspondent accounts’’ with foreign 34–63964 (Feb. 24, 2011). designed to conceal the nature and purpose of illicit financial institutions or the offer of 641 See Financial Action Task Force (‘‘FATF’’), transactions and the identities of the persons ‘‘private banking accounts’’ that would Money Laundering and Terrorist Financing in the associated with them); Financial Crimes Securities Sector 20–21 (Oct. 2009) (‘‘FATF Enforcement Network, The Role of Domestic Shell trigger the corresponding due diligence Typology’’) (discussing the money laundering risks Companies in Financial Crime and Money obligations under the BSA.654 While it associated with low priced securities, private Laundering: Limited Liability Companies (Nov. is possible that a funding portal’s issuers and shell companies). 2006), available at http://www.fincen.gov/news_ 642 activities could trigger other BSA Id. As explained in the FATF Typology, illicit room/rp/files/LLCAssessment_FINAL.pdf. actors ‘‘can either use existing shares that are 645 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012) obligations, we expect that the nature of already publicly traded or start a shell company for (statement of Sen. Carl Levin) (‘‘Senior citizens, a funding portal’s business would the express purpose of engaging in those illicit state securities regulators, and others worry that typically implicate the AML Program activities. In addition, criminal organizations also this will give rise to money laundering and fraud Requirement, the CIP Requirement, the have been known to use illicit assets generated risks.’’) outside the securities industry to engage in market 646 See BSA, note 562. SAR Requirement and the information manipulation and fraud.’’ Id. 647 See 31 CFR Chapter X. sharing provisions of the Section 314(a) 643 Id. ‘‘Moreover, criminal organizations can also 648 Requirements. We, therefore, highlight initially invest in a private company that they can We also propose to impose on funding portals then use as a front company for commingling illicit obligations that are analogous to those imposed on these obligations below. and legitimate assets. They can then take this broker-dealers pursuant to Exchange Act Rule 17a– Brokers and funding portals, which as company public through an offering in the public 8 (17 CFR 240.17a–8), which requires broker- noted above meet the definition of securities markets, thus creating what appear to be dealers to comply with the reporting, recordkeeping legitimate offering revenues. Alternatively, criminal and record retention requirements of the BSA’s organizations can acquire a publicly traded implementing regulations, as found in Chapter X of 653 31 CFR 1010.100(h). As noted above, certain company and use it to launder illicit assets.’’ Id. Title 31 of the CFR. These proposed obligations are FinCEN regulations apply to a ‘‘broker-dealer,’’ The FATF Typology further highlighted the risk of discussed in Section II.D.5 below, which also which is defined as a ‘‘person registered or required shell companies that, for example, ‘‘can be addresses other recordkeeping requirements we are to be registered as a broker or dealer with the established to accept payments from criminal proposing for funding portals. See proposed Rule Commission under the Securities Exchange Act of organizations for non-existent services. These 404(f) of Regulation Crowdfunding. 1934 (15 U.S.C. 77a et seq.), except persons who 649 payments, which appear legitimate, can be See 31 U.S.C. 5318(h). See also 31 CFR register pursuant to 15 U.S.C. 78o(b)(11).’’ 31 CFR deposited into depository or brokerage accounts 1023.210; FINRA Rule 3310. 1023.100(b). Such broker-dealers also would meet and either wire transferred out of a jurisdiction or 650 31 CFR 1023.220. the definition of ‘‘broker or dealers in securities’’ used to purchase securities products that are easily 651 31 CFR 1023.320. See also FINRA Rule 3310. above. transferable or redeemable.’’ Id. at 39. 652 31 CFR 1010.520. 654 See 31 CFR 1010.610 and 1010.620.
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‘‘broker,’’ 655 can satisfy the AML The CIP rule provides that, under of federal law enforcement agencies.670 Program Requirement by implementing certain defined circumstances, brokers, Law enforcement agencies with criminal and maintaining an AML program that which would include funding portals, investigative authority are permitted to complies with SRO rules.656 Generally, may rely on the performance of another request that FinCEN solicit, on the under existing rules applicable to financial institution to fulfill some or all agency’s behalf, certain information brokers, an AML program must be in of the requirements of the broker’s from a financial institution, including writing and include, at a minimum: (1) CIP.661 In order for brokers (which brokers; FinCEN also may make similar Policies, procedures and internal would include funding portals) to rely requests on its own behalf or on behalf controls reasonably designed to achieve on the other financial institution, for of certain components of Treasury.671 compliance with the BSA and its example, the reliance must be Upon receiving such a request, a broker implementing rules; (2) policies and reasonable.662 The other financial (which would include a funding portal) procedures that can be reasonably institution also must be subject to an is required to search its records to expected to detect and cause the AML compliance program rule and be determine whether it has accounts for, reporting of transactions under 31 regulated by a federal functional or has engaged in transactions with, any U.S.C. 5318(g) and the implementing regulator.663 Additionally, the broker specified individual, entity or regulations thereunder; (3) the and the other financial institution must organization.672 If the broker identifies designation of an AML compliance enter into a contract, and the other an account or transaction identified officer, including notification to the financial institution must certify with any individual, entity or SROs; (4) ongoing AML employee annually to the broker that it has organization named in the request, it training; and (5) an independent test of implemented an AML program and that must report certain relevant information the firm’s AML program, annually for it will perform the specified to FinCEN.673 Brokers also must most firms.657 requirements of the broker’s CIP.664 designate a contact person (typically the FinCEN’s BSA regulations also Under the SAR Requirement, brokers firm’s AML compliance officer) to require brokers, and thus would require and funding portals, which as noted receive the requests and must maintain funding portals, to establish a written above meet the definition of the confidentiality of any request and CIP that, at a minimum, includes ‘‘broker,’’ 665 must file a suspicious any responsive reports to FinCEN.674 procedures for: (1) Obtaining customer activity report if: (1) A transaction is Request for Comment identifying information from each conducted or attempted to be conducted customer prior to account opening; (2) by, at, or through a broker; (2) the 233. We identified the AML Program, verifying the identity of each CIP, SAR and 314(a) Requirements as 658 transaction involves or aggregates funds customer, to the extent reasonable or other assets of at least $5,000; and (3) the most significant requirements that and practicable, within a reasonable the broker knows, suspects or has would most typically apply to funding time before or after account opening; (3) reason to suspect that the transaction: (i) portals, in light of the nature of their making and maintaining a record of Involves funds or is intended to disguise business. Under the proposed rules, obtained information relating to identity funds derived from illegal activity, (ii) is however, funding portals would be verification; (4) determining, within a designed to evade requirements of the subject to all BSA requirements reasonable time after account opening or BSA, (iii) has no business or apparent applicable to registered brokers. Are earlier, whether a customer appears on lawful purpose, and the broker knows of there any other requirements under the any list of known or suspected terrorist no reasonable explanation for the BSA and its implementing regulations organizations designated by transaction after examining the available that should be clarified, with regard to Treasury; 659 and (5) providing each facts, or (iv) involves the use of the application in the crowdfunding customer with adequate notice, prior to broker-dealer to facilitate criminal context, or excluded from application to opening an account, that information is activity.666 The suspicious activity must funding portals? If so, which ones? being requested to verify the customer’s 234. Is express compliance with the identity.660 be reported on a form prescribed by FinCEN, which includes instructions.667 BSA by funding portals, as proposed, necessary to protect against the risk of 655 See discussion in this section above and in Brokers, which would include funding Section II.D.2.a above. portals, must maintain a copy of any money laundering, given that other 656 31 CFR 1023.210 (providing that a broker- suspicious activity report filed, as well regulated entities involved in dealer is deemed to have satisfied the requirement as supporting documentation for a transactions conducted pursuant to to establish an AML program if it (1) implements Section 4(a)(6), such as the qualified and maintains an anti-money laundering program period of five years from the date of 668 that complies with the rules, regulations or filing the report. The report (and any third party we propose to require be requirements of its SRO governing such programs; information that would reveal its involved in the transmission of and (2) the rules, regulations or requirements of the existence) must be kept confidential.669 proceeds, are subject to the BSA? Please SRO have been approved, if required, by the SEC). Under the Section 314(a) explain. 657 See, e.g., FINRA Rule 3310. FINRA’s existing 235. Is there another approach, other AML program rule applies to member broker- Requirements, brokers, which would dealers. FINRA or any other national registered include funding portals, also must than the one we have proposed, to help securities association may adopt an AML Program respond to mandatory requests for protect against the risk of money Requirement specific to funding portals. Consistent information made by FinCEN on behalf laundering, that does not rely on BSA with the BSA, any such rule must require that the compliance? If so, please explain. AML program include, at a minimum: the development of internal policies, procedures and 661 31 CFR 1023.220(a)(6). c. Privacy controls; designation of a compliance officer, an 662 31 CFR 1023.220(a)(6)(i). ongoing employee training program and an 663 31 CFR 1023.220(a)(6)(ii). Section 4A(a)(9) requires independent audit function to test the program. See 664 intermediaries to take such steps to 31 U.S.C. 5318(h). 31 CFR 1023.220(a)(6)(iii). 665 658 For purposes of the CIP requirements, a See discussion in this section above and in 670 customer is generally defined as ‘‘a person that Section II.D.2.a above. 31 CFR 1010.520. opens a new account.’’ 31 CFR 1023.100(d). 666 31 CFR 1023.320(a). 671 31 CFR 1010.520(b). 659 To date, there are no designated government 667 31 CFR 1023.320(b). 672 31 CFR 1010.520(b)(3). lists to verify specifically for CIP purposes. 668 31 CFR 1023.320(d). 673 31 CFR 1010.520(b)(3)(ii). 660 31 CFR 1023.220. 669 31 CFR 1023.320(e). 674 31 CFR 1010.520(b)(3)(iii) and (iv).
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protect the privacy of information affiliates of covered persons (i.e., parties.691 We believe that these collected from investors as the brokers, dealers, investment companies provisions, in combination with the Commission shall, by rule, determine and both investment advisers and Privacy Rules, address the commenter’s appropriate. One commenter suggested transfer agents registered with the concern. Although one commenter that the responsibility for storing Commission) from soliciting the urged us not to permit intermediaries to confidential information should rest consumer based on eligibility store information with third parties,692 with the intermediary and that data information (i.e., certain financial we note that our recordkeeping rules should not be shared with, or stored by, information, such as information applicable to brokers permit the use of any other organization.675 The regarding the consumer’s transactions or third-party service providers for storing commenter recommended requiring experiences with the covered person) records.693 We are proposing a similar intermediaries to store information in a received from the covered person.683 requirement for funding portals, as secure fashion on a dedicated, secure Regulation S–ID generally requires discussed in Section II.D.5 below. A server. The commenter also urged the brokers to develop and implement a different requirement for funding Commission to identify, by rule or written identity theft prevention portals would not be consistent with the otherwise, an appropriate industry program that is designed to detect, requirements for brokers and may not be standard for protection of this data, prevent and mitigate identity theft in economically feasible for some perhaps looking to standards adopted in connection with certain existing intermediaries. the legal and banking industries as accounts or the opening of new examples. Another commenter accounts.684 Request for Comment suggested that a procedure should be While we recognize that 236. Is it appropriate to implement established to allow the public to crowdfunding activities, like any the requirements of Section 4A(a)(9) by control the delivery and the amount of Internet-based communications, could applying the requirements of the emails soliciting funds for raise novel issues not already addressed Privacy Rules to funding portals? Why crowdfunding projects.676 in existing regulations and guidance, we or why not? Is the nature of a funding The proposed rules would implement believe that it is unnecessary to repeat portal’s activities such that a different the requirements of Section 4A(a)(9) by identical, existing requirements, in a requirement to protect privacy would be subjecting funding portals, as brokers, to separate rule proposal only for funding more appropriate? Please explain. the same privacy rules applicable to portals, or to propose rules that would 237. Are there specific considerations brokers.677 Proposed Rule 403(c), apply not only to crowdfunding, but to with respect to privacy and therefore, would require funding portals a broader set of technology-based crowdfunding that are not already to comply with Regulation S–P (Privacy activity. We believe that the adequately addressed in the Privacy of Consumer Financial Information and requirements of the Privacy Rules Rules? If so, what are they and how Safeguarding Personal Information),678 would impose relatively minimal costs should we address them? Regulation S–AM (Limitations on on funding portals,685 but provide key 238. Should we provide additional Affiliate Marketing) 679 and Regulation investor protections, and that persons guidance concerning the application of S–ID (Identity Theft Red Flags) 680 who deal with funding portals, as the Privacy Rules to funding portals? If (collectively, the ‘‘Privacy Rules’’).681 opposed to brokers, should not have to so, which parts and why? Regulation S–P governs the treatment lose the benefit of those protections. 239. Under the proposed rules, of nonpublic personal information by Although one commenter suggested funding portals would be required to brokers, among others.682 It generally the development of a procedure to allow collect information about their requires a broker to provide notice to the public to control the delivery and customers in order to comply with anti- investors about its privacy policies and the amount of emails that solicit funds money laundering provisions, as brokers 686 practices; describes the conditions for crowdfunding projects, we note are required to do, as discussed above under which a broker may disclose that the definition of funding portal in in relation to proposed Rule 402(b). At nonpublic personal information about Exchange Act Section 3(a)(80) and the the same time, intermediaries would be 687 investors to nonaffiliated third parties; proposed rules prohibit a funding required to take steps to protect the and provides a method for investors to portal from soliciting investors for privacy of information collected from prevent a broker from disclosing that specific crowdfunding projects. customers, as set forth in Section information to most nonaffiliated third Moreover, Section 4A(b)(2) and the 4A(a)(9). Do our proposed rules achieve 688 parties by ‘‘opting out’’ of that proposed rules prohibit issuers from the appropriate balance between these disclosure, subject to certain exceptions. advertising the terms of an offering, two objectives? What other approaches Regulation S–AM allows a consumer, in except for directing potential investors would achieve an appropriate balance? 689 certain limited situations, to block to the intermediary. The proposed Please explain. rules 690 also incorporate prohibitions 675 See RocketHub Letter 1. on the transmission of personally d. Inspections and Examinations 676 See Bach Letter. identifiable information in connection Congress specified that funding 677 See proposed Rule 403(c) of Regulation with intermediaries’ advertisements, portals must remain subject to our Crowdfunding. referrals and payments to third 694 678 See Privacy of Consumer Financial examination authority. Under the Information (Regulation S–P), Release No. 34–42974 683 17 CFR part 248 subpart B. (June 22, 2000) [65 FR 40334 (June 29, 2000)]. 691 See discussion in Sections II.C.7 and II.D.3 684 679 See Regulation S–AM: Limitations on Affiliate See Identity Theft Red Flags Rules, note 680. above. 685 Marketing, Release No. 34–60423 (Aug. 4, 2011) [74 See discussion in Section IV.C.2.l below. 692 See RocketHub Letter 1. 686 FR 40398 (Aug. 11, 2009)]. See Bach Letter. 693 See 17 CFR 240.17a–4(i). 687 680 See Identity Theft Red Flags Rules, Release See proposed Rule 300(c) of Regulation 694 As a condition to exempting funding portals No. 34–69359 (Apr. 10, 2013) [78 FR 23637 (Apr. Crowdfunding. from the requirement to register as broker-dealers 19, 2013)] (‘‘Identity Theft Red Flags Rules’’) 688 See proposed Rule 204 of Regulation under Exchange Act Section 15(a)(1) (15 U.S.C. (adopted jointly with the Commodity Futures Crowdfunding. 78c(a)(1)), Exchange Act Section 3(h)(1)(A) requires Trading Commission). 689 See discussion in Section II.B.4 above. that registered funding portals remain subject to, 681 See 17 CFR part 248. 690 See proposed Rules 305 and 402(b)(6) of among other things, our examination authority. See 682 See 17 CFR part 248 subpart A. Regulation Crowdfunding. proposed Rule 403(d) of Regulation Crowdfunding.
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proposed rules, a funding portal would securities through the funding portal rules pertaining to their crowdfunding be required to permit the examination and to persons having control with activities. and inspection of all of its business and respect to those issuers. This proposed The proposed rules would require a business operations that relate to its requirement would better enable funding portal to maintain all notices activities as a funding portal, such as its regulators to gather information about provided by the funding portal to premises, systems, platforms and the activities in which the funding issuers and investors generally through records, by our representatives and by portal has been engaged, as well as the funding portal’s platform or representatives of the registered national about the issuers and investors that use otherwise.702 This proposed securities association of which it is a the funding portal for their requirement would assist regulatory member. crowdfunding transactions. examination of the funding portal for any communications to issuers or Request for Comment The proposed rules also would require a funding portal to maintain investors that could indicate violations 240. Are there any additional records of all communications that of particular provisions of proposed provisions that should be incorporated occur on or through its platform.698 Regulation Crowdfunding. in the proposed rules regarding Some commenters expressed concerns The proposed rules would require a inspection and examination of funding about the ability of funding portals to funding portal to maintain records of all portals? Please explain. track and store communications that written agreements (or copies thereof) 5. Records To Be Created and take place outside of their platforms.699 entered into by a funding portal, relating Maintained by Funding Portals We believe that funding portals should to its business as such.703 This proposed be responsible to keep records of only requirement is intended to capture The proposed rules would require a the communications that occur on or details of any funding portal funding portal to create and maintain 695 through their platforms, including in the arrangements and the funding portal’s certain records. We believe that it is compliance with applicable important for funding portals to be communication channels they are required to provide. We do not believe requirements. subject to a recordkeeping requirement The proposed rules would require a in order to create a meaningful audit they should be responsible for keeping records of communications that take funding portal to create and maintain trail of the crowdfunding transactions daily, monthly and quarterly summaries and communications. Without these place exclusively outside of their platforms, such as on third-party social of transactions effected through it.704 records, the Commission and any The purpose of this proposed registered national securities association media sites or elsewhere on the Internet. The proposed rules also would require requirement is to help ensure that an would have difficulty examining a historical and ongoing record exists of funding portal for compliance with the a funding portal to keep all records related to persons that use the transactions that have been requirements of Regulation conducted through the funding portal, Crowdfunding, the BSA 696 and the communication services provided by a especially given the high volume of federal securities laws. funding portal to promote an issuer’s transactions we expect to occur on The proposed rules would require a securities or to communicate with funding portal to make and preserve potential investors.700 These proposed funding portals’ platforms. The proposed rules would require a certain records for five years, with the requirements would help regulators to funding portal to make and keep a log records retained in a readily accessible examine the funding portal for any of each offering, reflecting the progress place for at least the first two years.697 potential connection with promoters, of each issuer in meeting the target The records would include those including associated persons that act as offering amount.705 This proposed regarding investors who purchase or promoters, whose promotion or requirement is intended to support, or attempt to purchase securities through communication activities could cause the funding portal, such as information the funding portal to lose its exemption otherwise be compared against, from broker-dealer registration. information included on an issuer’s relating to educational materials 706 provided to investors, account opening The proposed rules would require a filing of Form C–U. The proposed rules also would and transactions (including notices of funding portal to maintain records require that a funding portal make and investment commitments and demonstrating its compliance with reconfirmations), as required under requirements of Subparts C 702 These would include, but not be limited to: (1) Subpart C. They also would include (intermediary obligations) and D Notices addressing hours of funding portal 701 records relating to issuers that offer and (funding portal requirements). This operations (if any); (2) funding portal malfunctions; sell, or attempt to offer and sell, proposed requirement would require a (3) changes to funding portal procedures; (4) funding portal to keep all the records it maintenance of hardware and software; (5) instructions pertaining to access to the funding 695 See proposed Rule 404 of Regulation has created in the course of its business portal; and (6) denials of, or limitations on, access Crowdfunding. Exchange Act Section 3(h)(1)(C) in order to comply with Regulation to the funding portal. See proposed Rule 404(a)(6) permits us to impose, as part of our authority to of Regulation Crowdfunding. exempt funding portals from broker registration, Crowdfunding. This requirement alone 703 ‘‘such other requirements under [the Exchange Act] would not, however, require the See proposed Rule 404(a)(7) of Regulation as the Commission determines appropriate.’’ creation of any records or proscribe the Crowdfunding. 704 696 In the release adopting Exchange Act Rule These would include: (1) Issuers for which the format or manner of any records. This target offering amount has been reached and funds 17a–8 (17 CFR 240.17a–8), which requires broker- proposed requirement would not only dealers to comply with the reporting, recordkeeping distributed; and (2) transaction volume, expressed and record retention rules adopted under the BSA, assist in regulators’ compliance in number of transactions, number of securities the Commission noted that the ‘‘most effective examinations, but also should assist involved in a transaction and total amounts raised means of enforcing compliance with the reporting funding portals in complying with the by and distributed to issuers, as well as total dollar and recordkeeping requirements is through on-site amounts raised across all issuers, expressed in U.S. examinations of broker-dealer firms conducted by dollars. See proposed Rule 404(a)(8) of Regulation 698 the Commission and the self-regulatory See id. Crowdfunding. organizations. . . .’’ See Recordkeeping by Brokers 699 See CFIRA Letter 13. 705 See proposed Rule 404(a)(9) of Regulation and Dealers, Release No. 34–18321 (Dec. 10, 1981) 700 See proposed Rule 404(a)(3) of Regulation Crowdfunding. [46 FR 61454 (Dec. 17, 1981)]. Crowdfunding. 706 See discussion in Section II.B.1 above. See 697 See proposed Rules 404(a)(1) through (9) of 701 See proposed Rule 404(a)(5) of Regulation also Section II.C.5 above for a discussion of Regulation Crowdfunding. Crowdfunding. proposed Rule 303(a) of Regulation Crowdfunding.
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preserve its organizational documents, records are the property of the funding analogous to that imposed on broker- during its operation as a funding portal portal and would be surrendered dealers under Exchange Act Rule 17a– and of any successor funding portal.707 promptly on request by the Commission 8.713 This requirement is intended to This proposed requirement is intended or the national securities association of ensure that funding portals create and to ensure that these key documents are which the funding portal is a maintain an accurate record of their maintained for identification and member.710 The funding portal also compliance with BSA obligations, verification purposes. would be required to file, with the including the requirement to maintain These recordkeeping requirements are registered national securities association records of suspicious activity reports.714 similar to, but in many ways less of which it is a member, this written As noted above, we believe that it is extensive than, those for registered undertaking, signed by a duly important for funding portals to be broker-dealers under Exchange Act Rule authorized representative of the third subject to a recordkeeping requirement, 17a–4(a).708 Because funding portals party. We believe that this provision along the same lines of the requirement would be engaged in a more limited would help to ensure that records applicable to brokers, to create a range of activities than brokers and a maintained or preserved by a third party meaningful audit trail of the relatively high proportion of funding would be readily available for crowdfunding transactions and portals would be new market entrants examination. communications that occur on and that may not have formal recordkeeping Under the proposed rules, all records through their platforms. Without these practices in place, the proposed of a funding portal would be subject at records, we, FINRA or any other requirements are relatively streamlined, any time, or from time to time, to such registered national securities compared to those for brokers. The reasonable periodic, special or other association, would have difficulty proposed funding portal recordkeeping examination by our representatives and examining a funding portal for requirements would require only those representatives of the registered national compliance with the requirements of documents that relate to the funding securities association of which the Regulation Crowdfunding, the BSA 715 portal’s business and would require the funding portal is a member.711 We and the federal securities laws. portal to retain them for five years, but believe that this requirement would Although under the proposed rules in an easily accessible place for the first facilitate our oversight of funding funding portals would be required to two years, for purposes of facilitating portals and crowdfunding activities, as create and maintain certain records, we and ensuring timeliness of inspections. Congress intended.712 believe this particular rule is necessary A funding portal would be required to Finally, the proposed rules would to achieve consistent application of, and produce, reproduce and maintain the require that a funding portal comply ability to examine and enforce, BSA required records in the original, non- with the reporting, recordkeeping and requirements across all intermediaries, alterable format in which they were record retention requirements of whether brokers or funding portals. created or as permitted under Exchange Chapter X of Title 31 of the Code of Act Rule 17a–4(f).709 This flexibility Federal Regulations, a requirement Request for Comment should be appropriate for funding 241. We have proposed a variety of portals, because we believe that many of 710 See proposed Rule 404(d) of Regulation documents and data to be retained by a their documents would already be in Crowdfunding. An agreement between a funding portal and a third party would not relieve the funding portal. Are these documents electronic form. Thus, funding portals funding portal from its responsibility to prepare and and data appropriate? Should other should not incur a significant additional maintain records, as required under proposed Rule types of documents and data be required burden for maintenance of those 404 of Regulation Crowdfunding. The written to be retained, and if so, which records. This flexibility also is undertaking would be required to include the following provision: ‘‘With respect to any books documents and data and why? Are any consistent with the broker and records maintained or preserved on behalf of of the documents and data we propose recordkeeping requirements under [name of funding portal], the undersigned hereby to require be retained unnecessary, Exchange Act Rule 17a–4(f). acknowledges that the books and records are the unclear or not sufficiently detailed? If We recognize that a funding portal property of [name of funding portal], and hereby undertakes to permit examination of such books so, which ones? Please explain. Should may find it cost-effective or otherwise and records at any time, or from time to time, any of the proposed books and records appropriate to use the recordkeeping during business hours by representatives of the requirements be modified? If so, please services of a third party. The proposed Securities and Exchange Commission, the national explain why. rules would allow third parties to securities association of which the funding portal is a member, and to promptly furnish to the 242. What burdens or costs would the prepare or maintain the required records Commission and national securities association of retention of such information entail? Is on behalf of the funding portal, which the funding portal is a member, a true, it appropriate to base the books and provided that there is a written correct, complete and current hard copy of any, all, records requirements of funding portals agreement in place between the funding or any part of, such books and records.’’ See proposed Rule 404(d) of Regulation Crowdfunding. on the books and records requirements portal and the third party in which the This provision is consistent with the recordkeeping for broker-dealers generally? Have we third party states that the required provisions applicable to brokers under Exchange appropriately tailored the broker-dealer Act Rules 17a–4(f) (17 CFR 17a–4(f)) and 17a–4(j) requirements for funding portals? If not, 707 These would include, but not be limited to: (1) (17 CFR 240.17a–4(j)), but it is somewhat simplified Partnership agreements; (2) articles of incorporation to be more appropriate for funding portals. how should they be further modified? or charter; (3) minute books; and (4) stock certificate 711 See proposed Rule 404(e) of Regulation Would these tailored requirements books (or other similar type documents). See Crowdfunding. create any competitive advantages for proposed Rule 404(b) of Regulation Crowdfunding. 712 See Exchange Act Section 3(h)(1)(A). See also funding portals as compared to broker- 708 Exchange Act Rule 17a–4 provides more 158 Cong. Rec. S5474–03 (daily ed. July 26, 2012) extensive details of the types of records required, (statement of Sen. Jeff Merkley) (‘‘I would 713 and it also specifies different time periods for encourage the SEC and the relevant national 17 CFR 240.17a–8. retention, namely three to six years, depending on securities association to engage in regular reviews 714 We note that a funding portal’s proposed the type of record. 17 CFR 240.17a–4(a). and reports regarding developments in the obligation, under the BSA, to report suspicious 709 See proposed Rule 404(c) of Regulation crowdfunding marketplace. . . . Should problems activity includes an obligation to maintain the Crowdfunding. Permitted formats would include arise, these authorities should act quickly, confidentiality of suspicious activity reports and the use of electronic storage media that otherwise including use of their full rulemaking and any information that would reveal the existence of permits the funding portal to comply with its enforcement authorities. . . . For [crowdfunding] to a suspicious activity report. See generally 31 CFR obligations under the proposed rules. 17 CFR succeed long-term, it will require careful oversight, 1023.320. 240.17a–4(f). especially during the early stages.’’). 715 See note 696.
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dealers engaged solely in the same would be out of the issuer’s control, if 245. Are there certain deviations that limited activities in which a funding the issuer did not know of such failure should never be considered portal may engage? Are there books and or such failure related to offerings other insignificant for purposes of this safe records requirements currently than the issuer’s offering. Absent this harbor? Why or why not? Should we applicable to broker-dealers, but not safe harbor, we believe issuers may be provide examples of deviations that we included in the proposed rules, that hesitant to participate in offerings in would consider significant? If so, what should be included? Please provide reliance on Section 4(a)(6) due to should those be (e.g., failure to file the examples of any such requirements or uncertainty regarding their ability to Form C: Offering Statement on EDGAR)? any suggested alternatives. rely on the exemption, which could 2. Restrictions on Resales E. Miscellaneous Provisions undermine the facilitation of capital raising for startups and small Section 4A(e) provides that securities 1. Insignificant Deviations From businesses. issued in reliance on Section 4(a)(6) Regulation Crowdfunding We believe that the potential harm to may not be transferred by the purchaser for one year after the date of purchase, We are proposing to provide issuers a investors that might result from the except when transferred: (1) To the safe harbor for certain insignificant applicability of this safe harbor would issuer of the securities; (2) to an deviations from a term, condition or be minimal because the deviations must accredited investor; (3) as part of an requirement of Regulation be insignificant to the offering as a offering registered with the Crowdfunding.716 To qualify for the safe whole for the safe harbor to apply. In Commission; or (4) to a family member harbor, the issuer relying on the addition, the proposed rules would of the purchaser or the equivalent, or in exemption would have to show that: (1) provide that notwithstanding this safe connection with certain events, The failure to comply with a term, harbor, any failure to comply with including death or divorce of the condition or requirement was Regulation Crowdfunding would purchaser, or other similar insignificant with respect to the offering nonetheless be actionable by the circumstances, in the discretion of the as a whole; (2) the issuer made a good Commission.718 We believe that this Commission. Section 4A(e) further faith and reasonable attempt to comply safe harbor would address concerns provides that the Commission may with all applicable terms, conditions raised by one commenter and a member establish additional limitations on and requirements of Regulation of Congress.719 We also believe it securities issued in reliance on Section Crowdfunding; and (3) the issuer did appropriately would protect an issuer 4(a)(6). not know of the failure to comply, who made a diligent attempt to comply The proposed rules track the where the failure to comply with a term, with the proposed rules from losing the provisions of Section 4A(e).720 We also condition or requirement was the result exemption as a result of insignificant are proposing to include instructions in of the failure of the intermediary to deviations from Regulation the rules to define ‘‘accredited investor’’ comply with the requirements of Crowdfunding. and a ‘‘member of the family of the Section 4A(a) and the related rules, or Request for Comment purchaser or the equivalent.’’ Under the such failure by the intermediary proposed rules, the term ‘‘accredited occurred solely in offerings other than 243. Is a safe harbor for certain investor’’ would have the same the issuer’s offering. insignificant deviations from a term, definition as in Rule 501(a) of The first two prongs of the safe harbor condition or requirement of Regulation Regulation D.721 provision are modeled after a similar Crowdfunding appropriate? If so, is the The statute does not define ‘‘member provision in Rule 508 of Regulation proposed safe harbor sufficiently broad 717 of the family of the purchaser or the D, and we believe a similar safe or too broad? Are there additional equivalent.’’ We propose to define the harbor is appropriate for offerings made conditions that should apply for an phrase to mean a ‘‘child, stepchild, in reliance on Section 4(a)(6). The issuer to rely on the safe harbor? If so, grandchild, parent, stepparent, offering exemption in Section 4(a)(6) what conditions and why? grandparent, spouse or spousal was designed to help alleviate the 244. Should we define the term equivalent, sibling, mother-in-law, funding gap and the accompanying ‘‘insignificant’’ or use a different term? father-in-law, son-in-law, daughter-in- regulatory concerns faced by startups Please explain. Should we use a law, brother-in-law, or sister-in-law of and small businesses, many of which standard requiring something other than the purchaser, and shall include may not be familiar with the federal ‘‘good faith and reasonable attempt’’ to adoptive relationships.’’ This definition securities laws. We believe that issuers comply with the requirements? If so, tracks the definition of ‘‘immediate should not lose the Section 4(a)(6) what standard and why? Is it family’’ in Exchange Act Rule 16a– exemption because of a failure to appropriate for the safe harbor to cover 1(e),722 but with the addition of comply that is not significant with the failure of the intermediary to ‘‘spousal equivalent.’’ We propose to respect to the offering as a whole, so comply with the requirements of include the term spousal equivalent to long as the issuer, in good faith, Section 4A(a) if the issuer did not know address the concept in Section attempted to comply with the rules. We of such failure or such failure occurred 4A(e)(1)(D) of the ‘‘equivalent’’ of a also propose to include the third prong solely in offerings other than the issuer’s member of the family of the purchaser. of the safe harbor because, under the offering? Why or why not? The proposed rules would define statute, an issuer could lose the spousal equivalent to mean a cohabitant exemption because of the failure of the 718 See proposed Rule 502(b) of Regulation occupying a relationship generally intermediary to comply with the Crowdfunding. equivalent to that of a spouse.723 This is requirements of Section 4A(a). We 719 See 2012 SEC Government-Business Forum, the same definition as in Rule believe that an issuer should not lose note 29 (recommending that we provide a safe the offering exemption due to such harbor for ‘‘innocent violations of procedural or disclosure requirements’’ in transactions relying on 720 See proposed Rule 501 of Regulation failure by the intermediary, which likely Section 4(a)(6)). See also 158 Cong. Rec. S2230 Crowdfunding. (daily ed. Mar. 29, 2012) (statement of Sen. Scott 721 17 CFR 230.501(a). See also note 38. 716 See proposed Rule 502 of Regulation Brown) (‘‘[I]ssuers should not be held liable for 722 17 CFR 240.16a–1(e). Crowdfunding. misstatements or omissions that were made by 723 See proposed Instruction to paragraph (c) of 717 17 CFR 230.508. mistake’’). proposed Rule 501 of Regulation Crowdfunding.
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202(a)(11)(G)–1(d)(9) under the ‘‘immediate family’’ under Exchange require issuers or intermediaries to Investment Advisers Act of 1940.724 We Act Section 16 (with the addition of provide this information directly to state believe issuers and investors would ‘‘spousal equivalent’’), or would another regulators? Please explain. benefit from definitions that are definition be more appropriate? Should 4. Exemption from Section 12(g) consistent with those already used in any persons be included or not included our rules, rather than creating a new in the definition? Why or why not? Section 303 of the JOBS Act amended definition, because issuers may be Should we use a consistent definition Exchange Act Section 12(g) to provide familiar with those terms and should throughout Regulation Crowdfunding that ‘‘the Commission shall, by rule, benefit from existing Commission and even if it differs from similar rules in exempt, conditionally or staff guidance. The proposed rules also other Commission regulations? Why or unconditionally, securities acquired would provide that securities offered why not? pursuant to an offering made under and sold in reliance on Section 4(a)(6) [S]ection 4[(a)](6) of the Securities Act 3. Information Available to States may be transferred during the initial of 1933 from the provisions of this one-year period to a trust controlled by Under Section 4A(d), the Commission subsection.’’ the initial purchaser or to a trust created shall make available, or shall cause to be As amended by the JOBS Act, Section for the benefit of a member of the family made available by the relevant 12(g) requires, among other things, that of the purchaser or the equivalent. We intermediary, the information required an issuer with total assets exceeding believe allowing transfers in such cases under Section 4A(b) and such other $10,000,000 and a class of securities would be consistent with the intent of information as the Commission, by rule, held of record by either 2,000 persons, the provision because the person that determines appropriate to the securities or 500 persons who are not accredited controls or benefits from the trust would commission (or any agency or office investors, register such class of otherwise be covered by the rules. performing like functions) of each State securities with the Commission.730 and territory of the United States and Crowdfunding contemplates the Request for Comment the District of Columbia. issuance of securities to a large number 246. Are the proposed limitations on One commenter suggested that all of holders, which could increase the resale appropriate? Why or why not? If information filed with the Commission likelihood that Section 4(a)(6) issuers not, what approach would be more should be made available to state would exceed the thresholds for appropriate and why? Should there be regulators.727 Another commenter reporting in Section 12(g). Section 303 additional limitations on resale, questioned whether open Internet could be read to mean that securities especially after the first year? Why or access to the crowdfunding platforms acquired in a crowdfunding transaction why not? If so, what should they be and would be sufficient, questioning a would be excluded from the record why? If an issuer no longer was in platform’s ability to maintain or archive holder count permanently, regardless of compliance with the ongoing reporting records from Web sites that are whether the securities continue to be requirements 725 or was no longer in routinely updated.728 Another held by a person who purchased in the business, should we place restrictions commenter suggested that the crowdfunding transaction. An on the resale of the issuer’s securities or requirement in Section 4A(d) should alternative reading could provide that otherwise limit the ability of those create an affirmative obligation for an securities acquired in a crowdfunding shares to trade? If so, please describe the intermediary only if a state regulator transaction would be excluded from the appropriate restrictions and explain requests information in excess of what record holder count only while held by how we could implement such is provided to the Commission.729 the original purchaser in the Section restrictions. We are proposing to require issuers to 4(a)(6) transaction, as a subsequent 247. To transfer securities to an file on EDGAR the information required purchaser of the securities would not be accredited investor during the one-year by Section 4A(b) and the related rules. considered to have ‘‘acquired [the period beginning when the securities Information filed on EDGAR is publicly securities] pursuant to an offering made are sold in reliance on Section 4(a)(6), available and would, therefore, be under [S]ection 4[(a)](6).’’ the seller would need to have a available to each state, territory and the Commenters expressed concern that reasonable belief that the purchaser is District of Columbia. We believe this once the securities issued pursuant to an accredited investor.726 Is this approach would satisfy the requirement Section 4(a)(6) are transferred, the approach appropriate? Why or why not? to make the information available. exemption from Section 12(g) 248. Is the proposed use of the Accordingly, we do not believe that it is registration could cease to apply and definition of ‘‘accredited investor’’ in necessary to propose to impose any any new holders of those securities Rule 501(a) of Regulation D appropriate? additional obligations on intermediaries would be included in the calculation of Why or why not? Should a different with respect to this requirement. holders of record for purposes of definition be used for purposes of Request for Comment Section 12(g), which could potentially Regulation Crowdfunding? Please require an issuer to register its securities explain. 250. Would the availability of with the Commission.731 Another 249. Is the proposed definition of information on EDGAR satisfy the ‘‘member of the family of the purchaser requirement to make the information 730 See Section 501 of the JOBS Act. In the case or the equivalent’’ appropriate? Is it available to each state, territory and the of an issuer that is a bank or a bank holding appropriate to track the definition of District of Columbia? Are there other company, Exchange Act Section 12(g)(1)(B) (15 means of making the information U.S.C. 78l(g)(1)(B)) requires, among other things, that the issuer, if it has total assets exceeding 724 17 CFR 275.202(a)(11)(G)–1(d)(9). See also available? Should we impose any $10,000,000 and a class of securities held of record Family Offices, Release No. IA–3220 (Jun. 22, 2011) additional obligations on intermediaries by 2,000 persons, register such class of securities [76 FR 37983 (June 29, 2011)] (adopting release); with respect to this requirement? If so, with the Commission. See Section 601 of the JOBS Family Offices, Release No. IA–3098 (Oct. 12, 2010) what are they? For example, should we Act. [75 FR 63753 (Oct. 18, 2010)] (proposing release). 731 See Liles Letter 1; NCA Letter (stating that the 725 See Section II.B.2 above for a discussion of the time and expense associated with registration of a ongoing reporting requirements. 727 See Commonwealth of Massachusetts Letter. class of securities could affect an issuer’s working 726 See proposed Rule 501(b) of Regulation 728 See NASAA Letter. capital and business operations); CFIRA Letter 2 Crowdfunding. 729 See RocketHub Letter 1. Continued
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commenter noted that the prospect that with the Commission.736 We believe implement Section 303 that may be resales could trigger registration this is consistent with the proposal to more appropriate? Please explain. requirements under the Exchange Act permanently exempt securities issued in 252. One commenter suggested 741 might provide an incentive for issuers to reliance on Section 4(a)(6) from the that the Section 4(a)(6) exemption attempt in some way to restrict resale record holder count under Section 12(g). should survive and attach to different and transfer of the securities issued in Section 303 of the JOBS Act does not securities issued in a subsequent the offering made in reliance on Section extend the exemption from Section restructuring, recapitalization or similar 4(a)(6), even after the lapse of the one 12(g) to different securities issued in a transaction that is exempt from, or year transfer limitation, which would be subsequent restructuring, otherwise not subject to, the registration to the detriment of small crowdfunding recapitalization or similar transaction, requirements of Section 5, if the parties investors seeking liquidity.732 One so we are not proposing to exempt such to the transaction are affiliates of the commenter suggested that the securities at this time, as one original issuer. While we are not exemption from Section 12(g) commenter suggested.737 We also are proposing to implement this suggestion at this time, we invite commenters to registration should attach to different not proposing to condition the discuss the advantages and securities issued in a subsequent exemption on the issuer’s compliance with the ongoing reporting requirements disadvantages of this approach. restructuring, recapitalization or similar 253. The same commenter or on the issuer not having total assets transaction that is exempt from, or suggested 742 that the availability of the in excess of a certain amount, as the otherwise not subject to, the registration exemption under Section 12(g)(6) same commenter suggested.738 We requirements of Section 5, so long as the should be conditioned on the issuer not believe that the size of the issuer should parties to the transaction are affiliates of having total assets, at the last day of the 733 not affect the availability of the the original issuer. The same fiscal year with respect to which the commenter suggested that the exemption because conditioning the Section 12(g) compliance determination availability of the exemption be exemption on the issuer not exceeding is made (or a reasonable time before or conditioned on the issuer complying a certain amount of total assets would after such date), in excess of $25 with the ongoing reporting requirements impose an additional burden on million. Should we condition the and not having total assets at the last successful issuers that unsuccessful availability of the exemption under day of the fiscal year in excess of $25 issuers would not face, which in turn Section 12(g)(6) on the issuer not having million.734 would discourage growth. We also total assets in excess of $25 million? If believe that failure to comply with the not $25 million, should the availability Proposed Rule 12g–6 provides that ongoing reporting requirements could securities issued pursuant to an offering of the exemption be conditioned on be better addressed as proposed by total assets not exceeding some other made under Section 4(a)(6) would be making the issuer ineligible to use the permanently exempted from the record amount (e.g., $10 million, $50 million, exemption under Section 4(a)(6),739 etc.)? Should this determination be holder count under Section 12(g). An rather than by requiring such issuer to issuer seeking to exclude a person from made as of the last day of the fiscal year register a class of securities under or a different date? Please explain. the record holder count would have the Section 12(g).740 254. Should issuers that fail to responsibility for demonstrating that the comply with the ongoing reporting Request for Comment securities held by the person were requirements743 of Regulation initially issued in an offering made 251. Should the Commission Crowdfunding be disqualified from under Section 4(a)(6). We believe that relying on the exemption under Section allowing issuers to sell securities permanently exempt securities issued pursuant to an offering under Section 12(g)(6), as suggested by one pursuant to Section 4(a)(6) without 744 4(a)(6) from the record holder count commenter? Why or why not? becoming Exchange Act reporting 255. How would issuers be able to issuers is consistent with the intent of under Section 12(g), as proposed? Why or why not? Should the Commission distinguish securities issued in a Title III.735 In this regard, we note that transaction exempt under Section Title III provides for an alternative exempt securities issued under Section 4(a)(6) only when held of record by the 4(a)(6) from securities issued in other reporting system under which issuers offerings? What would be the costs would be required to file annual reports original purchaser in the Section 4(a)(6) transaction, an affiliate of the original associated with making such a purchaser, a member of the original determination? (stating that the need for additional capital to meet registration requirements would result in an issuer purchaser’s family or a trust for the 5. Scope of Statutory Liability either having to borrow money, thus leveraging its benefit of the original purchaser or the As noted above, Securities Act business, or raising additional capital through a original purchaser’s family? Why or Section 4A(c) sets forth a liability subsequent equity offering that would dilute why not? Are there other ways to existing stockholders); ABA Letter 2 (stating that a provision for crowdfunding transactions Section 12(g) exemption limited to the initial under Section 4(a)(6).745 Section 4A(c) purchaser of securities would undermine the utility 736 See Section II.B.2 above for a discussion of the provides that an issuer will be liable to of such an exemption and that an initial purchaser requirement to file annual reports. a purchaser of its securities in a should not be able to force an issuer to register 737 See ABA Letter 2. under Section 12(g) simply by reselling his or her 738 See id. 741 securities). 739 See proposed Rule 100(b)(6) of Regulation See ABA Letter 2. 732 See Liles Letter 1. Crowdfunding. 742 See id. 733 See ABA Letter 2. 740 We note, however, that making the issuer 743 See proposed Rules 202 and 203(b) of 734 Id. ineligible to use the exemption under Section Regulation Crowdfunding and Section II.B.2 above 735 See 158 Cong. Rec. S1829 (daily ed. Mar. 20, 4(a)(6) if the issuer failed to comply with the for a discussion of the ongoing reporting 2012) (statement of Sen. Jeff Merkley) (‘‘It also ongoing reporting requirements could have a requirements. provides a very important provision so the small limited impact since it only would impact an issuer 744 See ABA Letter 2. investors do not count against the shareholder that intended to rely on the Section 4(a)(6) 745 The anti-fraud and civil liability provisions of number that drives companies to have to become exemption for future offers and sales. But see the Securities Act, such as Sections 12(a)(2) and 17, a fully public company. That is critical and Bradford note 1 (‘‘The need to go back to investors apply to exempted transactions, including those interrelates with other parts of the [crowdfunding] for future funding should constrain self-dealing, transactions that will be conducted in reliance on bill before us.’’). opportunistic behavior by the entrepreneur.’’). Section 4(a)(6).
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transaction exempted by Section 4(a)(6) Rule 262 of Regulation A,747 and they credit union and insurance regulators, if the issuer, in the offer or sale of the also must cover certain actions by state federal banking regulators and the securities, makes an untrue statement of regulators enumerated in Section National Credit Union Administration a material fact or omits to state a 302(d)(2). The disqualifying events that either: material fact required to be stated or listed in Rule 262 apply to the issuer Æ bar a person from association with necessary in order to make the and certain other persons associated an entity regulated by the regulator statements, in light of the circumstances with the issuer or the offering, including issuing the order; engaging in the under which they were made, not the issuer’s predecessors and affiliated business of securities, insurance or misleading, provided that the purchaser issuers; directors, officers and general banking; or engaging in savings did not know of the untruth or partners of the issuer; beneficial owners association or credit union activities; or Æ omission, and the issuer does not of 10 percent or more of any class of the are based on a violation of any law sustain the burden of proof that such issuer’s equity securities; promoters or regulation that prohibits fraudulent, issuer did not know, and in the exercise connected with the issuer; and manipulative or deceptive conduct of reasonable care could not have underwriters and their directors, officers within a 10-year period ending on the date of the filing of the offer or sale; and known, of the untruth or omission. and partners. Rule 262 disqualifying • Section 4A(c)(3) defines, for purposes of events include: felony and misdemeanor the liability provisions of Section 4A, an • Felony and misdemeanor convictions in connection with the issuer as including ‘‘any person who convictions in connection with the purchase or sale of a security or offers or sells the security in such purchase or sale of a security or involving the making of a false filing offering.’’ On the basis of this definition, involving the making of a false filing with the Commission. One commenter urged us to apply the it appears likely that intermediaries, with the Commission (the same criminal same standards adopted by the including funding portals, would be conviction standard as in Section 302(d) Commission for Rule 506 of Regulation considered issuers for purposes of this of the JOBS Act) within the last five D 748 to this exemption.749 Another liability provision. We believe that steps years in the case of issuers and 10 years commenter stated that searching for intermediaries could take in exercising in the case of other covered persons; most disqualifying events could be reasonable care in light of this liability • injunctions and court orders within achieved with automated or semi- provision would include establishing the last five years against engaging in or automated inquiries to databases or data 746 continuing conduct or practices in policies and procedures that are services, but other disqualifying events reasonably designed to achieve connection with the purchase or sale of securities, or involving the making of would be difficult to identify with those compliance with the requirements of types of inquiries and should be the Regulation Crowdfunding, and that any false filing with the Commission; • responsibility of the issuer to address include the intermediary conducting a United States Postal Service false 750 representation orders within the last with representations and warranties. review of the issuer’s offering One commenter stated that if a documents, before posting them to the five years; • filing, or being named as an bankruptcy proceeding would be a platform, to evaluate whether they disqualifying event, it should be limited contain materially false or misleading underwriter in, a registration statement or Regulation A offering statement that to a bankruptcy proceeding of the issuer information. or the intermediary and not include a Under this liability provision, an is the subject of a proceeding to 751 determine whether a stop order should personal bankruptcy proceeding. investor who purchases securities in a Another commenter recommended that crowdfunding transaction may bring an be issued, or as to which a stop order was issued within the last five years; the disqualification rules: (1) Not be so action against the issuer to recover the broad as to affect ‘‘persons who may not consideration paid for the security, with and • for covered persons other than the be true bad actors—such as persons who interest, or damages if the person no consent to the entry of judgments which longer holds the security. The statute issuer: Æ being subject to a Commission do not also include meaningful further provides that actions brought monetary or other penalties;’’ (2) not under Section 4A(c) will be subject to order: D revoking or suspending their apply retroactively to cover the provisions of Securities Act Sections disqualifying events prior to the 12(b) and 13, as though the liability registration as a broker, dealer, municipal securities dealer or adoption of the final rules; and (3) apply were created under Securities Act to other types of exempt offerings Section 12(a)(2). investment adviser; D placing limitations on their 6. Disqualification activities as such; 748 See Securities Act Rule 506(d) [17 CFR D 230.506(d)]. See also Disqualification Adopting Section 302(d) of the JOBS Act barring them from association with Release, note 101. requires the Commission to establish any entity; or 749 See NASAA Letter (stating that an offering D barring them from participating in made pursuant to Section 4(a)(6) also should be disqualification provisions under which an offering of penny stock; or subject to disqualification based on the prior bad an issuer would not be eligible to offer Æ being suspended or expelled from acts of the funding portal and its management). securities pursuant to Section 4(a)(6) 750 See Applied Dynamite Letter (stating that membership in, or suspended or barred certain disqualifying events have open-ended and an intermediary would not be from association with a member of, a eligible to effect or participate in definitions that would make it difficult to satisfy registered national securities exchange with confidence: ‘‘any court of competent transactions pursuant to Section 4(a)(6). or national securities association for jurisdiction’’ having entered an order because there Section 302(d)(2) specifies that the is no limit to the number of courts which may have, conduct inconsistent with just and at some time, been competent to enter an order disqualification provisions must be equitable principles of trade. ‘‘substantially similar’’ to the regarding an issuer; being ‘‘subject to’’ certain The disqualifying events specifically unpublished orders or injunctions such as a United disqualification provisions contained in required by Section 302(d)(2) are: States Postal Service false representation order; and • final orders issued by state the extension of disqualification events to 746 With respect to intermediaries that are funding predecessors and affiliated issuers because of the portals, see proposed Rule 403(a) of Regulation securities, banking, savings association, innumerable ways in which two companies might Crowdfunding and the discussion in Section II.D.4 be deemed to be affiliated). above. 747 17 CFR 230.262. 751 See Landon Letter 1.
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(including offerings made in reliance on offering’’ 757 as it is currently covered in disqualification rules and the disclosure Regulation A).752 Rule 506. In adopting the Rule 506 requirements of Sections 4A(b)(1)(B) disqualification rules, we noted that an and 4A(b)(1)(H)(iii), which require a. Issuers and Certain Other Associated ‘‘officer’’ test would be unduly certain disclosures about shareholders Persons burdensome and overly restrictive due based on a 20 percent threshold.759 The disqualification provisions to the larger and more complex The proposed rules would include the included in Section 302(d) of the JOBS organizations that are involved in many category of compensated solicitor and Act are modeled on the disqualification Rule 506 transactions as compared to any director, officer, general partner or provisions included in Section 926 of the smaller entities that use Regulation managing member of any such the Dodd-Frank Act, which required the A. We also noted that limiting the compensated solicitor, currently in the Commission to adopt rules, coverage of the Rule 506 Rule 506 disqualification rules.760 ‘‘substantially similar’’ to Rule 262, that disqualification rules to executive Regulation A offerings may involve disqualify securities offerings involving officers and officers who participate in traditional underwritten offerings, but certain ‘‘felons and other ‘bad actors’ ’’ the offering would lessen the potential offers and sales made in reliance on from reliance on Rule 506 of Regulation compliance burden by limiting the Section 4(a)(6), similar to transactions D.753 On July 10, 2013, we adopted rules number of covered persons. In contrast, under Rule 506, would not involve to implement Section 926 of the Dodd- we believe that the startups and small underwriters. Thus, the proposed Frank Act to disqualify certain businesses that may seek to raise capital disqualification rules would not apply securities offerings from reliance on in reliance on Section 4(a)(6) generally to underwriters, but would substitute Rule 506 of Regulation D.754 The will be smaller than the entities underwriters with the concept of proposed disqualification rules,755 as involved in Rule 506 transactions and, compensated solicitor. The statute and they relate to issuers and certain other likely, smaller than the issuers of the proposed rules would permit issuers associated persons, are modeled on the securities relying on Regulation A.758 offering and selling securities in Rule 506 disqualification rules, which, We also believe that the ‘‘officers’’ of reliance on Section 4(a)(6) to in turn, are substantially similar to the many issuers relying on Section 4(a)(6) compensate persons to promote the disqualification provisions in Rule 262. may be only a few individuals, with or issuer’s offering through communication without formal titles. As a result, we do channels provided by the intermediary, i. Covered Persons not believe that an ‘‘officer’’ test would subject to certain conditions.761 We The proposed rules would apply the be more burdensome than the test used believe those individuals receiving disqualification provisions to: for Regulation A purposes, so we do not compensation to promote the issuer’s • the issuer and any predecessor of see a need to deviate from Rule 262 in offering should be covered by the the issuer or affiliated issuer; this context. disqualification provisions because they • any director, officer, general partner The proposed rules also would cover would be subject to conflicts of interest or managing member of the issuer; persons who are 20 Percent Beneficial in transactions pursuant to Section Owners. This threshold differs from the 4(a)(6), which would be substantially • any 20 percent Beneficial Owner; • 10 percent threshold specified in Rule similar to those of underwriters in any promoter connected with the 262, but it is the same as the threshold Regulation A transactions.762 issuer in any capacity at the time of the in the Rule 506 disqualification rules. Moreover, the proposed rules would sale; provide that events relating to certain • We believe that a 10 percent ownership any person that has been or will be threshold could impose an undue affiliated issuers are not disqualifying if paid (directly or indirectly) burden on participants in the Section they pre-date the affiliate remuneration for solicitation of 4(a)(6) marketplace. In this regard, the relationship.763 Rule 262(a)(5) currently purchasers in connection with sales of potential administrative complexity of provides that orders, judgments and securities in the offering (which we refer monitoring the fluctuating ownership decrees entered against affiliated issuers to as a ‘‘compensated solicitor’’); and levels and the issuer’s inability to before the affiliation arose do not • any director, officer, general partner control the actions of a shareholder who disqualify an issuer from reliance on or managing member of any such does not disclose disqualification would Regulation A if the affiliated issuer is compensated solicitor. be greater under a 10 percent threshold not: (1) In control of the issuer; or (2) These covered persons are scheme than under a 20 percent under the common control of a third substantially similar to those currently threshold scheme. This is the same party that controlled the affiliated issuer covered by the disqualification rules for concern that led us to change the 10 at the time such order, judgment or Rules 262 and 506. The proposed rules percent threshold in the Rule 506 decree was entered. The proposed rules would cover any ‘‘officer’’ 756 of the disqualification rules. A 20 percent would include a substantially similar issuer, mirroring the coverage in Rule threshold would provide greater provision but would clarify that it 262, rather than any ‘‘executive officer certainty and ease of compliance than a applies to all potentially disqualifying [and] other officer participating in the 10 percent threshold, and it also would events that pre-date affiliation. We be consistent with both the threshold believe this is appropriate because the 752 See SEC Government-Business Forum, note specified in the Rule 506 29. 759 See discussion in Section II.B.1.a.i(a) above. 753 See Dodd-Frank Act, note 38. 757 Under Securities Act Rule 405, the term 760 See proposed Rule 503(a) of Regulation 754 See Disqualification Adopting Release, note ‘‘executive officer’’ is defined as a ‘‘president [of the Crowdfunding. 101. registrant], any vice president of the registrant in 761 See Section 4A(b)(3) and proposed Rule 205 755 See proposed Rules 503(a)–(c) of Regulation charge of a principal business unit, division or of Regulation Crowdfunding. See also Section II.B.5 Crowdfunding. function (such as sales, administration or finance), above. 756 Under Securities Act Rule 405, the term any other officer who performs a policy making 762 We note that the receipt of transaction-based ‘‘officer’’ is defined as ‘‘a president, vice president, function or any other person who performs similar compensation in connection with the offer and sale secretary, treasurer or principal financial officer, policy making functions for the registrant.’’ 17 CFR of a security could cause a person to be a broker comptroller or principal accounting officer, and any 230.405. required to register with us under Exchange Act person routinely performing corresponding 758 There is no cap on the amount of proceeds Section 15(a)(1) (15 U.S.C. 78c(a)(1)). functions with respect to any organization.’’ 17 CFR that may be raised in an offering relying on Rule 763 See proposed Rule 503(c) of Regulation 230.405. 506, and Regulation A limits offerings to $5 million. Crowdfunding.
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current placement of this language Should we, as proposed, expand this Commission before an offer or sale is within paragraph (5) of Rule 262(a) may treatment to entities that have made in reliance on Regulation D.768 incorrectly suggest that it applies only undergone a change of control or a Because the proposed rules would to Postal Service false representation change of policy? Why or why not? require issuers offering securities in orders. This is the same approach we reliance on Section 4(a)(6) to file with ii. Disqualifying Events took in the Rule 506 disqualification the Commission the information rules. As in Rule 506(d), the proposed (a) Criminal Convictions required by Section 4A(b),769 the rules would not treat entities differently Section 302(d)(2)(B)(ii) provides for proposed rules would measure the look- if they have undergone a change of disqualification if any covered person back period based on the filing date, control or other remedial measures.764 ‘‘has been convicted of any felony or similar to Rule 262, rather than the date This should avoid undue complexity in misdemeanor in connection with the of sale. applying the proposed rules, while also purchase or sale of any security or (b) Court Injunctions and Restraining avoiding potential abuse by bad actors involving the making of any false filing Orders that may falsely claim to have with the Commission.’’ This essentially 765 Under Rule 262(a)(4), an issuer is undergone a change of control. mirrors Rule 262(a)(3), which covers disqualified from reliance on Regulation criminal convictions of issuers, and Request for Comment A if it, or any predecessor or affiliated Rule 262(b)(1), which covers criminal 256. Should we eliminate or modify issuer, is subject to a court injunction or convictions of other covered persons. restraining order against ‘‘engaging in or any of the proposed categories of There are, however, two differences covered persons? If so, which ones and continuing any conduct or practice in between the felony and misdemeanor connection with the purchase or sale of why? Would doing so still result in a conviction provisions of Section rule substantially similar to Rule 262? any security or involving the making of 302(d)(2)(B)(ii) and Rule 262. First, any false filing with the Commission.’’ Should we disqualify additional Section 302(d)(2)(B)(ii) does not include categories of covered persons? If so, Similarly, under Rule 262(b)(2), an a specific time limit (or ‘‘look-back issuer is disqualified from reliance on which ones and why? period’’) on convictions that trigger 257. The proposed rules would apply Regulation A if any other covered disqualification, while Rule 262 to officers of the issuer, mirroring Rule person is subject to such a court provides a five-year look-back period for 262, rather than executive officers and injunction or restraining order or to one criminal convictions of issuers and a 10- other officers participating in the ‘‘arising out of the conduct of the year look-back period for criminal offering, as in Securities Act Rule business of an underwriter, broker, convictions of other covered persons. In 506(d). Is this approach appropriate? dealer, municipal securities dealer or light of the time limits on criminal Why or why not? investment adviser.’’ Disqualification is convictions under Rule 262, we are 258. Should persons compensated to triggered by temporary or preliminary proposing the same five-year and 10- promote the issuer’s offering through injunctions and restraining orders that year look-back periods so the proposed communication channels provided by are currently in effect, as well as by rules would be substantially similar to the intermediary be covered persons, as permanent injunctions and restraining the existing rules. Second, unlike Rule is the case for the Rule 506 orders entered within the last five 262(b)(1), Section 302(d) does not 770 disqualification rules? Why or why not? years. include a reference to criminal Would doing so result in a rule The proposed rules are substantially convictions ‘‘arising out of the conduct substantially similar to Rule 262? similar to these two provisions, but in 259. The proposed disqualification of the business of an underwriter, a simplified, combined format.771 The rules would cover persons who are 20 broker, dealer, municipal securities proposed rules would include the same Percent Beneficial Owners. Is the 20 dealer or investment adviser.’’ We are coverage and look-back periods that percent beneficial ownership threshold not aware of any legislative history that apply under the disqualification appropriate? Why or why not? Should explains why this type of conviction provisions for Rules 262 and 506, except the proposed disqualification rules was not mentioned in Section 302(d). that the look-back period would be cover persons based on a 10 percent However, because such convictions are measured from the date of the requisite ownership threshold, as in Rule 262? covered in Rule 262, we believe that filing with the Commission, consistent Why or why not? rules substantially similar to the with the approach in Rule 262. The 260. Should orders, judgments and existing rules should cover them. proposed rules also would not impose decrees entered against affiliated issuers The proposed rules are based on Rule due process requirements (such as not be disqualifying if they pre-date the 262 and differ from the Rule 506 notice and an opportunity to appear) or affiliate relationship, as proposed? disqualification rules in that the look- require that all appeals be exhausted or back period would be measured from 764 See Disqualification Adopting Release, note the date of the requisite filing with the 768 See also Disqualification Adopting Release, 101 (declining to provide different treatment for Commission, rather than the date of the note 101. entities that have undergone a change of control or relevant sale.766 We noted in the 769 See Sections II.B.1 and II.B.3 above for a other remedial measures, such as a change of policy proposing release for the Rule 506 discussion of the disclosure and filing requirements. whereby an issuer would have implemented 767 policies and procedures, designed to prevent the disqualification rules that measuring 770 The look-back period means that occurrence of the kinds of activities that gave rise from the date of the requisite filing, as disqualification no longer arises from a permanent to disqualification, and such policies and in Rule 262, would not be appropriate injunction or restraining order after the requisite procedures would have been approved by a in the context of Rule 506 because no amount of time has passed, even though the regulator or a court). filing is required to be made with the injunction or order may still be in effect. In 765 Entities that have undergone a change of addition, because disqualification is triggered only control or a change of policy could, however, seek when a person ‘‘is subject to’’ a relevant injunction a waiver of the disqualification upon a proper 766 See proposed Rule 503(a)(1) of Regulation or order, injunctions and orders that have expired showing that there has been a change of control and Crowdfunding. or are otherwise no longer in effect are not the persons responsible for the activities resulting 767 See Disqualification of Felons and Other ‘‘Bad disqualifying, even if they were issued within the in a disqualification are no longer employed by the Actors’’ from Rule 506 Offerings, Release No. 33– relevant look-back period. entity or exercise influence over such entity. See 9211 (proposed May 25, 2011) at 18 [76 FR 31518, 771 See proposed Rule 503(a)(2) of Regulation Section II.E.6.a.iv below for a discussion of waivers. 31523 (June 1, 2011)]. Crowdfunding.
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the time for appeal be expired, as a Section 302(d)(2)(B) is substantively Exchange Act 776). We believe that condition to disqualification. This is the identical to Exchange Act Section including CFTC orders would make the same approach as under the 15(b)(4)(H) and Section 203(e)(9) of the disqualification rules for transactions disqualification provisions for Rules 262 Investment Advisers Act of 1940 made in reliance on Section 4(a)(6) more and 506. We believe that the risk that (‘‘Advisers Act’’). Section 302(d)(2)(B) internally consistent, treating relevant disqualification may arise from ex parte contains a 10-year look-back period for sanctions similarly for disqualification proceedings could be better addressed final orders based on violations of laws purposes, which should enhance the through the waiver process,772 rather and regulations that prohibit fraudulent, effectiveness of the disqualification than through additional requirements manipulative and deceptive conduct, rules to screen out felons and bad for factual inquiry that would affect all while the Exchange Act and Advisers actors. offerings. As for appealable orders, we Act provisions have no time limit for In our view, bars are orders issued by believe that suspending disqualification such orders. one of the specified regulators that have during the pendency of a potentially The proposed rules would reflect the the effect of barring a person from: (1) lengthy appeals process could text of Section 302(d)(2)(B) with two Associating with certain regulated significantly undermine the intended clarifications.773 First, the proposed entities; (2) engaging in the business of protections in the rules, and therefore, rules would specify that an order must securities, insurance or banking; or (3) the proposed rules would disqualify bar the covered person ‘‘at the time of engaging in savings association or credit covered persons during the pendency of the filing of the information required by union activities. We believe that any the appeals. Section 4A(b) of the Securities Act of such order that has one of those effects With regard to who would be viewed 1933,’’ to clarify that a bar would be would be a bar, regardless of whether it as subject to an order, we believe the disqualifying only for as long as it has uses the term ‘‘bar.’’ 777 Under the proposed rules should be applied continuing effect. Second, the proposed proposed rules, a disqualifying order is consistently with the way the staff has rules would require that orders must one that bars the person ‘‘at the time of applied Rule 262. For disqualification have been ‘‘entered’’ within the look- the filing of the information required by purposes, the staff has interpreted Rule back period, to clarify that the date of Section 4A(b) of the Securities Act of 262 to limit those considered ‘‘subject the order, and not the date of the 1933’’ from one or more of the specified to’’ an order to only the persons underlying conduct, was relevant for activities. Thus, for example, a person specifically named in the order. Others that determination. We believe these who was barred permanently, with the who are not specifically named but who clarifications would eliminate potential right to apply to reassociate after three come within the scope of an order (such ambiguities and allow for more years, would be disqualified until such as, for example, agents, attorneys and appropriate application of the rules. time as he or she successfully applied persons acting in concert with the These clarifications also are consistent to reassociate, assuming that the bar had named person) would not be treated as with the approach in the Rule 506 no continuing effect after reassociation. ‘‘subject to’’ the order for purposes of disqualification rules, except that under Bars would be disqualifying for as long disqualification. Securities Act Rule 506(d), the order as they are in effect but no longer, matching the period of disqualification (c) Final Orders of Certain Regulators must bar the covered person at the time of the relevant sale, rather than at the to the duration of the regulatory Section 302(d)(2)(B) provides that the sanction. The treatment of regulatory time of the filing, because no filing is 778 disqualification rules for transactions required to be made with the bars and orders is different in one relevant respect from court injunctions made in reliance on Section 4(a)(6) must Commission prior to the time of a sale and restraining orders.779 Court disqualify any covered person that: made pursuant to Rule 506. injunctions and restraining orders (i) is subject to a final order of a State The proposed rules also would would be subject to a five-year look- securities commission (or an agency or include the U.S. Commodity Futures back period, which would function as a officer of a State performing like Trading Commission (‘‘CFTC’’) in the cut-off (i.e., injunctions and restraining functions), a State authority that list of regulators whose regulatory bars orders issued more than five years supervises or examines banks, savings and other final orders will trigger before the filing required by Section associations, or credit unions, a State disqualification. This is consistent with 4A(b) would no longer be disqualifying, insurance commission (or an agency or the approach in the Rule 506 officer of a State performing like even if they are still in effect or disqualification rules. As we noted in permanent). This is the same approach functions), an appropriate Federal the adopting release for Securities Act banking agency, or the National Credit 774 as under the Rules 262 and 506 Rule 506(d), the conduct that would disqualification rules, and we do not Union Administration, that— typically give rise to CFTC sanctions is (I) bars the person from— believe that the shift from Regulation A similar to the type of conduct that and Rule 506 offerings to offerings (aa) association with an entity would result in disqualification if it regulated by such commission, pursuant to Section 4(a)(6) justifies were the subject of sanctions by another extending the time period for authority, agency, or officer; financial regulator. For that reason, (bb) engaging in the business of disqualifications associated with court CFTC orders trigger consequences under securities, insurance, or banking; or injunctions and restraining orders. other Commission statutes 775 (for (cc) engaging in savings association or The proposed rules would define a example, both registered broker-dealers credit union activities; or ‘‘final order’’ as ‘‘a written directive or (II) constitutes a final order based on and investment advisers may be subject declaratory statement issued by a a violation of any law or regulation that to Commission disciplinary action prohibits fraudulent, manipulative, or based on violations of the Commodity 776 7 U.S.C. 1 et seq. deceptive conduct within the 10-year 777 Orders that do not have any of those effects 773 See proposed Rule 503(a)(3) of Regulation are not bars, although they may be disqualifying period ending on the date of filing of the Crowdfunding. ‘‘final orders.’’ offer or sale. 774 Disqualification Adopting Release, note 101. 778 See proposed Rule 503(a)(3) of Regulation 775 See, e.g., Exchange Act Section 15(b)(4)(D) [15 Crowdfunding. 772 See Section II.E.6.a.iv below for a discussion U.S.C. 78o(b)(4)(D)] and Advisers Act Section 779 See proposed Rule 503(a)(2) of Regulation of the waiver process. 203(e)(5) [15 U.S.C. 80b–3(e)(5)]. Crowdfunding.
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federal or state agency, described in investment advisers and their associated omission appears to be largely proposed Rule 503(a)(3) of Regulation persons, including suspension or historical: the Commission did not have Crowdfunding, under applicable revocation of registration, censure, authority to bring cease-and-desist statutory authority that provides for limiting their activities, imposing civil proceedings when Rule 262 was notice and an opportunity for hearing, money penalties and barring individuals originally adopted, and the rule has not which constitutes a final disposition or from being associated with specified been amended to take that authority into action by that federal or state entities and from participating in the account. We believe that adding certain agency.’’ 780 This definition is based on offering of any penny stock. Commission cease-and-desist orders to the definition that FINRA uses in forms The proposed rules are based on Rule the disqualification provisions would related to Exchange Act Section 262(b)(3) but would not include the further enhance the investor protection 15(b)(4)(H), which is identical to reference to Section 15B(a) (the basic intent of the disqualification provisions. provisions of Section 302(d). Section registration requirements for municipal This approach also would be consistent 302(d) provides that disqualification securities dealers).783 Section 15B(a) is with the disqualification provisions for must result from final orders of the not generally a source of sanctioning Rule 506. We believe an injunctive or relevant regulators that are ‘‘based on a authority, and we do not believe it is restraining order issued by a federal violation of any law or regulation that appropriate to refer to it in the context court and a Commission cease-and- prohibits fraudulent, manipulative, or of the proposed disqualification rules. desist order arising out of the same legal deceptive conduct.’’ The proposed rules This is consistent with the approach in violation demonstrate equally would not, similar to the Rule 506 the Rule 506 disqualification rules. disqualifying conduct and should have disqualification rules, limit ‘‘fraudulent, Under the proposed rules, the the same consequences under our manipulative or deceptive conduct’’ to disqualification would continue only for proposed disqualification rules. We matters involving scienter. Scienter is as long as some act is prohibited or believe that the determination of not a requirement under Exchange Act required to be performed pursuant to disqualification should not depend on Section 15(b)(4)(H) or Advisers Act the order (with the consequence that whether a particular enforcement action Section 203(e)(9). Commission orders censures and orders to pay civil money is brought in court or through a are issued under these sections based penalties, assuming the penalties are Commission cease-and-desist only on the existence of a relevant state paid in accordance with the order, proceeding. Commission cease-and- or federal regulatory order. The would not be disqualifying, and a desist orders would be an additional Commission has stated that, while the disqualification based on a suspension disqualification trigger not provided for degree of scienter involved is a factor in or limitation of activities would expire in Section 302(d). In our view, Section determining what sanction is when the suspension or limitation 302(d) does not limit the existing appropriate,781 the Commission can expires). authority we previously used to create order sanctions even where scienter is other bad actor provisions, and based on (e) Certain Commission Cease-and- not an element of the underlying state the foregoing reasons, we believe it Desist Orders antifraud law violation.782 We do not would be appropriate to add believe it would be appropriate to limit Section 302(d) mandates that Commission cease-and-desist orders to the provision to matters involving disqualification result from final orders the disqualification triggers. scienter absent a clear statutory issued within a 10-year period by the The proposed rules, consistent with directive to do so, particularly when the state and federal regulators identified in the approach for the Rule 506 disqualification rules, would not relevant language has been construed in Section 302(d)(2)(B)(i). These regulators include administrative cease-and-desist other contexts not to be so limited. include state authorities that supervise orders that do not require any showing Moreover, imposing such a limitation banks, savings associations or credit or finding of scienter, with one may result in excluding regulatory unions; state insurance regulators; exception.786 The proposed orders that are explicitly mandated to be appropriate federal banking agencies; disqualification trigger only would covered by the new rules. and the National Credit Union Administration. The Commission is not cover Commission orders to cease and (d) Commission Disciplinary Orders included in the list of regulators, and desist from violations and future Rule 262(b)(3) of Regulation A orders issued in stand-alone violations of the scienter-based anti- disqualifies an issuer if any covered Commission cease-and-desist fraud provisions of the federal securities laws (including, without limitation, person is subject to a Commission order proceedings 784 are not disqualifying Securities Act Section 17(a)(1),787 ‘‘entered pursuant to [S]ection 15(b), under Rule 262.785 The reason for this Exchange Act Section 10(b) 788 and Rule 15B(a), or 15B(c) of the Exchange Act, 10b–5 thereunder,789 Exchange Act or [S]ection 203(e) or (f) of the 783 See proposed Rule 503(a)(4) of Regulation Section 15(c)(1) 790 and Advisers Act Investment Advisers Act.’’ Under these Crowdfunding. 784 Section 206(1) 791). The only additional provisions (other than Section 15B(a), In cease-and-desist proceedings, the Commission can issue orders against ‘‘any person,’’ disqualification trigger not requiring discussed below), the Commission has including entities and individuals outside the scienter would be Section 5 authority to order a variety of sanctions securities industry, imposing sanctions such as against registered brokers, dealers, penalties, accounting and disgorgement or officer and director bars. In contrast, administrative persons (such as accountants and attorneys) who municipal securities dealers and proceedings generally are limited to regulated appear or practice before it, or to deny them the entities and their associated persons. privilege of appearing before the Commission 780 temporarily or permanently. 17 CFR 201.102(e). The federal or state agencies described in 785 The disqualification provisions under Rule proposed Rule 503(a)(3) of Regulation Orders under these sections are not disqualifying 262 also do not cover other types of Commission under Rule 262. Crowdfunding are the ones identified in Section actions. For example, the Commission has authority 786 See proposed Rule 503(a)(5) of Regulation 302(d)(2)(B)(i), with the addition of the CFTC. under Section 9(b) of the Investment Company Act Crowdfunding. 781 Steadman v. SEC, 603 F.2d 1126, 1140 (5th to bring proceedings against ‘‘any person’’ and may 787 Cir. 1979), aff’d on other grounds, 450 U.S. 91 impose investment company bars, civil penalties 15 U.S.C. 77q(a)(1). 788 (1981). and disgorgement under Sections 9(d) and (e) of the 15 U.S.C. 78j(b). 782 See In the Matter of Mitchell M. Maynard and Investment Company Act. 15 U.S.C. 80a–9(b), (d) 789 17 CFR 240.10b–5. Dorice A. Maynard, Release No. IA–2875 (May 15, and (e). The Commission also has authority under 790 15 U.S.C. 78o(c)(1). 2009). Rule 102(e) of its Rules of Practice to censure 791 15 U.S.C. 80b–6(1).
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violations.792 Section 5 imposes a strict Regulation A offering statement that was Request for Comment liability standard, which does not the subject of a Commission refusal 261. Should we eliminate or modify 793 require a finding of scienter. As a order, stop order or order suspending any of the proposed disqualification matter of policy, we do not believe that the Regulation A exemption within the events? If so, which ones and why? the exemption from registration under last five years, or is the subject of a Should additional events be Section 4(a)(6) should be made available pending proceeding to determine disqualifying events? If so, what should to persons whose prior conduct has whether such an order should be constitute a disqualifying event and resulted in an order to cease and desist issued.798 Similarly, paragraphs (c)(1) why? from violations of the registration and (2) of Rule 262 disqualify an 262. The proposed disqualification for requirements of Section 5. offering if any underwriter of the certain criminal convictions A disqualification based on a securities proposed to be issued was, or contemplates a look-back period of five Commission cease-and-desist order was named as, an underwriter of years for criminal convictions of issuers would be subject to the same five-year securities under a registration statement (including predecessors and affiliated look-back period that applies to court or Regulation A offering statement that issuers) and 10 years for other covered restraining orders and injunctions, was the subject of a Commission refusal persons. Should we modify the rather than the 10-year look-back that is order, stop order or order suspending proposed five- and 10-year look-back mandated to apply to other final the Regulation A exemption within the periods? If so, what should the look- regulatory orders under Section 302(d), last five years, or is the subject of a back periods be? Should the look-back which would provide consistent pending proceeding to determine periods be measured from the date of Commission treatment of cease-and- the requisite filing with the desist orders with court orders that we whether such an order should be issued.799 Commission, as proposed, or the date of seek. This approach is also consistent the relevant sale? Why? with the Rule 506 disqualification rules. The proposed rules would incorporate 263. Should we expand or narrow the the substance of paragraphs (a)(1), (a)(2), (f) Suspension or Expulsion From SRO scope of the coverage of criminal (c)(1) and (c)(2) of Rule 262 in a single Membership or Association With an convictions? Why or why not? paragraph that applies to all covered SRO Member 264. Is the proposed coverage and persons,800 resulting in rules that are look-back period for disqualification Rule 262(b)(4) disqualifies an offering substantially similar to Rule 262. This is events relating to court injunctions and if any covered person is suspended or the same as the approach in the Rule restraining orders appropriate? Why or expelled from membership in, or 506 disqualification rules. why not? Should we impose any due suspended or barred from association (h) United States Postal Service False process requirements as a condition to with a member of, a self-regulatory disqualification? If so, what should Representation Orders organization or ‘‘SRO’’ (e.g., a registered those requirements be and why? Should national securities exchange or national Paragraphs (a)(5) and (b)(5) of Rule we expand or narrow our proposed securities association) for any act or approach of who would be viewed as omission to act constituting conduct 262 disqualify an offering if the issuer or another covered person is subject to subject to an order? Why or why not? inconsistent with just and equitable 265. Are the proposed disqualification 794 a United States Postal Service false principles of trade. provisions relating to final orders of The proposed rules would include a representation order, entered within the preceding five years, or to a temporary certain regulators appropriate? Why or reference to a registered affiliated why not? The proposed rules would add securities association 795 and would restraining order or preliminary injunction with respect to conduct the CFTC to the list of regulators whose apply the standard to all covered regulatory bars and other final orders persons,796 but they would not alleged to have violated the false representation statute that applies to will trigger disqualification. Is this otherwise change the substance of Rule addition appropriate? Why or why not? 797 U.S. mail.801 262(b)(4). Including these changes is Should we define or provide additional the same approach as in the Rule 506 The proposed rules would incorporate guidance about what constitutes a disqualification rules. the substance of paragraphs (a)(5) and ‘‘bar’’? Why or why not? Is our proposed (g) Stop Orders and Orders Suspending (b)(5) of Rule 262 in a single definition of ‘‘final order’’ appropriate? 802 the Regulation A Exemption paragraph, resulting in rules that are If not, why not and what should it be? substantially similar to Rule 262. This is Should we limit ‘‘fraudulent, Paragraphs (a)(1) and (2) of Rule 262 the same as the approach in the Rule manipulative or deceptive conduct’’ to disqualify an offering if the issuer, or 506 disqualification rules. matters involving scienter? Why or why any predecessor or affiliated issuer, has not? filed a registration statement or 798 17 CFR 230.262(a)(1) and (2). 266. Are the proposed disqualification 799 17 CFR 230.262(c)(1) and (2). 792 provisions relating to Commission 15 U.S.C. 77e. 800 See proposed Rule 503(a)(7) of Regulation 793 See SEC v. Ross, 504 F.3d 1130, 1137 (9th Cir. disciplinary orders appropriate? Why or Crowdfunding. why not? Should the disqualification 2007); Swenson v. Engelstad, 626 F.2d 421, 424 (5th 801 Paragraph (a)(5) of Rule 262 relates to issuers Cir. 1980); SEC v. N. Am. Research and Dev. Corp., and their predecessors and affiliated issuers, and continue only for as long as some act is 424 F.2d 63, 81–82 (2d Cir. 1970); SEC v. Pearson, paragraph (b)(5) of Rule 262 relates to other covered prohibited or required to be performed 426 F.2d 1339, 1343 (10th Cir. 1970). persons. Disqualification results if any covered pursuant to the order, as proposed, or 794 See 17 CFR 230.262(b)(4). person ‘‘is subject to a United States Postal Service should we impose a look-back period 795 An association of brokers and dealers may be false representation order entered under 39 U.S.C. registered as an affiliated securities association 3005, within 5 years prior to the filing of the for Commission disciplinary orders? If under Exchange Act Section 15A. 15 U.S.C. 78o– offering statement, or is subject to a temporary we should impose a look-back period, 3. restraining order or preliminary injunction entered how long should that look-back period 796 Rule 262(b)(4) does not apply to issuers, their under 39 U.S.C. 3007 with respect to conduct be (e.g. five years, 10 years)? predecessors or affiliated issuers. 17 CFR alleged to have violated 39 U.S.C. 3005.’’ [17 CFR 230.262(b)(4). 230.262(a)(5) and (b)(5)]. 267. The proposed disqualification 797 See proposed Rule 503(a)(6) of Regulation 802 See proposed Rule 503(a)(8) of Regulation provisions would make certain Crowdfunding. Crowdfunding. Commission cease-and-desist orders a
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disqualifying event. Is this approach preserve the intended benefits of the approach appropriate? Why or why not? appropriate? Why or why not? Should Section 4(a)(6) exemption and avoid Should we include in the proposed we create a new disqualification trigger creating an undue burden on capital- rules additional guidance on what types for orders of any other regulator not raising activities, while giving effect to of factual inquiries should be identified in Section 302(d)? If so, the disqualification provisions. undertaken under the reasonable care which regulator and why? Although Rule 262 does not contain a standard? If so, what should that 268. Are the proposed disqualification reasonable care exception, we believe guidance include? Should we create a provisions relating to suspension or that even with its inclusion, the cut-off date to apply when issuers make expulsion from SRO membership or proposed rules would be substantially a factual inquiry? If so, what should that association with an SRO member similar to Rule 262. cut-off date be? appropriate? Why or why not? We are proposing that in order for an 269. Are the proposed disqualification issuer to establish that it had exercised iv. Waivers provisions relating to stop orders and reasonable care, it would need to make The proposed rules would include a orders suspending the Regulation A a factual inquiry into whether any waiver provision based on Rule 262 exemption appropriate? Why or why disqualifications existed. The nature under which the Commission could not? and scope of the factual inquiry would grant a waiver of disqualification if it 270. Are the proposed disqualification vary based on the circumstances of the determined that the issuer had shown provisions relating to United States issuer and the other offering good cause ‘‘that it is not necessary Postal Service false representation participants. For example, we believe under the circumstances that the orders appropriate? Why or why not? that issuers should have an in-depth [registration] exemption . . . be denied.’’ Depending on the specific facts, we iii. Reasonable Care Exception knowledge of their own officers and directors, which could be gained believe a number of circumstances (such The proposed rules would include an through the recruiting process and in as a change of control, change of exception from disqualification for the course of performing their duties. supervisory personnel, absence of notice offerings in which the issuer establishes When relevant inquiry has already been and opportunity for hearing and relief that it did not know and, in the exercise made, further steps may not be required from a permanent bar for a person who of reasonable care, could not have in connection with a particular offering. does not intend to apply to reassociate known that a disqualification existed In the absence of other factors, factual with a regulated entity) could be because of the presence or participation inquiry by means of questionnaires or relevant to the evaluation of a waiver 803 of another covered person. This is the certifications, perhaps accompanied by request. The Commission has delegated same as the approach in the Rule 506 contractual representations, covenants authority to the Director of the Division disqualification rules. The proposed and undertakings, may be sufficient. If of Corporation Finance to grant reasonable care exception should help the circumstances give an issuer reason disqualification waivers under address the potential difficulty for to question the veracity or accuracy of Regulation A.805 Given the expectation issuers in establishing whether any the responses to its inquiries, we believe of a short timeframe for crowdfunding covered persons are the subject of reasonable care would require the issuer offerings conducted pursuant to Section 804 disqualifying events, particularly to take further steps or undertake 4(a)(6), we are sensitive to the given that there is no central repository additional inquiry to provide a timeliness of the waiver application that aggregates information from all the reasonable level of assurance that no process and the risk that a lengthy federal and state courts and regulatory disqualifications apply. review process may disadvantage authorities that would be relevant in The timeframe for inquiry also should issuers seeking speedy access to capital. determining whether covered persons be reasonable in relation to the We believe the staff has managed the have a disqualifying event in their past. circumstances of the offering and the process of granting waivers from We are proposing a reasonable care participants. The objective would be for Regulation A and Rule 505 exception out of concern that the the issuer to gather information that is disqualification appropriately in the benefits of the new exemption under complete and accurate as of the time of past. Accordingly, we are proposing to Section 4(a)(6)—which, among other the relevant transactions without clarify the existing delegation of things, is intended to alleviate the imposing an unreasonable burden on authority to the Director of the Division funding gap and accompanying the issuer or the other offering of Corporation Finance by amending it regulatory concerns faced by startups participants. With that in mind, we to cover disqualification waivers under and small businesses in connection with would expect issuers to determine the Section 4(a)(6).806 This also is the same raising capital in relatively low dollar appropriate cut-off dates to apply when approach we took in the context of amounts—may otherwise be they make a factual inquiry, based upon waivers for the Rule 506 disqualification substantially reduced. Issuers may be the particular facts and circumstances of rules. reluctant to offer or sell securities in the offering and the participants The proposed rules would provide reliance on an exemptive rule if the involved, to determine whether any that disqualification would not arise if, exemption could later be found, despite covered persons are subject to before the filing of the information the issuer’s exercise of reasonable care, disqualification before seeking to rely required by Section 4A(b), the court or not to have been available. On the other on the exemption. regulatory authority that entered the hand, issuers must have a responsibility relevant order, judgment or decree to screen bad actors out of their Request for Comment advises in writing, whether contained in offerings made in reliance on Section 271. Is it appropriate to have a the relevant judgment, order or decree 4(a)(6). We believe that providing a reasonable care exception from or separately to the Commission or its reasonable care exception would help to disqualification? Why or why not? staff, that disqualification under Section 272. In order for an issuer to establish 803 See proposed Rule 503(b)(4) of Regulation that it had exercised reasonable care, the 805 See Rule 30–1(b) of our Rules of Organization Crowdfunding. proposed rules would require the issuer and Program Management [17 CFR 200.30–1(b)]. 804 See also Applied Dynamite Letter (discussing 806 See proposed paragraph (d) to Rule 30–1 of difficulties associated with satisfying certain to make a factual inquiry into whether our Rules of Organization and Program disqualification criteria with confidence). any disqualifications existed. Is this Management.
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4(a)(6) should not arise as a v. Transition Issues so, in either case, how should we consequence of such order, judgment or The proposed rules would specify address concerns about the fairness of decree. Because disqualification would that disqualification under Section retroactive application of the not arise in those circumstances, no 4(a)(6) would not arise as a result of disqualification provisions to actions waiver would be needed. This events occurring before the effective that took place prior to the enactment of automatic exception from date of Regulation Crowdfunding, when the JOBS Act and the adoption of rules disqualification is similar to that in adopted.808 This is consistent with the implementing the JOBS Act? NASAA’s approved Model Accredited approach we took with respect to the 277. The proposed rules would Investor Exemption (‘‘MAIE’’), adopted Rule 506 disqualification rules. We specify that disqualification under in 1997, and Uniform Limited Offering believe this approach would address Section 4(a)(6) would not arise as a Exemption (‘‘ULOE’’), adopted in 1983 concerns about the potential unfairness result of events occurring before the and again in 1989. Under both the MAIE of a retroactive application of the effective date of proposed Regulation and ULOE, disqualification is waived if, disqualification provisions, such as to Crowdfunding. Should we limit among other things, the regulator persons who settled actions prior to the disqualification to events occurring after issuing the relevant order determines enactment of the JOBS Act and the the enactment of the JOBS Act instead? that disqualification is not necessary adoption of rules to implement the JOBS Why or why not? 807 278. Is it appropriate to require under the circumstances. We believe Act. that including this automatic exception In lieu of imposing disqualification disclosure of matters that would have from disqualification is appropriate for pre-existing events, the proposed triggered disqualification had they because it allows the relevant rules would require disclosure in the occurred after the effective date of authorities to determine the impact of offering materials of matters that would proposed Regulation Crowdfunding? Is their roles, and it conserves Commission have triggered disqualification had they there a better method of putting resources (which might otherwise be occurred after the effective date of investors on notice of bad actor devoted to consideration of waiver proposed Regulation Crowdfunding.809 involvement? If so, what method? If applications) in cases where the We believe this disclosure would put disclosure of a pre-existing triggering relevant authority determines that investors on notice of events that would, event is required and not adequately disqualification from offerings made in but for the timing of such events, provided to an investor, should relief for reliance on Section 4(a)(6) is not disqualify offerings under Section insignificant deviations from Regulation warranted. This is the same as the 4(a)(6) that they are evaluating as Crowdfunding requirements be approach in the Rule 506 potential investments. We also believe available? Why or why not? disqualification rules. that this disclosure is particularly b. Intermediaries and Certain Other Request for Comment important because, as a result of the Associated Persons implementation of Section 302(d), 273. The proposed rules contemplate As noted above, Section 302(d)(1)(B) investors may have the impression that requires the Commission to establish that the Commission could grant a all bad actors would now be waiver of disqualification under certain disqualification provisions under which disqualified from participating in an intermediary would not be eligible to circumstances. Is this approach offerings under Section 4(a)(6). We appropriate? Why or why not? What effect or participate in transactions expect that issuers would give conducted pursuant to Securities Act should constitute ‘‘good cause’’ for reasonable prominence to the disclosure purposes of seeking a waiver? Are there Section 4(a)(6). Section 302(d)(2) to ensure that information about pre- requires that the disqualification specific circumstances under which a existing bad actor events would be waiver is appropriate (e.g. change of provisions we propose be substantially appropriately presented in the total mix similar to the provisions of Securities control, change of supervisory of information available to investors. If personnel, absence of notice and Act Rule 262, which applies to issuers. disclosure of a pre-existing, otherwise Exchange Act Section 3(a)(39) 811 opportunity for a hearing)? If so, what disqualifying event is required and not are they? currently defines the circumstances in adequately provided to an investor, we which a broker would be subject to a 274. Should we delegate authority to do not believe relief would be available ‘‘statutory disqualification’’ with respect 810 the Director of the Division of under the proposed rules, which to membership or participation in a self- Corporation Finance to grant provide that insignificant deviations regulatory organization such as FINRA disqualification waivers under Section from Regulation Crowdfunding or any other registered national 4(a)(6), as proposed? Why or why not? requirements would not necessarily securities association. We believe that 275. Is it appropriate to include an result in loss of the exemption. the definition of ‘‘statutory automatic exception from Request for Comment disqualification’’ under Section 3(a)(39) disqualification where the relevant is substantially similar to, while 276. Should we impose authority concludes that somewhat broader than, the provisions disqualification for all pre-existing disqualification under Section 4(a)(6) of Rule 262.812 should not arise as a consequence of events, regardless of whether they occurred before the effectiveness of the such order, judgment or decree, as 811 15 U.S.C. 78c(39). proposed? If not, why not? Should we final rules, or only for events after 812 There are certain differences between expand or limit this automatic effectiveness? Why or why not? Should Exchange Act Section 3(a)(39) and Rule 262. For exception? Please explain. we treat different types of pre-existing example, while Rule 262 refers to orders that had events differently? Why or why not? If been entered into within five years prior to a filing, there is no similar time restriction in Section 807 See MAIE paragraph (D)(2)(b), available at 3(a)(39). Unlike Rule 262, Section 3(a)(39) extends http://www.nasaa.org/wp-content/uploads/2011/ 808 See proposed Rule 503(b)(1) of Regulation disqualification to persons who, by their conduct 07/24-Model_Accredited_Investor_Exemption.pdf; Crowdfunding. while associated with brokers or dealers (among Peter M. Fass and Derek A. Wittner, Blue Sky 809 See proposed Rule 201(u) of Regulation other types of regulated entities), have been found Practice for Public and Private Direct Participation Crowdfunding. to be a cause of any effective, relevant suspension, Offerings, Appendix 9A, paragraph B.6 (Thompson 810 See proposed Rule 502 of Regulation expulsion or order. Section 3(a)(39) also subjects Reuters/West 2008). Crowdfunding. persons to disqualification if they had been
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The proposed rules would prohibit Exchange Act Rule 17f–2 would apply 280. Should we instead propose rules any person subject to a statutory to all brokers, including registered that mirror the disqualification rules we disqualification as defined in Exchange funding portals. The proposed are proposing for issuers? If we were to Act Section 3(a)(39) from acting as, or instructions to Rule 503(d) would take this approach, would any particular being an associated person of, an clarify that Rule 17f–2 requires that, disqualification provision need to be intermediary unless permitted to do so unless subject to an exemption, every tailored for intermediaries engaging in by Commission rule or order.813 The broker shall require that each of its crowdfunding transactions? Are there term ‘‘subject to a statutory partners, directors, officers and unintended consequences of having disqualification’’ has an established employees be fingerprinted and shall different disqualification standards for meaning under Exchange Act Section submit, or cause to be submitted, the issuers and for intermediaries? Please 3(a)(39) and defines circumstances that fingerprints of such persons to the explain. would subject a person to a statutory Attorney General of the United States or 281. Should any of the differences disqualification with respect to its designee for identification and between Rule 262 and Section 3(a)(39) membership or participation in, or appropriate processing. We believe that be addressed? Why or why not? If so, association with a member of, a self- consistent standards for all how should we address them? regulatory organization.814 Because intermediaries would assist FINRA or 282. Should we permit intermediaries funding portals, like broker-dealers, any other registered national securities to determine how best to screen would be members of FINRA or any association in monitoring compliance associated persons to ensure they are other registered national securities and enforcing its rules across its not subject to a statutory association, we anticipate that they members. disqualification? Why or why not? If so, would take appropriate steps to check We are proposing to apply to should we propose particular standards, the background of any person seeking to intermediaries the standard of Section or a level of care, applicable to this become associated with them, including 3(a)(39) rather than Rule 262 or the screening? whether such person is subject to a disqualification rules we are proposing 283. Should we prescribe specific statutory disqualification. In addition, for issuers, in part because the Section steps that an intermediary must take to we propose to clarify that associated 3(a)(39) standard is already an ascertain whether an associated person persons of intermediaries engaging in established one among financial should be prohibited from participating transactions in reliance on Section intermediaries and their regulators. We in or effecting crowdfunding 4(a)(6) must comply with Exchange Act believe that the practices that have transactions in reliance on Section Rule 17f–2, relating to the fingerprinting evolved around the Section 3(a)(39) 4(a)(6)? If so, what should those steps of securities industry personnel. standards have evolved in a manner be? 284. Should we permit intermediaries appropriate to intermediaries, and that convicted of, in addition to certain specified to reasonably rely on the representations to impose a new or different standard offenses related to securities and funds, any felony of associated persons regarding statutory only for those intermediaries that within ten years of filing to apply for membership disqualification if the intermediary or participation in, or to become associated with a engage in transactions in reliance on otherwise has conducted a background member of, an SRO; the comparable provisions of Section 4(a)(6), could create confusion Rule 262 are, in contrast, limited to felonies or check on the associated person? misdemeanors relating to the purchase or sale of and unnecessary burdens on market securities. Section 3(a)(39) covers suspensions, participants. Unnecessary burdens F. General Request for Comment expulsions and orders by both U.S. and non-U.S. would arise in particular for brokers that regulators and SROs (or their equivalents), whereas We request and encourage any Rule 262 covers suspensions, expulsions and orders act as intermediaries in transactions in interested person to submit comments by only U.S.-registered SROs, as well as orders, reliance on Section 4(a)(6), as they and regarding the proposed rules and form judgments and decrees of any court of competent their associated persons would become amendments, specific issues discussed jurisdiction. Finally, Rule 262 disqualifies a person, subject to two distinct standards for while Section 3(a)(39) does not, for being subject to in this release and other matters that a U.S. Postal Service false representation order, or disqualification. Consistent standards may have an effect on the proposed subject to a temporary restraining order or for all brokers and funding portals rules. We particularly welcome preliminary injunction, entered under 39 U.S.C. would also assist FINRA or any other 3005 or 39 U.S.C. 3007, respectively, within 5 years comments from issuers, investors, state prior to a filing. Despite these differences, we registered national securities association regulators and other market believe that Section 3(a)(39) and Rule 262 are in monitoring compliance and enforcing participants. With regard to any substantially similar in particular with regard to the its rules across its members. persons and events they cover, their scope and their comments, we note that such comments purpose. Request for Comment are of particular assistance to us if 813 See proposed Rule 503(d) of Regulation accompanied by supporting data and Crowdfunding. 279. Is the standard for ‘‘subject to a analysis of the issues addressed in those 814 Events that could result in a statutory statutory disqualification’’ as defined in comments. We urge commenters to be as disqualification for an associated person under Exchange Act Section 3(a)(39) Section 3(a)(39) include, but are not limited to: specific as possible. certain misdemeanor and all felony criminal appropriate for purposes of establishing convictions; temporary and permanent injunctions disqualification provisions for III. Economic Analysis issued by a court of competent jurisdiction intermediaries in crowdfunding Title III sets forth a comprehensive involving a broad range of unlawful investment transactions made in reliance on Section regulatory structure for startups and activities; expulsions (and current suspensions) from membership or participation in an SRO; bars 4(a)(6)? Why or why not? If another small businesses to raise capital through (and current suspensions) ordered by the standard would be appropriate, why securities offerings using the Internet Commission or an SRO; denials or revocations of should that standard be used instead of through crowdfunding. In particular, registration by the CFTC; and findings by the Section 3(a)(39)? If we were to use Commission, CFTC or an SRO that a person: (1) Title III provides an exemption from ‘‘willfully’’ violated the federal securities or another standard for funding portals, registration for certain offerings of commodities laws, or the Municipal Securities should we also use that standard for securities by adding Securities Act Rulemaking Board (MSRB) rules; (2) ‘‘willfully’’ brokers’ crowdfunding activities? Or, Section 4(a)(6). In addition, Title III: aided, abetted, counseled, commanded, induced or should brokers adhere to the Section • Adds Securities Act Section 4A, procured such violations; or (3) failed to supervise another who commits violations of such laws or 3(a)(39) standard for all their activities, which requires, among other things, that rules. 15 U.S.C. 78c(a)(39). including crowdfunding? issuers and intermediaries that facilitate
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transactions between issuers and rules under the Exchange Act, to intermediaries intending to facilitate investors provide certain information to consider the impact that any new rule such transactions generally are required investors and potential investors, take would have on competition and to not to register with the Commission as certain actions and provide notices and adopt any rule that would impose a broker-dealers under Exchange Act other information to the Commission; burden on competition that is not Section 15(a). Finally, under existing • Adds Exchange Act Section 3(h), necessary or appropriate in furtherance exemptions from the registration which requires the Commission to adopt of the purposes of the Exchange Act. requirements of the Securities Act, rules to exempt, either conditionally or The discussion below addresses the small investors may be limited in their unconditionally, funding portals from economic effects of the proposed rules, ability to participate in offerings of having to register as brokers or dealers including the likely costs and benefits of securities of nonpublic companies.815 pursuant to Exchange Act Section proposed Regulation Crowdfunding, as 15(a)(1); well as the likely effect of the proposed 1. Existing Funding Sources Available • Includes disqualification provisions rules on efficiency, competition and to Startups and Small Businesses under which an issuer would not be capital formation. Given the specific able to avail itself of the exemption for language of the statute and our The potential economic impact of the crowdfunding if the issuer or other understanding of Congress’s objectives, proposed rules, including their effect on related parties, including an we believe that it is appropriate for the efficiency, competition and capital intermediary, were subject to a proposed rules to follow the statutory formation, will depend on how the disqualifying event; and provisions closely. We nonetheless also crowdfunding method of raising capital • Adds Exchange Act Section rely on our discretionary authority to compares to existing methods that 12(g)(6), which requires the Commission propose certain additional provisions. startups and small businesses currently to adopt rules to exempt from Section While the costs and benefits of the use for raising capital. Startups and 12(g), either conditionally or proposed rules in large part stem from small businesses can potentially tap a unconditionally, securities acquired the statutory mandate of Title III, certain variety of financing sources in the pursuant to an offering made in reliance costs and benefits are affected by the capital markets: Debt, equity or hybrid on Section 4(a)(6). discretion we propose to exercise in security offerings; registered or As discussed in detail above, we are connection with implementing this unregistered offerings; and bank loans. proposing Regulation Crowdfunding to mandate. For purposes of this economic The figure below plots the capital implement the requirements of Title III. analysis, we address the costs and raising by various sources for the period The proposed rules would implement benefits resulting from the mandatory 2009–2012.816 As evident from the data, the new exemption for the offer and sale statutory provisions and our exercise of significant fundraising in the capital of securities pursuant to the discretion together, because the two markets takes place via public debt, requirements of Section 4(a)(6) and types of benefits and costs are not Regulation D offerings (which include provide a framework for the regulation separable. equity, debt and hybrid security of issuers and intermediaries, which We request comment on all aspects of offerings) and Rule 144A offerings includes brokers and funding portals our economic analysis, including the (which include predominantly debt engaging in such transactions. The potential costs and benefits of the securities). proposed rules also would exempt proposed rules. securities offered and sold in reliance A. Economic Baseline 815 For example, only up to 35 non-accredited on Section 4(a)(6) from the registration investors are allowed to participate in the most requirements of Exchange Act Section The baseline for our economic frequently used Regulation D exemption, Securities 12(g). analysis of proposed Regulation Act Rule 506(b) (17 CFR 230.506(b)), and these We are mindful of the costs imposed Crowdfunding, including the baseline investors must meet certain sophistication by, and the benefits to be obtained from, for our consideration of the effects of the requirements. 816 These statistics are based on a review of Form our rules. Securities Act Section 2(a) proposed rules on efficiency, D electronic filings with the Commission— and Exchange Act Section 3(f) require competition and capital formation, is specifically, the ‘‘total amount sold’’ as reported in us, when engaging in rulemaking that the situation in existence today, in the filings—and data regarding other types of requires us to consider or determine which startups and small businesses offerings (e.g., public debt offerings and Rule 144A offerings) from Securities Data Corporation’s New whether an action is necessary or seeking to raise capital through Issues database (Thomson Financial). See Vladimir appropriate in the public interest, to securities offerings must register the Ivanov and Scott Bauguess, Capital Raising in the consider, in addition to the protection of offer and sale of securities under the U.S.: An Analysis of Unregistered Offerings Using investors, whether the action will Securities Act unless they can rely on the Regulation D Exemption, 2009–2012 (July 2013) an existing exemption from registration (‘‘Ivanov/Bauguess Study’’), available at http:// promote efficiency, competition and www.sec.gov/divisions/riskfin/whitepapers/dera- capital formation. Exchange Act Section under the federal securities laws. unregistered-offerings-reg-d.pdf. Data on new bank 23(a)(2) requires us, when adopting Moreover, under existing requirements, loans per year is not available.
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Startups and small businesses seeking the average cost of achieving initial Section 4(a)(2), certain data available to raise capital can register the offer and regulatory compliance for an initial from Regulation D and Regulation A sale of securities under the Securities public offering is $2.5 million, followed filings allow us to gauge how frequently Act. Registered offerings, however, are by an ongoing compliance cost, once issuers use these exemptions when generally too costly to be viable public, of $1.5 million per year.818 raising capital. Based on Regulation D alternatives for startups and small Hence, for an issuer seeking to raise less filings by non-fund issuers 823 from 2009 businesses. In particular, issuers than $1 million, a registered offering is to 2012, there are a substantial number conducting registered offerings must not economically feasible if it would of issuers who choose to raise capital by usually pay underwriter commissions, cost an estimated $2.5 million, on relying on Rule 506 even though their which are, on average, 7% for initial average, to achieve initial regulatory offering size would qualify for an compliance for an initial public public offerings, 5.4% for follow-on 819 exemption under Rule 504 or Rule offering. 824 equity offerings and between 0.9% and The alternative to raising capital via 505. With the recent amendment to 1.5% for issuers raising capital through registered offerings is for startups and Rule 506 of Regulation D that permits an 817 public bond issuances. Issuers small businesses to offer and sell issuer to engage in general solicitation conducting registered offerings also securities by relying on an existing or general advertising in offering and must pay Commission registration fees exemption from registration under the selling securities pursuant to Rule 506, and FINRA or any other registered federal securities laws. For example, subject to certain conditions,825 we national securities association filing they could rely on current exemptions expect to see an even higher percentage fees, legal and accounting fees and from registration under the Securities of issuers relying on that rule. As shown expenses, transfer agent and registrar Act, such as Section 3(a)(11), Section in the table below reporting the number fees, costs associated with periodic 4(a)(2),820 Regulation D 821 and of Regulation D and Regulation A reporting requirements and other Regulation A.822 While we do not have offerings by non-fund issuers, from 2009 regulatory requirements and various complete data on offerings relying on an to 2012, relatively few issuers rely on other fees. Two surveys concluded that exemption under Section 3(a)(11) or Regulation A.
Offering size $5–50 < $1 Million $1–5 million million >$50 million
Rule 504 ...... 1,997 Rule 505 ...... 705 229 Rule 506 ...... 19,424 11,957 8,103 1,268
817 See, e.g., Hsuan-Chi Chen and Jay R. Ritter, rebuilding_the_ipo_on-ramp.pdf (‘‘IPO Task 823 These are issuers that are not pooled The Seven Percent Solution, 55 J. Fin. 1105–1131 Force’’). investment vehicles. (2000); Shane A. Corwin, The Determinants of 819 See id. 824 This tendency could, in part, be attributed to Underpricing for Seasoned Equity Offers, 58 J. Fin. 820 Securities Act Section 4(a)(2) provides that the two features of Rule 506: Blue Sky law preemption 2249–2279 (2003); Lily Hua Fang, Investment Bank provisions of the Securities Act shall not apply to Reputation and the Price and Quality of and an unlimited offering amount. See also U.S. Underwriting Services, 60 J. Fin. 2729–2761 (2005); ‘‘transactions by an issuer not involving a public Government Accountability Office, Factors That Stephen J. Brown, Bruce D. Grundy, Craig M. Lewis offering.’’ May Affect Trends in Regulation A Offerings, GAO– and Patrick Verwijmeren, Convertibles and Hedge 821 Regulation D provides a nonexclusive safe 12–839 (Jul. 3, 2012), available at http:// Funds as Distributors of Equity Exposure, 25 Rev. harbor from registration for certain types of www.gao.gov/products/GAO-12-839 (‘‘GAO Fin. Stud. 3077–3112 (2012). securities offerings. Report’’). 818 822 Regulation A provides a conditional See IPO Task Force, Rebuilding the IPO On- 825 See General Solicitation Adopting Release, Ramp, at 9 (Oct. 20, 2011), available at http:// exemption from registration for certain small note 12. www.sec.gov/info/smallbus/acsec/ issuances.
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Offering size $5–50 < $1 Million $1–5 million million >$50 million
Regulation A ...... 2 14 Note: Data comes from Form D and Form 1–A filings from 2009 to 2012. We consider only new offerings and exclude offerings with amount sold reported as $0 on Form D. We also use the maximum amount indicated in Form 1–A to determine offering size for Regulation A offerings.
Each of these exemptions, however, would need to file with the Commission avoid the restriction on general includes restrictions that may limit its an offering document, which, coupled solicitation and general advertising by suitability for startups and small with the potential review of such using the services of a financial businesses. The table below lists the document by the staff, has been cited as intermediary, those services may be main requirements of these exemptions. a reason why Regulation A is not widely costly.828 While Rule 506 under For example, the exemption under used.827 Issuers of securities pursuant to Regulation D preempts the applicability Securities Act Section 3(a)(11) is limited Securities Act Section 4(a)(2) and Rules of state laws regarding the offer and sale 826 to intrastate offerings, and an issuer 504, 505 and 506(b) under Regulation D of securities and new Rule 506(c) seeking to offer and sell securities generally may not engage in general permits general solicitation and general pursuant to Regulation A may be solicitation and general advertising to advertising, an issuer seeking to rely on required to register in all 50 states if it reach potential investors, which also Rule 506(c) would be limited to selling intends to offer and sell the securities in could place a significant limitation on securities only to accredited all 50 states using the Internet. An offerings by startups and small 829 issuer relying on Regulation A also businesses. Although an issuer may investors.
Issuer and Type of offering Dollar limit Manner of offering investor Filing requirement Restriction on Blue sky requirements resale exemption
Section 3(a)(11) ..... None ...... No limitation other All issuers and in- None ...... Rests within the Need to comply than to maintain vestors must be state (generally with state blue intrastate char- resident in a one-year pe- sky law by reg- acter of offering. state. No limita- riod for resales istration or state tion on number. within state). exemption. Section 4(a)(2) ...... None ...... No general solici- All issuers and in- None ...... Restricted securi- Need to comply tation or adver- vestors must ties. with state blue tising. meet sophis- sky law. tication and ac- cess to informa- tion test so as not to need pro- tection of reg- istration. Regulation A ...... $5,000,000 within ‘‘Testing the No requirements File test the None; freely resal- Need to comply prior 12 waters’’ per- waters docu- able. with state blue months, but no mitted before fil- ments, Form 1– sky law. more than ing Form 1–A. A, any sales $1,500,000 by Sales permitted material and selling security after Form 1–A Form 2–A re- holders. qualified. port of sales and use of pro- ceeds with the Commission.
826 Under Securities Act Section 3(a)(11), except if a corporation, incorporated by and doing business the average sales commission for Regulation D as expressly provided, the provisions of the within, such State or Territory.’’ offerings for up to $1 million was 6.5%, almost Securities Act (including the registration 827 See Rutheford B. Campbell, Jr., Regulation A: three times larger than that for offerings of more requirement under Securities Act Section 5) do not Small Businesses’ Search for ‘‘A Moderate Capital’’, than $50 million (1.9%). See Ivanov/Bauguess apply to a security that is ‘‘part of an issue offered 31 Del. J. Corp. L. 77, 106 (2006). See also GAO Study, note 816. and sold only to persons resident within a single Report, note 824. 829 See General Solicitation Adopting Release, State or Territory, where the issuer of such security 828 An internal study by our Division of Economic is a person resident and doing business within, or, and Risk Analysis covering 2009 to 2012 found that note 12.
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Issuer and Type of offering Dollar limit Manner of offering investor Filing requirement Restriction on Blue sky requirements resale exemption
Rule 504 ...... $1,000,000 within No general solici- No requirements File Form D with Restricted unless Need to comply Regulation D ...... prior 12 months. tation or adver- the Commission registered in a with state blue tising unless not later than state requiring sky law by reg- registered in a 15 days after use of a sub- istration or state state requiring first sale. Filing stantive disclo- exemption. use of a sub- not a condition sure document stantive disclo- of the exemp- or sold under sure document tion. state exemption or sold under for sale to ac- state exemption credited inves- for sales to ac- tors with gen- credited inves- eral solicitation. tors with gen- eral solicitation. Rule 505 ...... $5,000,000 within No general solici- Unlimited accred- File Form D with Restricted securi- Need to comply Regulation D ...... prior 12 months. tation or adver- ited investors the Commission ties. with state blue tising. and 35 non-ac- not later than sky law. credited inves- 15 days after tors. first sale. Filing not a condition of the exemp- tion. Rule 506 ...... None ...... No general solici- Under Rule File Form D with Restricted securi- Exempt as ‘‘cov- Regulation D ...... tation or adver- 506(b), unlim- SEC not later ties. ered security’’ tising under ited accredited than 15 days pursuant to Se- Rule 506(b). investors and after first sale. curities Act General solicita- 35 non-accred- Filing not a con- Section 18 [15 tion and general ited investors. dition of the ex- U.S.C. 77r]. advertising per- Under Rule emption. mitted under 506(c), all pur- Rule 506(c), chasers must provided all pur- be accredited chasers are ac- investors. credited inves- tors.
2. Current Sources of Funding for equity stake in the business. A recent b. Commercial Loans, Peer-to-Peer Startups and Small Businesses That study of the financing choices of Loans and Microfinance Could Be Substitutes or Complements to startups finds that most of the capital Startups and small businesses also Crowdfunding supplied by friends and family is in the may seek loans from financial At present, startups and small form of loans.831 In contrast to a institutions.832 A recent study of the businesses can raise capital through commercial lender that, for example, financing choices of startups suggests several sources that could be close would need to assess factors such as the that they resort to bank financing early substitutes or complements to willingness and ability of a borrower to in their lifecycle.833 The study finds that crowdfunding transactions that rely on repay the loan and the viability of its businesses rely heavily on external debt Section 4(a)(6). These sources are either business, family and friends may be sources such as bank financing in the based on unregistered securities willing to assist based primarily or first year after being formed, which offerings or involve lending by financial solely upon personal relationships. comes mostly in the form of personal institutions. Family and friends, however, may be and commercial bank loans, business a. Family and Friends able to provide only a limited amount of capital compared to other sources. In 832 Using data from the 1993 Survey of Small Family and friends are sources addition, financial arrangements with Business Finance, one seminal study indicates that through which startups and small financial institutions account for approximately businesses can raise capital. This source family and friends may not be an 27% of small firms’ borrowings. See Allen N. Berger of capital is usually available early in optimal source of funding if any of the and Gregory F. Udell, The Economics of Small parties is untrained in the structuring of Business Finance: The Roles of Private Equity and the lifecycle of a small business, before Debt Markets in the Financial Growth Cycle, 22 J. the business approaches arm’s-length loan agreements, equity investments or Banking & Fin. 613 (1998). See also 1987, 1993, formal financial channels.830 Among in related areas of accounting. 1998 and 2003 Surveys of Small Business Finances, other things, family and friends may Unfortunately, there is no available data available at http://www.federalreserve.gov/pubs/ oss/oss3/nssbftoc.htm. The Survey of Small donate funds, loan funds or acquire an on these financing sources that could Business Finances was discontinued after 2003. allow us to quantify their magnitude Using data from the Kauffman Foundation Firm 830 See Paul Gompers and Josh Lerner, The and compare them to other current Surveys, one study finds that 44% of startups use Venture Capital Cycle (MIT Press 2006) sources of capital. loans from financial institutions. See Rebel A. Cole (‘‘Gompers’’); Alicia M. Robb and David T. and Tatyana Sokolyk, How Do Start-Up Firms Robinson, The Capital Structure Decisions of New Finance Their Assets? Evidence from the Kauffman Firms, Rev. Fin. Stud. (forthcoming), available at Firm Surveys (2012), available at http://papers.ssrn. http://rfs.oxfordjournals.org/content/early/2012/07/ com/sol3/papers.cfm?abstract_id=2028176. 07/rfs.hhs072.full.pdf+html (‘‘Robb’’). 831 See Robb, note 830. 833 See Robb, note 830.
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credit cards and credit lines. Another institutions from June 30, 2006 until approximately 18% from 2008 until recent report, however, suggests that June 30, 2013 also shows that both small 2013. Large business loans, on the other bank lending to small businesses fell by business loans (those for up to a $1 hand, range from a high of $2,440 $100 billion from 2008 to 2011 and that million) and large business loans (those billion in 2008 to a low of $1,924 billion by 2012, less than one-third of small greater than $1 million) experienced a in 2010. The figure shows that this businesses reported having a business decline from the peak in 2008.835 Small segment of the loan market has shown 834 bank loan. Our analysis of lending business loans, however, declined steady increases since 2010. data from FDIC-insured depository continuously over the period by
Additionally, although covering the loans, equipment loans and motor fiscal year 2011, the SBA approved pre-recessionary period, a Federal vehicle loans.839 approximately $30.5 billion in 7(a) and Reserve Board staff study analyzing data Various loan guarantee programs of CDC/504 loans, which were distributed from the 2003 Survey of Small Business the Small Business Administration to approximately 54,500 small Finance suggests that 60 percent of (‘‘SBA’’) make credit more accessible to businesses.844 The SBA, however, small businesses have outstanding small businesses by either lowering the currently accounts for a small part of the credit in the form of a credit line, a loan interest rate of the loan or enabling a overall small business lending in the or a capital lease.836 These loans were market-based loan that a lender would United States, administering less than 2 not otherwise be willing to provide, 845 borrowed from two types of financial percent of all small business loans. absent a guarantee.840 Although the SBA Many startups and small businesses institutions—depositary and non- does not itself act as a lender, the may find loan requirements imposed by depositary institutions (e.g., finance agency guarantees a portion of loans financial institutions difficult to meet companies, factors or leasing made and administered by commercial and may not be able to rely on these 837 companies). Lines of credit were the lending institutions. SBA loan programs institutions to secure funding. For 838 most widely used type of credit. include 7(a) loans,841 CDC/504 loans 842 example, financial institutions generally Other types of loans included mortgage and Microloans.843 For example, in require a borrower to provide collateral
834 See The Kauffman Foundation, 2013 State of 838 See 2003 Survey, note 836 (estimating that average microloan is about $13,000. See Microloan Entrepreneurship Address (Feb. 5, 2013), available 34% of small businesses use lines of credit). Program, U.S. Small Business Administration, at http://www.kauffman.org/uploadedFiles/Down 839 Id. available at http://www.sba.gov/content/microloan- _ LoadableResources/SOE%20Report 2013pdf.pdf. 840 Numerous states also offer a variety of small program. The report cautions against prematurely concluding business financing programs, such as Capital 844 See U.S. Small Business Administration, FY that banks are not lending enough to small Access Programs, collateral support programs and 2013 Congressional Budget Justification And FY businesses as the sample period of the study loan guarantee programs. These programs are 2011 Annual Performance Report (‘‘2011 Annual includes the most recent recession. eligible for support under the State Small Business Performance Report’’), available at http://www.sba. 835 We define business loans to include Credit Initiative, available at http://www.treasury. gov/sites/default/files/files/1–508%20Compliant commercial and industrial loans and commercial gov/resource-center/sb-programs/Pages/ssbci.aspx. %20FY%202013%20CBJ%20FY%202011%20APR real estate loans. See Federal Deposit Insurance 841 15 U.S.C. 631 et seq. The 7(a) loans provide %281%29.pdf. Corporation, Statistics on Banking, available at small businesses with financing guarantees for a 845 One article notes that as of September 2012, http://www2.fdic.gov/SDI/SOB/. variety of general business purposes through the SBA managed 318,396 ($79 billion) loans, while 836 See Federal Reserve Board, Financial Services participating lending institutions. there were 17,249,884 ($646 billion) small-business Used by Small Businesses: Evidence from the 2003 842 15 U.S.C. 695 et seq. The CDC/504 loans are loans on the books of banks insured by the FDIC. Survey of Small Business Finances (October 2006), made available through ‘‘certified development By this measure, the SBA managed 1.85% (12.23% available at http://www.federalreserve.gov/pubs/ companies’’ or ‘‘CDCs’’, typically structured with in dollar volume) of all small-business loans. See bulletin/2006/smallbusiness/smallbusiness.pdf the SBA providing 40% of the total project costs, Ami Kassar, Putting the S.B.A. Into Perspective, (‘‘2003 Survey’’). a participating lender covering up to 50% of the N.Y. Times, Sept. 14, 2012, available at http://boss. 837 See Rebel Cole, What Do We Know About the total project costs and the borrower contributing blogs.nytimes.com/2012/09/14/putting-the-s-b-a- Capital Structure of Privately Held Firms? Evidence 10% of the project costs. into-perspective/. The SBA recently proposed rule from the Surveys of Small Business Finance 843 15 U.S.C. 631 et seq. The Microloan program amendments to increase eligibility for loans under (Working Paper) (Feb. 2013), available at http:// provides small, short-term loans to small businesses the SBA’s business loan programs. See SBA 504 and onlinelibrary.wiley.com/doi/10.1111/fima.12015/ and certain types of not-for-profit childcare centers. 7(a) Regulatory Enhancements, 13 CFR 120 pdf. The maximum loan amount is $50,000, but the (proposed Feb. 25, 2013).
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and/or a guarantee,846 which startups, of these securities.850 Like any in loans.853 In the U.S., there were about small businesses and their owners may traditional lending arrangement, 362 MFIs who disbursed 9,100 loans for not be able to provide. Collateral may be however, borrowers on peer-to-peer a total value of $100 million.854 On required even for loans guaranteed by lending sites are required to make fixed average, U.S. microloans are relatively the SBA. regular payments to their lenders, which larger with lower interest rates than Another source of debt financing for might make it a less attractive option for those of microloans in developing startups and small businesses is peer-to- small businesses with negative cash countries. One distinctive characteristic peer lending, which, according to one flows and short operating histories, both of the U.S. model of microfinance is that study, began developing in 2005.847 of which may make it more difficult for MFIs provide borrowers not only with Peer-to-peer lending Web sites facilitate such businesses to demonstrate their funds, but also with educational debt transactions by directly connecting ability to repay loans. services to build entrepreneurial and borrowers and lenders over the Internet. Microfinance also is another source of leadership skills.855 While data on the size of the overall debt financing for startups and small c. Venture Capitalists and Angel industry is sparse, peer-to-peer lending businesses. Microfinance consists of Investors was estimated to have reached small, working capital loans provided approximately $647 million in 2009 and by microfinance institutions (‘‘MFIs’’) Startups and small businesses also was expected to grow to $5.8 billion by that are invested in microenterprises or may seek funding from venture 2010.848 Although this source of income-generating activities.851 The capitalists (‘‘VCs’’) and angel investors. funding is small relative to the role of typical users of microfinance services Entrepreneurs seek VC and angel financial institutions, peer-to-peer and, in particular, of microcredits are financing usually after they have lending sites may offer small businesses family-owned enterprises or self- exhausted other sources of capital that more flexibility with regard to pricing, employed, low-income entrepreneurs, generally do not require the terms of credit, repayment schedules such as street vendors, farmers, service entrepreneurs to relinquish control and other conditions. Moreover, peer-to- providers, artisans and small producers, rights (for example, personal funds and peer lending sites may not require who live close to the poverty line in funds from family and friends, if borrowers to post collateral or a both urban and rural areas.852 available). guarantee, and some market participants The microfinance market has evolved As the chart below shows, according offer a secondary market for loans and grown considerably in the past to data from the National Venture originated on their own sites.849 At least decades. While data on the size of the Capital Association, in 2012, VCs one of the existing peer-to-peer overall industry is sparse, in 2008, it invested approximately $27 billion in platforms sells third-party issued was estimated that there were between approximately 3,800 deals that included securities to multiple individual 7,000 and 10,000 MFIs globally that seed, early-stage, expansion, and late- investors, thus improving the liquidity supplied an estimated $15 to $25 billion stage companies.856
846 Approximately 92% of all small business debt 850 Id. We note that under current law, this 853 See Sam Daley-Harris, State of Microcredit to financial institutions is secured, and about 52% activity would require broker-dealer registration. Summit Campaign Report 2009, Washington DC, of that debt is guaranteed, primarily by the owners 851 See Craig Churchill and Cheryl Frankiewicz, Microcredit Summit Campaign (2009). 854 of the firm. See Berger, note 832. Making Microfinance Work: Managing for Improved See FIELD at the Aspen Institute, Key Data on 847 See Ian Galloway, Peer-to-Peer Lending and Performance, Geneva International Labor the Scale of Microlending in the U.S. (February Community Development Finance, Federal Reserve 2011). Organization (2006). Bank of San Francisco (Working Paper) (2009), 855 Id. at 4 and 13. 852 See Joanna Ledgerwood, Microfinance available at http://www.frbsf.org/publications/ 856 See National Venture Capital Association, community/wpapers/2009/wp2009–06.pdf. Handbook: An Institutional and Financial Recent Stats & Studies, available at http://www. 848 Id. Perspective, Washington DC, World Bank nvca.org/index.php?option=com_content&view= 849 Id. Publications (1999). article&id=344&Itemid=103.
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Some startups, however, may struggle a defined or sustained business model made equity-based crowdfunding to attract funding from VCs because VCs commensurate with typical issuers of difficult in the United States, we assume tend to invest in startups with certain securities. The industry report finds that that the data for equity-based characteristics. A defining feature of more than half of all projects on one of crowdfunding comes from offerings VCs is that they tend to focus the largest domestic crowdfunding sites outside the United States. exclusively on startup companies with during the period 2009 through 2011 We are unaware of any domestic high-growth potential and a high involved film and musical endeavors.862 issuers and investors that are currently likelihood of going public after a few According to the industry report, participating in securities-based years of financing. VCs also tend to approximately $1.5 billion in financing crowdfunding offerings on Internet- invest in companies that have already was raised through crowdfunding based crowdfunding platforms that are used some other sources of financing, platforms during 2011, with over half of operating outside of the United States tend to be concentrated in certain that amount raised in the United States, (other than offerings made in reliance geographic regions (e.g., California and although only approximately $174 on Rule 506(c) of Regulation D), Massachusetts) and often require their million was attributable to ‘‘equity- although we recognize that these investments to have an attractive based’’ (or the equity model of platforms may represent an additional business plan, meet certain growth crowdfunding) and ‘‘reward-based’’ source of funding for startups and small benchmarks or fill a specific portfolio or crowdfunding.863 The industry report businesses. industry niche.857 In addition, when further states that equity-based investing in companies, VCs tend to crowdfunding is the fastest-growing of 3. Survival Rates for Startups and Small acquire significant control rights (e.g., all the crowdfunding categories, at a Businesses board seats, rights of first refusal, etc.), 114% compound annual growth rate Startups and small businesses that which they gradually relinquish as the (‘‘CAGR’’) in 2011.864 According to the lack tangible assets or business company approaches an initial public report, the rapid growth in equity-based experience needed to obtain offering.858 crowdfunding has been driven largely conventional financing might turn to According to a trade association, the by European platforms.865 securities-based crowdfunding in Angel Capital Association, in 2006, the According to the industry report, most reliance on Section 4(a)(6) as an 5,632 accredited angel investors in its current crowdfunding projects solicit attractive potential source of financing. member groups made 947 investments low levels of funding, with the average There is broad evidence that many of in 512 companies, providing startups successful project receiving less than these potential issuers are likely to fail with a total of $228.8 million.859 A $10,000.866 The industry report also after receiving funding. For example, a study suggests that angel investors tend states that, in 2011, equity-based 2010 study reports that of a random to invest in younger companies than offerings were, on average, much larger sample of 4,022 new high-technology VCs.860 We do not have more detailed than donation-based offerings, with businesses started in 2004, only 68% data on the amount of angel investments 68% of total funds raised on equity- survived by the end of 2008.869 Other in more recent years. based crowdfunding platforms drawing studies also have documented high $50,000 or more in financing, suggesting d. Current Crowdfunding Practices failure rates for small newly listed that the types of ventures financed companies. For example, the ten-year Currently in the United States, through equity-based crowdfunding delist rate for newly listed firms during crowdfunding activity generally is could be different than those financed the period 1981–1991 is 44.1%, lending-based, ‘‘reward-based’’ or through other crowdfunding compared to 16.9% for newly listed 867 ‘‘donation-based,’’ as defined by a methods. Because the prohibition on 870 861 firms in the 1970s. recent crowdfunding industry report. general solicitation and general Similarly, other studies suggest that The report defines reward-based advertising (which was recently lifted startups and small businesses financed crowdfunding as a model where funders for offerings made in reliance on Rule by venture capitalists also tend to have 868 receive a ‘‘reward,’’ such as a token or 506(c) of Regulation D ) would have high failure rates. One study finds that a manufactured product sample, and it for 16,315 VC-backed companies that 862 defines donation-based crowdfunding as Id. received their first institutional funding a model where funders donate to causes 863 One observer stated that most of the $1.5 round between 1980 and 1999, that they want to support, with no billion in financing cited in the Massolution industry report was attributable to ‘‘donation- approximately one-third failed after the expected compensation or return on based’’ and ‘‘lending-based’’ crowdfunding. See first funding round.871 Additionally a their investment. Many of the current Felix Salmon, Annals of Dubious Statistics, recent study of more than 2,000 domestic crowdfunding offerings relate Crowdfunding Edition, REUTERS (July 27, 2012), companies that received at least $1 to individual projects and may not have available at http://blogs.reuters.com/felix-salmon/ 2012/07/27/annals-of-dubious-statistics- million in venture funding, from 2004 crowdfunding-edition. Another observer reported through 2010, finds that almost three- 857 See Gompers, note 830. that Massolution CEO Carl Esposti clarified that the 872 858 See Steven N. Kaplan and Per Stromberg, amount directly attributed to reward-based and quarters of these companies failed. Financial Contracting Meets the Real World: An equity-based crowdfunding is $174 million. See Liz Empirical Analysis of Venture Capital Contracts, 70 Gannes, Widely Cited Crowdfunding Market 869 See Alicia Robb, E.J. Reedy, Janice Ballou, Rev. Econ. Stud. 281–316 (2003). Estimates Are Probably Too Optimistic, David DesRoches, Frank Potter and Zhanyun Zhao, 859 See Scott Shane, The Importance of Angel ALLTHINGSD (July 28, 2012), available at http:// An Overview of the Kauffman Firm Survey: Results Investing in Financing the Growth of allthingsd.com/20120728/crowdfunding-market- from the 2004–2008 Data, Kauffman Foundation Entrepreneurial Ventures, 2 Q. J. of Fin. (2012). nearly-10-times-smaller-than-widely-cited-estimate. (‘‘Kauffman Firm Survey’’), available at http://www. 864 _ _ 860 See Gompers, note 830. See Massolution, note 861 at 17. By kauffman.org/uploadedFiles/kfs 2010 report.pdf. 861 See Massolution, Crowdfunding Industry comparison, ‘‘reward-based’’ crowdfunding had a 870 See Eugene F. Fama and Kenneth R. French, Report: Market Trends, Composition and 79% CAGR in 2011, while ‘‘lending-based’’ New Lists: Fundamentals and Survival Rates, 73 J. Crowdfunding Platforms (Abridged) (May 2012), crowdfunding and ‘‘donation-based’’ crowdfunding of Fin. Econ. 229–269 (2004). available at http://www.crowdsourcing.org/ had CAGRs of 50% and 41%, respectively. 871 See Yael V. Hochberg, Alexander Ljungqvist 865 document/crowdfunding-industry-report-abridged- Id. and Yang Lu, Whom You Know Matters: Venture version-market-trends-composition-and-crowd 866 Id. at 20–21. Capital Networks and Investment Performance, 62 funding-platforms/14277 (‘‘Massolution’’). Lending- 867 Id. at 20–21. J. of Fin. 251–301 (2007). based crowdfunding includes peer-to-peer lending, 868 See General Solicitation Adopting Release, 872 See Deborah Gage, The Venture Capital Secret: a funding source that is discussed above. Id. note 12. 3 Out of 4 Start-Ups Fail, Wall St. J., Sept. 19, 2012.
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These failure rates are high, despite the offerings. The potential economic Section 4(a)(6),879 the number of unique involvement of sophisticated investors impact of the proposed rules will issuers was 15,616. Among these like VCs that are likely better equipped depend on how these market issuers, 24% reported no revenue, while than the average retail investor to deal participants respond to the proposed approximately 20% had revenues of less with uncertainty and risk associated rules. Each party is discussed in further than $1 million.880 Approximately 92% with investments in startups and that detail below. of these issuers were organized as either generally specialize in selecting firms a corporation or a limited liability a. Issuers with good prospects, have direct access company. to management, have board The proposed rules would permit It is expected that many future issuers representation and have at least some certain entities to raise capital by of securities in crowdfunding offerings degree of control over operating issuing securities for the first time. The would have otherwise raised capital decisions. number, type and size of the potential from one of these alternative sources of Because we expect that issuers that issuers that would seek to use financing, while others would have would engage in offerings made in crowdfunding to offer and sell securities been financed by friends and family or reliance on Section 4(a)(6) would in reliance on Section 4(a)(6) is not financed at all. Hence, while the potentially be in an earlier stage of uncertain, but data regarding current total number of businesses using these business development than the market practices may help identify the alternative funding sources provides a businesses included in the above number and characteristics of potential basis for the potential number of issuers studies, we believe that issuers that issuers. offering and selling securities in engage in securities-based Although it is not possible to predict reliance on Section 4(a)(6) in the future, crowdfunding may have higher failure the number of future securities offerings we cannot know how many of these rates than those in the studies cited that might rely on Section 4(a)(6), businesses would elect securities-based above.873 particularly because rules governing the crowdfunding in reliance on Section process are not yet in place, we estimate 4(a)(6) once it becomes available, nor 4. Market Participants that the number could be in the can we know how many future The proposed rules will have their thousands per year. We base this businesses may not be financed at all. most significant impact on the market estimate on the current number of Further, SBA loan programs and other for the financing of startups and small businesses pursuing similar levels of government contracting programs businesses. The number of participants financing through alternate capital classify ‘‘small businesses’’ as those in this market and the amounts raised raising methods: small business loans, with fewer than 500 employees,881 and through alternative sources indicate that reward-based and donation-based we expect that some of these businesses this is a large market. In 2011, there crowdfunding and Regulation D might be too large for crowdfunding in were almost 5 million small businesses, offerings. According to the SBA’s fiscal reliance on Section 4(a)(6) to be an defined by the U.S. Census Bureau as year 2011 annual performance report, effective capital-raising option. having fewer than 500 paid 54,500 small businesses received Separately, many of the current employees.874 In the same year, FDIC- funding in 2011 through SBA’s main rewards-based or donations-based insured depositary institutions held lending programs, 7(a) and 504 loans.877 crowdfunding projects likely entail approximately $626 billion in small A crowdfunding industry report applications that may not be suitable to business loans,875 and VCs contributed estimates that there were 430,920 a long-lived security issuance (e.g., an additional $30 billion of capital to donation-based or reward-based certain artistic endeavors or artistic startups and small businesses.876 campaigns in the U.S., which we projects). Nevertheless, these data show We analyze the economic effect of the estimate were conducted by 181,440 that the potential number of businesses proposed rules on the following parties: unique issuers.878 Finally, a large that might seek to offer and sell (1) Issuers, typically startups and small number of Regulation D offerings are securities in reliance on Section 4(a)(6) businesses seeking to raise capital by within the offer limits established for is large, particularly when compared to issuing securities; (2) intermediaries, crowdfunding under Section 4(a)(6). the current number of Exchange Act through which issuers seeking to engage According to filings made with the reporting issuers, which is less than in transactions in reliance on Section Commission, from 2009 to 2012, there 10,000.882 4(a)(6) will offer and sell their were 25,274 new Regulation D offerings We believe that many potential securities; (3) investors who purchase or with offer sizes of $1 million or less. issuers of securities through may consider purchasing securities in These offerings involved 19,652 unique crowdfunding would be startups and such offerings; and (4) other capital issuers. When excluding hedge funds small businesses that are close to the providers, broker-dealers and finders and investment companies, entities that who currently participate in private generally would not be eligible to raise 879 See discussion in Section II.A.3 above. capital in reliance on the exemption in 880 These percentages could be higher because 873 See Rajshree Agarwal and Michael Gort, Firm almost 45% of the Regulation D issuers declined to and Product Life Cycles and Firm Survival, 92 Am. 877 See 2011 Annual Performance Report, note disclose their size. ¥ Econ. Rev. 184 190 (2002) (‘‘Agarwal’’). 844. 881 See, e.g., 13 CFR 121.406(b) (a non- 874 See U.S. Department of Commerce, United 878 The estimated number of campaigns is based manufacturing business may qualify as a small States Census Bureau, Business Dynamics Statistics, on 532,000 successful fundraising campaigns in business concern under Small Business Data: Firm Characteristics (2011), available at North America, 90% of which were in the U.S. and Administration regulations, in part, if it does not _ http://www.census.gov/ces/dataproducts/bds/data most of which (90%) were either rewards-based or exceed 500 employees); 7 CFR 3403.2 (defining firm.html. donation-based. According to the industry report, small business concern under U.S. Department of 875 Small business loans are defined as loans 69% of issuers engaged in one to two campaigns, Agriculture regulations, in part, as a concern that secured by nonfarm nonresidential properties and 26% in three to five campaigns and 5% in more has not more than 500 employees). commercial and business loans of $1,000,000 or than five campaigns. To estimate the number of 882 In fiscal year 2012, there were approximately less. See Federal Deposit Insurance Corporation, unique issuers, we used the midpoint from the first 9,140 reporting companies. U.S. Securities and note 835. two groupings and assumed that issuers in the third Exchange Commission, FY 2014 Congressional 876 See National Venture Capital Association, grouping engage in six campaigns. The number of Budget Justification, 2014 Annual Performance Recent Stats & Studies, available at http://www. unique issuers is thus estimated as follows: (90% Plan, FY 2012 Annual Performance Report, at 80, nvca.org/index.php?option=com_content&view= × 90% × 532,000)/((69% × 1.5) + (26% × 4) + (5% available at http://www.sec.gov/about/reports/ article&id=344&Itemid=103. × 6)) = 181,440. See Massolution, note 861. secfy14congbudgjust.pdf.
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‘‘idea’’ stage of the business venture and crowdfunding.885 Moreover, the experience in providing that have business plans that are not industry survey stated that current recommendations or investment advice, sufficiently well-developed or do not crowdfunding portals typically charge as well as broker-dealers’ access to offer the profit potential or business entrepreneurs a listing fee that is based investors.890 There is anecdotal model to attract VCs or angel investors on how large the target amount is and/ evidence that these partnerships are that otherwise specialize in investing in or upon reaching the target. According already forming under existing high risk ventures. In this regard, a to the survey, fees from survey regulations, and one report predicted study of one large platform revealed that participants worldwide ranged from 2% that in the first quarter of 2013, two to relatively few companies on that to 25%, with an average of 7% in North three dozen crowdfunding portals platform operate in technology sectors America and Europe.886 would partner with broker-dealers to that typically attract VC investment We do not know at present which start conducting private offerings under activity.883 market participants would become Regulation D in anticipation of intermediaries under Section 4(a)(6) securities-based crowdfunding.891 b. Crowdfunding Intermediaries after final rules are adopted, but we c. Investors Section 4(a)(6)(C) requires that an believe that existing crowdfunding offer and sale of securities in reliance on platforms might seek to leverage their It is unclear what types of investors Section 4(a)(6) be conducted through a already-existing Internet-based would participate in offerings made in registered funding portal or a broker. platforms, brand recognition and user reliance on Section 4(a)(6), but based on Registered brokers, both those that are bases to facilitate offerings in reliance the profile of investors in the current already registered with the Commission on Section 4(a)(6).887 Industry domestic reward-based and donation- and those that would register, might participants have suggested that they based crowdfunding market, we believe wish to facilitate securities-based expect three to four of the crowdfunding that many investors affected by the crowdfunding transactions. New platforms that currently have the proposed rules would likely be entrants that do not wish to register as majority of market share in rewards- individual retail investors who brokers might decide to register as based and donation-based currently do not have broad access to funding portals to facilitate securities- crowdfunding to obtain the majority of investment opportunities in early-stage based crowdfunding transactions in market share in the newly-developed ventures, either because they do not reliance on Section 4(a)(6). Donation- securities-based crowdfunding market have the necessary accreditation or based or reward-based crowdfunding that relies on Section 4(a)(6).888 sophistication to invest in most private platforms with established customer Under the statute and the proposed offerings or because they do not have relations might seek to leverage these rules, funding portals are constrained in sufficient funds to participate as angel relations and register as funding portals, the services they could provide, and investors. Offerings made in reliance on or register as or associate with registered persons (or entities) seeking the ability Section 4(a)(6) might provide retail broker-dealers. Although the number of to participate in activities unavailable to investors with additional investment potential intermediaries that would fill funding portals, such as offering opportunities, although the extent to these roles is uncertain, practices of investment advice or holding, which they invest in such offerings existing brokers and crowdfunding managing, possessing or otherwise would likely depend on their view of platforms provide insight into how the handling investor funds, would instead the potential return on investment as need to register as brokers or investment market might develop. well as the risk for fraud. advisers, depending on their activities. In contrast, larger, more sophisticated As of December 2012, there were Although we believe, based on or well-funded investors may be less 4,450 broker-dealers registered with the conversation with industry participants, likely to invest in offerings made in Commission, with average total assets of that initially, upon adoption of the final reliance on Section 4(a)(6). The approximately $1.1 billion per broker- rules, more new registrants would relatively low investment limits set by dealer. The aggregate total assets of register as funding portals than as the statute for crowdfunding investors these registered broker-dealers are broker-dealers, our conversations with might make these offerings less approximately $4.9 trillion. Of these industry participants 889 indicate that attractive for professional investors, registered broker-dealers, 410 also are market competition to offer broker- including VCs and angel investors.892 dually registered as investment advisers. dealer services as part of intermediaries’ While an offering made in reliance on Existing crowdfunding platforms are service capabilities might either drive Section 4(a)(6) could bring an issuer to diverse and actively involved in more broker-dealer growth in the longer the attention of these investors, it is financing, allowing thousands of term or provide registered funding possible that professional investors projects to search for capital. A recent portals with the incentive to form long- would prefer, instead, to invest in a industry survey of crowdfunding term partnerships with registered platforms reports that 191 platforms broker-dealers. For example, 890 See Mohana Ravindranath, Crowdfunding were estimated to be operating in the crowdfunding platforms could have platform ships product samples to potential 884 U.S. as of 2012. Additionally, based incentives to partner with broker- investors, Wash. Post, Nov. 29, 2012. 891 on 135 participants in the survey dealers because of broker-dealers’ See David Drake, Rich Man’s Crowd Funding, worldwide (including the U.S.), 15% of Forbes, Jan. 15, 2013. See also Mohana Ravindranath, Quickly adapting to crowdfunding platforms were engaged in equity-based 885 Id. at 17. laws, Wash. Post, Sept. 7, 2012; J.J. Colao, In the crowdfunding, 11% in lending-based 886 Id. at 23. Crowdfunding Gold Rush, This Company Has a crowdfunding, 27% in donation-based 887 For example, a recent crowdfunding industry Rare Edge, Forbes, June 5, 2013. crowdfunding and 47% in reward-based report suggests that funding portal reputation is 892 An observer suggests that, unlike angels, VCs important in the crowdfunding market, especially may be less interested in crowdfunding because, if for equity-based crowdfunding. See id. VCs rely on crowdfunding sites for their deal flow, 883 See Ethan R. Mollick, The Dynamics of 888 For information on Commission staff it would be difficult to justify charging a 2% Crowdfunding: An Exploratory Study (Working discussions with industry participants, see management fee and 20% carried interest to their Paper) (June 26, 2013), available at http:// Meetings with SEC Officials, available at http:// limited partners. See Ryan Caldbeck, papers.ssrn.com/sol3/ www.sec.gov/comments/jobs-title-iii/jobs-title- Crowdfunding—Why Angels, Venture Capitalists papers.cfm?abstract_id=2088298. iii.shtml#meetings. And Private Equity Investors All May Benefit, 884 See Massolution, note 861 at 16. 889 Id. Forbes, Aug. 7, 2013.
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Rule 506 offering, which is not subject are large: the average commission paid 1. Broad Economic Considerations to the investment limitations applicable by issuers conducting offerings of up to In this release, we discuss costs and to offerings made in reliance on Section $1 million (6.5%) is almost three times benefits that are related to the proposed 4(a)(6). larger than the average commission paid rules. Many of these costs and benefits d. Other Capital Providers, Broker- by issuers conducting offerings of more are difficult to quantify or estimate with Dealers and Finders in Private Offerings than $50 million (1.9%). Similarly, the any degree of certainty, especially average finder’s fee for offerings of up to considering that Section 4(a)(6) provides The proposed rules might affect the $1 million is approximately 6.1%, a new method for raising capital in the capital providers that currently finance compared to 1.4% for offerings of more United States. Some costs are difficult to small private businesses: small business than $50 million. We base these quantify or estimate because they lenders, VCs, family and friends and represent transfers between various angel investors. The current scope of estimates, however, only on the market participants. For instance, costs fundraising done by these capital Regulation D market. It is possible that to issuers could be passed on to providers is discussed above. As issuers engaging in other types of investors and costs to intermediaries discussed below, the magnitude of the private offerings (e.g., those relying on could be passed on to issuers and impact would depend on whether Section 4(a)(2)), for which we do not have data, might use broker-dealers and investors. These difficulties in crowdfunding in reliance on Section estimating and quantifying are 4(a)(6) emerges as a substitute or a finders more frequently and have different fee structures. exacerbated by the limited public data complement to these financing sources. that indicates how issuers, In addition, issuers conducting B. Analysis of Proposed Rules intermediaries and investors would private offerings might currently use respond to these new investment broker-dealers to help them with As noted above, we are sensitive to opportunities. various aspects of the offering and to the costs and benefits of the proposed The discussion below highlights help ensure compliance with the ban on rules, as well as the impact that the several general areas where general solicitation and advertising that proposed rules would have on uncertainties regarding the new exists for most private offerings. Private efficiency, competition and capital crowdfunding market might affect the offerings also could involve finders who formation. In enacting Title III, Congress potential costs and benefits of the connect issuers with potential investors established a framework for a new type proposed rules. It also highlights the 893 for a fee. These private offering of exempt offering and required us to potential effects on efficiency, intermediaries also may be affected by adopt rules to implement that competition and capital formation, as the proposed rules because once these framework. To the extent that well as our ability to quantify relevant rules come into effect, issuers might no crowdfunding rules are successfully benefits and costs. In light of these longer need the services of those broker- utilized, the crowdfunding provisions of uncertainties, we encourage dealers and finders. Although we are the JOBS Act should provide startups commenters to provide data and unable to predict the exact size of the and small businesses with the means to analysis to help further quantify or market for broker-dealers and finders in raise relatively modest amounts of estimate the potential benefits and costs private offerings that are comparable to capital, from a broad cross section of of these proposed rules. those that the proposed rules would potential investors, through securities The extent to which the statute and permit,894 data on the use of broker- offerings that are exempt from the proposed rules would affect capital dealers and finders in the Regulation D registration under the Securities Act. formation and the cost of capital to markets suggest that they may not They also should permit small investors issuers depends in part on the issuers currently play a large role in private to participate in a wider range of that choose to participate. In particular, offerings. Only 13% of all new securities offerings than may be if the offering exemption under Section Regulation D offerings from 2009 to 4(a)(6) only attracts issuers that are available currently.896 Specifically, the 2012 used an intermediary such as a otherwise able to raise capital through statutory provisions and the proposed broker-dealer or a finder.895 alternative venues (e.g., offerings relying Approximately 11% of new offerings rules address several challenges specific on an exception from registration under reported sales commissions greater than to financing startups and small Securities Act Section 3(a)(11), zero, while approximately 3% reported businesses, including, for example, Securities Act Section 4(a)(2), finder fees greater than zero. The use of accessing a large number of potential Regulation A or Regulation D), the a broker-dealer or a finder increased investors, the regulatory requirements statute and the proposed rules could with offering size; they participated in associated with issuing a security, result in a redistribution of capital flow, 13% of offerings for up to $1 million protecting investors and making such which would enhance allocative and 18% of offerings for more than $50 securities offerings cost-effective for the efficiency but have a limited impact on million. Moreover, broker-dealer issuer. the aggregate level of capital commissions and finder fees tend to In the sections below, we analyze the formation.897 In addition, the degree to decrease with offering size. Unlike the costs and benefits associated with the which the proposed rules would affect gross spreads in registered offerings, the proposed crowdfunding regulatory capital formation depends on the differences in commissions for regime, as well as the potential impacts implementation of other provisions of Regulation D offerings of different sizes of such a regulatory regime on the JOBS Act that may alter existing efficiency, competition and capital options for small companies to raise 893 Depending on their activities, these persons formation, in light of the background may need to be registered as broker-dealers. 897 discussed above. For example, a recent GAO report on 894 See The Task Force on Private Placement Regulation A offerings suggests that a significant Broker-Dealers, ABA Section of Business Law, decline in the use of this funding alternative after Report and Recommendations of the Task Force on 896 See, e.g., 158 Cong. Rec. S1781 (daily ed. Mar. 1997 could be partially attributed to a shift in Private Placement Broker-Dealers, 60 Bus. Law. 19, 2012) (statement of Sen. Carl Levin) (‘‘Right offerings to Rule 506 offerings under Regulation D, 959, 969–70 (2005) (‘‘Task Force on Private now, the rules generally prohibit a company from as a result of the preemption of state securities laws Placement Broker-Dealers’’). raising very small amounts from ordinary investors for Rule 506 offerings that occurred in 1996. See 895 See Ivanov/Bauguess Study, note 816. without significant costs.’’). GAO Report, note 824.
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capital. For example, Title II allows there would be no underwriter of the issuer could execute a sale or otherwise issuers relying on the exemption in offering and the issuer may not offer to buy back or retire the securities, Securities Act Rule 506(c) to use general otherwise be skilled in valuation. It is it might be difficult for investors to solicitation and general advertising, not clear, therefore, how an initial determine whether the issuer was while Title IV envisions a modified offering price would be reached for offering a fair market price. These Regulation A offering exemption with a many of the securities offered, nor how uncertainties might limit the use of the higher dollar limit. investors would be protected against Section 4(a)(6) exemption. Notwithstanding these alternatives, poor initial valuations.899 These The potential benefits of the proposed we believe that the Section 4(a)(6) potential difficulties might limit rules also might depend on how offering exemption would likely investor participation in offerings made investors respond to potential liquidity represent a new source of capital for in reliance on Section 4(a)(6) and issues unique to the securities-based many issuers that currently have mitigate some of the associated benefits crowdfunding market. It is currently difficulty raising capital and that would of capital formation. unclear how securities offered and sold continue to have difficulty raising Uncertainty surrounding exit in reliance on Section 4(a)(6) would be capital when other JOBS Act provisions strategies for investors in crowdfunding transferred in the secondary market after are implemented. Startups and small offerings also might limit the benefits. In the one-year restricted period ends, and businesses usually have smaller and particular, it is unlikely that purchasers investors who purchased securities in more variable cash flows than larger in crowdfunding transactions would be reliance on Section 4(a)(6) and who seek more established companies, and able to follow the typical path to to divest their securities would be internal financing from their own liquidity that investors in other exempt unlikely to find a liquid market.903 business operations tends to be limited offerings follow. For instance, investors Shares might migrate to the over-the- and unstable. Moreover, these in a VC-backed startup might eventually counter market or to trading platforms businesses tend to have smaller asset sell their securities in an initial public that trade shares of private 898 904 bases and, thus, less collateral for offering on a national securities companies. It is possible that traditional bank loans. Startups and exchange or to another company in an secondary trading costs for investors small businesses, which are widely acquisition.900 We anticipate that most might be substantial, effective and viewed to have more financial businesses engaging in offerings in quoted spreads might be wide, and price constraints than publicly-traded reliance on Section 4(a)(6) are unlikely volatility might be high compared to 905 companies and large private companies, to progress directly to an initial public those of listed securities. Illiquidity is could therefore benefit significantly offering on a national securities a concern for other exempt offerings and from a securities-based crowdfunding exchange given their small size,901 and small registered offerings. However, market. We believe that the statute, as investors might lack adequate strategies because investors purchasing securities it would be implemented by the or opportunities to eventually divest in reliance on Section 4(a)(6) might be proposed rules, could increase both their holdings.902 A sale of the business less sophisticated than investors in capital formation and the efficiency of would require the issuer to have a track other private offerings due to the fact capital allocation. The extent to which record in order to attract investors with 903 such issuers would use the Section the capital willing to buy the business. Academic studies have shown that the over- 4(a)(6) offering exemption, however, is the-counter market is less liquid than the national Moreover, the likely broad geographical exchanges. See Christie, Market Microstructure of difficult to assess. dispersion of crowdfunding investors the Pink Sheets, 33 J. Banking & Fin. 1,326–1,339 If startups and small businesses find might make shareholder coordination (2009); Andrew Ang, Assaf Shtauber and Paul alternative capital raising options more Tetlock, Asset Pricing in the Dark: The Cross difficult, although the electronic means attractive than securities-based Section of OTC Stocks, Rev. Fin. Stud. may mitigate any difficulties. Even if an (forthcoming). crowdfunding, the impact of Section 904 Given the services that funding portals are 4(a)(6) on capital formation could be 899 There also is a chance that valuations that permitted to provide under the statute and the limited. Even so, the availability of emerge are inaccurate. For example, there is vast proposed rules, investors would not be able to use securities-based crowdfunding as a literature documenting that, on average, IPOs are funding portals to trade in securities offered and sold in reliance on Section 4(a)(6) in a secondary financing option could increase significantly underpriced relative to their initial prices on the secondary market. For a review of the market. 905 competition among suppliers of capital, theory and evidence of IPO underpricing, see Jay Academic studies show that reducing the resulting in a potentially lower cost of Ritter and Ivo Welch, A Review of IPO Activity, information transparency about an issuer increases capital for all issuers, including those Pricing, and Allocations, 57 J. Fin. 1795–1828 the effective and quoted spreads of its shares, reduces share price and increases price volatility. that choose not to use securities-based (2002). See also Ivo Welch, Sequential Sales, Learning, and Cascades, 47 J. Fin. 695–732 (1992) Specifically, percentage spreads triple and volatility crowdfunding. (analyzing the risk of herding among investors doubles when NYSE issuers are delisted to the Pink For issuers that pursue offerings in when shares are sold sequentially). Sheets. See Jonathan Macey, Maureen O’Hara and David Pompilio, Down and Out in the Stock Market: reliance on Section 4(a)(6), establishing 900 See Gompers, note 830. The Law and Finance of the Delisting Process, 51 901 an initial price might be challenging. As noted, under the statute and the proposed J.L. & Econ 683–713 (2008). When NASDAQ issuers Although the statute requires certain rules, businesses relying on Section 4(a)(6) would delist and subsequently trade on the OTC Bulletin issuer disclosures and the proposed be limited to raising an aggregate of $1 million Board and/or the Pink Sheets, share volume during a 12-month period. By contrast, as noted in rules are intended to help investors declines by two-thirds, quoted spreads more than the IPO Task Force report, the size of an initial double, effective spreads triple and volatility evaluate the viability of the issuer and public offering generally exceeds $50 million. See triples. See Jeffrey H. Harris, Venkatesh the initial offering, these disclosures IPO Task Force, note 818. Panchapagesan and Ingrid M. Werner, Off But Not may be insufficient for investors to 902 In contrast, given the required qualifications Gone: A Study of NASDAQ Delistings, Fisher determine an appropriate price since and capital amount limits, Regulation D offerings College of Business Working Paper No. 2008–03– may generally attract issuers that are more 005 and Dice Center Working Paper No. 2008–6 knowledgeable and better capitalized. Moreover, (Mar. 4, 2008), available at http://papers.ssrn.com/ 898 See, e.g., John Asker, Joan Farre-Mensa and such offerings are likely to have a larger proportion sol3/papers.cfm?abstract_id=628203. One factor Alexander Ljungqvist, Corporate Investment and of accredited investors because, in contrast to that may alleviate transparency concerns is the fact Stock Market Listing: A Puzzle? (European securities-based crowdfunding, there are no that issuers that sold securities in an offering made Corporate Governance Institute Finance Working limitations on individual investment amounts. As in reliance on Section 4(a)(6) would have an Paper, June 2012), available at http:// a result, we believe that Regulation D issuers and ongoing reporting obligation, so disclosure of papers.ssrn.com/sol3/ investors are more likely to have potential exit information about the issuer would continue to be papers.cfm?abstract_id=1603484. strategies in place. required.
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that there would be no investor capital under existing private offering offer investment opportunities in micro- qualification requirements, we expect exemptions to relying on the exemption loans generally do not permit donors to that they would face additional provided by Section 4(a)(6), this likely collect interest on their investments challenges in addressing the impact of would negatively affect the revenue of because of concerns that this activity illiquidity, either in finding a suitable finders in the market for private would implicate the federal securities trading venue or negotiating with the offerings, while intermediaries under laws unless an exemption from issuer for an alternative retirement Section 4(a)(6) likely would gain from registration is available.909 Under the provision. The potentially high degree the potential losses in revenue that proposed rules, these platforms might of illiquidity associated with securities finders may face. This may disadvantage choose to permit businesses to offer purchased in reliance on Section 4(a)(6) finders, but competition may ultimately securities that would provide investors might prevent investors from investing lead to more efficient allocation of with the opportunity to obtain a return in businesses through such offerings, capital. on investment. This could broaden their thus limiting potential capital Using information from the user base and attract a group of formation. Regulation D market allows us to investors different from those already Even with the mandated disclosures, quantify at least some of these potential participating in reward-based or unsophisticated investors purchasing losses. For example, from 2009 to 2012, donation-based crowdfunding. It is securities issued in reliance on Section the estimated cumulative dollar amount likely that some registered broker- 4(a)(6) also may face certain of finder fees charged for Regulation D dealers will find it profitable to enter expropriation risks, potentially limiting offerings of up to $1 million was the securities-based crowdfunding the upside of their investment, even approximately $18 million, covering market and operate funding portals as when they select investments in 437 offerings.907 In a similar vein, from well. Such an entry will increase the successful ventures. This could occur if 2009 to 2012, the estimated cumulative competition among intermediaries and issuers issue securities with certain dollar amount of commissions charged likely lead to lower costs for issuers. features (e.g., callable securities or by broker-dealers for Regulation D However, many projects that are well securities with differential control offerings of up to $1 million was suited for reward-based or donation- rights) or have insider-only financing approximately $76.6 million, covering based crowdfunding (e.g., because they rounds or financing rounds at reduced 1,480 offerings.908 Thus, to the extent have finite lives, their payoffs to prices (the so-called ‘‘down rounds’’) that issuers rely on Section 4(a)(6) to investors could come before the project that could have the effect of diluting an offer and sell securities in lieu of relying is completed, they could be contingent investor’s interest or otherwise on Regulation D, the dollar amount of on the project’s success, etc.) may have diminishing the value of the securities commissions and finder fees generated little in common with startups and offered and sold in reliance on Section would be reduced, unless broker-dealers small businesses that are well suited for 4(a)(6). Investors purchasing securities and finders provide new services that an offering in reliance on Section issued in reliance on Section 4(a)(6) such issuers are willing to pay. For 4(a)(6). As a result, diversification might not have the experience or the example, under the statute, broker- among existing platforms might not market power to negotiate various anti- dealers would be able to operate portals. always be optimal or preferred, dilution provisions, right of first refusal, If securities-based crowdfunding particularly if complying with the tag-along rights, superior liquidation primarily attracts new issuers to the proposed rules proves preferences and rights upon a change in market, the impact on broker-dealers disproportionately costly compared to control that have been developed by and finder revenue could be negligible the amount of potential capital to be institutional and angel investors as and the proposed rules may even have raised. protections against fundamental a positive effect on their revenues by changes in a business.906 If these or revealing more potential clients for 2. Crowdfunding Exemption similar types of protections are absent, them. Additionally, greater investor a. Limitation on Capital Raised the expropriation risk could discourage interest in private company investment The statute imposes certain some potential investors from might increase capital formation, participating in offerings made in creating new opportunities for broker- limitations on the total amount of reliance on Section 4(a)(6), potentially dealers and finders that otherwise securities that may be sold by an issuer hindering efficiency, competition and would have been unavailable. during the 12-month period preceding capital formation. Rules implementing Section 4(a)(6) the date of the transaction made in The proposed rules also might have also could encourage current reliance on Section 4(a)(6). Specifically, an effect on broker-dealers and finders participants in the securities-based Section 4(a)(6)(A) provides for a participating in private offerings. Some crowdfunding market to diversify their maximum aggregate amount of $1 issuers that previously relied on broker- funding models to attract a broader million sold in reliance on the dealers and finders to assist with raising group of issuers and to provide exemption during the 12-month 910 capital through private offerings may, additional investment opportunities for period. instead, begin to rely on the Section investors. For example, donation-based The limitation on the amount that 4(a)(6) exemption to find potential crowdfunding platforms that currently may be raised could benefit investors by investors. The precise impact of the reducing the potential for dilution or proposed rules on these intermediaries 907 We use data from new Form D filings and fraud. However, we recognize that the would depend on whether (and, if so, to include in the analysis only filings with an offer cap on the maximum amount that may what extent) issuers switch from using amount greater than zero. We also exclude be sold in reliance on Section 4(a)(6) indefinite offerings because, for those, we cannot existing exemptions to using the also could prevent certain issuers from determine the offer size. raising all the capital they need to make exemption provided by Section 4(a)(6) 908 Since we do not have data on broker-dealer or whether the proposed rules primarily and finder participation in other types of private attract new issuers. If a significant offerings (e.g., Section 4(a)(2) offerings), it is 909 See, e.g., Deutsche Bank Microcredit possible that the impact of crowdfunding in those Development Fund, Inc., SEC No-Action Letter number of issuers switch from raising offerings could be different than the impact on (Apr. 8, 2012). broker-dealers and finders in Regulation D 910 See also proposed Rule 100(a)(1) of Regulation 906 See Kaplan, note 858. offerings. Crowdfunding.
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their businesses viable, which in turn negatively affect the informational be disqualified from relying on Section could result in lost opportunities. It also efficiency of the securities-based 4(a)(6) pursuant to the disqualification is likely to reduce efficiency to the crowdfunding market because provisions of Section 302(d) of the JOBS extent that resources cannot be sophisticated investors are better able to Act.916 Second, we propose to exclude channeled to productive use. Due to the accurately price such offerings. These issuers that sold securities in reliance lack of data, however, we are not able investors also could add value to the on Section 4(a)(6) and have not filed to quantify the size of the efficiency discussions taking place through an with the Commission and provided to loss. We are proposing, however, to intermediary’s communication channels investors the ongoing annual reports allow issuers to conduct other exempt about a potential offering by providing required by Regulation Crowdfunding offerings that would not necessarily be their views on financial viability. during the two years immediately integrated with the offering made in The aggregate cap on investments also could limit the ability of investors to preceding the filing of the required reliance on Section 4(a)(6), as long as 917 the issuer satisfies the requirements of diversify within the securities-based offering statement. This additional the exemption relied upon for the crowdfunding market. As securities- exclusion would not impose any particular offering. We could have based crowdfunding investments might additional burdens and costs on an selected an alternative that would have have inherently high failure rates,912 issuer that the issuer would not have aggregated the amounts offered in investors who do not diversify their already incurred had it complied with reliance on Section 4(a)(6) with the investments across a number of the ongoing reporting requirements as amounts offered pursuant to other offerings could face an increased risk of they came due. Further, the requirement exempt offerings. Under such an incurring large losses, relative to their that a delinquent issuer prepare two alternative, the amounts raised in other investments, even when they investigate annual reports at one time should exempt offerings would count toward offerings thoroughly. By comparison, provide updated and current the maximum offering amount under VC firms typically construct highly information to investors without Section 4(a)(6). Compared to this diversified portfolios with the requiring an issuer to become current in alternative, the ability of issuers to understanding that many ventures fail, its reporting obligations. As a result, we conduct other exempt offerings that resulting in a complete loss of some believe that this exclusion would would not count toward the maximum investments, but with the expectation incentivize issuers to comply with its offering amount under Section 4(a)(6) that those losses will be offset by the ongoing reporting requirements, if they might alleviate some of the concerns large upside of the relatively fewer intend to rely again on Section 4(a)(6) to investments that succeed.913 The that certain issuers would not be able to raise additional capital, which would securities-based crowdfunding market is raise sufficient capital. allow investors to make more informed expected to involve earlier-stage b. Investment Limitations financing compared to venture capital investment decisions. We also recognize The statute and the proposed rules financing, and therefore, the chances of that conditioning an issuer’s Section also impose certain limitations on the investment success may be lower.914 4(a)(6) eligibility on the requirement aggregate dollar amount of securities The statutory thresholds for overall that issuers provide ongoing reports for that may be sold to any investor in securities-based crowdfunding only the previous two-years may reliance on Section 4(a)(6) during the investments under Section 4(a)(6) might deprive investors of information in preceding 12 months.911 These limit an investor’s ability to choose a some periods that might otherwise have provisions would cap the potential sufficiently large number of investments negative effects on the price formation investment and, consequently, the to offset this risk and to recover the due and liquidity of the securities in the potential losses for any single investor. diligence costs of sufficiently secondary market. The potential damage Offerings made in reliance on Section investigating individual investments. to an issuer’s reputation resulting from 4(a)(6) would not be subject to review One potential solution to this being delinquent, however, may provide by Commission staff prior to the sale of diversification problem would be to the issuer with sufficient incentive to securities, but the aggregate investment invest smaller amounts in more consistently comply with the ongoing limits would provide some measure of ventures. The drawback is that the costs reporting requirements. protection for investors. associated with identifying and We recognize that the investment caps reviewing investment opportunities are, Third, we propose to exclude a would limit the potential upside for to a large extent, fixed. company that has no specific business investors. This might particularly affect plan or has indicated that its business c. Issuer Eligibility the decisions of those with large plan is to engage in a merger or portfolios who might be able to absorb The statute and the proposed rules acquisition with an unidentified losses and understand the risks exclude certain categories of issuers company or companies. This proposed associated with risky investments. For from eligibility to rely on Section 4(a)(6) ineligibility requirement will have only these investors, the $100,000 aggregate to engage in crowdfunding a marginal effect on issuer participation cap might limit their incentive to transactions.915 We are proposing to and capital formation because the participate in the securities-based exclude three additional categories of startups and small businesses seeking crowdfunding market, compared to issuers, beyond those identified in the the exemption would generally have, other types of investments, potentially statute, from being eligible to rely on even in the early stage of their depriving the securities-based Section 4(a)(6) to engage in development, a business plan specific crowdfunding market of more crowdfunding transactions. First, we enough to distinctly differentiate them propose to exclude issuers that would experienced and knowledgeable from companies with no specific investors and possibly impeding capital 912 business plan. formation. Limiting the participation of See discussion in Section III.A.3 above. 913 See John Cochrane, The Risk and Return of such investors would be likely to Venture Capital, 75 J. of Fin. Econ. 3 (2005). 914 See Agarwal, note 873. 916 See proposed Rule 100(b)(4) of Regulation 911 See Section 4(a)(6)(B). See also proposed Rule 915 See Section 4A(f). See also proposed Rule Crowdfunding. 100(a)(2) of Regulation Crowdfunding. 100(b) of Regulation Crowdfunding. 917 See discussion in Section II.A.4 above.
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3. Issuer Requirements requirements and the proposed rules, in further detail elsewhere in this including the disclosure requirements, section, the following table summarizes We recognize that there are benefits pertaining to issuers. While the these costs: and costs associated with the statutory estimated costs to issuers are discussed
Offerings of more than Offerings of Offerings of $100,000 $100,000, but more than or less not more than $500,000 $500,000
Compensation to the intermediary 918 ...... $2,500–7,500 ...... $15,000– $37,500– 45,000 112,500 Costs per issuer for obtaining EDGAR access codes on Form ID 919 ...... 60 ...... 60 60 Costs per issuer for preparation and filing of Form C for each offering 920 ...... 6,000 ...... 6,000 6,000 Costs per issuer for preparation and filing of the progress updates on Form C–U 921 400 ...... 400 400 Costs per issuer for preparation and filing of annual report on Form C–AR 922 ...... 4,000 ...... 4,000 4,000 Costs for annual review or audit of financial statements per issuer 923 ...... Not required ...... 14,350 28,700 Costs per issuer for preparation and filing of Form C–TR to terminate reporting 924 ... 600 ...... 600 600
a. General Disclosure Requirements rejected by other potential funding The statute and the proposed rules sources, including banks, VCs and angel seek to reduce information asymmetries The statute and the proposed rules investors. In addition, the securities- by requiring issuers to file specified related to issuer disclosures are based crowdfunding market may attract disclosures with the Commission for intended to reduce the information unsophisticated retail investors who offerings made in reliance on Section asymmetries that currently exist may not have the resources necessary to 4(a)(6) on the offer date and on an between small businesses and potential 925 effectively monitor issuers. For instance, annual basis thereafter. Issuers also investors. Small private businesses would be required to provide these typically do not disclose information as some issuers might use capital to fund riskier projects than what was disclosed disclosures to investors, and in the case frequently or as extensively as public of offering documents, to potential companies, if at all. Moreover, unlike to investors, or they might not make best efforts to achieve their stated business investors and the relevant broker or public companies, small private funding portal. The proposed disclosure objectives. If investors in securities- businesses are not required to hire an requirements described above 926 are based crowdfunding are unable to independent third party to validate the more extensive than those required monitor such issuers because of limited information disclosed. When under existing offering exemptions. For information about a company is difficult information or credible third-party example, although the current to obtain or the quality of the validation of this information, they requirements under Regulation A information is uncertain, investors are at might eventually seek higher yields or require similar initial financial risk of making poorly-informed choose to withdraw from the securities- disclosures, they do not require periodic investment decisions regarding that based crowdfunding market altogether, reporting.927 Issuers using the Rule 504 company. thus increasing the cost of capital to exemption under Regulation D to raise Such information asymmetries might issuers and impeding capital formation. up to $1 million do not need to provide be especially acute in the securities- In addition, investors in offerings made audited financial statements and there based crowdfunding market because the in reliance on Section 4(a)(6) might are no periodic disclosure requirements. market includes startups and small make relatively small investments. The Regulation D offerings under Rules 505 businesses that have significant risk potential dispersed investor base may and 506 for up to $2 million require factors and that might have make it difficult for investors to solve issuers to provide audited current characteristics that have led them to be collective action problems. balance sheets to non-accredited
918 See discussion in Section III.B.4 below. For professionals, for purposes of this analysis, as we of the hourly burden would be carried by outside purposes of the table, we estimate the range of believe internal costs would vary greatly among professionals retained by the issuer at an average compensation that an issuer would pay the issuers. cost of $400 per hour. intermediary assuming the following: (1) The 920 See proposed Rule 203(a)(1) of Regulation 923 See proposed Rule 201(t) of Regulation compensation would be calculated as a percentage Crowdfunding. See also Section IV.C.1.a below for Crowdfunding. See also Section II.B.1.a.ii above. of the offering amount ranging from 5% to 15% of a discussion of the hourly burdens for preparing 924 See proposed Rule 203(b)(2) of Regulation the total offering amount; and (2) the issuer is and filing Form C for each offering. For purposes offering $50,000, $300,000 and $750,000, which are Crowdfunding. See also Section IV.C.1.c below for of the table, we estimate that 25 percent of the a discussion of the hourly burdens for preparing the mid-points of the offering amounts under each hourly burden would be carried by outside of the respective columns. The compensation paid and filing Form C–TR. For purposes of the table, we professionals retained by the issuer at an average to the intermediary may, or may not, cover services estimate that the hourly burden would be carried cost of $400 per hour. to an issuer in connection with the preparation and by outside professionals retained by the issuer at an 921 filing of the proposed filings identified in this table. See proposed Rule 203(a)(3) of Regulation average cost of $400 per hour. Crowdfunding. See also Section IV.C.1.a below for 919 See Section IV.C.1.d below for a discussion of 925 a discussion of the hourly burdens for preparing See Section 4A(b). See also proposed Rules the hourly burdens for obtaining EDGAR access 201, 202 and 203 of Regulation Crowdfunding. codes on Form ID. We estimate, for purposes of the and filing the progress updates on Form C–U. For 926 See Section II.B.1 above. Paperwork Reduction Act, the cost of outside purposes of the table, we estimate that the hourly 927 counsel at a rate of $400 an hour. We recognize that burden would be carried by outside professionals Securities Act Rule 257 (17 CFR 230.257), the costs of retaining outside professionals may retained by the issuer at an average cost of $400 per however, requires issuers conducting offerings vary depending on the nature of the professional hour. pursuant to Regulation A to file Form 2–A (17 CFR service and that many small issuers are likely to 922 See proposed Rule 203(b)(1) of Regulation 239.91) with the Commission at certain intervals to face substantially lower costs. Small issuers also Crowdfunding. See also Section IV.C.1.b below for report sales and the use of proceeds until may choose to prepare the proposed forms without a discussion of the hourly burdens for preparing termination, completion or final sale of securities in seeking the assistance of outside counsel. The table and filing each annual report on Form C–AR. For the offering or until the proceeds have been shows only those costs we attribute to outside purposes of the table, we estimate that 25 percent applied, whichever is later.
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investors (and unaudited statements of proposed rules also would require attractiveness and, thus, may divert income, cash flows and changes in disclosure of any prior securities-based potential issuers from crowdfunding. stockholders’ equity), but there are no crowdfunding or other exempt offerings In addition, under the statute and the periodic reporting requirements. The conducted within the past three proposed rules, issuers that complete a disclosure requirements in the proposed years.931 In some cases, an issuer might crowdfunding transaction in reliance on rules should benefit investors by have previously engaged in Section 4(a)(6) would be subject to 933 enabling them to better evaluate the crowdfunding in reliance on Section ongoing reporting requirements, issuer and the offering, monitor how the 4(a)(6) and may be returning for which are not required under other issuer is doing over time and be aware additional funding. We believe that it private offering exemptions and which of when the issuer may terminate its would be important to investors to might increase compliance costs. The ongoing reporting obligations. This know whether the prior securities-based ongoing reporting, however, might provide a liquidity benefit for secondary would allow investors with various risk crowdfunding or other offerings of sales of the issuers’ securities. preferences to invest in the offerings securities were successful, and if so, the best suited for their risk tolerance, thus amount raised in these prior offerings. b. Financial Condition and Financial improving allocative efficiency. Statement Disclosure Requirements The disclosure requirements also Compared to the disclosure could improve informational efficiency requirements under existing private With respect to the statutory in the market. Specifically, the required offering exemptions, this information requirement to provide disclosure about disclosure would provide investors with would better inform investors about the the issuer’s financial condition, the a useful benchmark to evaluate other capital structure of an issuer, might proposed rules would require narrative private issuers both within and outside provide insight into how prior offerings disclosure addressing the issuer’s of the securities-based crowdfunding were valued and could enable investors historical results of operations, in market.928 Additionally, disclosure by to more fully assess the issuer and the addition to information about its issuers engaging in crowdfunding potential risks associated with the liquidity and capital resources.934 We transactions in reliance on Section current offering. expect that this discussion would 4(a)(6) could inform financial markets We recognize that the additional inform investors about the financial more generally by providing information required by the condition of the issuer, without information about new consumer trends discretionary requirements would imposing significant costs, because the and new products, thus creating increase the disclosure costs to issuers, issuer should already have such information readily available. In externalities that benefit other types of but we believe that this would improve addition, the proposed rules would not investors and issuers. investor decision-making and ultimately prescribe the content or format for this We recognize, however, that the benefit issuers with viable investment proposed disclosure requirements also information. opportunities by improving price would have associated limitations and With respect to the requirement to efficiency in the securities-based costs, including the direct costs of provide financial statements, the crowdfunding market. Although we preparation, certification (when proposed rules would implement the necessary) and dissemination of the recognize that requiring less disclosure tiered financial disclosure requirements disclosure documents. We note that, would impose lower compliance costs, specified by the statute, which are based under the statute, the disclosure we believe that the additional disclosure on the aggregate amount of securities requirements for offerings made in requirements we are proposing strike offered and sold during the preceding reliance on Section 4(a)(6) are more the appropriate balance between 12-month period, inclusive of the extensive, in terms of breadth and enhancing the ability of issuers relying offering amount in the offering for frequency, than those for other private on Section 4(a)(6) to raise capital and which disclosure is being provided.935 offerings. The statute also provides us enabling investors to make informed Although the disclosure requirements with the discretion to impose additional investment decisions. Additionally, would provide investors with more requirements on issuers engaging in disclosure might have indirect costs to information than might otherwise be crowdfunding transactions, and in some the extent that information disclosed by obtained in private offerings, the cases, the proposed rules would require issuers relying on Section 4(a)(6) could disclosures might create additional costs issuers to disclose information in be used by their competitors. Requiring for those issuers who have limited addition to the information specifically significant levels of disclosure at an financial and accounting expertise listed in the statute.929 For example, we early stage of an issuer’s lifecycle might necessary to produce the financial are proposing to require disclosure of affect an issuer’s competitive position disclosures envisioned by the statute any indebtedness of the issuer 930 and might limit the use of the and the proposed rules. In this respect, because we believe that servicing debt exemption in Section 4(a)(6) by issuers the statute anticipates a level of could place additional pressures on a who are especially concerned with development among issuers that might company in the early stages of confidentiality. It also is possible that not be present in the relevant securities- development and this information these disclosure costs would make other based crowdfunding market. For would be important to investors. The types of private offerings more attractive instance, a startup with a promising to potential securities-based business idea might have little capital 928 See Christian Leuz and Peter Wysocki, crowdfunding issuers. For example, the prior to the offering, leaving limited Economic Consequences of Financial Reporting and recent changes to Rule 506 of Regulation amounts to be audited or certified. The Disclosure Regulation: A Review and Suggestions issuer disclosures required for offerings for Future Research, (Working Paper, University of D,932 which allow for general made in reliance on Section 4(a)(6), Chicago) (2008), available at http:// solicitation, subject to certain _ papers.ssrn.com/sol3/papers.cfm?abstract conditions, are likely to increase its id=1105398. 933 See Section 4A(b)(4). See also proposed Rule 929 See Section 4A(b)(5). See also Section 202 of Regulation Crowdfunding. II.B.1.a.i(g) for a description of the additional 931 See proposed Rule 201(q) of Regulation 934 See proposed Rule 201(s) of Regulation disclosure requirements. Crowdfunding. Crowdfunding. See also Section II.B.1.a.ii(a) above. 930 See proposed Rule 201(p) of Regulation 932 See General Solicitation Adopting Release, 935 See proposed Rule 201(t) of Regulation Crowdfunding. note 12. Crowdfunding. See also Section II.B.1.a.ii(b) above.
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therefore, might not always help Compared to an alternative that we somewhat mitigated by the proposed investors with their investment could have selected, that of requiring requirement that issuers provide decisions or may weigh against an financial statements covering only the disclosure about material changes in issuer when a potential investor is most recently completed fiscal year as their financial condition since the prior deciding whether to make an one commenter suggested,939 requiring a year.944 In addition, we are proposing a investment. second year of financial statements form of certification for the principal The proposed rules would require all might increase the cost for the issuer.940 executive officer to provide in the issuers to provide a complete set of their Also, to the extent that the issuer had no issuer’s offering statement, which we financial statements (a balance sheet, or little operations in the prior year, the believe would help issuers comply with income statement, statement of cash benefit of comparability might not the certification required by the statute flows and statement of changes in apply. In this regard, we recognize that and the proposed rules.945 owners’ equity) that are prepared in many issuers might not have any For offerings of more than $100,000, accordance with U.S. GAAP and cover financial history, and potential investors but not more than $500,000, the the shorter of the two most recently might make investment decisions proposed rules specify that the required completed fiscal years or the period without a track record of issuer financial statements must be reviewed since inception.936 This proposed performance, relying largely on the in accordance with SSARS issued by the requirement may impose a cost on belief that an issuer can succeed based AICPA.946 Although one alternative we potential issuers, especially those on the concept and other factors. could have selected is to develop a new smaller issuers that may have For offerings of $100,000 or less, the review standard for purposes of these historically prepared their financial statute and the proposed rules would rules, we believe that issuers would statements in accordance with other require the issuer to provide its filed benefit from a rule that requires the use comprehensive bases of accounting, income tax returns for the most recently of the AICPA’s widely-utilized review such as a cash basis of accounting or a completed year (if any) and financial standard, particularly in light of the fact tax basis of accounting, rather than U.S. statements that are certified by the that there are no other widely-utilized GAAP. Investors, however, would principal executive officer to be true review standards from which to choose. benefit from the requirement that and complete in all material respects.941 We believe that many accountants financial statements be prepared in While providing an income tax return is reviewing financial statements of issuers accordance with U.S. GAAP, as U.S. not expected to impose a significant cost raising capital in reliance on Section GAAP is widely used and would allow on issuers, it is not clear to what extent 4(a)(6) would be familiar with the for more comparability among issuers. the information presented in a tax AICPA’s standards and procedures for The proposed rules also specify that return would be useful for an investor review, which should help to lessen an issuer could conduct an offering in evaluating whether or not to purchase review costs. reliance on Section 4(a)(6) using securities from the issuer. Although the For offerings of more than $500,000, financial statements for the fiscal year information might be limited, it would the statute and the proposed rules prior to the most recently completed not be uninformative. Under the would require that financial statements fiscal year, provided that not more than proposed rules, issuers would be be audited.947 The statute gives us 120 days have passed since the end of required to redact personal information discretion to change the threshold that the issuer’s most recently completed from the required tax returns.942 We would require audited financial fiscal year, the issuer was not otherwise believe that this would alleviate privacy statements, but we are not proposing to required to update the financial concerns, while still satisfying the change it at this time. We believe that statements and updated financial statutory requirement to provide tax audited financial statements would statements are not otherwise return information. benefit investors in offerings by issuers available.937 This might impose a cost Moreover, the proposed rules would with substantive prior business activity on potential investors to the extent that specify that if an issuer is offering by providing them with greater the investors would not have the most securities in reliance on Section 4(a)(6) confidence in the quality of the recent information about the issuer’s before filing a tax return for the most financial statements of issuers seeking financial condition. However, this recently completed fiscal year, the to raise larger amounts of capital. We concern is somewhat mitigated by the issuer could use the tax return filed for also understand that requiring audited proposed requirement that issuers the prior year, on the condition that the financial statements would increase the include a discussion of changes in their issuer provides the tax return for the cost to issuers, and for issuers that are financial condition since the period most recent fiscal year when it is filed, newly formed, with no or very limited covered by the financial statements, if it is filed during the offering operations, the benefit of the audit may including changes in revenue or net period.943 This accommodation should not justify the cost of the audit. income and other relevant financial benefit issuers by enabling them to Compared to an alternative that we measures.938 engage in transactions during the time could have taken, that of a higher Requiring financial statements period between the end of their fiscal threshold (e.g., offerings of more than covering the two most recently year and when they file their tax return $700,000) for providing audited completed fiscal years, as proposed, for that year. This might impose a cost financial statements, our approach in would benefit investors by providing a on potential investors because they the proposed rules would likely result basis for comparison against the most might not receive the most up-to-date in more issuers having to provide recently completed fiscal year and by information about the issuer’s financial audited financial statements, as well as allowing investors to identify changes in condition. However, this concern is the development of the business. 944 See proposed Instruction 9 to paragraph (t) of 939 See CompTIA Letter. proposed Rule 201 of Regulation Crowdfunding. 936 See proposed Instruction 2 to paragraph (t) of 940 But see note 174. 945 See proposed Instruction 4 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. 941 See Section 4A(b)(1)(D)(i). See also proposed proposed Rule 201 of Regulation Crowdfunding. 937 See proposed Instruction 8 to paragraph (t) of Rule 201(t)(1) of Regulation Crowdfunding. 946 See proposed Rule 201(t)(2) of Regulation proposed Rule 201 of Regulation Crowdfunding. 942 See proposed Instruction 3 to paragraph (t) of Crowdfunding. 938 See proposed Instruction 9 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. 947 See Section 4A(b)(1)(D)(iii). See also proposed proposed Rule 201 of Regulation Crowdfunding. 943 Id. Rule 201(t)(3) of Regulation Crowdfunding.
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higher compliance costs for those higher costs associated with engaging an We expect that requiring certain issuers. Based on a compilation of data accountant that satisfies the disclosures to be submitted using XML- submitted to us by reporting companies, independence standards. Also, the based filings would produce numerous the average cost of an audit for an issuer independence standards set forth in benefits for issuers, investors and the with less than $1 million in market Rule 2–01 of Regulation S–X may Commission. For instance, using capitalization and less than $1 million impose higher costs than other information filed pursuant to these in revenues is approximately independence standards, such as the proposed requirements, users of the $28,700.948 We expect that the cost of an AICPA independence standards.951 information could readily track capital audit for many issuers engaging in a In addition, the proposed rules would generated through crowdfunding crowdfunding transaction in reliance on require an issuer to file a review report offerings without requiring the manual Section 4(a)(6) might be less, because or audit report, whichever is inspection of each filing. The ability to they likely would be at an earlier stage applicable.952 This could impose an efficiently collect information on all of development than issuers that file additional cost on issuers to the extent issuers also could provide an incentive Exchange Act reports with us and, thus, that the accountant or auditor increases for data aggregators or other market would be less complex to audit. the fee associated with the review or participants to offer services or analysis For offerings of more than $500,000, audit to compensate for any additional that investors could use to compare and the proposed rules also would require liability that may result. choose among different offerings. For financial statements to be audited in example, reporting key financial accordance with the auditing standards c. Issuer Filing Requirements information using XML-based filings issued by either the AICPA or the The statute does not specify a format would allow investors, analysts and PCAOB.949 We believe that letting that issuers must use to present the data aggregators to more easily compile, issuers choose the auditing standards required disclosures and file the analyze and compare information could provide a number of benefits. If disclosures with the Commission. As regarding the capital structure and an issuer currently has financial noted above, we are proposing to financial position of various issuers. statements audited under one of the require issuers to file the mandated XML-based filings also would provide specified standards, the issuer would disclosure on EDGAR using new Form the Commission with data about the use not need to obtain a new audit or engage C.953 Issuers would incur the cost to of the new exemption that would allow a different auditor to conduct an audit comply with the disclosure the Commission to evaluate whether the to engage in a crowdfunding transaction requirements and file the information in rules implementing the exemption in reliance on Section 4(a)(6) and the the new proposed Form C: Offering include appropriate investor protections proposed rules. If an issuer chooses to Statement and Form C–U: Progress and whether the rules unduly restrict have an audit conducted in accordance Update before the offering was funded, capital formation. In addition, requiring with PCAOB auditing standards, it thus imposing a cost on issuers disclosure of the compensation paid to would not need to obtain a new audit regardless of whether their offerings intermediaries would help inform the to file a registration statement with the were successful. In addition, issuers Commission, issuers and investors Commission for a registered offering. By would incur the cost to comply with the about the costs of raising capital in this not taking an alternative approach, that ongoing reporting requirements and file market. of requiring the audits to be conducted information in the new proposed Form We expect that the cost of preparing by PCAOB-registered firms, the C–AR: Annual Report.954 and filing Form C could vary proposed rules should allow for the Form C would require certain significantly among issuers. For eligibility of a greater number of disclosures to be submitted using an example, issuers with little operating accountants to audit the issuers’ XML-based filing,955 while allowing the activity might have lower costs because financial statements, and thereby, could issuer to customize the presentation of they likely would have less to disclose reduce costs for crowdfunding issuers. other required disclosures. This than a more complex operation. Further, As described above, the statute and proposed approach would provide small issuers might choose to prepare the proposed rules require some issuers with the flexibility to present and file Form C without seeking the 956 financial statements to be reviewed or required disclosures in a cost-effective assistance of outside counsel. Thus, audited by a public accountant. The manner, while also requiring the the Commission also expects that proposed rules would specify that a disclosure of certain key offering reporting costs for many small issuers 957 public accountant must be independent information that would be collected in may be insignificant. of the issuer, in accordance with the a standardized format, which we believe The proposed rules also would independence standards set forth in would benefit investors and help require that issuers file a Form C–U: Rule 2–01 of Regulation S–X.950 The facilitate capital formation. Progress Update to describe the progress proposed requirement to comply with of the issuer in meeting the target offering amount.958 The proposed rules our independence standards may 951 For example, under the independence impose costs to the extent that there are standards set forth in Rule 2–01 of Regulation S– would require the issuer to file two X, an auditor cannot provide bookkeeping services progress updates within five business 948 See Audit Analytics, Auditor-Fees, available to an audit client, so an issuer would need to retain at http://www.auditanalytics.com/0002/audit-data- a different accountant to provide those services. See 956 See Section IV.C.1. below. company.php. The auditor fee database contains fee Rule 2–01(c)(4) of Regulation S–X [17 CFR 210.2– 957 We estimate, for purposes of the Paperwork data disclosed by Exchange Act reporting 01(c)(4)]. Reduction Act, that 25 percent of the 60 hours companies in electronic filings since January 1, 952 See proposed Instructions 5 and 6 to anticipated to prepare and file Form C could be 2001. For purposes of our calculation, we averaged paragraph (t) of proposed Rule 201 of Regulation performed by outside counsel at a rate of $400 an the auditor fee data for companies with both market Crowdfunding. hour. See Section IV.C.1.a below. We recognize that capitalization and revenues of less than $1 million 953 See proposed Rule 203(a) of Regulation the costs of retaining outside professionals may (the smallest subgroup of companies for which data Crowdfunding. See also Section II.B.3 above. vary depending on the nature of the professional is compiled). 954 See proposed Rule 203(b) of Regulation service and that many small issuers are likely to 949 See proposed Rule 201(t)(3) of Regulation Crowdfunding. See also Section II.B.3 above. face substantially lower costs. Crowdfunding. 955 See proposed Instruction to paragraph (a)(1) of 958 See proposed Rule 203(a)(3) of Regulation 950 See proposed Instruction 7 to paragraph (t) of proposed Rule 203 of Regulation Crowdfunding. Crowdfunding. See also Sections II.B.1.b and II.B.3 proposed Rule 201 of Regulation Crowdfunding. See also Section II.B.3 above. above.
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days from the day when the issuer unique to the securities-based to an intermediary’s platform.967 The reaches one-half and 100 percent of the crowdfunding market, discussed above. terms of the offering would include the target offering amount, as well as a final Annual reporting requirements, amount offered, the nature of the progress update within five business however, would impose ongoing costs securities, price of the securities and days after the end of the offering period on issuers. The proposed rules would length of the offering period.968 The if the issuer will accept proceeds in require that issuers continue to file proposed rules would allow an issuer to excess of the target offering amount. The Form C–AR: Annual Report until the publish a notice about the terms of the Commission expects the costs of earlier of the following: (1) The issuer offering made in reliance on Section preparing these updates to vary but to becomes a reporting company required 4(a)(6), subject to certain limitations on be relatively small, given how little to file reports under Exchange Act the content of the notice.969 The notices information is required.959 However, if Sections 13(a) or 15(d); (2) the issuer or would be similar to the ‘‘tombstone ads’’ the size of the security-based another party repurchases all of the permitted under Securities Act Rule crowdfunding market developed to a securities issued pursuant to Securities 134,970 except that the proposed rules level commensurate with the current Act Section 4(a)(6), including any would require the notices to direct non-security-based crowdfunding payment in full of debt securities or any potential investors to the intermediary’s market, this could result in tens of complete redemption of redeemable platform, through which the offering thousands of filings with the securities; or (3) the issuer liquidates or made in reliance on Section 4(a)(6) Commission each year. To the extent dissolves its business in accordance would be conducted. that this same progress information also with state law.963 We estimate that the We believe this approach would allow would be available on the registered cost to prepare and file Form C–AR issuers to generate interest in offerings intermediary’s Web site, as is already would be approximately two-thirds of and to leverage the power of social occurring with existing non-security- the cost to prepare and file Form C: media to attract potential investors. At based offering platforms, then there Offering Statement. Form C–AR requires the same time, we believe it also would might be little marginal benefit to these similar disclosure as Form C. If an protect potential investors by limiting filings. For these reasons, we are seeking issuer undertakes multiple offerings, the ability of issuers to provide certain comment on alternative frequencies and which individually require different advertising materials without also manner of progress updates. levels of financial statements, the issuer providing the disclosures, available on As noted above, the statute also would be required to provide financial the intermediary’s platform, that are requires an issuer to file and provide to statements that meet the highest required for an offering made in reliance investors information about the issuer’s standard previously provided. An issuer on Section 4(a)(6). Moreover, this financial condition on at least an annual would not be required to provide the proposed requirement that limits the basis, as determined by the offering-specific information that was issuer’s ability to advertise the terms of Commission.960 To implement this filed at the time of the offering, but the the offering, while directing investors to statutory requirement, the proposed disclosure requirements would the intermediary’s platform for more rules would require any issuer that sold otherwise be the same as those required offering-specific information, would not securities in a crowdfunding transaction in connection with the offer and sale of impose costs to market participants. in reliance on Section 4(a)(6) to file the securities,964 which should e. Compensation of Persons Promoting annually with the Commission a new minimize the disclosure burden for the Offering Form C–AR: Annual Report, no later issuers. Any issuer terminating its than 120 days after the end of each annual reporting obligations would be The statute and the proposed rules fiscal year covered by the report.961 We required to file a notice under cover of would prohibit an issuer from believe that annual reports would ‘‘Form C–TR: Termination of Reporting’’ compensating, or committing to inform investors in their portfolio to notify investors and the Commission compensate, directly or indirectly, any decisions and could enhance price that it would no longer file and provide person to promote the issuer’s offering efficiency. Moreover, as discussed annual reports pursuant to the through communication channels above, under the statute and the requirements of Regulation provided by the intermediary unless the proposed rules, the securities would be Crowdfunding.965 The Commission issuer takes reasonable steps to ensure freely tradable after one year,962 and expects the costs of preparing these that such person clearly discloses the therefore, this information also would updates to vary significantly among receipt of such compensation (both past benefit potential future holders of the issuers.966 and prospective) each time a issuer’s securities by enabling them to promotional communication is made.971 update their assessments as new d. Advertising—Notice of Offering We believe that such requirement information was made available through The statute and the proposed rules would benefit the securities-based the annual updates, potentially allowing would prohibit an issuer from crowdfunding market because it would for more efficient pricing. More advertising the terms of the offering, allow investors to make better informed generally, these proposed continued except for notices that direct investors investment decisions. A premise of disclosures also might help facilitate the crowdfunding is that investors would transfer of securities in secondary 963 See proposed Rule 202(b) of Regulation rely, at least in part, on the collective markets after the one-year restricted Crowdfunding. wisdom of the crowd to make better period ends, which could mitigate some 964 See proposed Rule 202(a) of Regulation informed investment decisions. of the potential liquidity issues that are Crowdfunding. 965 See proposed Rule 203(b)(2) of Regulation 967 Crowdfunding. See Section 4A(b)(2). See also proposed Rule 959 204 of Regulation Crowdfunding. See Section IV.C.1.a below. 966 Issuers would spend, on average, 968 960 See Section 4A(b)(4). approximately 1.5 hours to complete this task. See proposed Instruction to proposed Rule 204 961 See proposed Rule 202 of Regulation Again, we do not have the information necessary to of Regulation Crowdfunding. Crowdfunding. See also Section II.B.2 above for a provide a reasonable estimate of the costs 969 See proposed Rule 204(b) of Regulation discussion of the disclosure requirements for Form associated with this time burden because these Crowdfunding. See also Section II.B.4 above. C–AR. costs would vary significantly among small issuers 970 17 CFR 230.134. 962 See Section 4A(e). See also proposed Rule 501 and would depend, in part, on the stage of the 971 See Section 4A(b)(3). See also proposed Rule of Regulation Crowdfunding. issuer’s development. See Section IV.C.1.c below. 205 of Regulation Crowdfunding.
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Accordingly, we propose to require opportunity to cancel their investment estimated at over 500,000 successful intermediaries to provide commitments if they decide to do so. campaigns in the aggregate,978 communication channels for issuers and demonstrating that the use of platforms h. Restrictions on Resales investors to exchange information about for crowdfunding may be familiar to the issuer and its offering.972 Although The statute and the proposed rules investors and issuers. the requirement to take steps to ensure also include restrictions on transfers of We believe that existing disclosure of compensation paid to securities for one year, subject to limited crowdfunding platforms would initially persons promoting the offering would exceptions (e.g., for transfers to the be the primary, non-broker-dealer impose compliance costs for issuers, we issuer of the securities, in a registered intermediaries in the securities-based believe that investors would benefit offering, to an accredited investor or to crowdfunding market. Registered from knowing if the investment they are certain family members).976 The brokers, or broker-dealers that are considering and discussing with other proposed rules also would permit currently unregistered, but are planning potential investors is being touted by a transfers to trusts controlled by, or held to register in the future, also might wish promoter who is compensated by the for the benefit of, covered family to enter the securities-based issuer. members.977 We believe that including crowdfunding market, which would increase the competition among f. Oversubscription and Offering Price such proposed restrictions is important for investor protection. By restricting crowdfunding intermediaries and The proposed rules would permit an the transfer of securities for a one-year potentially lower the cost of issuer to accept investments in excess of period, the proposed rules would give intermediation to issuers. Both existing the target offering amount, subject to the investors in a business a defined period non-securities-based crowdfunding $1 million limitation and certain to observe the performance of the platforms and registered brokers might conditions.973 We believe that business and to potentially obtain more need to invest resources (including costs permitting oversubscriptions would information about the potential success to comply with the proposed regime) to provide flexibility to issuers so that they or failure of the business before trading create the infrastructure for securities- can raise the amount of capital they occurs. The restrictions on resales, based crowdfunding, with brokers likely deem necessary to finance their however, may impede price discovery. investing to develop an Internet-based businesses. For example, permitting The proposed one-year restriction on platform and non-securities-based oversubscriptions would allow an issuer transfers of securities purchased in a crowdfunding platforms investing to to raise more funds, while lowering transaction conducted in reliance on register as funding portals and revise compliance costs, if the issuer discovers Section 4(a)(6) might reduce trading their existing sites to comply with the during the offering process that there is liquidity, raise capital costs to issuers requirements of the statute and the greater investor interest in the offering and limit investor participation, proposed rules. Although the eventual than initially anticipated or if the cost particularly for investors who cannot extent of broker involvement in the of capital is lower than initially risk locking up their investments for securities-based crowdfunding market is anticipated. this period. The illiquidity cost would difficult to anticipate, we believe that The proposed rules also would not be mitigated, in part, by provisions that some brokers might acquire or form require issuers to set a fixed price or allow investors to transfer the securities partnerships with funding portals to prohibit dynamic pricing. We believe within one year of issuance by reselling obtain access to a new and diverse that allowing issuers flexibility in the securities to accredited investors, investor base. In addition, some existing setting the offering price would allow back to the issuer or in a registered non-securities-based crowdfunding them to extract investors’ reservation offering or transferring them to certain platforms might eventually either price for a given offering or to family members or trusts of those family register as brokers or form partnerships incentivize investors to subscribe to an members. These provisions likely would with registered brokers to offer offering early, thus increasing the improve the liquidity of these securities brokerage services as part of their likelihood that the offering would be and, thus, could increase investor service offerings. As discussed above, successful. Further, the proposed participation in securities-based we believe that there could be required disclosure of the pricing crowdfunding offerings. incentives for funding portals to pursue method used and the final prices for the such partnerships, because of brokers’ securities before an offering closes,974 4. Intermediary Requirements expertise and access to investors, as coupled with the investor’s ability to The statute and the proposed rules well as because of the statutory and cancel his or her investment proposed rule restrictions on funding 975 require that transactions be conducted commitment, could mitigate potential through a registered broker or registered portal activities. concerns that dynamic pricing could be funding portal. The use of a registered Although it is not possible to predict used to provide preferential treatment to intermediary to match issuers and precisely the future number of persons certain investors (e.g., when an issuer investors would require that they incur (or entities) who would register as either offers better prices to relatives or certain transactions costs necessary to brokers or funding portals to act as insiders). We also believe that the intermediaries in securities-based support the intermediation activity, but 979 proposed cancellation rights would also would provide centralized venues crowdfunding transactions, we address the concerns about time for crowdfunding activities that should 978 See note 863. pressure on the investment decision lower investor and issuer search costs. because investors would have the 979 There are significant challenges to establishing As discussed earlier, existing rewards- a statistically reliable estimate of the number of based and donations-based intermediaries that would participate in the 972 See proposed Rule 303(c) of Regulation crowdfunding platforms already engage securities-based crowdfunding market. For Crowdfunding. example, in a similar context, a 2005 report on 973 See proposed Rule 201(h) of Regulation in a large number of transactions, private placement broker-dealers determined that Crowdfunding. See also Section II.B.6.i above. there is no effective measuring device to estimate 974 See proposed Rule 201(l) of Regulation 976 See Section 4A(e). See also proposed Rule 501 the number of intermediaries for small businesses Crowdfunding. of Regulation Crowdfunding. currently in the marketplace. See Task Force on 975 See proposed Rule 201(j) of Regulation 977 See proposed Rule 501(a)(4) of Regulation Private Placement Broker-Dealers, note 894. We also Crowdfunding. Crowdfunding. recognize that there are limitations on predicting
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estimate that intermediaries would significant limitations to our ability to addition, we estimate that the cost to number approximately 110, including estimate the potential benefits and costs. comply with the various requirements approximately 10 intermediaries that The statute requires that the offer or that apply to registered brokers engaging would register as brokers in order to sale of securities in reliance on in transactions pursuant to Section engage in crowdfunding, approximately Securities Act Section 4(a)(6) be 4(a)(6) would be approximately 50 intermediaries that would already be conducted through a broker or a funding $245,000 initially, and $180,000 each registered as brokers and approximately portal that complies with the year thereafter. In making this estimate, 50 intermediaries that would register as requirements of Securities Act Section we assume that brokers acting as funding portals.980 It is possible that the 4A(a).981 Among other things, the intermediaries in transactions pursuant actual number of participants could intermediary must register with the to Section 4(a)(6) would provide a full deviate significantly from these Commission as a broker or a funding range of brokerage services in estimates, and it is likely that there portal, and it also must register with a connection with these transactions, would be significant competition registered national securities including certain services such as between existing crowdfunding venues association.982 The proposed rules providing investment advice and and new entrants that could result in would implement these statutory recommendations, soliciting investors, further changes in the number and types requirements, including by requiring an and managing and handling customer of intermediaries as the market develops intermediary to be a member of FINRA funds and securities, that funding and matures. It also is likely that there or any other applicable registered portals cannot provide.984 will be significant developments in the national securities association. If instead an entity were to register as types and ranges of crowdfunding We recognize that there are benefits a funding portal and become a funding products and services offered to and costs associated with the statutory portal member of a national securities potential issuers and investors, requirements and the proposed rules association, we estimate the initial cost particularly as competitors learn from pertaining to intermediaries. While the would be approximately $100,000, with their experiences. Moreover, the benefits and costs are described in an ongoing cost of approximately business models of the successful further detail below, the following $10,000 in each year thereafter to crowdfunding intermediaries are likely tables summarize the estimated direct maintain this registration and 985 to change over time as they grow in size costs to intermediaries, including membership. or market share or if they are forced to brokers and funding portals. Some of These estimated costs are exclusive of differentiate from other market the direct costs of the rules would be the cost of establishing and maintaining participants in order to maintain a place incurred by all intermediaries, while a platform and related functionality. We in the market. others are specific to whether the anticipate that a significant percentage intermediary is a new entrant (either of intermediaries (whether brokers or As a result of the uncertainty over broker or funding portal) or is already funding portals) will already have in how the market may develop, any registered as a broker. place platforms and related systems that estimates of the potential number of Although we have attempted to would only need to be tailored to market participants, their services or estimate the direct costs on comply with the requirements of Title fees charged are subject to significant intermediaries, we recognize that some III of the JOBS Act and Regulation estimation error. While we recognize costs could vary significantly across Crowdfunding. We estimate that a cost that there are benefits as well as costs intermediaries, and within categories of associated with the statutory intermediaries. For example, some and their licensing requirements, the scope of the requirements and the proposed rules intermediaries may choose to leverage proposed brokerage activities, and the means by pertaining to intermediaries, there are which the broker administers the registration existing platforms or systems and so process (e.g., it may choose to hire outside counsel may not need to incur significant to assist with the process). We also recognize that the number of intermediaries that would participate additional expenses to develop a the time required for a broker to become a member in securities-based crowdfunding, based on existing of a national securities association varies and could practices in the donation-based and rewards-based platform or comply with specific take six months to one year. We estimate the range crowdfunding markets or foreign securities-based proposed requirements of Regulation of this cost to be between $50,000 and $500,000, crowdfunding. In particular, platforms currently Crowdfunding. In light of these and so we have chosen the average amount of involved in donation-based and rewards-based uncertainties, we encourage $275,000 for purposes of this discussion. crowdfunding may be motivated by philanthropic commenters to provide data and 984 Among other things, a broker providing interests and may not intend to expand their recommendations and investment advice would be platforms to offer securities-based crowdfunding analysis to help analyze and quantify required to comply with FINRA rules on suitability. opportunities. In addition, foreign securities-based further the potential benefits and costs See FINRA Rule 2111. A broker soliciting through crowdfunding takes place in a different regulatory of these rules. advertisements would be required to comply with setting, and thus, the market may not develop the We estimate that the cost for an entity FINRA rules relating to communications with the same way in the United States. public. See FINRA Rule 2210. Brokers handling 980 These estimates are based, in part, on current to register as a broker and become a customer funds and securities also would be indications of interest, which may change as the member of a national securities required to maintain net capital, segregate customer market develops. According to FINRA, as of association in order to engage in funds and comply with Exchange Act Rule 15c2– October 3, 2013, approximately 36 entities have crowdfunding pursuant to Section 4. See Exchange Act Rules 15c3–1, 15c3–3 and submitted the voluntary Interim Form for Funding 15c2–4 [17 CFR 240.15c3–1, 15c3–3 and 15c2–4]. Portals to FINRA to indicate their intention to act 4(a)(6) would be approximately 985 In making these estimates, we assume that the as funding portals under the JOBS Act. See Press $275,000, with an ongoing annual cost membership process would take approximately one Release, Financial Industry Regulatory Authority, of approximately $50,000 to maintain month and that there would be no related licensing FINRA Issues Voluntary Interim Form for that registration and membership.983 In requirement for associated persons of the funding Crowdfunding Portals (Jan. 10, 2013), available at portal. We also only include domestic entities in http://www.finra.org/Newsroom/NewsReleases/ these estimates, which would not need to comply 2013/P197636; Financial Industry Regulatory 981 Section 4(a)(6)(C). with the proposed requirements in Regulation Authority, Crowdfunding Portals, available at 982 Section 4A(a)(2). Crowdfunding that would apply to nonresident http://www.finra.org/industry/issues/crowdfunding. 983 We recognize that the cost of registering and funding portals. Nonresident funding portals would Based on the current indication of interest, we becoming a member of a national securities be subject to an additional cost of approximately expect that the number of funding portals that association varies significantly among brokers, $25,870 to comply with the costs of completing would ultimately register with the Commission will depending on facts and circumstances. Among Schedule C to Form Funding Portal, hiring and be approximately 50. This estimate may change as other things, the cost can vary depending on the maintaining an agent for service of process and the market develops. number of associated persons of the broker entity providing the required opinion of counsel.
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of approximately $100,000 in the first related systems. However, for an cost to do so would be approximately year, and approximately $40,000 intermediary (whether broker or funding $400,000 in the initial year, and annually thereafter for an intermediary portal) that would need to develop a approximately $40,000 annually to that already has in place a platform and platform from scratch, we estimate the maintain thereafter.
ESTIMATED COSTS OF INTERMEDIARIES THAT REGISTER AS BROKERS
Estimated costs Initial cost Ongoing cost (year 1) per year
Form BD Registration and National Securities Association Membership ...... $275,000 $50,000 Complying with Requirements to Act as an Intermediary in, and to Engage in Broker Activities Related to, Transactions pursuant to Section 4(a)(6) 986 ...... 245,000 180,000 Platform Development ...... 987 250,000 40,000
Subtotal ...... 770,000 270,000
ESTIMATED COSTS OF INTERMEDIARIES THAT REGISTER AS FUNDING PORTALS
Estimated costs
Initial cost Ongoing cost (year 1) per year
Form Funding Portal Registration and National Securities Association Membership 988 ...... $100,000 $10,000 Complying with Requirements to Act as an Intermediary 989 ...... 67,000 40,000 Platform Development 990 ...... 250,000 40,000
Subtotal ...... 417,000 90,000
ESTIMATED INCREMENTAL COSTS OF INTERMEDIARIES ALREADY REGISTERED AS BROKERS
Estimated costs Initial cost Ongoing cost (year 1) per year
Complying with Requirements to Act as an Intermediary in Transactions pursuant to Section 4(a)(6) 991 ...... $45,000 $30,000 Platform Development 992 ...... 250,000 40,000
Subtotal ...... 295,000 70,000
We believe that, while the registration rules governing the conduct of its intermediaries would incur in requirements would necessarily impose members and associated persons, and connection with registering as a broker costs on intermediaries, they also would informing and educating the investing on Form BD or as a funding portal on provide significant protections for the public. Similarly, the regulatory Form Funding Portal, submitting crowdfunding investor marketplace. framework that a registered national amendments to registrations and Among other things, in addition to the securities association—likely initially withdrawing registrations. We estimate Commission’s oversight and rule- FINRA—would be required to create for that approximately 50 intermediaries writing functions with regard to broker- funding portals would play an that would already be brokers that have dealers, FINRA currently is responsible important role in the oversight of these already registered with the for conducting most broker-dealer entities. examinations, mandating certain The estimated costs in the table above disclosures by its members, writing reflect the direct, quantifiable costs that
986 As discussed above, these costs include, chart, we use the average of the range provided chart, we use the average of the range provided among others, the costs to the broker of having above ($100,000 to $400,000 in the initial year). above. See Section IV.C.2 below for further detail associated persons, who have licensing 988 As described above, this estimate reflects a on costs associated with developing a platform. requirements, suitability requirements, streamlined process of becoming a member of a 991 This includes the incremental costs of requirements relating to advertisements, net capital national securities association, which we assume complying with the requirements of proposed and fidelity bond requirements, and compliance would take approximately one month and not Subpart C of Regulation Crowdfunding, but it with Exchange Act Rule 15c2–4 (17 CFR 240.15c2– involve application or licensing of associated excludes any registration or membership 4), as well as the costs of complying with proposed persons. requirements. See Section IV.C.2 below for further Subpart C of Regulation Crowdfunding. See Section 989 This includes the costs of complying with the detail on these costs. IV.C. 2 below for further detail on the costs requirements of proposed Subparts C and D of 992 As described above, the cost to develop a associated with the requirements under proposed Regulation Crowdfunding. See Section IV.C.2 below platform is expected to vary depending on the Subpart C. for further detail on these costs. extent to which the entity already has a platform 987 As described above, the cost to develop a 990 As described above, the cost to develop a and related systems in place. For purposes of this platform is expected to vary depending on the platform is expected to vary depending on the chart, we use the average of the range provided extent to which the entity already has a platform extent to which the entity already has a platform above. See Section IV.C.2 below for further detail and related systems in place. For purposes of this and related systems in place. For purposes of this on costs associated with developing a platform.
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Commission 993 and, as such, these could result in transaction costs for from accepting an investment brokers would not incur additional SEC issuers of 5% to 15% of the amount of commitment until the investor has registration costs associated with the the offering made in reliance on Section opened an account with the proposed rules. Additionally, 4(a)(6),996 depending on the intermediary and the intermediary has intermediaries that are not otherwise intermediary used and the fees charged obtained the investor’s consent to registered with FINRA or any other for services, including payment electronic delivery of materials. This registered national securities association processing. Although crowdfunding requirement would help ensure that would need to register, and the intermediaries are not expected to certain basic information about the estimated cost for such registration is provide issuers with underwriting investor is on file with the intermediary included in the table above. We services commensurate with registered and that all investors are on notice of anticipate that the cost for a funding offerings (and, in fact, funding portals the primary method of delivery for portal to become a member of a would be prohibited from doing so), the communications from the intermediary. registered national securities association fees charged in a crowdfunding offering We estimate the direct cost of this would be proportionately less than the could be significantly larger on a requirement in the table above. cost for a broker to do so because of the percentage basis relative to the The statute requires intermediaries to more limited nature of a funding underwriting fees for registered provide disclosures related to risks and portal’s permissible activities, and the offerings, which range from as high as other investor education materials. The streamlined set of rules that the 7% for initial public offerings to less proposed rules would implement this association would impose on funding than 1% for certain bond issuances.997 statutory mandate by requiring portals.994 However, the exact cost of In general, to the extent that a intermediaries to deliver educational registration for funding portals would significant component of the fees is materials that explain how the offering not be known until a registered national fixed, the transaction costs for issuers process works and the risks associated securities association adopts rules would make smaller issues more with investing in crowdfunding applicable to funding portals, and for expensive. Although crowdfunding securities.998 purposes of this economic analysis, we offerings would likely vary in size, The proposed educational have used a conservative estimate for based on an offering size of $100,000, an requirements would help make this cost based on the current fee and issuer would incur an average of $5,000 investors aware of the limits and risks costs applicable to brokers applying to to $15,000 in fees. As previously associated with purchasing become members of a national securities discussed, we believe that competition crowdfunding securities. Such association. among potential crowdfunding venues knowledge would help investors The proposed rules would also and the potential development of new understand the payoff structures that are require that an intermediary execute products and services could have a specified by the offering contractual transactions exclusively through its significant impact on these estimates features and the circumstances under online platform. This requirement over time. which they could expect to be should help to minimize the potential for ‘‘boiler room’’ and other similar a. Disclosure and Dissemination compensated. It also would help ensure abusive sales practices. Based on Requirements that offerings proceed more efficiently comments received and our discussions The statute and proposed rules as investors would be more informed by with industry participants,995 we include disclosure and dissemination the time they decide to make their believe that the use of an online provisions designed to provide investment commitments and receive platform would enhance the ability of information to security-based required notices. We recognize that the issuers and investors to transparently crowdfunding investors. These effectiveness of the educational communicate as compared to the provisions, together with the issuer materials to enhance investor protection alternative of allowing transactions to disclosure provisions discussed above, would vary depending upon the occur offline. This requirement should are expected to limit information education and experience of retail 999 help issuers gain exposure to a wide asymmetries and promote the efficient investors. In addition, a presentation range of potential investors, who also allocation of capital amongst that highlights the risks of securities- may benefit from having numerous crowdfunding issues. Additionally, based crowdfunding could discourage investment opportunities aggregated in these disclosure and dissemination investor participation. one place, resulting in lower search provisions would provide information Under the proposed rules, the costs or burdens related to identifying intended to ensure that investors are educational materials could be in any suitable investment opportunities. aware of the risks associated with their electronic format, including video We preliminarily estimate that the investment, which would help protect format, and the intermediary would requirement to use an intermediary investors in this new market. As have the flexibility to determine how discussed above, many of these costs best to communicate the contents of the 993 See Section IV.C.2 below. and benefits are difficult to quantify or educational material, thus the cost for 994 See FINRA, Jumpstart Our Business Startups estimate with any degree of certainty, intermediaries to develop educational Act: FINRA Requests Comment on Proposed materials is expected to vary widely. Regulation of Crowdfunding Activities, FINRA especially considering securities-based Regulatory Notice 12–34 (July 2012), available at crowdfunding provides a new method The table above includes our current http://www.finra.org/web/groups/industry/@ip/@ for raising capital in the United States. estimates of the direct, quantifiable reg/@notice/documents/notices/p131268.pdf (‘‘In To the extent possible, however, we costs that would be incurred to comply writing rules specifically for registered funding with the proposed requirement, as well portals, FINRA would seek to ensure that the have quantified the direct costs to capital-raising objectives of the JOBS Act are intermediaries associated with these advanced in a manner consistent with investor provisions in the table above. The 998 See proposed Rule 302(b) of Regulation protection. Commenters are urged to identify the proposed rules would prohibit any Crowdfunding. types of requirements that should apply to intermediary or its associated persons 999 See Jennifer E. Bethel and Allen Ferrell, Policy registered funding portals, taking into account the Issues Raised by Structured Products, Harv. L. & relatively limited scope of activities by a registered Econ. Discussion Paper No. 560, 2007, available at funding portal permitted under the JOBS Act.’’) 996 See note 918. http://papers.ssrn.com/sol3/papers.cfm?abstract_ 995 See note 888. 997 See note 817 and accompanying text. id=941720.
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as additional costs to update or revise The issuer disclosure requirements issuer and its offering with appropriate the materials from time to time. should benefit investors by enabling disclosures, ultimately allowing The proposed rules also require that them to better evaluate the issuer and investors to make more informed intermediaries obtain representations the offering. Requiring intermediaries to investment decisions. We estimate that from investors regarding their review of make the issuer information publicly the costs of this proposed requirement the investor education materials and available and easily accessible on their are incorporated into the costs of their understanding of the risks.1000 The platforms would reduce information developing a platform and that once the Commission believes these proposed asymmetries between issuers and platform has been set up the ongoing rules would improve investors’ investors and would enhance both burden to comply would be minimal. understanding of crowdfunding transparency and efficiency of the We are also proposing to require generally, as well as aspects of certain market. We expect that intermediaries intermediaries to, upon receipt of an types of securities and the implications would incur costs to develop the investment commitment from an for their investments in issuers that are functionality that would allow the investor, promptly provide or send to raising capital through securities-based uploading and downloading of issuer the investor a notification of that crowdfunding in reliance on Section information. We believe that the direct investment commitment.1004 While this 4(a)(6). We estimate that the direct costs costs of complying with this notice is not statutorily required, we of this requirement to an intermediary requirement would be included in the believe that this requirement is would be incorporated into the costs of overall cost to intermediaries to develop appropriate as it would provide developing a platform and that the their platforms and that this investors with key information about ongoing burden to comply would be requirement would impose only their investment commitments, minimal. This proposed requirement nominal incremental costs on including notice of the opportunity, as also might impose a further cost to the intermediaries on an ongoing basis, relevant, to cancel their investment extent that the requirement deters primarily because the functionality commitments. Investors would benefit investors from making investment necessary to upload the required issuer from these requirements because they commitments or otherwise participating disclosure information is a standard would be provided with the necessary in offerings made in reliance on Section feature offered on many Web sites and information to evaluate their investment 4(a)(6). would not require frequent updates. commitments, their securities The proposed rules would also The proposed rules would also transactions and the intermediaries that require an intermediary to clearly require an intermediary to provide are effecting those transactions. We disclose the manner in which the communication channels on its estimate that the costs of these intermediary is compensated in platform, meeting certain conditions, requirements are incorporated into the connection with offers and sales of which would allow investors who have costs of developing a platform and that securities in reliance on Section opened accounts with intermediaries the ongoing burden to comply would be 4(a)(6).1001 As explained above, we and representatives of the issuer to minimal. believe that investors would benefit by interact and exchange comments about We also propose to implement the having information about how the issuer’s offering on that statutory requirement for intermediaries intermediaries are compensated, such as intermediary’s platform, and which to allow investors to cancel their through compensation arrangements would be publicly available for viewing commitments to invest, by requiring with affiliates. We believe that the costs (i.e., by those who may not have opened investors to have until 48 hours prior to of complying with this requirement also accounts with the intermediary).1002 the deadline identified in the issuer’s generally would be included in the While Congress contemplated the use of offering materials to cancel their 1005 overall cost for intermediaries to such communication channels, the investment commitments. If an develop their platforms, as it would statute does not explicitly require issuer reaches its target offering amount entail adding an item of disclosure that intermediaries to provide them.1003 prior to the target offering deadline, the would be built into the functionality of Compared with the alternative of not proposed rules would permit early their platforms. The costs are reflected requiring intermediaries to provide closing of the offering, provided that the in the table above, and we believe that communication channels, we believe intermediary sends notices to investors this requirement would impose only that requiring the communications informing them of the closing and the nominal incremental costs on channel to be on the intermediary’s deadline for the opportunity to cancel.1006 The proposed rules also intermediaries on an ongoing basis. We platform would allow investors, would set forth notice requirements and also do not expect significant particularly those who might be less requirements related to the intermediary competitive costs from the disclosure of familiar with online social media, to directing payments in the event of such compensation arrangements. participate in online discussions regarding ongoing offerings without cancellations and material changes to The statute and the proposed rules 1007 further would require that having to actively search for such offerings. The proposed rules would intermediaries make available certain discussions on external Web sites. We impose specific obligations on issuer-provided information. As do recognize, however, that this intermediaries related to informing described above, intermediaries would requirement would not preclude investors about their right to cancel, have to implement and maintain investors from initiating additional depending on particular circumstances systems to comply with the information discussions on external Web sites. relating to timing of the offering, such disclosure requirements so that the Furthermore, the requirements that the as in the event of early closings, information was publicly available and communication channels be viewable 1004 easily accessible on the intermediary’s by the public and that promoters be See proposed Rule 303(d) of Regulation clearly identified on these channels Crowdfunding. platform by interested persons. 1005 See proposed Rule 304(a) of Regulation would enhance transparency about the Crowdfunding. 1000 See proposed Rule 303(b)(2) of Regulation 1006 See proposed Rule 304(b) of Regulation Crowdfunding. 1002 See proposed Rule 303(c) of Regulation Crowdfunding. 1001 See proposed Rule 302(d) of Regulation Crowdfunding. 1007 See proposed Rules 304(c) and (d) of Crowdfunding. 1003 See Section 4A(b)(3). Regulation Crowdfunding.
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cancellations and material changes that basis for believing that an issuer seeking purchase crowdfunding securities, trigger reconfirmations of investment to offer and sell securities in reliance on thereby potentially resulting in issuers commitments. Section 4(a)(6) through the having greater access to capital. We We believe that investors would intermediary’s platform complies with anticipate that most intermediaries benefit from receiving these notices the requirements in Section 4A(b) of the would employ third parties to perform because the notifications and Securities Act and the related background checks. accompanying information would keep requirements in Regulation We also recognize that permitting an investors informed about the status of Crowdfunding. In satisfying this intermediary to rely on an issuer’s the offering and help them make requirement, an intermediary may rely representations unless the intermediary informed investment decisions. We on the representations of the issuer has reason to question the reliability of further believe that investors would concerning compliance with these the representations could potentially reasonably expect to be informed of requirements unless the intermediary lessen the incentive for an intermediary changes impacting the timing of has reason to question the reliability of to thoroughly investigate the issuers and offerings and other material changes. those representations. The proposed securities to be offered on its platform. This approach also would benefit rules would also require that an Such an outcome could result in a investors by providing investors with intermediary have a reasonable basis for higher levels of fraud compared to a sufficient time to review and assess believing that an issuer seeking to offer requirement that intermediaries perform information and communications about and sell securities on the intermediary’s a thorough investigation to ensure that the issuer. platform complies with all issuer the issuer complied with all the We recognize that allowing investors requirements and has established means requirements. A higher level of fraud to cancel their investment commitments to keep accurate records of holders of would negatively affect both investors up to 48 hours prior to the deadline the securities. The proposed rules in crowdfunding offerings and non- identified in the issuer’s offering would permit an intermediary to rely on fraudulent issuers. Based on comments materials may impose a cost on issuers an issuer’s representations concerning and conversations with industry who, because of investors cancelling compliance with these requirements participants,1009 however, we believe it commitments late in the offering period, unless the intermediary has reason to is likely that investors and interested may fall below the target offering question the reliability of the participants would provide relevant amount and so decide to cancel the representations. The proposed rules also adverse information about an issuer or offering or to extend the offering period. would require an intermediary to deny an offering through postings on chat Accordingly, we recognize that this access to an issuer if it has a reasonable sites, message boards, and other requirement may have an effect on basis for believing that the issuer or any communication channels, including, but capital formation. Intermediaries also of its officers, directors (or any person not limited to, the communication may incur direct costs in developing occupying a similar status or performing channels to be provided by the and maintaining such systems, for a similar function) or 20 Percent intermediary. These media would instance to send the relevant notices to Beneficial Owners was subject to a provide a potential source of investors, as part of the cost of disqualification under the proposed information for intermediaries who may developing a platform reflected in the rules. As required by the statute, the be subject to liability as ‘‘issuers.’’ table above. proposed rules would require the The proposed rules also would b. Measures To Reduce the Risk of intermediary to conduct a background require an intermediary to have a Fraud and Limitations and securities enforcement check on reasonable basis for believing that an each of these persons. Furthermore, the investor has not exceeded the The statute and proposed rules proposed rules would require an investment limits discussed above require intermediaries to take certain intermediary to deny access to its before accepting an investment steps to reduce the risk of fraud, platform if the intermediary believes commitment from that investor.1010 including steps related to checking that the issuer or the offering presents Under the proposed rules, an whether issuers are eligible to rely on the potential for fraud or otherwise intermediary may rely on an investor’s Section 4(a)(6) and whether investors raises concerns regarding investor representations concerning compliance comply with investment limits in order protection.1008 Each of these proposed with the investment limits unless the to participate in an offering pursuant to requirements is intended to help reduce intermediary has reason to question the Section 4(a)(6). We believe that the risk of fraud in securities-based reliability of the representations. We intermediaries will be in the best crowdfunding. believe that this requirement would position to take these steps and that We believe that if intermediaries take help to ensure that the investor these requirements will increase the measures we propose to require, protection benefits associated with the investor protections. Additionally, the investors would be more willing to investment limits are realized. This statute and proposed rules place certain participate in securities-based ability to rely on investor limitations on intermediaries. These crowdfunding offerings. Investors representations should help mitigate the limitations are further meant to increase would rely on the efforts of the potential cost that intermediaries could investor protection in the securities- intermediary that conducted a incur in relation to this requirement. At based crowdfunding market. As noted background and securities enforcement the same time, we realize that investors above, the costs and benefits of these regulatory history check, solving a might make inaccurate representations, provisions are difficult to quantify or collective action problem that would be whether intentionally or not. Although estimate with any degree of certainty. prohibitively costly if left to individual some of these concerns could be To the extent possible, however, we investors. To the extent these checks addressed by the use of a central data have quantified estimates of the direct lessened the likelihood of inappropriate repository, for example, the statute does costs associated with these provisions or nefarious activity, they could not mandate the use of such a central and the proposed rules in the table increase investor willingness to above. 1009 See note 888. The proposed rules would require 1008 See proposed Rule 301 of Regulation 1010 See proposed Rule 303(b)(1) of Regulation that an intermediary have a reasonable Crowdfunding. Crowdfunding.
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data repository and we are not person posting a comment in the the funds or other consideration directly proposing to require one because, as we communication channels clearly to a qualified third party, which is a consider this alternative to the proposed disclose with each posting whether he bank, that has agreed in writing to hold standard, we believe that the benefits of or she is a founder or an employee of the funds or maintain a bank account (or establishing such a repository would not an issuer engaging in promotional accounts) for the exclusive benefit of, at this time justify the potentially activities on behalf of the issuer, or is and to promptly transmit the funds to, significant costs. Accordingly, we otherwise compensated, whether in the the issuer or the investors, depending believe that the standard proposed past or prospectively, to promote the on circumstances such as whether the represents a reasonable approach to issuer’s offering. offering was completed or was implement the statutory requirement, Under the proposed rules, cancelled, and whether the investment achieving an appropriate balance intermediaries might incur direct costs commitment was cancelled. The between competing concerns. in complying with the requirements to proposed rules also would require a We expect that because system disclose compensation to promoters, funding portal to direct the qualified functionality to obtain user and certain additional costs from time to third party to transmit funds to the acknowledgments is standard on many time to ensure continued compliance, as issuer once the target offering amount is online trading and electronic commerce outlined in the table above. In addition, reached and the cancellation period has Web sites, the market to build such if this proposed requirement elapsed; to return funds to an investor system functionality is highly discourages the use of promoters by when an investment commitment has commoditized and the average cost to issuers, it could limit the investor pool been cancelled; and to return funds to both develop and maintain systems that for a securities-based offering made in investors when the offering has not been allow an investor to represent that he or reliance on Section 4(a)(6), thus limiting completed. she has not exceeded allowable the ability of an issuer to raise capital. These requirements would benefit investment limits would not be unduly Additionally, the statute prohibits the investors and issuers by helping to high. As noted in the table above, we directors, officers or partners of an ensure that funds are appropriately estimate that the cost to comply with intermediary, or any person occupying refunded or transmitted in accordance this requirement would be incorporated a similar status or performing a similar with the terms of the offering. In into the costs to develop a platform and function, from having any financial particular, the requirement that the that the ongoing burden to comply interest in an issuer that uses the account in which funds are deposited be would be minimal. services of the intermediary. The exclusively for the benefit of investors As noted above, the statute and the proposed rules would implement this and the issuer would help prevent the proposed rules would also prohibit an statutory requirement but extend the intermediary or other parties from issuer from compensating, or prohibition to the intermediary as claiming or otherwise unlawfully taking committing to compensate, directly or well.1012 Such a prohibition would be funds from that account. indirectly, any person to promote the beneficial to investors and issuers Under the statute, intermediaries also issuer’s offering through communication because if an intermediary were to have may not compensate promoters, finders channels provided by the intermediary a financial interest in one or more or lead generators for providing brokers unless the issuer takes reasonable steps issuers that plan to use its services, the or funding portals with the personally to ensure that such person clearly intermediary could have an incentive identifiable information of any potential discloses the receipt (both past and not based solely on merit to promote investor. We propose to implement this prospective) of such compensation each that issuer’s offering, potentially to the statutory requirement by prohibiting an time a promotional communication is detriment of investors and other issuers. intermediary from compensating any made. We also are proposing to require The prohibition would, however, person for providing the personally that an intermediary take certain steps impose a cost on an issuer who might identifiable information of any to ensure that investors are made aware otherwise seek to compensate an crowdfunding investor or potential of such compensation, and that such intermediary with an interest in the investor to intermediaries.1014 We compensation is disclosed in the issuer, rather than cash, for its services. anticipate that intermediaries would communication channels, so that It is thus possible that the prohibition have some need for referrals to the investors can gauge the promoter’s could make securities-based intermediary’s platform and, therefore, 1011 communications appropriately. We crowdfunding unavailable to an issuer we are proposing to permit an believe that intermediaries would be in that does not have the ability to intermediary to compensate a person for an appropriate position to take such otherwise compensate an intermediary. directing issuers or potential investors steps. As part of the account opening, The statute requires that to the intermediary’s platform in certain the intermediary would be required intermediaries ensure that all offering situations.1015 These requirements disclose to persons opening accounts proceeds are provided to the issuer only would benefit intermediaries by that any person who receives when the aggregate capital raised from providing them with a means to attract compensation to promote an issuer’s all investors is equal to or greater than more investors to their crowdfunding offering, or who is a founder or an a target offering amount. The proposed portals, without allowing the sharing of employee of an issuer that engages in rules would implement this requirement personally identifiable information. promotional activities on behalf of the by requiring intermediaries that are Investors would meanwhile benefit from issuer on the intermediary’s platform, registered as brokers to comply with the the additional privacy protection. must clearly disclose on the platform existing requirements of Exchange Act Intermediaries might incur a cost the receipt of the compensation and that Rule 15c2–4.1013 Intermediaries because the proposed requirement he or she is engaging in promotional registered as funding portals would be would not allow them to use personally activities on behalf of the issuer. In required to direct investors to transmit identifiable information to target and addition, under the proposed rules, the intermediary must require that any 1012 See proposed Rule 300(b) of Regulation 1014 See proposed Rule 305(a) of Regulation Crowdfunding. Crowdfunding. 1011 See proposed Rules 302(c) and 303(c)(4) of 1013 See proposed Rule 303(e) of Regulation 1015 See proposed Rule 305(b) of Regulation Regulation Crowdfunding. Crowdfunding. Crowdfunding.
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seek out specific investors, thus and to certify and provide opinion of funding portal.1017 This proposed rule reducing the potential investor pool for counsel that as a matter of law, the would benefit funding portals because it certain offerings. funding portal can provide the would specify the scope of the limited Commission and any national securities exemption in the statute, thus providing 5. Additional Funding Portal association of which it is a member with clarity to the funding portals regarding Requirements prompt access to its books and records their activities. We believe this Under the proposed rules, a funding and can, as a matter of law, submit to approach of exempting funding portals portal would register with the onsite inspection and examination by from broker registration and its Commission by filing a complete Form the Commission and the national accompanying regulations would Funding Portal with information securities association. benefit the market and its participants. concerning the funding portal’s Compared to an alternative that we The activities of funding portals would operation.1016 In the table above, we could have selected, i.e., that of not be more limited than those of brokers. estimate the costs that intermediaries allowing nonresident entities to operate Thus, the proposed rules would require would incur related to registering as a as funding portals in the U.S. funding portals to comply with a funding portal on Form Funding Portal. crowdfunding market, the proposed registration requirement and set of The proposed rules would include the rules would increase competition regulations more appropriate for their statutory requirement that a funding among crowdfunding intermediaries, activities, rather than the more portal be a member of a registered which in turn is likely to reduce the fees extensive and higher cost requirements national securities association. As that intermediaries charge issuers. The that accompany broker-dealer explained above, we believe that the lack of data does not allow us to registration. Lower registration costs of statute effectively mandates that an estimate the magnitude of this potential funding portals could translate into intermediary be a FINRA member or any fee reduction. Lower costs of raising lower fees they charge issuers that use other registered national securities capital could also attract more potential these portals, thus benefiting issuers of association (as applicable). The issuers to use the crowdfunding crowdfunding securities and potentially proposed requirement that funding exemption, thus enhancing capital increasing capital formation. We are portals register with the Commission formation. Conditioning the nonresident unable to quantify these potential and a registered national securities funding portal registration on the benefits. We do not expect any association benefits investors by presence of an information sharing significant benefits to registered broker- providing oversight to reduce the risk agreement as mentioned above would dealers from this limited exemption for for fraud. Although we estimate that provide regulators and market funding portals. Registered broker- there are costs associated with this participants with more information dealers could be put at a competitive requirement, we believe that the about the nonresident funding portals, disadvantage because of the higher reduction in fraud risk deriving from thus reducing the likelihood of fraud. registration cost. They, however, will be this requirement might benefit portals Although the requirements we allowed a wider variety of activities by helping to create a marketplace in propose with respect to appointment of compared to funding portals, the which investors are more willing to an agent for service of process, and a benefits of which could more than participate and issuers are more certification and legal opinion would compensate for the higher registration comfortable using this method of capital impose costs on nonresident funding costs. formation. portals, these requirements are The proposed rules would also The proposed rules also would consistent with regulations we have require a funding portal to obtain a require that funding portals use proposed to impose on other fidelity bond, and maintain fidelity proposed Form Funding Portal to nonresident entities subject to our bond coverage for the duration of its provide updates whenever information regulation. The proposed regulations registration as a funding portal.1018 This on file becomes inaccurate for any would enhance investor protection by requirement would benefit investors by reason, to register successor funding requiring steps to ensure that funding protecting them to some extent from portals and to withdraw from funding portals that were not based in the potential losses caused by fraud. portal registration. Although funding United States, or that were subject to Investors and issuers that used funding portals would incur time and laws other than those of the United portals for their offerings would States, would nevertheless be accessible compliance costs to update Form likewise benefit from the added stability to the Commission and other relevant Funding Portal, we expect funding that the fidelity bond protection would regulators for purposes of conducting portals would have navigated the filing provide. process for Form Funding Portal when examinations of, and enforcing U.S. We estimated the costs of maintaining they register and would be familiar with laws and regulations against these fidelity bond coverage based on the process by the time they update the entities. While the JOBS Act does not conversations with insurance service form. distinguish between resident and companies for FINRA-registered firms We propose to allow nonresident nonresident funding portals, it clearly and note that the actual cost of coverage contemplates Commission oversight of funding portals to register with us, for funding portals would vary registered funding portals and the provided that certain conditions are depending on particular circumstances, tailoring of such requirements to varied met. One condition is that an such as the size of the firm. For circumstances. information sharing agreement is in instance, according to these sources, place between the Commission and a The statute also provides an exemption from broker-dealer funding portals with fewer employees competent regulatory authority in the (e.g., up to 30 employees) might incur relevant jurisdiction. The proposed registration for funding portals. The proposed rules would implement the lower fidelity bond costs than funding rules would also require a nonresident portals with more employees. funding portal to appoint an agent for statutory requirement by stating that a registered funding portal is exempt from service of process in the United States, 1017 See proposed Rule 401(a) of Regulation the broker registration requirements of Crowdfunding. See also Section IV.C.2.j below. 1016 See proposed Rule 400(a) of Regulation Exchange Act Section 15(a)(1) in 1018 See proposed Rule 400(f) of Regulation Crowdfunding. connection with its activities as a Crowdfunding.
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a. Safe Harbor for Certain Activities Under the proposed rules, funding from the additional business that portals would be permitted to provide funding portals might be able to attract Exchange Act Section 3(a)(80) advice to an issuer on the structure and through their platforms and online prohibits funding portals from (1) content of its offerings, including presence generally, as well as from offering investment advice or assistance to the issuer in preparing services, such as those related to recommendations, (2) soliciting documentation.1021 This proposed rule technology, which funding portals purchases, sales or offers to buy would allow issuers to obtain guidance could provide. Issuers and investors securities offered or displayed on the that may not typically be available to might benefit from such arrangements funding portal’s platform, (3) them and lower funding costs. Many by having more readily-available compensating employees, agents or potential issuers seeking to offer and services provided to them by entities other such persons for solicitation or sell crowdfunding securities are subject to the applicable regulatory based on the sale of securities displayed unlikely to be familiar with how to best oversight. or referenced on the funding portal’s structure offerings so as to raise capital platform, or (4) holding, managing, The proposed rules would permit a in the most cost effective manner, and funding portal to advertise its existence, possessing or otherwise handling they might not have the capital, investor funds or securities. The subject to certain conditions.1025 These knowledge or resources to hire outside requirements would benefit funding proposed rules would give funding advisors. Given that an issuer would be portals by allowing them to advertise portals, their associated persons, required to effect offerings through an publicly to attract more investors to affiliates and business associates, a intermediary, we believe that permitting their crowdfunding platforms; however, measure of clarity regarding activities funding portals to provide these services they might bear costs associated with that would be permissible without to issuers would lower overall ensuring compliance with the rule’s violating these statutory prohibitions, transaction costs for issuers, as they conditions. The proposed rule also while also helping to protect investors would not need to engage another party would enhance market efficiency as from activities that would create to provide these services. This effect 1019 investors become more aware of potential conflicts of interest. Thus, would in turn help to enhance market available offerings through compared with the alternative that we efficiency. could have chosen, that of not providing The proposed rules would also permit advertisements by funding portals and the safe harbor, the proposed rules will a funding portal to compensate a third are thus able to better match their likely reduce funding portals’ regulatory party for referring a person to the investments with projects that are most burden (e.g., it will be easier for funding funding portal in certain suitable for their risk preferences. portals to advertise their activities and circumstances.1022 As discussed above, The statute requires intermediaries to attract issuers and investors, thus this proposed safe harbor would benefit take measures to reduce the risk of potentially increasing their revenue). funding portals by providing them with fraud, and we propose to implement The legal certainty provided by the safe a means to attract more investors to this requirement by requiring a funding harbors, for example proposed Rule their crowdfunding platforms, while portal to deny access to its platform to 402(b)(4) which permits a funding protecting investors’ personally an issuer that the funding portal portal to provide on its platform identifiable information. Investors also believes presents the potential for fraud communication channels, would help would benefit from the prohibition on or otherwise raises concerns regarding ensure that the benefits of the transaction-based compensation (other investor protection.1026 The requirement substantive rule provisions are realized. than to registered broker-dealers), which would further enhance investor Such measures have the potential to would help to reduce the incentive for protection by giving funding portals the attract greater numbers of investors to abusive practices. flexibility to deny access to potential crowdfunding through funding portals The proposed rules would permit a bad actors. Funding portals also would than would otherwise participate, funding portal to pay or offer to pay benefit from the ability to deny access thereby encouraging capital formation. compensation to a registered broker or to certain issuers to protect the integrity The proposed rules would permit a dealer for services provided in of the offering process and the market funding portal to apply objective criteria connection with the offer or sale of reputation of the crowdfunding to limit the crowdfunding securities securities in reliance on Section 4(a)(6), platforms without fear of violating the offered on its platform.1020 Investors subject to certain conditions set forth in prohibition on providing investment would benefit by being able to search, the rule.1023 Similarly, a funding portal advice. could, subject to certain conditions, sort or categorize offerings on a funding The proposed rules would clarify that receive compensation from a registered portal’s platform in an organized a funding portal would not be in broker or dealer for services provided by manner, which would allow them to violation of the statutory prohibitions the funding portal.1024 Under these find investment opportunities meeting on holding, managing, possessing or proposed rules, funding portals would specific criteria. This functionality otherwise handling investor funds or benefit from being able to enter into would more efficiently match investors securities by accepting investment these types of arrangements with with investment opportunities. These commitments from potential registered broker-dealers who could proposed rules would benefit funding investors.1027 provide services that the funding portals Under the proposed rules portals by providing them with the funding portals could direct investors flexibility to limit the use of their otherwise would be prohibited from providing. Brokers also would benefit where to transmit funds or remit platform to certain types of issuers and payment in connection with the to highlight certain offerings on their purchase of securities offered and sold platforms which investors may find of 1021 See proposed Rule 402(b)(5) of Regulation Crowdfunding. interest. 1022 See proposed Rule 402(b)(6) of Regulation 1025 See proposed Rule 402(b)(9) of Regulation Crowdfunding. Crowdfunding. 1019 See proposed Rule 402 of Regulation 1023 See proposed Rule 402(b)(7) of Regulation 1026 See proposed Rules 301(c) and 402(b)(10) of Crowdfunding. Crowdfunding. Regulation Crowdfunding. 1020 See proposed Rule 402(b)(1) of Regulation 1024 See proposed Rule 402(b)(8) of Regulation 1027 See proposed Rule 402(b)(11) of Regulation Crowdfunding. Crowdfunding. Crowdfunding.
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in reliance on Section 4(a)(6).1028 follow these AML procedures, in its premises, systems, platforms and Similarly, a funding portal could direct particular the requirement to file SARs, records by Commission representatives a qualified third party to release would help identify to law enforcement and by representatives of the registered proceeds of a successful offering to the and regulators potentially fraudulent national securities association of which issuer upon completion of the offering activity. These AML requirements it is a member.1035 Although funding or to return investor proceeds when an would help therefore to protect market portals would face time and compliance investment commitment or offering is participants from illegal activity that costs in submitting to Commission and cancelled.1029 These proposed rules could potentially infiltrate new online registered national securities association would give both funding portals and investment opportunities. Requiring the examinations, inspections or entities with which they do business a implementation of AML procedures investigations, and potentially measure of legal certainty that funding would, in turn, provide potential responding to any issues identified, portals providing direction for funds to investors with some degree of funding portals, investors and issuers and from qualified third parties in confidence that adequate protections would benefit from the enhanced compliance with the proposed rules against illegal activity exist for this new compliance with regulations due to the would not constitute activity in fundraising approach and would oversight, as well as the sanctions or violation of the statutory prohibitions encourage more investors to participate, other disciplinary actions that may on holding, managing, possessing or thus facilitating capital formation. follow upon findings of violations otherwise handling investor funds or Additionally, the statute requires that through such inspections, examinations securities. intermediaries take such steps to protect or investigations. the privacy of information collected We are proposing to require a b. Compliance Requirements from investors as we determine registered funding portal to maintain We are proposing to require that a appropriate. We are proposing to and preserve certain records relating to funding portal implement written implement this statutory provision by its business.1036 The proposed rules policies and procedures, reasonably requiring a funding portal to comply would require, among other things, that designed to achieve compliance with with Regulation S–P, S–ID and the funding portal maintain and proposed Regulation Crowdfunding and Regulation S–AM, which are applicable preserve certain books and records for a 1034 the rules and regulations thereunder, to brokers. We believe that requiring period of not less than five years and in relating to its business as a funding a funding portal to comply with privacy an easily-accessible place for the first portal.1030 This requirement would obligations would help protect the two years. Recordkeeping requirements provide a benefit to investors and personally identifiable information of help registrants with their compliance. funding portals alike, as written policies investors and potential investors, They are a familiar and important and procedures would aid, enhance and consistent with how it is protected by element of the approach to broker-dealer help to ensure consistent compliance other financial intermediaries. regulation, as well as the regulation of with the proposed rules. Funding Compared with an alternative that we investment advisers and others, and are portals would incur costs associated could have selected, that of developing designed to maintain the effectiveness with the requirement to develop their a new privacy regime applicable only to of our inspection program for regulated own procedures and implement written funding portals, the proposed rules entities, facilitating our review of their policies and procedures, as well as to would introduce consistency between compliance with statutory mandates update and enforce them, as set forth in funding portals and broker-dealers with and with our rules. The proposed rule respect to privacy obligations. That will the table above. would assist us in evaluating a funding benefit investors by lowering their We are also proposing to require portal’s compliance with the Securities information search costs and reducing registered funding portals to comply Act Sections 4(a)(6) and 4A and the investor confusion. We recognize that with the requirements of the Bank rules issued thereunder. Regulators the requirement would impose costs on Secrecy Act (BSA), including the would benefit from standardized funding portals to comply with the reporting, recordkeeping and record recordkeeping practices for privacy requirements, as set forth in the retention requirements that apply to intermediaries because they would be 1031 table above; however, these additional brokers. We recognize that the able to perform more efficient, targeted privacy protections could give potential proposed rules would impose costs on inspections and examinations, and have investors the confidence to participate funding portals to implement anti- an increased likelihood of identifying in offerings made in reliance on Section money laundering (AML) procedures, as improper conduct at earlier stages of the 4(a)(6), which would facilitate capital set forth in the table above; however, we inspection or examination. formation and benefit the markets believe that the proposed requirements Funding portals may incur one-time generally. provide important benefits. As costs in establishing the systems 1032 As a condition to exempting funding discussed above, low-priced and necessary to comply with the proposed portals from the requirement to register privately-placed securities pose a books and records requirements. We as broker-dealers under Exchange Act money laundering risk because they are note, however, that the records required Section 15(a)(1), Exchange Act Section susceptible to market manipulation and to be made and preserved under the 1033 3(h)(1)(A) requires that registered fraud. Requiring funding portals to proposed rules are those that would funding portals remain subject to, ordinarily be made and preserved in the 1028 See proposed Rule 402(b)(12) of Regulation among other things, the Commission’s Crowdfunding. examination authority. Under the 1035 See proposed Rule 403(d) of Regulation 1029 See proposed Rule 402(b)(13) of Regulation proposed rules, a funding portal would Crowdfunding. Crowdfunding. be required to permit the examination 1036 See proposed Rule 404 of Regulation 1030 See proposed Rule 403(a) of Regulation and inspection of all its business and Crowdfunding. We note that registered brokers Crowdfunding. business operations relating to its already are expected to comply with the books and 1031 See proposed Rules 401(b), 403(b) and 404(f) records requirements in Exchange Act Rules 17a– of Regulation Crowdfunding. See also Section II.D.4 activities as a funding portal, including 3, 17a–4 and 17a–5 (17 CFR 240.17a–3, 17a–4 and above. 17a–5). Thus, all intermediaries, whether registered 1032 See Section II.D.4.b above. 1034 See proposed Rule 403(c) of Regulation as brokers or as funding portals, would be required 1033 See FATF Typology, note 641. Crowdfunding. to make and preserve books and records.
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ordinary course of business by a Regulation Crowdfunding or they may a registered transaction or registers a regulated broker engaging in these face greater uncertainty regarding their class of securities under the Exchange activities. We recognize that there may reliance on the exemption, which could Act to reach a trading market. This be a slight competitive advantage for discourage participation in this market, allows an issuer to time the decision to funding portals over brokers to the impacting efficiency and capital become a reporting company without extent that the proposed recordkeeping formation. forcing it to become a reporting rule for funding portals is less company through actions outside of its 7. Relationship With State Law burdensome for than the requirements control (e.g., secondary market trading). applicable to brokers. At the same time, Section 305 of the JOBS Act amended By conditioning the more burdensome we believe that the proposed Securities Act Section 18(b)(4) 1038 to reporting requirements on the decision recordkeeping rule for funding portals is preempt the ability of states to regulate to raise new capital or to actively seek consistent with the narrow range of certain aspects of crowdfunding a liquid trading market, the benefits of their activities. Our estimates of the conducted pursuant to Section 4(a)(6). increased disclosure would scale with costs associated with this requirement This statutory amendment would the scope of investment in the issuer, are set forth in the table above. benefit issuers by making transactions thus improving efficiency. 6. Insignificant Deviations made in reliance on Section 4(a)(6) less This proposal could, however, result costly, because an issuer would not be in an unintended and potentially costly We are proposing to provide a safe required to register transactions with outcome. It is possible that an issuer harbor for issuers for certain each state where it offers and sells that sells securities in reliance on insignificant deviations from a term, securities in reliance on Section 4(a)(6). Section 4(a)(6) could become an condition or requirement of Regulation It also could benefit investors because Exchange Act reporting company, but Crowdfunding.1037 The proposed safe these cost savings ultimately may be then deregister and go dark with harbor would provide that insignificant passed on to investors. Absent potentially thousands of investors. For deviations from a term, condition or preemption of the states’ registration example, in an attempt to provide requirement of Regulation requirements, an offering made through additional liquidity to its shareholders, Crowdfunding would not result in a loss the Internet in reliance on Section an issuer could voluntarily register a of the exemption, so long as the issuer 4(a)(6) and the proposed rules could class of securities under Exchange Act relying on the exemption can show that: result in an issuer potentially violating Section 12(g) so that the securities could (1) The failure to comply was state securities laws. Recent evidence in be quoted in the over-the-counter insignificant with respect to the offering donation-based and reward-based as a whole; (2) the issuer made a good market. The issuer would become crowdfunding campaigns suggests that subject to Exchange Act reporting faith and reasonable attempt to comply contributions are not exclusively with all applicable terms, conditions requirements and would no longer be local.1039 The statutory preemption of subject to the ongoing reporting and requirements of Regulation state registration laws would reduce Crowdfunding; and (3) the issuer did requirements of Regulation issuer uncertainty regarding the Crowdfunding. If the issuer does not sell not know of the failure to comply, necessity of state registration, and it where the failure to comply with a term, securities in a registered offering or would eliminate the costs that would be trigger the asset and holder of record condition or requirement was the result associated with state registration. On the of the failure of the intermediary to thresholds for mandatory Exchange Act other hand, state registration laws may registration in Section 12(g), the issuer comply with the requirements of provide an additional layer of investor Section 4A(a) and the related rules, or could deregister its securities and stop protection, and their preemption will all ongoing reporting obligations even if such failure by the intermediary remove a potential layer of review and occurred solely in offerings other than all the securities sold in reliance on may lead to increased levels of fraud. Section 4(a)(6) remain outstanding.1040 the issuer’s offering. This potential negative effect of state Providing a safe harbor could impose Given that securities-based law preemption, however, could be costs on investors, issuers, funding crowdfunding could attract thousands offset by some of the statutory portals and regulators, compared with of potential issuers, this is a possible requirements and the proposed rules the alternative of not providing a safe outcome for some of these issuers. that are designed to deter fraud, such as harbor, to the extent that issuers lessen Under such an outcome, a significant public disclosure, investment limits and the vigor with which they develop and number of investors in an issuer might the use of a registered intermediary. implement systems and controls to be unable to obtain important achieve compliance with the 8. Exemption From Section 12(g) information about that issuer, which requirements of Regulation could affect the liquidity and pricing of Proposed Rule 12g–6 provides that the securities these investors hold. Crowdfunding. We believe that limiting securities issued pursuant to an offering the proposed safe harbor to insignificant made under Section 4(a)(6) would be 9. Disqualification instances of non-compliance and permanently exempted from the record requiring a good faith and reasonable The statute and the proposed rules holder count under Section 12(g). This impose disqualification provisions attempt to comply with the proposal delays the more extensive requirements would mitigate these under which an issuer would not be Exchange Act reporting requirements eligible to offer securities pursuant to potential costs and would benefit until the issuer either sells securities in issuers and funding portals by providing Section 4(a)(6) and an intermediary would not be eligible to effect or greater certainty regarding their reliance 1038 15 U.S.C. 77r(b)(4). participate in transactions pursuant to on the exemption. In the absence of a 1039 For example, in crowdfunding campaigns for safe harbor, issuers may extend early stage musical projects, the average distance significantly more effort and more between artist-entrepreneurs and contributors was 1040 Although less likely, the same could happen 3,000 miles. See Ajay Agrawal, Christian Catalini if an issuer sells securities in reliance on Section resources to satisfy the requirements of and Avi Goldfarb, The Geography of Crowdfunding, 4(a)(6) and subsequently registers a class of NET Institute Working Paper No. 10–08 (Oct. 29, securities under Exchange Act Section 12(b) in 1037 See proposed Rule 502(a) of Regulation 2010), available at http://ssrn.com/ order to list its securities on a national securities Crowdfunding. abstract=1692661. exchange.
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Section 4(a)(6).1041 The proposed connection with seeking waivers of Disclosure of triggering events also may disqualification provisions for issuers disqualification from the Commission or make it more difficult for issuers to are substantially similar to those determinations by other authorities that attract investors, and issuers may imposed under Rules 262 of Regulation existing orders should not give rise to experience some or all of the impact of A and 506 of Regulation D,1042 while disqualification. disqualification as a result. the proposed disqualification provisions We anticipate that the reasonable care We believe the inclusion of for intermediaries under Section exception 1043 also would impose costs Commission cease-and-desist orders in 3(a)(39) are substantially similar to, and benefits. In this regard, a reasonable the list of disqualifying events would while somewhat broader than, the care exception might encourage capital not impose a significant, incremental provisions of Rule 262. formation by eliminating any hesitation cost on issuers and other covered issuers might otherwise experience a. Issuers persons because many of these groups under a strict liability standard. might already be subject to disqualifying The proposed rules should induce However, such an exception also might orders issued by the states, federal issuers to implement measures to encourage issuers to take fewer steps to banking regulators and the National restrict bad actor participation in inquire about offering participants than Credit Union Administration.1045 The offerings made in reliance on Section they would if a strict liability standard inclusion of such orders in the list of 4(a)(6). This should help reduce the applied, increasing the potential for disqualifying events might change how potential for fraud in the market for fraud in the market for offerings made settlement negotiations are conducted such offerings, which should help in reliance on Section 4(a)(6). between respondents and the reduce the cost of raising capital to Nevertheless, some issuers, with regard Commission, and the Commission could issuers that rely on Section 4(a)(6), to to the exercise of reasonable care, might grant an appropriate waiver from the extent that disqualification incur costs associated with conducting disqualification. standards lower the risk premium and documenting their factual inquiry Under the proposed rules, orders associated with the presence of bad into possible disqualifications. The lack actors in securities offerings. In issued by the CFTC would trigger of specificity in the rule, while disqualification to the same extent as addition, the requirement that issuers providing flexibility to the issuer to determine whether any covered persons orders of the regulators enumerated in tailor its factual inquiry as appropriate Section 302(d)(2)(B)(i) of the JOBS Act are subject to disqualification might to a particular offering, might increase obviate the need for investors to do their (e.g., state securities, insurance and these costs because uncertainty could banking regulators, federal banking own investigations and eliminate drive issuers to do more than necessary redundancies that might exist in agencies and the National Credit Union under the rule. Alternatively, it might Administration). We believe that otherwise separate investigations. This reduce these costs because uncertainty should help reduce information- including orders of the CFTC would might drive issuers to exert minimum result in the similar treatment, for gathering costs to investors, to the effort in conducting and documenting a extent that issuers are at an advantage disqualification purposes, of factual inquiry. comparable sanctions. In this regard, we in accessing much of the relevant The requirement that issuers disclose note that the conduct that would information and to the extent that matters that would have triggered typically give rise to CFTC sanctions is issuers could do so at a lower cost than disqualification, had they occurred after similar to the type of conduct that investors. the effective date of proposed would result in disqualification if it The proposed rules still would, Regulation Crowdfunding,1044 also were the subject of sanctions by another however, impose costs on issuers, other would impose costs and benefits. The covered persons and investors. If issuers financial services industry regulator. disclosure requirement would reduce This should enable the disqualification are disqualified from relying on Section costs associated with covered persons 4(a)(6) to make their offerings, they rules to more effectively screen out bad who would be disqualified under the actors. might experience increased costs in proposed rules but for the fact that the As discussed above, the baseline for raising capital through alternative disqualifying event occurred prior to the our economic analysis of proposed methods that do not require bad actor effective date of the rules. However, this disqualification, if available, or Regulation Crowdfunding, including the approach would allow the participation alternative methods might be altogether baseline for our consideration of the of past bad actors, whose disqualifying unavailable. This could hinder potential effects of the proposed rules on events occurred prior to the effective investment opportunities for such efficiency, competition and capital date of the proposed rules, which could issuers, with possible negative effects on formation, is the situation in existence expose investors to the risks that arise capital formation. In addition, issuers today, in which startups and small when bad actors are associated with an and other covered persons may incur businesses seeking to raise capital offering. Nevertheless, investors would costs in connection with internal through securities offerings must benefit by having access to such personnel changes that issuers may register the offer and sale of securities information that could inform their make to avoid the participation of those under the Securities Act unless they can investment decisions. Issuers also may covered persons who are subject to comply with an existing exemption incur costs associated with the factual disqualifying events. Issuers also might from registration under the federal inquiry, preparing the required incur costs associated with restructuring securities laws. Relative to the current disclosure and making any internal or share ownership positions to avoid baseline, we believe that the share ownership changes they may having 20 Percent Beneficial Owners disqualification provisions may not decide to make to avoid the who are subject to disqualifying events. impose significant incremental costs on participation of covered persons that Finally, issuers might incur costs in issuers and other covered persons trigger the disclosure requirement. because the proposed rules are 1041 See Section 302(d) of the JOBS Act; proposed substantially similar to the Rule 503 of Regulation Crowdfunding. See also 1043 See proposed Rule 503(b)(4) of Regulation discussion in Section II.E.6 above. Crowdfunding. See also Section II.E.6.a.iii above. 1042 See Disqualification Adopting Release, note 1044 See proposed Rule 201(u) of Regulation 1045 See Disqualification Adopting Release, note 101. Crowdfunding. See also Section II.E.6.a.v above. 101.
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disqualification provisions under provisions that are already imposed on year before selling a security sold in a existing exemptions. broker-dealers. Section 4(a)(6) offering. At that time, how would existing security holders b. Intermediaries C. Request for Comment liquidate their positions? What is the In implementing the statute, we are Throughout this release, we have likelihood that there would be a ready proposing to apply to intermediaries the discussed the anticipated costs and market for mature securities issued in disqualification provisions under benefits of the proposed rules and their reliance on Section 4(a)(6)? What Section 3(a)(39), rather than Rule 262 or potential impact on efficiency, entities or investors are likely to supply the disqualification rules we are competition and capital formation. We the liquidity, and what discounts, if proposing for issuers. We believe that request and encourage any interested any, are investors likely to face when the standard of Section 3(a)(39) is person to submit comments regarding exiting their investments? To what already an established one among the proposed rules, our analysis of the extent would, or should, liquidity broker-dealers and their regulators and potential effects of the rules and other provisions be built into the design of the that, despite the differences, Section matters that may have an effect on the security issues (e.g., call provisions or 3(a)(39) and Rule 262 are substantially proposed rules. We request comment self-liquidation features)? similar in particular with regard to the from the point of view of issuers, 288. How, and to what extent, would persons and events they cover, their investors and other market participants. the collective knowledge of scope and their purpose.1046 We believe With regard to any comments, we note crowdfunding investors (i.e., the that imposing any new or different that such comments are of particular ‘‘wisdom of the crowd’’) provide standard, including Rule 262, only for assistance to us if accompanied by investor protections and mitigate those intermediaries that engage in supporting data and analysis of the potential fraud or unspecified offering crowdfunding transactions would likely issues addressed in those comments. We risks at the time of issuance? Would create confusion and unnecessary also are interested in comments on the ‘‘the wisdom of the crowd’’ provide burdens, as currently-registered broker- qualitative benefits and costs we have ongoing investor protections to the dealers and their associated persons identified and any benefits and costs we community of securities-based would become subject to two distinct may have overlooked. We urge crowdfunding investors? If so, how and standards for disqualification. commenters to be as specific as to what extent? Consistent standards for all brokers and possible. 289. Do the proposed rules require funding portals also would assist a Comments on the following questions sufficient disclosure and educational registered national securities association are of particular interest. requirements to help ensure that in monitoring compliance and enforcing 285. How similar or different is a investors have a reasonable its rules. securities-based crowdfunding offering understanding of the risks and costs of The proposed rules would implement from a non-securities-based investing in crowdfunding securities? the statutory requirement for crowdfunding offering? To what extent Are the proposed disclosure and intermediaries by providing that a should we base the anticipated effects of educational requirements sufficient for person subject to a statutory the proposed rules on the experience of investors to understand: (1) The disqualification, as defined in Exchange current crowdfunding platforms and methods used for valuing securities Act Section 3(a)(39), may not act as, or their participants, including those based issued in reliance on Section 4(a)(6), (2) be an associated person of, an on rewards and donations? Should we potential complexity in the security intermediary in a transaction involving expect the same incidence of success, design, or (3) risks of subsequent the offer or sale of securities in reliance failure, fraud and other outcomes when dilution of their investment? If not, on Section 4(a)(6) unless so permitted crowdfunding involves participants what additional requirements would by Commission rule or order. While this providing financing with an expectation further mitigate the associated risks? requirement would potentially reduce of a monetary return on their 290. Should intermediaries be the number of intermediaries, we expect investments? Would securities-based required to systematically collect and that it would strengthen investor crowdfunding attract similar projects, report information—to the Commission protection by preventing bad actors ventures and capital seekers as other and/or publicly—about the progress, from entering the securities-based forms of crowdfunding? If not, why not, success and failures of issuers that crowdfunding market and by reducing and what differences in the types of relied on Section 4(a)(6) to offer and sell the potential for fraud and other abuse. ventures, participants and outcomes securities subsequent to initial As discussed above, the baseline for might be expected? financing? Would collecting and our economic analysis of proposed 286. How would securities issued in reporting such statistics help investors Regulation Crowdfunding, including the reliance on Section 4(a)(6) be valued? better understand the risks associated baseline for our consideration of the Would issuers and/or investors have with securities-based crowdfunding effects of the proposed rules on sufficient financial sophistication or investments with the passage of time? If efficiency, competition and capital methods available to accurately assess so, what information should be formation, is the situation in existence the intrinsic risks associated with the reported, and to whom and in what today, in which intermediaries issuance? If so, what mechanisms would manner should it be reported? Would a intending to facilitate securities help assure accurate pricing? If not, requirement to collect and maintain transactions are required to register with what specific challenges or issues information about issuers that relied on the Commission as broker-dealers under would prevent issuers and/or investors Section 4(a)(6) after the completion of Exchange Act Section 15(a). Relative to from arriving at a price that reflects the the offering be too burdensome for the current baseline, we believe that the intrinsic value of the offering? intermediaries? disqualification provisions might not 287. How would investors who 291. Other than averting potential impose significant incremental costs to purchase securities in an offering in losses, what are the potential economic brokers because the proposed rules are reliance on Section 4(a)(6) exit their effects of limiting the investment size the same as the disqualification investment? Once the securities are for any single investor to a maximum issued, investors would have to wait, aggregate amount of $100,000? Would 1046 See discussion in Section II.E.6.b above. except in certain circumstances, for one this reduce the incentive for some
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investors to participate in offerings in IV. Paperwork Reduction Act estimate on the number of issuers that reliance on Section 4(a)(6), and if so, conducted a Regulation D offering that A. Background would this impede potential capital had no revenues or less than $1 million formation or the efficiency with which Certain provisions of the proposed in revenues.1050 We believe those offerings can be made? Would this limit rules contain ‘‘collection of issuers would be similar in size to the the ability of investors to appropriately information’’ requirements within the potential issuers that may participate in diversify their securities-based meaning of the Paperwork Reduction securities-based crowdfunding, and we crowdfunding investments? Please Act of 1995 (‘‘PRA’’).1047 We are assume that each issuer would conduct explain. submitting the proposal to the Office of one offering per year, raising an average 292. Would the permanent exemption Management and Budget (‘‘OMB’’) for of $100,000 per offering. of securities-based crowdfunding review in accordance with the PRA.1048 2. Intermediaries That Are Registered securities from the record holder count The titles for the collections of Brokers under Section 12(g) of the Exchange Act information are: pose any significant risks to investors of (1) ‘‘Form ID’’ (OMB Control Number We estimate that the proposed successful ventures? For example, is it 3235–0328); collections of information would apply likely or possible that an issuers that (2) ‘‘Form C’’ (a proposed new to approximately 10 intermediaries per offers and sells securities in reliance on collection of information); year that are not currently registered (3) ‘‘Form BD’’ (OMB Control Number Section 4(a)(6) could became subject to with the Commission and would choose 3235–0012); and to register as brokers to act as Exchange Act reporting, but then (4) ‘‘Regulation Crowdfunding— intermediaries for transactions made in subsequently delist and go dark without Intermediaries and Funding Portals’’ (a reliance on Section 4(a)(6). However, we regard to the number of record holders? proposed new collection of believe that, given the high cost that an 293. We estimated the costs for a information). unregistered entity would incur to broker to act as an intermediary in In addition, the collections of register as a broker with us, compared transactions conducted pursuant to information included under OMB with the lower cost of becoming a Section 4(a)(6), and to engage in related Control Numbers 1506–0034 and 1506– funding portal, unregistered entities broker activities, to be approximately 0019, regarding the CIP and SAR generally would have less incentive to $770,000 in the first year and requirements of the Department of register as brokers than as funding approximately $270,000 each year Treasury, would be amended to reflect portals. thereafter. In making these estimates, we related burdens under proposed Rule We further estimate that assumed that brokers would engage in 403(b) of Regulation Crowdfunding. An approximately 50 intermediaries per particular activities in connection with agency may not conduct or sponsor, and year that are already registered as these transactions, namely providing a person is not required to respond to, brokers with the Commission would investment advice and a collection of information unless it choose to add to their current service recommendations, soliciting investors, displays a currently valid OMB control offerings by also becoming and managing and handling customer number. We are applying for OMB crowdfunding intermediaries. These funds and securities. Are our control numbers for the proposed new entities would not have to register anew assumptions correct? If not, please collections of information in accordance with us, and if doing business with the explain. Are our estimates of the cost of with 44 U.S.C. 3507(j) and 5 CFR public, would already be members of doing business as a broker, in general, 1320.13, and OMB has not yet assigned FINRA (the applicable national accurate? If not, please explain and a control number to each new securities association registered under provide relevant data. collection. Responses to these new Exchange Act Section 15A). Because we 294. We estimated the costs for a collections of information would be do not have any data indicating the funding portal to act as an intermediary mandatory. in transactions pursuant to Section number of currently-registered brokers 4(a)(6) to be approximately $417,000 in B. Estimate of Issuers and that would be interested in becoming the first year, and approximately Intermediaries crowdfunding intermediaries, we $90,000 each year thereafter. Are our 1. Issuers cannot estimate how many would estimates of the costs of doing business choose to enter the crowdfunding as a funding portal, and the assumptions The number, type and size of the market.1051 issuers that would participate in behind these estimates, in general, 3. Funding Portals accurate? If not, please explain and securities-based crowdfunding provide relevant data. transactions are uncertain, but data We estimate that approximately 50 regarding current market practices may 295. The Commission is interested in intermediaries per year would choose to help identify the number and receiving comments, views, estimates register as funding portals during the characteristics of potential issuers that and data concerning the following: first three years following effectiveness may offer and sell securities in reliance Æ Expected size of the securities- of the proposed rules. This estimate on Section 4(a)(6).1049 While it is not based crowdfunding market (e.g., assumes that, upon effectiveness of the possible to predict the number of future number of offerings, number of issuers, proposed rules, about 15% of the offerings made in reliance on Section number for funding portals, size of approximately 200 U.S.-based 4(a)(6), particularly because rules offerings, number of investors, etc., as governing the process are not yet in 1050 well as information comparing these See id. place, for purposes of this analysis, we 1051 estimates to the current baseline); Similarly, we cannot estimate with any estimate that the number would be degree of certainty how many unregistered Æ Overall economic impact of the 2,300 offerings per year. We base this ‘‘finders’’ would potentially choose to enter the proposed rules; securities-based crowdfunding market. See, e.g., Æ Competitive effects on brokers of Task Force on Private Placement Broker-Dealers, 1047 44 U.S.C. 3501 et seq. note 894 (stating that quantifying the number of the development of funding portals; and 1048 Æ 44 U.S.C. 3507(d); 5 CFR 1320.11. ‘‘finders’’ that help small businesses to obtain Any other aspect of the economic 1049 See Section III.A.4.a above for a discussion of sources of capital ‘‘is an impossibility, since there analysis. the data regarding current market practices. is no effective measuring device.’’).
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crowdfunding portals 1052 currently in capital pursuant to a Regulation A that the burden to prepare and file each existence would participate in offering generally would be at a more progress update, which only has one securities-based crowdfunding and that advanced stage of development than disclosure requirement, would be 0.50 the number of crowdfunding portals issuers likely to raise capital pursuant to hours. We further estimate that an issuer would grow at 60% per year over the Section 4(a)(6), so the complexity of the would be required to file an average of next three years.1053 Therefore, we required disclosure and, in turn, the two progress updates during each estimate that an average of burden of compliance with the offering.1064 Therefore, we estimate that approximately 50 respondents would requirements of proposed Form C would an issuer’s compliance with proposed register as funding portals annually.1054 be significantly less than for Form 1– Form C–U would result in an aggregate Of those 50 funding portals, we estimate A.1058 We estimate that the total burden burden of 1.00 hours per issuer.1065 that two would be nonresident funding to prepare and file the Form C, We estimate that compliance with the portals. These estimates are based in including any amendment to disclose requirements of a Form C submitted in part on current indications of interest any material change, would be connection with transactions made in expressed in responses to FINRA’s approximately 60.00 hours, which is reliance on Section 4(a)(6) would voluntary interim form for funding approximately 10 percent of the burden require 138,000 burden hours (2,300 portals.1055 to prepare a Form 1–A for a Regulation offering statements × 60.00 hours/ A offering. We estimate that 75 percent offering statement) in aggregate each C. Estimate of Burdens of the burden of preparation would be year, which corresponds to 103,500 1. Issuers carried by the issuer internally and that hours carried by the issuer internally × a. Form C: Offering Statement and 25 percent would be carried by outside (2,300 offering statements 60.00 1059 × Progress Update professionals retained by the issuer hours/offering statement 0.75) and at an average cost of $400 per hour.1060 costs of $13,800,000 (2,300 offering Under the proposed rules, an issuer Under the proposed rules, the issuer statements × 60.00 hours/offering conducting a transaction in reliance on also would be required to file with us statement × 0.25 × $400) for the services Section 4(a)(6) would file with us regular updates regarding the progress of outside professionals. We also specified disclosures on a Form C: of the issuer in meeting the target estimate that compliance with the Offering Statement.1056 An issuer also offering amount.1061 The issuer would requirements of Form C–U submitted would file with us amendments to Form make the filing under cover of a Form during an offering would require 2,300 C to disclose any material change in the C–U: Progress Update. The issuer would burden hours (2,300 offering statements offer terms or disclosure previously be required to disclose its progress in × 2 progress updates per offering × 0.50 provided to investors.1057 Form C is meeting the target offering amount. hours per progress update) in aggregate similar to the Form 1–A offering Form C–U is similar to a Form D Notice each year. These estimates include the statement under Regulation A, but it of Exempt Offering of Securities under time and cost of collecting the would require fewer disclosure items Regulation D 1062 and a Form 2–A information, preparing and reviewing (e.g., it would not require disclosure Report of Sales and Uses of Proceeds disclosure, filing documents and about the plan of distribution, the Pursuant to Rule 257 of Regulation retaining records. We derived the above compensation of officers and directors, A.1063 Form C–U would require estimates by estimating the average litigation or a discussion of federal tax significantly less disclosure than the number of hours it would take an issuer aspects). We note that offerings made in Form D and the Form 2–A, however, as to prepare and review the proposed reliance on Regulation A allow issuers it would only require disclosure of the disclosure requirements. In deriving our to offer up to $5 million, involve review issuer’s progress in meeting the target estimates, we recognize that the burdens by the staff and require filings at the offering amount, rather than likely would vary among individual state level. In light of these factors, we compensation and use of proceeds issuers based on a number of factors, expect that issuers seeking to raise disclosures or other information about including the stage of development of the issuer and the offering. Thus, the the business and the number of years 1052 This estimate is based in part on an industry complexity of the required disclosure since inception of the business. We estimate that, as of April 2012, there were and the burden to prepare and file Form believe that some issuers would approximately 200 non-securities-based crowdfunding portals operating in the United C–U would be significantly less than for experience costs in excess of this States. See Massolution, note 861 at 16. either Form D or Form 2–A. We estimate average and some issuers may 1053 A worldwide survey of crowdfunding portals experience less than these average costs. indicated that, in 2011, approximately 14.8% of the 1058 We estimate the burden per response for surveyed crowdfunding portals (mostly based in preparing a Form 1–A to be 608.00 hours. See Form b. Form C–AR: Annual Report Europe) participated in ‘‘equity-based’’ 1–A at 1. Under the proposed rules, any issuer crowdfunding. Id. Also, the total number of 1059 For example, an issuer could retain an crowdfunding portals worldwide grew by an outside professional to assist in the preparation of that sells securities in a transaction estimated 60% from 2011 to 2012. Id. at 13. the financial statements, but could decide to made pursuant to Section 4(a)(6) would 1054 200 U.S.-based crowdfunding portals × 15% address the remaining disclosure requirements be required to file annually with us an (estimated percentage of crowdfunding portals that internally. annual report on Form C–AR: Annual would participate in securities-based 1060 We recognize that the costs of retaining 1066 crowdfunding) = 30 funding portals that would outside professionals may vary depending on the Report. Form C–AR would require participate in securities-based crowdfunding. nature of the professional services, but for purposes Assuming 60% growth over three years, the number of this PRA analysis, we estimate that such costs 1064 See proposed Rule 203(a)(3) of Regulation of registered funding portals would be 30 during the would be an average of $400 per hour. This is the Crowdfunding. The proposed rules would require first year, 48 during the second year and 77 during rate we typically estimate for outside legal services an issuer to file a progress update after reaching the third year. The average number of registered used in connection with public company reporting. one-half and 100 percent of the target offering funding portals over three years is (30 + 48 + 77)/ 1061 See proposed Rule 203(a)(3) of Regulation amount. 3 = 52 funding portals (or approximately 50 funding Crowdfunding. 1065 We estimate that the burden of preparing portals per year). 1062 We estimate the burden per response for Form C–U would be approximately 1/8 of the 1055 See note 980. preparing a Form D to be 4.00 hours. See Form D burden for Form D. Therefore, the aggregate burden 1056 See proposed Rule 203(a)(1) of Regulation at 1. per issuer would be 100 hour (2 progress updates Crowdfunding. 1063 We estimate the burden per response for × 0.50 hours/update). 1057 See proposed Rule 203(a)(2) of Regulation preparing a Form 2–A to be 12.00 hours. See Form 1066 See proposed Rule 202 of Regulation Crowdfunding. 2–A at 1. Crowdfunding.
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disclosure substantially similar to the or 15(d).1072 Therefore, we estimate that additional burden for purposes of this disclosure provided in the Form C: compliance with the proposed Form C– PRA discussion. Entities that are not Offering Statement, except that offering- TR would result in a similar burden as already registered as brokers may decide specific disclosure would not be compliance with Form 15, a burden of to register as brokers or as funding required. Therefore, we estimate that the 1.50 hours per response. We estimate portals and to become members of a burden to prepare and file Form C–AR that compliance with proposed Form C– registered national securities would be less than that required to TR would result in a burden of 276 association, pursuant to the proposed prepare and file Form C. We estimate hours (2,300 issuers × 0.08 issuers filing rules. We estimate that each year, that compliance with proposed Form C– Form C–TR × 1.50 hours/issuer) in the approximately 10 entities may decide to AR would result in a burden of 40.00 aggregate during the first year for issuers register as brokers, and on average, hours per response.1067 We further terminating their reporting obligations. approximately 50 entities may decide to estimate that 75 percent of the burden register as funding portals by filing d. Form ID Filings of preparation would be carried by the Form Funding Portal. In addition, we issuer internally and that 25 percent Under the proposed rules, an issuer estimate that of those 50 entities that would be carried by outside would be required to file specified register as funding portals, two would professionals 1068 retained by the issuer disclosures with us on EDGAR.1073 We be nonresident funding portals and at an average cost of $400 per hour.1069 anticipate that the majority of first-time subject to the additional requirements of We estimate that compliance with the issuers seeking to offer and sell completing Schedule C, hiring an agent requirements of Form C–AR after issuers securities in reliance on Section 4(a)(6) for service of process in the United sell securities pursuant to Section would not previously have filed an States and providing an opinion of 4(a)(6) would require 92,000 burden electronic submission with us and so counsel. hours (2,300 issuers × 40.00 hours/ would need to file a Form ID. Form ID We estimate the burden for registering issuer) in the aggregate each year, which is the application form for access codes as a broker with us based upon the corresponds to 69,000 hours carried by to permit filing on EDGAR. The existing burdens for completing and the issuer internally (2,300 issuers × proposed rules would not change the filing Form BD.1075 Consequently, we 40.00 hours/issuer × 0.75) and costs of form itself, but we anticipate that the estimate that total annual burden hours $9,200,000 (2,300 issuers × 40.00 hours/ number of Form ID filings would required for all intermediaries, issuer × 0.25 × $400) for the services of increase due to new issuers seeking to including brokers and funding portals, outside professionals. offer and sell securities in reliance on to register with us under the proposed Section 4(a)(6). For purposes of this rules would be approximately 165 hours c. Form C–TR: Termination of Reporting PRA discussion, we estimate that all of (2.75 hours/respondent × (10 brokers + the issuers who would seek to offer and Under the proposed rules, any issuer 50 funding portals)). In addition, those sell securities in reliance on Section terminating its annual reporting entities that register as nonresident 4(a)(6) would not have filed an obligations would be required to file a funding portals would face an electronic submission with us notice under cover of Form C–TR: additional burden of half an hour to previously and would, therefore, be Termination of Reporting to notify complete Schedule C, half an hour to required to file a Form ID. As noted investors and the Commission that it no hire an agent for the service of process, above, we estimate that approximately longer will file and provide annual and one hour to provide an opinion of 2,300 issuers per year would seek to reports pursuant to the requirements of counsel. Consequently, we estimate that offer and sell securities in reliance on Regulation Crowdfunding.1070 We of the 50 registered funding portals, two Section 4(a)(6), which would estimate that eight percent of the issuers would face the burden of an additional correspond to 2,300 additional Form ID that sell securities pursuant to Section two hours to register. filings. As a result, we estimate the 4(a)(6) would file a notice under cover We take into consideration that additional annual burden would be of Form C–TR during the first year.1071 brokers that register to engage in approximately 345 hours (2,300 filings × The Form C–TR would be similar to the crowdfunding transactions conducted in 0.15 hours/filing).1074 Form 15 that issuers file to provide reliance on Section 4(a)(6) may notice of termination of the registration 2. Brokers and Funding Portals eventually decide to withdraw their registration. Withdrawal requires the of a class of securities under Exchange a. Registration Requirements Act Section 12(g) or to provide notice of entity to complete and file with us a 1076 the suspension of the duty to file reports i. Time Burden Form BDW. We further estimate that required by Exchange Act Sections 13(a) The proposed rules would require intermediaries to register with us as 1075 While it is likely that the time necessary to complete Form BD varies depending on the nature 1067 We estimate that the burden of preparing the either a broker or funding portal. We and complexity of the entity’s business, we information required by Form C–AR would be believe that some entities that may previously estimated that the average time approximately 2/3 of the burden for the Form C: necessary for a broker-dealer to complete and file Offering Statement in light of the fact that offering- engage in crowdfunding pursuant to Section 4(a)(6) and the proposed an application for broker-dealer registration on specific disclosure would not be required and that Form BD would be approximately 2.75 hours. We the issuer may be able to update disclosure regulation would already be registered also estimate that the time burden to register as a previously provided in the Form C: Offering as brokers. Therefore, this registration funding portal on Form Funding Portal would be, Statement. requirement would impose no new for purposes of this PRA discussion, the same, 1068 See note 1059. requirement on these entities and no based upon the time required to complete and file 1069 See note 1060. Form BD because the information required for that 1070 See proposed Rule 203(b)(2) of Regulation form is similar. Crowdfunding. 1072 We currently estimate the burden per 1076 The time necessary to complete Form BDW 1071 For purposes of the PRA, we estimate that response for preparing a Form 15 to be 1.50 hours. varies depending on the nature and complexity of eight percent of issuers will not survive past their See Form 15 at 1. the applicant’s securities business. We previously first year, based on a recent study that found that 1073 See proposed Rules 201–203 of Regulation estimated that it would take a broker-dealer of a random sample of 4,022 new high-technology Crowdfunding. approximately one hour to complete and file a Form businesses started in 2004, 92.3% survived past 1074 We currently estimate the burden associated BDW to withdraw from Commission registration, as their first year. See Kauffman Firm Survey, note 869 with Form ID is 0.15 hours per response. See Form required by Exchange Act Rule 15b6–1 (17 CFR at 13. ID at 1. 240.15b6–1).
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approximately 500 broker-dealers that amount or 110 hours would be FINRA’s current member application fee withdraw from Commission registration required of an intermediary registering structure, which assesses fees annually 1077 and, therefore, file a Form as a funding portal. Consequently, we depending on the size of the new BDW. Of them, we estimate that estimate that total annual burden hours member applicant. The current member approximately one broker who had required for all intermediaries, application fee for broker-dealers with 1 registered in order to facilitate including brokers and funding portals, to 10 associated registered persons is crowdfunding transactions made in to register with FINRA or any other $7,500, and the fee for broker-dealers reliance on Section 4(a)(6) may decide registered national securities association with 11 to 100 associated registered to withdraw in each year following would be approximately 6,600 hours persons is $12,500.1082 We expect that adoption of the rules.1078 Therefore, the (220 hours/broker-dealer respondent × the size of funding portals that would one broker-dealer that withdraws from 10 brokers + 110 hours/funding portal register with FINRA would be similar, registration by filing Form BDW would respondent × 50 funding portals). For and therefore, our preliminary estimate incur an aggregate annual reporting intermediaries who choose to hire a of FINRA’s application fee for funding burden of approximately one hour (one third party to assist in the membership portals is based on the above fees. The × hour/respondent one broker). process, we assume that the hours average of the two fees is ($7,500 + Similarly, we estimate that would be further reduced by at least $12,500)/2 = $10,000. The total cost approximately six funding portals may one-half for a total of 3,300 hours. across all intermediaries would be choose to withdraw from registration Once registered, a broker must approximately ($10,000/intermediary × 1079 each year and that each withdrawal, promptly file an amended Form BD (10 brokers + 50 funding portals) = as with Form BDW, would take one when information it originally reported $600,000. In addition, two on Form BD changes or becomes hour. This would result in an aggregate intermediaries would face an additional inaccurate. Similarly, a registered annual reporting burden of cost of $25,130 to complete Schedule C, funding portal must report to us approximately six hours (one hour/ retain an agent for the service of process respondent × 6 funding portals). amendments relating to its Form and provide an opinion of counsel to Newly-registered intermediaries Funding Portal filing.1080 Based on the would be required to also become number of amended Forms BD that we register as a nonresident funding portal. members of FINRA or any other received from October 1, 2007 through In addition to the initial registration registered national securities September 30, 2012, we estimate that cost, we estimate that costs associated association. Based on discussions with the total number of amendments that we with completing a membership process industry participants, we estimate that would receive on Form BD from the 10 with FINRA or any other registered the burden associated with this brokers that register under this proposed national securities association would be requirement would be approximately system would be approximately 34.1081 approximately $3,450,000 across all 220 hours per intermediary that Therefore, we estimate that the total intermediaries. Discussions with registers as a broker-dealer. We also additional annual burden hours industry participants have indicated assume that approximately one-half of necessary for broker-dealers to complete that most broker-dealers currently hire a and file amended Forms BD would be third party consultant or attorney to 1077 This estimate is based on Form BDW data approximately 11.2 hours (34 amended assist in the membership process. collected over the past five years and may be Forms BD per year × 0.33 hours, i.e., 20 Assuming that 90% of intermediaries (9 skewed as a result of the impact of the financial crisis on broker-dealers. For the past five fiscal minutes, per amendment). Similarly, we brokers and 45 funding portals) would years (from 10/1 through 9/30), the number of estimate that the total annual burden employ an outside party, we estimate broker-dealers that withdrew from registration were hours for funding portals to complete total costs charged by the outside party as follows: 503 in 2008, 533 in 2009, 510 in 2010, and file amended Forms Funding Portal 524 in 2011 and 428 in 2012. (503 + 533 + 510 + to be $1,575,000 ($50,000/third party 524 + 428)/5 = 500. would be approximately 56.1 hours (50 assisting broker-dealers × 9 brokers + × 1078 As of September 30, 2012, there were 4,653 funding portals 3.4 amendments per $25,0000/third party assisting funding × broker-dealers registered with the Commission. An year 0.33 hours per amendment). portals × 45 funding portals).1083 As average of 500 broker-dealers per year withdraw from registration, or 11% of the number of ii. Cost indicated above, we assume that the registered broker-dealers (500 withdrawing broker- intermediary’s Chief Compliance Officer We estimate that the initial dealers/4,653 registered broker-dealers). We are or person in a similar position would registration cost for an intermediary to assuming that the same percentage of broker-dealers spend approximately 110 hours that withdraw from registration would apply to the register with a national securities assisting in broker-dealer registration population of registered broker-dealers participating association would be approximately in offerings in reliance on Section 4(a)(6). Of our and 55 hours assisting in funding portal $10,000. This estimate is based on estimate of 10 registered broker-dealers per year registration for a total approximate cost registering to participate in crowdfunding transactions in reliance on Section 4(a)(6), we 1080 We previously estimated that the average of $1,530,000 (110 hours/broker-dealer estimate that approximately one broker-dealer per time necessary to complete an amended Form BD respondent × 9 brokers + 55 hours/ year (10 registered broker-dealers × 11%) would would be approximately 20 minutes. We estimate funding portal respondent × 45 funding withdraw from registration. that an amendment to Form Funding Portal would 1079 We estimate that the percentage of registered take the same amount of time as an amendment to 1082 funding portals participating in crowdfunding Form BD because the forms are similar. See FINRA, Revised Fees: Changes to transactions in reliance on Section 4(a)(6) that 1081 We received 16,365, 17,247, 15,638, 15,491 Advertising, Corporate Financing, New Membership would withdraw from registration annually would and 13,271 amended Forms BD during the fiscal and Continuing Membership Application, Central be the same as the percentage of broker dealers that years ending 2008, 2009, 2010, 2011 and 2012, Registration Depository and Branch Office Annual withdraw from registration annually because of the respectively, reflecting an average of 15,602 Registration Fees, FINRA Regulatory Notice 12–32 similarity of the businesses. Of our estimate of 50 amendment filings per year (16,365 + 17,247 + (June 2012), available at http://www.finra.org/web/ registered funding portals participating in 15,638 + 15,491 + 13,271)/5 years). As of September groups/industry/@ip/@reg/@notice/documents/ crowdfunding transactions in reliance on Section 30, 2012, there were 4,653 broker-dealers registered notices/p127238.pdf. 4(a)(6), we estimate that approximately six funding with the Commission. Therefore, we estimate that 1083 Discussions with industry participants portals per year (50 registered funding portals × there are approximately 3.4 amendments (15,602 indicated that third parties charge between $25,000 11%) would withdraw from registration. For amended Forms BD/4,653 broker-dealers) per and $75,000, for an average of $50,000, to assist funding portals, a decision to withdraw registration registered broker-dealer per year. We estimate that applicants seeking to register as broker-dealers. We would be required to be reported to us in the same the 10 broker-dealers who register under this assume that charges for intermediaries registering as way an amendment would; however, for brokers, proposed regulation would submit, on aggregate, funding portals would be approximately one-half of withdrawal requires the fling of Form BDW. approximately 34 amendments per year. these costs, for an average of $25,000.
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portals) × $441/hour.1084 For the setting up systems functionality to year to use a third-party developer to remaining 10% of intermediaries comply with our proposed rules, and update an Internet-based crowdfunding (1 broker and 5 funding portals) that developing other platform capabilities portal and all of its basic functionality, would not employ an outside party to and operations. Based on our or $85,000 per year on average.1086 If we assist in the process, we estimate the discussions with potential assume that half of the 110 newly- total cost to be $340,000 ((220 hours/ intermediaries, we initially estimate that registered intermediaries updated their broker-dealer respondent × 1 broker + intermediaries would typically hire a systems accordingly, the total ongoing 110 hours/funding portal respondent × team of approximately 4 to 6 developers cost would be $4,675,000 per year (55 45 funding portals) × $441/hour). that would work on all aspects of intermediaries × $85,000 = $4,675,000). Intermediaries would face an ongoing platform development, including, but c. Measures to Reduce the Risk of Fraud cost to remain registered with a national not limited to, front-end programming, securities association. We expect these data management, systems analysis, i. Time Burden costs would vary based on the size and communication channels, document The proposed rules would require profitability of the intermediary. The delivery, and Internet security. To intermediaries to have a reasonable current FINRA annual assessment fee develop a platform, we estimate, based basis for believing that an issuer seeking for members that are brokers having on our discussions with potential to offer and sell securities in reliance on annual revenue of up to $1,000,000 is intermediaries, that intermediaries Section 4(a)(6) through the $1,200. In addition, FINRA members would spend an average of 1,500 hours intermediary’s platform complies with currently pay $150.00 for each principal for planning, programming and the requirements in Section 4A(b) and and each representative of the member implementation. the related requirements in Regulation entity, up to five principals and As discussed above, we anticipate Crowdfunding.1087 The proposed rules representatives, and also pay $175 for that 10 intermediaries would newly would require intermediaries to have a the first 250 branch offices registered by register as brokers, 50 intermediaries reasonable basis for believing that an the member. For purposes of the PRA, would be brokers that are already issuer has established means to keep we assume that brokers acting as registered and 50 intermediaries would accurate records of the holders of the intermediaries as well as funding register as funding portals. It is difficult securities it would offer and sell portals would have on average a total of to estimate the number of intermediaries through the intermediary’s platform. For five principals or representatives (or that would develop their platforms in- both requirements, an intermediary may their equivalent), would maintain fewer house, but if we assume that half of the reasonably rely on the representations of than 250 branch offices, and would have 110 newly-registered intermediaries the issuer. For the purposes of the PRA, annual revenues less than $1,000,000. were to do so, then the total initial time we expect that 100% of intermediaries Also for purpose of these estimates, we burden would be 82,500 hours (55 would rely on the representations of × assume that the fees the national intermediaries 1,500 hours = 82,500 issuers. This would impose an securities association would set for hours). estimated time burden in the first year funding portals would be the same as We estimate that annually updating of five hours per intermediary to those FINRA currently has set for the features and functionality of an establish standard representations it members that are brokers. We do intermediary’s platform would require would request from issuers, and 6 recognize, however, that the national approximately 20% of the hours minutes per intermediary per issuer to securities association fees for funding required to initially develop the obtain the issuer representation, which portals may be lower than those platform, for an average burden of 300 is consistent with estimates we have currently in place for brokers, hours per year. If we assume that half used for other regulated entities to proportionate to funding portals’ more of the 110 newly-registered obtain similar documentation, such as limited scope of activity compared to intermediaries updated their systems consents, from customers. Based on our brokers.1085 Thus, we estimate that on accordingly, the total ongoing time estimate that there would be average intermediaries would pay burden would be 16,500 hours per year approximately 2,300 offerings per year, × ongoing annual fees to a national (55 intermediaries 300 hours = 16,500 that each issuer would conduct one securities association of $2,130, after the hours). offering per year, and that there would × year they become members ((5 ii. Cost be 110 intermediaries, we calculate that $150.00) + $175 + $1,200 = $2,125). each intermediary would facilitate There would be a cost to developing Nonresident funding portals, would also approximately 20 offerings per year be subject to an annual cost of $130 to a platform. Based on our discussions (2,300 offerings/(10 newly registered maintain an agent for service of process with potential intermediaries, we broker-dealers + 50 previously in the United States initially estimate that it would cost an registered broker-dealers + 50 funding intermediary approximately $250,000 to portals) = 20.9). Therefore, we estimate b. Development of Intermediary $600,000 to build an Internet-based Platform that the total initial burden hours would crowdfunding portal and all of its basic be approximately 770 hours ((5 hours/ i. Time Burden functionality. Assuming that half of the intermediary × (10 newly-registered 110 newly-registered intermediaries The proposed rules are based on an broker-dealers + 50 previously- were to hire outside developers to build intermediary developing an electronic registered broker-dealers + 50 funding their platforms, the total initial cost platform to offer securities in reliance portals) + (6 minutes/issuer × 20 would be $13,750,000 to $33,000,000 on Section 4(a)(6) to the public. A issuers/intermediary × (10 newly- (55 intermediaries × $250,000 = broker or funding portal that creates its $13,750,000; 55 intermediaries × 1086 initial platform in-house would incur an Our estimate of the average initial external $600,000 = $33,000,000). For purposes initial time burden associated with cost per intermediary to develop a crowdfunding of the PRA, we are estimating the cost platform is the average of the cited range of at $23,375,000. $250,000 to $600,000, or (($250,000 + $600,000)/)/ 1084 The hourly rate estimate for a Chief )/2) = $425,000. One-fifth of the cost of $425,000 Compliance Officer is taken from SIFMA We estimate that it would typically is ($425,000//5) = $85,000. Management Data. cost an intermediary approximately one- 1087 See proposed Rule 301(a) of Regulation 1085 See note 994. fifth of the initial development cost per Crowdfunding.
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registered broker-dealers + 50 Section 4(a)(6) per year,1089 the total previously-registered broker-dealers + previously-registered broker-dealers + estimated initial cost for all 50 funding portals)). 50 funding portals)). intermediaries to fulfill the required We believe that the ongoing time We believe that the ongoing time background and securities enforcement burdens for this requirement would be burdens for this requirement would be regulatory history checks would range significantly less than the initial time approximately one hour per from approximately $1,840,000 to burden, and thus we are estimating 1090 intermediary per year to review and $4,600,000 per year, or approximately two hours per check that the standard representations approximately $16,700 to $41,800 per intermediary per year, to review and 1091 check the related processes. Therefore, it requests from issuers remain intermediary per year. For purposes we estimate that the ongoing total appropriate, and 6 minutes per of the PRA, we will average the cost to burden hours necessary for this intermediary per issuer to obtain the $29,250 per intermediary per year. functionality would be approximately representation. Therefore, we estimate We believe that, on an ongoing basis, 220 hours per year (2 hours/ that the ongoing total burden hours intermediaries would continue to use intermediary × (10 newly-registered necessary for intermediaries to rely on third-party services to conduct broker-dealers + 50 previously- the representations of the issuers would background and securities enforcement registered broker-dealers + 50 funding be approximately 330 hours per year ((1 regulatory history checks. We also portals)). hour/intermediary × (10 newly- believe that the total estimated ongoing registered broker-dealers + 50 cost for all intermediaries to fulfill the ii. Cost previously-registered broker-dealers + required background and securities To the extent an intermediary uses a 50 funding portals)) + (6 minutes/issuer enforcement regulatory history checks third party to establish account opening × × 20 issuers/intermediary (10 newly- would be the same as the estimated functionality, the initial costs relevant registered broker-dealers + 50 initial cost, ranging from approximately to this requirement would be previously-registered broker-dealers + $1,840,000 to $4,600,000 per year, or incorporated into the cost of hiring a 50 funding portals))). approximately $16,700 to $41,800 per third party to develop the platform, intermediary per year. For purposes of ii. Cost discussed below in Section IV.C.2.f. the PRA, we will average the cost to We do not believe that there are any The proposed rules would require $29,250 per intermediary per year. ongoing costs relevant to this intermediaries to conduct a background d. Account Opening: Accounts and requirement. and securities enforcement regulatory Electronic Delivery e. Account Opening: Educational history check on each issuer and each Materials officer, director or 20 Percent Beneficial i. Time Burden Owner to determine whether the issuer i. Time Burden The proposed rules would provide or such person is subject to a that no intermediary or associated The proposed rules would require disqualification. We anticipate that most person of an intermediary could accept intermediaries to provide educational intermediaries would employ third- 1093 an investment commitment in a materials to investors, to help ensure parties that perform background checks, transaction involving the offer or sale of that investors have a baseline and for the purposes of this PRA understanding of the risks and costs of securities made in reliance on Section discussion, we assume that 100% of investing in securities offered and sold 4(a)(6) until the investor has opened an intermediaries would use these third- in reliance on Section 4(a)(6). Given that account with the intermediary and party services rather than develop the the intermediary would determine what consented to electronic delivery of capability to conduct background and electronic format is effective in materials.1092 For the purposes of the securities enforcement regulatory communicating the requisite contents of PRA, we expect that the functionality history checks in-house. The cost to the educational material, the expected required to require an investor to open perform a background check is cost for intermediaries to develop the an account with an intermediary and estimated to be between $200 and $500, educational material is expected to vary obtain consents would result in an depending on the nature and extent of widely and are difficult to estimate. For initial time burden of approximately 10 the information provided.1088 We the purposes of the PRA, we are hours per intermediary in the first year. recognize that some issuers would assuming that half of the intermediaries Therefore, we estimate that the total require more than one background would develop their educational initial burden hours necessary for this check (e.g., for officers or directors of materials in-house, which would functionality would be approximately the issuer), and we estimate that include online presentations and 1,100 hours (10 hours/intermediary × intermediaries would perform four written documents, and that the other (10 newly-registered broker-dealers + 50 background checks per issuer, on half would employ third-parties to average. We base this number on that produce professional-quality online 1089 Because crowdfunding transactions in assumption that most crowdfunding reliance on Section 4(a)(6) are a new approach to video presentations. We estimate that, to issuers will be startups and small capital formation, it is difficult for us to accurately develop their non-video educational businesses with small management estimate an average number of offerings per year. materials in-house, each intermediary teams and few owners. Assuming that As stated above, we assume that there would be would incur an initial time burden of approximately 2,300 offerings made in reliance on there is an average of approximately Section 4(a)(6) per year. approximately 20 hours. Therefore, the 2,300 offerings made in reliance on 1090 2,300 securities-based offerings made in total initial burden would be reliance on Section 4(a)(6) per year × ($200 to $500 approximately 2,200 hours (110 1088 See, e.g., A Matter of Fact, Background Check per background and securities enforcement intermediaries × 20 hours/ × FAQ: Frequently Asked Questions, available at regulatory history check) 4 checks per offering = intermediary). http://www.amof.info/faq.htm (Matter of Fact is a $1,840,000 to $4,600,000 per year. Assuming that half of the background check provider accredited by the 1091 $1,840,000/110 intermediaries = approx. National Association of Professional Background $16,700 per intermediary; $4,600,000/110 intermediaries would develop their Screeners and the Background Screening intermediaries = approx. $41,800 per intermediary. Credentialing Council and states that the cost for a 1092 See proposed Rule 302(a) of Regulation 1093 See proposed Rule 302(b) of Regulation comprehensive background check is $200 to $500). Crowdfunding. Crowdfunding.
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educational materials in-house, we will average the cost to $10,000 per required to provide to potential expect that these intermediaries also intermediary per year. investors, in a manner that reasonably would update their educational permits a person accessing the platform f. Account Opening: Promoters materials in-house, as needed. We to save, download or otherwise store the estimate that to update their educational i. Time Burden information, until the offer and sale of 1096 materials in-house, each intermediary The proposed rules would require an securities is completed or cancelled. would incur an ongoing time burden of intermediary, at the account opening For purposes of the PRA, our estimate approximately 10 hours per year. stage, to disclose to investors that any of the hourly burdens related to the Therefore, the total ongoing burden person who receives compensation to public availability of the issuer information is included as part of our would be approximately 1,100 hours per promote an issuer’s offering, or who is × estimate of the hourly burdens year (110 intermediaries 10 hours/ a founder or employee of an issuer associated with overall platform intermediary). engaging in promotional activities on development, as discussed above in behalf of the issuer, must clearly ii. Cost Section IV.C.2.b. The platform disclose the receipt of compensation functionality would include not only As stated above, for the purposes of and his or her engagement in the ability to display, upload and this PRA discussion, we assume that promotional activities on the download issuer information as half of the intermediaries would employ platform.1095 For purposes of the PRA, required under the proposed rules, but third-party companies to produce we expect that this requirement would professional-quality video materials also the ability to provide users with result in an estimated time burden of required online disclosures, as instead of developing materials in- five hours per intermediary in the first house. Public sources indicate that the discussed below. year, to prepare this particular We recognize that, over time, typical cost to produce a professional disclosure and incorporate it into the corporate training video ranges from intermediaries may need to update their account opening process. Therefore, we systems that allow issuer information to approximately $1,000 to $3,000 per estimate that the total initial burden production minute.1094 Based on be uploaded to their platforms. We do hours necessary for intermediaries to not expect a significant ongoing burden discussions with industry participants, comply with this requirement would be we assume that, on average, each for providing issuer disclosures, approximately 550 hours (5 hours/ primarily because the functionality intermediary would produce a series of × intermediary (10 newly-registered required for required issuer disclosure short educational videos that would broker-dealers + 50 previously- cover all of the requirements of the information to be uploaded is a standard registered broker-dealers + 50 funding feature offered on many Web sites and proposed rules, and the video material portals)). would be 10 minutes long in total. would not require frequent or We believe that the ongoing time significant updates. Based on this assumption, we estimate burdens for this requirement would be that the average initial cost for an approximately one hour per ii. Cost intermediary to develop and produce intermediary per year to review and We do not expect a significant educational materials would range from check that the disclosures remain ongoing cost for providing issuer approximately $10,000 to $30,000. The appropriate. Therefore, we estimate that disclosures, primarily because the total initial cost across all 110 the ongoing total burden hours functionality required to upload intermediaries per year would be necessary for intermediaries to comply required issuer disclosure information is $1,100,000 to $3,300,000. For purposes with this requirement would be a standard feature offered on many Web of the PRA, we will average the cost to approximately 110 hours per year (1 sites and would not require frequent $20,000 per intermediary per year. We hour/intermediary × (10 newly- updates. Because we are including the note that the estimated initial cost may registered broker-dealers + 50 burdens that are associated with be significantly lower, because not all previously-registered broker-dealers + providing issuer disclosures as part of intermediaries that outsource the 50 funding portals)). our estimates for overall platform development of educational materials development, we discuss our cost ii. Cost may choose to produce educational estimates for ongoing platform videos, while others may produce To the extent an intermediary uses a development and updates there. videos of shorter length. third party to develop the functionality We estimate that, on an ongoing basis, for this requirement, the initial costs h. Other Disclosures to Investors and when using a third-party company to relevant to this requirement would be Potential Investors update their video educational incorporated into the cost of hiring a i. Time Burden materials, each intermediary would third party to develop the platform, spend approximately half of the initial Intermediaries would be required to discussed below in subsection IV.C.2.f. implement and maintain systems to average cost. We estimate, therefore, We do not believe that there are any that the average ongoing annual cost for comply with the information disclosure, ongoing costs relevant to this communication channels, and investor an issuer to update its video educational requirement. materials would range from notification requirements, including approximately $5,000 to $15,000 and g. Issuer Disclosures To Be Made providing disclosure about that the total ongoing annual cost across Available compensation at account opening, obtaining investor acknowledgements to all intermediaries would range from i. Time Burden approximately $550,000 to $1,650,000 confirm investor qualifications and per year. For purposes of the PRA, we The proposed rules would require an review of educational materials, intermediary to make publicly available providing investor questionnaires, on its platform the information that an providing communication channels 1094 See, e.g., Lee W. Frederiksen, What Is the Cost of Video Production for the Web?, Hinge issuer of crowdfunding securities is with third parties and among investors, Marketing, available at http:// www.hingemarketing.com/library/article/what-is- 1095 See proposed Rule 302(c) of Regulation 1096 See proposed Rule 303(a) of Regulation the-cost-of-video-production-for-the-web. Crowdfunding. Crowdfunding.
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notifying investors of investment registered funding portal would be j. Fidelity Bond commitments, confirming completed required to enter into a written i. Time Burden transactions and confirming or agreement with a qualified third party to reconfirming offering cancellations. hold its client funds, or to open a bank Funding portals would be required to Based on our discussions with industry account for the exclusive benefit of the comply with the requirements in participants, these functionalities would investors and issuer, and it also would proposed Rule 400(f) related to generally be part of the overall platform be required to send directions to the obtaining and maintaining fidelity bond development process and costs. We qualified third party depending on coverage. A registered funding portal discuss platform development costs whether an investing target is met or an would be required to enter into a above, which would include developing investment commitment or offering is written agreement with a fidelity bond the functionality that would allow cancelled. For purposes of the PRA, we provider to obtain the required coverage. Based on discussion with intermediaries to comply with are providing an estimate for the time disclosure and notification industry participants, we estimate that that a funding portal would need to requirements.1097 funding portals would incur an initial enter into on an initial basis, and review We do not expect a significant burden of approximately 15 hours each ongoing burden for providing and update on an ongoing basis, a to comply with these requirements, or disclosures, as required by the proposed written agreement with the qualified 750 hours total (15 hours per funding rules, because the functionality required third party. We expect that the burden portal × 50 funding portals = 750 hours). to provide information and associated with the Web site We expect that, on an ongoing basis, communication channels would likely functionality required to send directions a registered funding portal would have not require frequent updates. We to third parties would be included as to periodically review and update its incorporate the total burden to update part of the platform development fidelity bond coverage. We estimate that the required functionality for processing discussed above. Based on discussion funding portals would incur an ongoing issuer disclosure and investor with industry participants, we estimate burden of approximately 5 hours each to acknowledgment information in the that funding portals would incur an comply with these requirements, or 250 total burden estimates discussed above initial burden of approximately 20 hours total (5 hours per funding portal relating to platform development.1098 hours each to comply with these × 50 funding portals = 2,500 hours). requirements, or 1,000 hours total (20 ii. Cost hours per funding portal × 50 funding ii. Cost We recognize that some portals = 1,000 hours). We estimate the initial costs for the intermediaries may add the required We expect that, on an ongoing basis, fidelity bond to be $825. We estimate functionality for processing issuer a registered funding portal would have that on an ongoing basis, the costs disclosure and investor to periodically review and update its would be $825. acknowledgments by using a third-party written agreement with a bank or other developer. We also do not expect there k. Compliance: Policies and Procedures third party to hold its client funds. A to be a significant ongoing cost for registered funding portal also would be i. Time Burden developing the functionality to process required to send directions on an these disclosures and acknowledgments, Based on discussion with industry ongoing basis to a third party depending primarily because this functionality participants, we estimate that a funding on whether an investing target is met or would likely not require frequent portal would spend approximately 40 updates by third-party developers. The an investment commitment or offering hours to establish written policies and total cost to add the required is cancelled. Based on discussion with procedures to achieve compliance with functionality for processing issuer industry participants, we estimate that the JOBS Act and the rules and disclosure and investor funding portals would incur an ongoing regulations thereunder, as required acknowledgments, as well as to update annual burden of approximately 5 hours under the proposed rules. This would the required functionality for processing each to comply with these requirements, result in an aggregate initial issuer disclosure and investor or 250 hours total (5 hours per funding recordkeeping burden of 2,000 hours (40 × × acknowledgments, is incorporated into portal 50 funding portals = 2,500 hours 50 funding portals). the total cost estimates discussed above hours). We estimate that, on an ongoing basis, relating to platform development.1099 funding portals would spend ii. Cost approximately 5 hours per year i. Maintenance and Transmission of For purposes of the PRA, we are not updating, as necessary, the policies and Funds providing any cost estimate for this procedures required by the proposed i. Time Burden requirement, because we expect that the rules. This would result in an aggregate ongoing recordkeeping burden of 250 cost associated with developing the Intermediaries would be required to hours (5 hours × 50 funding portals). comply with the requirements related to functionality required to send the maintenance and transmission of instructions to third parties would be ii. Cost funds. A registered broker would be included as part of the platform 1101 As we anticipate that funding portals required to comply with the development discussed above. would comply with this requirement by requirements of Rule 15c2–4 of the using internal personnel and internal Exchange Act (Transmission or well as for any other rule to which brokers are information technology resources subject regardless of whether they engage in Maintenance of Payments Received in integrated into their platforms, we Connection with Underwritings).1100 A transactions pursuant to Section 4(a)(6), are not addressed here; rather, they are included in any estimate that there would be no costs OMB approvals for the relevant rule. Rule 15c2–4, related to this requirement. To the 1097 See Section IV.C.2.b.i above. however, does not include any information extent a funding portal employs a 1098 See Section IV.C.2.b.i above. collection requests for purposes of the PRA, and so 1099 See Section IV.C.2.b above. there is no relevant approval or control number consultant or attorney to establish 1100 17 CFR 240.15c2–4. For purposes of this PRA from OMB for this rule. written policies and procedures, these discussion, the burdens associated with this rule, as 1101 See Section IV.C.2.f above. costs would be incorporated into the
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cost of hiring a third party to assist in notices required by Regulation S–P (the prevent and mitigate identity theft in the membership process. model privacy form adopted by the connection with certain existing Commission and the other agencies in accounts or the opening of new l. Compliance: Anti-Money Laundering 2009, designed to serve as both a accounts. Based on our institutional While the proposed CIP and the SAR privacy notice and an opt-out notice, is knowledge, we estimate that the initial Requirements, and other BSA only two pages); and (3) the availability burden for funding portals to comply requirements, impose burdens on of the model privacy form and online with the applicable portions of relevant entities, the proposed rules do model privacy form builder. Given these proposed Regulation S–ID would be (1) not impose any burden on funding consideration and with the aid of our 25 hours to develop and obtain board portals in addition to that already institutional knowledge, we estimate approval of a program; (2) 4 hours to imposed on broker-dealers by those that each funding portal would spend, train staff; and (3) 2 hours to conduct an requirements. The burden on funding on an ongoing basis, an average of initial assessment of relevant accounts, portals, would be the same as broker- approximately 12 hours per year for a total of 31 hours. We estimate that dealers, and would be included within complying with the information all 50 funding portals would incur these those estimates provided by collection requirement of Regulation S– initial time burdens, resulting in an 1102 Treasury, so we do not discuss those P, for a total of approximately 600 aggregate time burden of 1,550 hours burdens here, and we would not be annual burden-hours (12 hours/ ((25 + 4 + 2 hours/respondent) × 50 requesting any separate approval from respondent × 50 funding portals). funding portals). OMB to impose the burdens associated Regulation S–AM would require With respect to the requirements of with the information collection funding portals to provide a notice to Regulation S–ID, we estimate that the requirements to comply with the CIP each affected individual informing the ongoing burden per year would include: and SAR Requirements. individual of his or her right to prohibit (1) 2 hours to periodically review and m. Compliance: Privacy such marketing before a receiving update the program, review and affiliate may make marketing preserve contracts with service i. Time Burden solicitations based on the providers and review and preserve any We estimate that the initial time communication of certain consumer documentation received from service burden of the requirement related to the financial information from the broker. providers; (2) 4 hours to prepare and proposed Privacy Rules, including Based on the discussion with industry present an annual report to a Regulation S–P, S–AM and S–ID, would participants, we estimate that compliance director; and (3) 2 hours to be negligible in light of the limited approximately 20 funding portals would conduct periodic assessments to activities of funding portals, so we have affiliations that would subject determine if the entity offers or discuss it below only in relation to them to the requirements of Regulation maintains covered accounts, for a total ongoing time burdens. S–AM under the proposed regulation, of 8 hours, of which we estimate 7 hours Regulation S–P would require a and that they would require an average would be spent by internal counsel and funding portal to provide notice to one-time burden of 1 hour to review 1 hour would be spent by a compliance investors about its privacy policies and affiliate marketing practices, for a total × director. We estimate that 50 funding practices; describes the conditions of 20 hours (1 hour/respondent 20 portals would incur these ongoing time under which a broker may disclose funding portals). We also estimate that burdens, making the total ongoing these 20 funding portals would be nonpublic personal information about burden 400 hours (8 hours/respondent × required to provide notice and opt-out investors to nonaffiliated third parties; 50 funding portals). and provides a method for investors to opportunities to consumers pursuant to prevent a funding portal from disclosing the requirements of Regulation S–AM ii. Cost that information to most nonaffiliated and that they would incur an average We estimate that, for PRA purposes, third parties by ‘‘opting out’’ of that first-year burden of 18 hours in doing there is no cost associated with the disclosure, subject to certain exceptions. so, for a total estimated first-year burden × requirements of Regulation S–P, For funding portals, we expect that the of 360 hours (18 hours/respondent 20 Regulation S–AM or Regulation S–ID. privacy and opt-out notices would be funding portals). We estimate that delivered electronically, which reduces funding portals would incur a n. Records To Be Made and Kept by the delivery burden compared to paper continuing ongoing burden related to Funding Portals delivery. the requirements of Regulation S–AM to i. Time Burden Based on the proposed requirements, provide notice and opt-out we estimate that all 50 funding portals opportunities of approximately 4 hours All funding portals would be required would be subject to the requirements of per respondent per year to create and to make and keep records related to Regulation S–P under the proposed deliver notices to new investors and their activities to facilitate transactions regulation. In developing an estimate we record any opt-outs that are received on in reliance on Section 4(a)(6) and the have considered: (1) The minimal an ongoing basis, for a total of related rules. These proposed books and recordkeeping burden imposed by approximately 80 annual burden-hours records requirements are based × Regulation S–P (Regulation S–P has no (4 hours/respondent 20 funding generally on Exchange Act Rules 17a–3 1103 recordkeeping requirement, and records portals). and 17a–4, which apply to broker- relating to customer communications Under our proposed rules, Regulation dealers. To estimate the initial burden already must be made and retained S–ID generally would require funding for funding portals, we examined the portals to develop and implement a current annual burdens of Rules 17a–3 pursuant to other Commission rules); (2) 1104 the summary fashion in which written identity theft prevention and 17a–4. information must be provided to program that is designed to detect, 1104 investors in the privacy and opt-out See Collections of Information for Exchange 1103 The average (blended) annual time burden Act Rules 17a–3 and 17a–4 (OMB Control Nos. per respondent for Regulation S–AM requirements 3235–0033 and 3235–0279), Office of Information 1102 See OMB File No. 1506–0034 for the CIP would be 10 hours ((18 hours in the first year/3 and Regulatory Affairs, Office of Management and requirement and OMB File No. 1506–0019 for the years) + 4 hours/year continuing burden = 10 hours Budget, available at http://www.reginfo.gov/public/ SAR requirement. per year). do/PRAMain.
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The most recently approved annual scope of the proposed books and records would be required to retain records and recordkeeping burden for broker-dealer rules, and the fact that funding portals information under proposed Regulation compliance with Rule 17a–3 is currently would make, deliver (as required) and Crowdfunding for the required retention estimated at 394.16 hours per store records electronically, we expect periods specified in proposed Rule respondent, and the most recently the annual recordkeeping cost of the 404.1109 approved annual recordkeeping burden proposed rule requirements may be less for broker-dealer compliance with Rule than that of Rules 17a–3 and 17a–4. For G. Request for Comment purposes of the PRA, we assume that 17a–4 is currently estimated at 254 The Commission invites comment on the annual recordkeeping cost on hours per respondent. all of the above estimates. In particular, average for a funding portal to comply Given the more limited scope of a the Commission requests comment on with the proposed requirements that funding portal’s business as compared the assumptions and estimates to that of a broker, the more limited records be made and kept would be described above with respect to how scope of the proposed books and records about 50% less than burdens of a issuers and intermediaries, especially rules, and the fact that funding portals broker-dealer to comply with Rules 17a– funding portals, would comply with the would make, deliver and store records 3 and 17a–4. We expect the initial proposed information collection electronically (as required), we expect recordkeeping cost for funding portals, requests. Pursuant to 44 U.S.C. the burden of the proposed rules may be therefore, to be approximately $5,350 3506(c)(2)(A), the Commission requests less than that of Rules 17a–3 and 17a– per respondent,1106 or $267,500 total comment in order to: (1) Evaluate 4. For the purposes of the PRA, we ($5,350 per respondent × 50 whether the proposed collections of assume that the recordkeeping burden, respondents = $267,500). information are necessary for the proper on average, for a funding portal to We also estimate that the ongoing comply with the proposed rules would recordkeeping cost for funding portals performance of our functions, including be 50% of the burdens of a broker-dealer would be approximately $5,350 per whether the information would have to comply with Rules 17a–3 and 17a–4 respondent, or $267,500 total ($5,350 practical utility; (2) evaluate the (although 50% may turn out to be a high per respondent × 50 respondents = accuracy of our estimate of the burden estimate). We expect the ongoing $267,500). of the proposed collections of recordkeeping burden for funding information; (3) determine whether D. Collections of Information Are there are ways to enhance the quality, portals would be the same as the initial Mandatory burden because maintaining such utility and clarity of the information to records would be consistent each year. The collections of information be collected; and (4) evaluate whether Therefore, we estimate the initial required under proposed Rules 201 there are ways to minimize the burden burden to be approximately 325 hours through 203 would be mandatory for all of the proposed collections of per respondent,1105 or 16,250 hours issuers. The collections of information information on those who respond, total (325 hours/respondent × 50 required under proposed Rules 300 including through the use of automated respondents = 16,250 hours). We through 304 would be mandatory for all collection techniques or other forms of estimate that the ongoing recordkeeping intermediaries. The collections of information technology. burden for funding portals would be information required under proposed Persons submitting comments on the approximately 325 hours per Rules 400 through 404 would be proposed collection of information respondent, or 16,250 hours total (325 mandatory for all funding portals. requirements should direct their hours/respondent × 50 funding portals). E. Confidentiality comments to the Office of Management ii. Cost Responses on Form C, Form C–A, and Budget, Attention: Desk Officer for Form C–U, Form C–AR and Form C–TR the Securities and Exchange For purposes of the PRA, we assume would not be confidential. Responses on Commission, Office of Information and that a funding portal’s initial Form ID would be kept confidential by Regulatory Affairs, Washington, DC recordkeeping cost associated with the Commission, subject to a request 20503, and should also send a copy of making and keeping records by a under the Freedom of Information their comments to Elizabeth M. Murphy, funding portal would not be Act.1107 Secretary, Securities and Exchange significantly different from the ongoing Responses on Form Funding Portal would not be confidential. Commission, 100 F Street NE., recordkeeping cost because maintaining Washington, DC 20549–1090, with such records would be consistent each F. Retention Period of Recordkeeping reference to File No. S7–09–13. year. The most recently approved Requirements Requests for materials submitted to annual recordkeeping cost for broker- Issuers are not subject to OMB by the Commission, with regard to dealer compliance with Rule 17a–3 is recordkeeping requirements under these collections of information, should currently estimated at $5,706.67 per proposed Regulation Crowdfunding. be in writing, with reference to File No. respondent. These ongoing Intermediaries that are brokers would be S7–09–13, and they should be recordkeeping costs reflect the costs of required to retain records and submitted to the Securities and systems and equipment development. information relating to proposed Exchange Commission, Office of FOIA The most recently approved annual Regulation Crowdfunding for the Services, 100 F Street NE., Washington, recordkeeping cost for broker-dealer required retention periods specified in DC 20549–2736. As OMB is required to compliance with Rule 17a–4 is currently Exchange Act Rule 17a–4.1108 make a decision concerning the estimated at $5,000 per respondent. Intermediaries that are funding portals collections of information between 30 Given the more limited scope of a and 60 days after publication, a funding portal’s business as compared 1106 $5,706.673 (recordkeeping cost for Rule 17a– comment to OMB is best assured of to that of a broker, the more limited 3) + $5,000 (recordkeeping cost for Rule 17a–4) = having its full effect if OMB receives it $10,706.673 multiplied by 50%. within 30 days of publication. 1105 394.16 hours (recordkeeping burden for Rule 1107 5 U.S.C. 552. The Commission’s regulations 17a–3) + 254 hours (recordkeeping burden for Rule that implement the Freedom of Information Act are 17a–4) = 648.16 hours. 648.16 hours/2 = 324.08 at 17 CFR 200.80 et seq. 1109 See proposed Rule 404 of Regulation hours. 1108 17 CFR 240.17a–4. Crowdfunding.
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V. Small Business Regulatory B. Objectives based on FOCUS Report 1114 data, there Enforcement Fairness Act are 871 broker-dealers that are classified As discussed above, the For purposes of the Small Business as ‘‘small’’ entities for purposes of the crowdfunding provisions of the JOBS 1115 Regulatory Enforcement Fairness Act of Regulatory Flexibility Act. We apply 1110 Act, which we would implement comparable criteria to funding portals 1996 (‘‘SBREFA’’), the Commission through this proposed regulation, were must advise the OMB as to whether the that would register under the proposed designed to help alleviate the funding regulation. Based on discussions with proposed rules constitute a ‘‘major’’ gap and accompanying regulatory rule. Under SBREFA, a rule is industry participants, we estimate that, concerns faced by small businesses by of the anticipated 50 funding portals we considered ‘‘major’’ when, if adopted, it making relatively low dollar offerings of results or is likely to result in: (1) An expect to register under the proposed securities less costly and by providing annual effect on the economy of $100 regulation, 30 would be classified as crowdfunding platforms a means by million or more (either in the form of an ‘‘small’’ entities for purposes of the which to facilitate the offer and sale of increase or a decrease); (2) a major Regulatory Flexibility Act. securities without registering as brokers, increase in costs or prices for consumers with a framework for regulatory D. Projected Reporting, Recordkeeping or individual industries; or (3) oversight to protect investors. and other Compliance Requirements significant adverse effect on As discussed above, the proposed C. Small Entities Subject to the competition, investment or innovation. regulation includes reporting, Proposed Rules If a rule is ‘‘major,’’ its effectiveness will recordkeeping and other compliance generally be delayed for 60 days For purposes of the Regulatory requirements. In particular, the pending Congressional review. proposed regulation would impose The Commission requests comment Flexibility Act, under our rules, an certain disclosure requirements on on the potential impact of the proposed issuer (other than an investment issuers offering and selling securities in rules on the economy on an annual company) is a ‘‘small business’’ or a transaction relying on the exemption basis, any potential increase in costs or ‘‘small organization’’ if it has total assets of $5 million or less as of the end of its provided by Section 4(a)(6). The prices for consumers or individual proposed rules would require that industries and any potential effect on most recent fiscal year and is engaged or proposing to engage in an offering of issuers relying on the exemption competition, investment or innovation. provided by Section 4(a)(6) file with the Commenters are requested to provide securities which does not exceed $5 million.1112 We believe that many Commission certain specified empirical data and other factual support information about the issuer and the for their view to the extent possible. issuers seeking to offer and sell securities in reliance on Section 4(a)(6) offering, including information about VI. Initial Regulatory Flexibility Act would be at a very early stage of their the issuer’s contact information; Analysis business development and would likely directors, officers and certain beneficial The Commission has prepared the have total assets of $5 million or less. owners; business and business plan; following Initial Regulatory Flexibility Also, to qualify for the exemption under current number of employees; financial Analysis (‘‘IRFA’’), in accordance with Section 4(a)(6), the amount raised by an condition; target offering amount and the provisions of the Regulatory issuer must not exceed $1 million in a the deadline to reach the target offering Flexibility Act,1111 regarding proposed 12-month period. Therefore, we amount; use of proceeds from the Regulation Crowdfunding. estimate that all issuers who offer or sell offering and price or method for securities in reliance on the exemption calculating the price of the securities A. Reasons for the Proposed Actions would be classified as a ‘‘small being offered; ownership and capital The proposed regulation is designed business’’ or ‘‘small organization.’’ structure; material factors that make an investment in the issuer speculative or to implement the requirements of Title Paragraph (a) of Rule 0–10 under the III. Title III added Securities Act Section risky; indebtedness; description of other Exchange Act provides that, for offerings of securities; and transactions 4(a)(6), which provides a new purposes of the Regulatory Flexibility exemption from the registration with related parties. Issuers also would Act, ‘‘[w]hen used with reference to a be required to file updates with the requirements of Securities Act Section 5 broker or dealer, the Commission has for crowdfunding transactions, provided Commission to describe the progress of defined the term ‘‘small entity’’ to mean the issuer in meeting the target offering the transactions are conducted in the a broker or dealer (‘‘small broker-dealer’’ manner set forth in new Securities Act amount. Any issuer that sold securities that: (1) Had total capital (net worth in reliance on Section 4(a)(6) also would Section 4A. Section 4A includes plus subordinated liabilities of less than requirements for issuers that offer or sell be required to file annually with the $500,000 on the date in the prior fiscal Commission an annual report to update securities in reliance on the year as of which its audited financial crowdfunding exemption, as well as for the previously provided disclosure statements were prepared pursuant to about the issuer’s contact information; persons acting as intermediaries in Rule 17a-5(d) or, if not required to file those transactions. The proposed rules directors, officers and certain beneficial such statements, a broker or dealer that owners; business and business plan; prescribe requirements governing the had total capital (net worth plus offer and sale of securities in reliance on current number of employees; financial subordinated debt) of less than $500,000 condition; ownership and capital Section 4(a)(6), and provide a on the last business day of the preceding framework for the regulation of structure; material factors that make an fiscal year (or in the time that it has investment in the issuer speculative or registered funding portals and brokers been in business if shorter); and (2) is that act as intermediaries in the offer not affiliated with any person (other 1114 FOCUS Reports, or ‘‘Financial and and sale of securities in reliance on than a natural person) that is not a small Section 4(a)(6). Operational Combined Uniform Single’’ Reports, business or small organization as are monthly, quarterly, and annual reports that defined in this release.’’ 1113 Currently, broker-dealers generally are required to file with the 1110 Pub. L. No. 104–121, Title II, 110 Stat. 857 Commission and/or self-regulatory organizations (1996) (codified in various Sections of 5 U.S.C., 15 pursuant to Exchange Act Rule 17a–5 (17 CFR U.S.C. and as a note to 5 U.S.C. 601). 1112 17 CFR 230.157. 240.17a–5). 1111 5 U.S.C. 603. 1113 17 CFR 240.0–10(c). 1115 See 17 CFR 240.0–10(a).
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risky; indebtedness; description of other for small entities; (3) the use of (whether brokers or funding portals) offerings of securities; and transactions performance rather than design could undermine the objectives of the with related parties. standards; and (4) an exemption from proposed requirements, and could lead Intermediaries would be required to coverage of the rule, or any part of the to less regulatory clarity. register with the Commission as either rule, for small entities. brokers or as funding portals pursuant G. Request for Comment to the proposed rules. Intermediaries 1. Issuers also would be required to provide The Commission considered whether The Commission encourages written quarterly reports to the Commission. it is necessary or appropriate to comments on matters discussed in this Funding portals would be required to establish different compliance or IRFA. In particular, the Commission make and keep certain records in reporting requirements or timetables or seeks comment on the number of small accordance with the proposed rules. In to clarify, consolidate or simplify entities that would be affected by the addition, the proposed rules would compliance and reporting requirements proposed rules and whether the effect impose specific compliance under the proposed rules for small on small entities would be economically requirements on intermediaries. issuers. With respect to using significant. Commenters are asked to In proposing this regulation, the performance rather than design describe the nature of any effect and to Commission took into account that the standards, the Commission used provide empirical data to support their regulation, as mandated in the JOBS performance standards to the extent views. Act, aimed to address difficulties appropriate under the statute. For encountered by issuers that are small example, issuers have the flexibility to VII. Statutory Authority and Text of entities. Accordingly, the Commission customize the presentation of certain Proposed Regulation designed the proposed rules for disclosures in their offering We are proposing the rules and forms intermediaries, to the extent possible, statements.1117 The Commission also for small entities. We believe that the considered whether there should be an contained in this document under the potential impact of the proposed exemption from coverage of the rule, or authority set forth in the Securities Act, regulation on larger brokers and funding any part of the rule, for small issuers. particularly, Sections 4(a)(6), 4A and 19 portals would be less than on small However, because the proposed rules thereof, 15 U.S.C. 77a et seq., the brokers and small intermediaries. We have been designed in the context of Exchange Act, particularly, Sections believe that the reporting, recordkeeping crowdfunding, which focuses on the 3(b), 3(h), 10(b), 15, 17, 23(a) and 36 and other compliance requirements of needs of issuers that are small entities, thereof, 15 U.S.C. 78a et seq., and Public the proposed regulation applicable to the Commission believes that small Law 112–106, § 301–305, 126 Stat. 306 intermediaries would impact, in issuers should be covered by the (2012). particular, small entities that decide to proposed rules. The Commission does List of Subjects register as funding portals. We believe not believe it would be necessary to that most of these requirements would establish different compliance 17 CFR Part 200 be performed by internal compliance requirements for small issuers. Having personnel of the broker or funding inconsistent requirements could Administrative practice and portal, but we estimate that at least one- undermine the objectives of the procedure, Authority delegations third of funding portals may decide to proposed rules. (Government agencies), Organization hire outside counsel and third-party 2. Intermediaries and functions (Government agencies), service providers to assist in meeting Reporting and recordkeeping the compliance requirements. For The Commission also considered requirements. example, a funding portal may decide to whether, for small brokers or small 17 CFR Part 227 hire a third party to maintain records funding portals, it is appropriate to required by the proposed rules. establish different compliance, reporting or timing requirements, or whether to Crowdfunding, Funding portals, E. Duplicative, Overlapping or clarify, consolidate or simplify those Intermediaries, Reporting and Conflicting Federal Rules requirements in our proposed rules. recordkeeping requirements, Securities. The Commission believes that there While the proposed rules are based in 17 CFR Parts 232 and 239 are no federal rules that duplicate, large part on existing compliance overlap or conflict with the proposed requirements applicable to registered Reporting and recordkeeping regulation or the proposed amendment brokers, the Commission believes that it requirements, Securities. to Rule 30–1 of our Rules of would not be necessary to establish 17 CFR Part 240 Organization and Program Management. different requirements for small entities (whether brokers or funding portals) F. Significant Alternatives Brokers, Confidential business that engage in crowdfunding. The information, Fraud, Reporting and Pursuant to Section 3(a) of the proposed rules have been tailored to the recordkeeping requirements, Securities. Regulatory Flexibility Act,1116 the limited role intermediaries would play Commission must consider certain types in offerings made pursuant to Section 17 CFR Part 249 of alternatives, including: (1) The 4(a)(6) (as compared to the wide range establishment of differing compliance or of services that a traditional broker- Brokers, Reporting and recordkeeping reporting requirements or timetables dealer may provide). Therefore, we requirements, Securities. that take into account the resources believe that the proposed rules are In accordance with the foregoing, we available to small entities; (2) the appropriate, and properly cover all propose to amend Title 17, Chapter II of clarification, consolidation or brokers and funding portals. The the Code of Federal Regulations as simplification of compliance and Commission believes that having follows: reporting requirements under the rule separate requirements for small entities
1116 5 U.S.C. 603(c). 1117 See Section II.B.3 above.
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PART 200—ORGANIZATION; 227.404 Records to be made and kept by § 227.303(b) to ensure that the aggregate CONDUCT AND ETHICS; AND funding portals. amount of securities purchased by an INFORMATION AND REQUESTS Subpart E—Miscellaneous Provisions investor in offerings pursuant to Section 4(a)(6) of the Securities Act will not Subpart A—Organization and Program 227.501 Restrictions on resales. 227.502 Insignificant deviations from a cause the investor to exceed the limit set Management term, condition or requirement of forth in Section 4(a)(6) of the Securities Regulation Crowdfunding. Act and § 227.100(a)(2), provided that ■ 1. The authority citation for part 200, 227.503 Disqualification. the issuer does not know that the subpart A, continues to read, in part as investor had exceeded the investor follows: Authority: 15 U.S.C. 77d, 77d–1, 77s, 78c, 78o, 78q, 78w, 78mm, and Pub. L. 112–106, limits or would exceed the investor Authority: 15 U.S.C. 77o, 77s, 77sss, 78d, § 301–305, 126 Stat. 306 (2012), unless limits as a result of purchasing 78d–1, 78d-2, 78w, 78ll(d), 78mm, 80a–37, otherwise noted. securities in the issuer’s offering. 80b–11, 7202, and 7211 et seq., unless (3) The transaction is conducted otherwise noted. Subpart A—General through an intermediary that complies * * * * * with the requirements in Section 4A(a) § 227.100 Crowdfunding exemption and ■ 2. Amend § 200.30–1 by: requirements. of the Securities Act (15 U.S.C. 77d– ■ a. Redesignating paragraphs (d), (e), 1(a)) and the related requirements in (a) Exemption. An issuer may offer (f), (g), (h), (i), (j) and (k) as paragraphs Regulation Crowdfunding (§§ 227.100 et and sell securities in reliance on Section (e), (f), (g), (h), (i), (j), (k) and (l), seq.), and the transaction is conducted 4(a)(6) of the Securities Act of 1933 (the respectively; and exclusively through the intermediary’s ‘‘Securities Act’’) (15 U.S.C. 77d(a)(6)), ■ platform; and b. Adding new paragraph (d). provided that: The addition reads as follows: Instruction 1 to paragraph (a)(3). An (1) The aggregate amount of securities issuer shall not conduct an offering or § 200.30–1 Delegation of authority to sold to all investors by the issuer in concurrent offerings in reliance on Director of Division of Corporation Finance. reliance on Section 4(a)(6) of the Section 4(a)(6) of the Securities Act of * * * * * Securities Act (15 U.S.C. 77d(a)(6)) 1933 (15 U.S.C. 77d(a)(6)) using more (d) With respect to the Securities Act during the 12-month period preceding than one intermediary. of 1933 (15 U.S.C. 77a et seq.) and the date of such offer or sale, including Instruction 2 to paragraph (a)(3). An Regulation Crowdfunding thereunder the securities offered in such intermediary through which a (§§ 227.100 through 227.503 of this transaction, shall not exceed $1,000,000; crowdfunding transaction is conducted chapter), to authorize the granting of (2) The aggregate amount of securities may engage in back office or other applications under § 227.503(b)(2) of sold to any investor by any issuer in administrative functions other than on this chapter upon the showing of good reliance on Section 4(a)(6) of the the intermediary’s platform. cause that it is not necessary under the Securities Act (15 U.S.C. 77d(a)(6)) (4) The issuer complies with the circumstances that the exemption under during the 12-month period preceding requirements in Section 4A(b) of the Regulation Crowdfunding be denied. the date of such transaction, including Securities Act (15 U.S.C. 77d–1(b)) and the securities sold to such investor in the related requirements in this part. * * * * * such transaction, shall not exceed the ■ 3. Part 227 is added to read as follows: (b) Applicability. The crowdfunding greater of: exemption shall not apply to PART 227—REGULATION (i) $2,000 or 5 percent of annual transactions involving the offer or sale CROWDFUNDING, GENERAL RULES income or net worth of the investor, of securities by any issuer that: AND REGULATIONS whichever is greater, if both the annual (1) Is not organized under, and subject income and net worth are less than to, the laws of a State or territory of the Sec. $100,000; and United States or the District of (ii) 10 percent of annual income or net Subpart A—General Columbia; worth of the investor, whichever is (2) Is subject to the requirement to file 227.100 Crowdfunding exemption and greater, not to exceed an amount sold of reports pursuant to Section 13 or requirements. $100,000, if either the annual income or Section 15(d) of the Securities Exchange Subpart B—Requirements for Issuers net worth of the investor is equal to or Act of 1934 (the ‘‘Exchange Act’’) (15 227.201 Disclosure requirements. more than $100,000; U.S.C. 78m or 78o(d)); 227.202 Ongoing reporting requirements. Instruction 1 to paragraph (a)(2). To (3) Is an investment company, as 227.203 Filing requirements and form. determine the investment limit for a defined in Section 3 of the Investment 227.204 Advertising. natural person, the person’s annual Company Act of 1940 (15 U.S.C. 80a–3), 227.205 Promoter compensation. income and net worth shall be or is excluded from the definition of Subpart C—Requirements for calculated as those values are calculated investment company by Section 3(b) or Intermediaries for purposes of determining accredited Section 3(c) of that Act (15 U.S.C. 80a– 227.300 Intermediaries. investor status in accordance with 17 3(b) or 80a–3(c)); 227.301 Measures to reduce risk of fraud. CFR 230.501. (4) Is not eligible to offer or sell 227.302 Account opening. Instruction 2 to paragraph (a)(2). The securities in reliance on Section 4(a)(6) 227.303 Requirements with respect to person’s annual income and net worth of the Securities Act (15 U.S.C. transactions. may be calculated jointly with the 77d(a)(6)) as a result of a 227.304 Completion of offerings, annual income and net worth of the disqualification as specified in cancellations and reconfirmations. person’s spouse. § 227.503(a); 227.305 Payments to third parties. Instruction 3 to paragraph (a)(2). An (5) Has sold securities in reliance on Subpart D—Funding Portal Regulation issuer offering and selling securities in Section 4(a)(6) of the Securities Act (15 227.400 Registration of funding portals. reliance on Section 4(a)(6) of the U.S.C. 77d(a)(6)) and has not filed with 227.401 Exemption. Securities Act (15 U.S.C. 77d(a)(6)) may the Commission and provided to 227.402 Conditional safe harbor. rely on the efforts an intermediary is investors, to the extent required, the 227.403 Compliance. required to undertake pursuant to ongoing annual reports required by this
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part during the two years immediately Instruction to paragraph (b). For (2) The intermediary will notify preceding the filing of the required purposes of this paragraph (b), the term investors when the target offering offering statement; or officer means a president, vice amount has been met; (6) Has no specific business plan or president, secretary, treasurer or (3) If an issuer reaches the target has indicated that its business plan is to principal financial officer, comptroller offering amount prior to the deadline engage in a merger or acquisition with or principal accounting officer, and any identified in its offering materials, it an unidentified company or companies. person routinely performing may close the offering early if it (c) Issuer. For purposes of this part, corresponding functions with respect to provides notice about the new offering issuer includes all entities controlled by any organization, whether incorporated deadline at least five business days prior or under common control with the or unincorporated. to such new offering deadline (absent a issuer. It also includes any predecessor (c) The name of each person, as of the material change that would require an of the issuer. most recent practicable date, who is a extension of the offering and Instruction to paragraph (c). An entity beneficial owner of 20 percent or more reconfirmation of the investment is controlled by or under common of the issuer’s outstanding voting equity commitment); and control with the issuer if the issuer securities, calculated on the basis of (4) If an investor does not cancel an possesses, directly or indirectly, the voting power; investment commitment before the 48- power to direct or cause the direction of (d) A description of the business of hour period prior to the offering the management and policies of the the issuer and the anticipated business deadline, the funds will be released to entity, whether through the ownership plan of the issuer; the issuer upon closing of the offering of voting securities, by contract or (e) The current number of employees and the investor will receive securities otherwise. of the issuer; in exchange for his or her investment; (d) Platform. For purposes of this part, (f) A discussion of the material factors (k) A statement that if an investor platform means an Internet Web site or that make an investment in the issuer does not reconfirm his or her other similar electronic medium speculative or risky; investment commitment after a material through which a registered broker or a (g) The target offering amount and the change is made to the offering, the registered funding portal acts as an deadline to reach the target offering investor’s investment commitment will intermediary in a transaction involving amount, including a statement that if be cancelled and the committed funds the offer or sale of securities in reliance the sum of the investment commitments will be returned; on Section 4(a)(6) of the Securities Act does not equal or exceed the target (l) The price to the public of the (15 U.S.C. 77d(a)(6)). offering amount at the offering deadline, securities or the method for determining no securities will be sold in the offering, the price, provided that, prior to any Subpart B—Requirements for Issuers investment commitments will be sale of securities, each investor shall be cancelled and committed funds will be provided in writing the final price and § 227.201 Disclosure requirements. returned; all required disclosures; An issuer offering or selling securities (h) Whether the issuer will accept (m) A description of the ownership in reliance on Section 4(a)(6) of the investments in excess of the target and capital structure of the issuer, Securities Act (15 U.S.C. 77d(a)(6)) and offering amount and, if so, the including: in accordance with Section 4A of the maximum amount that the issuer will (1) The terms of the securities being Securities Act (15 U.S.C. 77d-1) and this accept and whether oversubscriptions offered and each other class of security part must file with the Commission on will be allocated on a pro-rata, first of the issuer, including the number of the Electronic Data Gathering, Analysis, come-first served, or other basis; securities being offered and/or and Retrieval system (EDGAR), provide (i) A description of the purpose and outstanding, whether or not such to investors and the relevant intended use of the offering proceeds; securities have voting rights, any intermediary, and make available to Instruction to paragraph (i). An issuer limitations on such voting rights, how potential investors the following must identify any intended use of the terms of the securities being offered information: proceeds and provide a reasonably may be modified and a summary of the (a) The name, legal status (including detailed description of such intended differences between such securities and its form of organization, jurisdiction in use, such that investors are provided each other class of security of the issuer, which it is organized and date of with an adequate amount of information and how the rights of the securities organization), physical address and Web to understand how the offering proceeds being offered may be materially limited, site of the issuer; will be used. If an issuer has identified diluted or qualified by the rights of any (b) The names of the directors and a range of possible uses, the issuer other class of security of the issuer; officers (and any persons occupying a should identify and describe each (2) A description of how the exercise similar status or performing a similar probable use and the factors impacting of the rights held by the principal function) of the issuer, all positions and the selection of each particular use. If shareholders of the issuer could affect offices with the issuer held by such the issuer will accept proceeds in excess the purchasers of the securities being persons, the period of time in which of the target offering amount, the issuer offered; such persons served in the position or must describe the stated purpose and (3) The name and ownership level of office and their business experience intended use of the excess proceeds each person, as of the most recent during the past three years, including: with similar specificity. practicable date, who is the beneficial (1) Each person’s principal (j) A description of the process to owner of 20 percent or more of the occupation and employment, including complete the transaction or cancel an issuer’s outstanding voting equity whether any officer is employed by investment commitment, including a securities, calculated on the basis of another employer; and statement that: voting power; (2) The name and principal business (1) Investors may cancel an (4) How the securities being offered of any corporation or other organization investment commitment until 48 hours are being valued, and examples of in which such occupation and prior to the deadline identified in the methods for how such securities may be employment took place. issuer’s offering materials; valued by the issuer in the future,
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including during subsequent corporate (4) Any immediate family member of reviewed by a public accountant who is actions; any of the foregoing persons, which independent of the issuer, using the (5) The risks to purchasers of the means any child, stepchild, parent, Statements on Standards for Accounting securities relating to minority stepparent, spouse, sibling, mother-in- and Review Services issued by the ownership in the issuer and the risks law, father-in-law, son-in-law, daughter- Accounting and Review Services associated with corporate actions in-law, brother-in-law, or sister-in-law Committee of the American Institute of including additional issuances of of the person, and any persons (other Certified Public Accountants; and securities, issuer repurchases of than a tenant or employee) sharing the (3) More than $500,000, financial securities, a sale of the issuer or of household of the person; statements audited by a public assets of the issuer or transactions with Instruction to paragraph (r). For each accountant who is independent of the related parties; and transaction identified, disclose the name issuer, using auditing standards issued (6) A description of the restrictions on of the specified person and state his or by either the American Institute of transfer of the securities, as set forth in her relationship to the issuer, the nature Certified Public Accountants or the § 227.501; of his or her interest in the transaction Public Company Accounting Oversight (n) The name, Commission file and, where practicable, the approximate Board; number and Central Registration amount of the interest of such specified Instruction 1 to paragraph (t). To Depository (CRD) number (as person. The amount of such interest determine the financial statements that applicable) of the intermediary through shall be computed without regard to the would be required under paragraph (t), which the offering is being conducted; amount of the profit or loss involved in an issuer would aggregate amounts (o) The amount of compensation paid the transaction. Where it is not offered and sold in reliance on Section to the intermediary for conducting the practicable to state the approximate 4(a)(6) of the Securities Act (15 U.S.C. offering, including the amount of amount of the interest, the approximate 77d(a)(6)) within the preceding 12- referral and any other fees associated amount involved in the transaction shall month period and the offering amount with the offering; be disclosed. in the offering for which disclosure is (p) A description of the material terms (s) A description of the financial being provided. If the issuer will accept of any indebtedness of the issuer, condition of the issuer; proceeds in excess of the target offering including the amount, interest rate, Instruction to paragraph (s). In amount, the issuer must include in the maturity date and any other material providing a description of the issuer’s calculation to determine the financial terms; financial condition, provide a statements that would be required under (q) A description of exempt offerings discussion, to the extent material, of the paragraph (t) the maximum offering conducted within the past three years; issuer’s historical results of operations, amount that the issuer will accept. Instruction to paragraph (q). In liquidity and capital resources. For Instruction 2 to paragraph (t). The providing a description of any prior issuers with no prior operating history, financial statements required by exempt offerings, disclose: the description should include a paragraphs (t)(1), (t)(2) and (t)(3) of this (1) The date of the offering; discussion of financial milestones and section would include a balance sheet, (2) The offering exemption relied operational, liquidity and other income statement, statement of cash upon; challenges. For issuers with an flows and statement of changes in (3) The type of securities offered; and operating history, the discussion should owners’ equity and notes to the (4) The amount of securities sold and address whether historical earnings and financial statements prepared in the use of proceeds. cash flows are representative of what accordance with U.S. generally accepted (r) A description of any transaction investors should expect in the future. accounting principles (U.S. GAAP). The since the beginning of the issuer’s last Issuers should take into account the required financial statements must full fiscal year, or any currently proceeds of the offering and any other cover the shorter of the two most proposed transaction, to which the known or pending sources of capital. recently completed fiscal years or the issuer or any entities controlled by or Issuers should also discuss how the period since inception. under common control with the issuer proceeds from the offering will impact Instruction 3 to paragraph (t). An was or is to be a party and the amount the issuer’s liquidity and the necessity issuer shall redact personally involved exceeds five percent of the of receiving these funds and any other identifiable information from any tax aggregate amount of capital raised by additional funds to the viability of the returns required to be provided under the issuer in reliance on Section 4(a)(6) business. In addition, issuers should paragraph (t)(1) of this section. Issuers of the Securities Act (15 U.S.C. describe the other available sources of offering securities in a transaction in 77d(a)(6)) during the preceding 12- capital to the business, such as lines of reliance on Section 4(a)(6) of the month period, inclusive of the amount credit or required contributions by Securities Act (15 U.S.C. 77d(a)(6)) the issuer seeks to raise in the current shareholders. before filing a tax return with the U.S. offering under Section 4(a)(6) of the (t) For offerings that, together with all Internal Revenue Service for the most Securities Act, in which any of the other offerings of the issuer under recently completed fiscal year may use following persons had or is to have a Section 4(a)(6) of the Securities Act (15 the tax return filed with the U.S. direct or indirect material interest: U.S.C. 77d(a)(6)) within the preceding Internal Revenue Service for the prior (1) Any director or officer of the 12-month period, have, in the aggregate, year (if any), provided that the issuer issuer; target offering amounts of: uses the tax return for the most recent (2) Any person who is, as of the most (1) $100,000 or less, the income tax fiscal year when it is filed, if filed recent practicable date, the beneficial returns filed by the issuer for the most during the offering period. owner of 20 percent or more of the recently completed year (if any) and Instruction 4 to paragraph (t). With issuer’s outstanding voting equity financial statements of the issuer, which respect to the financial statements securities, calculated on the basis of shall be certified by the principal required by paragraph (t)(1) of this voting power; executive officer of the issuer to be true section, an issuer’s principal executive (3) If the issuer was incorporated or and complete in all material respects; officer must provide the following organized within the past three years, (2) More than $100,000, but not more certification in the Form C—Offering any promoter of the issuer; than $500,000, financial statements Statement (§ 239.900 of this chapter):
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I, [identify the certifying individual], continuing to rely on the exemption (1) Offering Statement. An issuer certify that the financial statements of provided by Section 4(a)(6) of the offering or selling securities in reliance [identify the issuer] included in this Securities Act (15 U.S.C. 77d(a)(6)) if on Section 4(a)(6) of the Securities Act Form are true and complete in all the issuer establishes that it did not (15 U.S.C. 77d(a)(6)) and in accordance material respects. [Signature and title]. know and, in the exercise of reasonable with Section 4A of the Securities Act Instruction 5 to paragraph (t). A copy care, could not have known of the (15 U.S.C. 77d–1) and this part must file of the public accountant’s review report existence of the undisclosed matter or with the Commission on EDGAR, must accompany the financial matters; and provide to investors and the relevant statements required by paragraph (t)(2) Instruction to paragraph (u). An intermediary, and make available to of this section. issuer will not be able to establish that potential investors a Form C: Offering Instruction 6 to paragraph (t). A copy it has exercised reasonable care unless Statement (Form C) (§ 239.900 of this of the audit report must accompany it has made factual inquiry into whether chapter) prior to the commencement of financial statements required by any disqualifications exist. The nature the offering of securities. The Form C paragraph (t)(3) of this section. An and scope of the factual inquiry will must include the information required issuer will be in compliance with the vary based on the facts and by § 227.201 of Regulation requirement to provide audited circumstances concerning, among other Crowdfunding. financial statements if the issuer things, the issuer and the other offering Instruction to paragraph (a)(1). An received an unqualified or a qualified participants. issuer shall input the following opinion, but it will not be in compliance (v) Updates regarding the progress of information in the XML-based portion with the requirement if it received an the issuer in meeting the target offering of Form C (§ 239.900 of this chapter): adverse opinion or a disclaimer of amount, to be provided in accordance name, legal status and contact opinion. with § 227.203. information of the issuer; name, Instruction 7 to paragraph (t). To Commission file number and CRD qualify as an independent public § 227.202 Ongoing reporting requirements. number (as applicable) of the accountant for purposes of paragraphs (a) An issuer that has offered and sold intermediary through which the offering (t)(2) and (t)(3) of this section, the securities in reliance on Section 4(a)(6) will be conducted; amount of accountant must satisfy the of the Securities Act (15 U.S.C. compensation paid to the intermediary, independence requirements in Rule 2– 77d(a)(6)) and in accordance with including the amount of referral and 01 of Regulation S–X (17 CFR 210.2–01). Section 4A of the Securities Act (15 other fees associated with the offering; Instruction 8 to paragraph (t). An type of security offered; number of issuer may conduct an offering in U.S.C. 77d–1) and this part must file with the Commission on EDGAR and securities offered; offering price; target reliance on Section 4(a)(6) of the offering amount and maximum offering Securities Act (15 U.S.C. 77d(a)(6)) post on the issuer’s Web site an annual report of its results of operations as amount (if different from the target using financial statements for the fiscal offering amount); whether year prior to the issuer’s most recently described in § 227.201(s) and financial statements of the issuer for the highest oversubscriptions will be accepted and, completed fiscal year, provided that the if so, how they will be allocated; aggregate target offering amount issuer was not otherwise already deadline to reach the target offering previously provided under § 227.201(t). required to update the financial amount; current number of employees; The report also must include the statements pursuant to § 227.202 and and selected financial data for the prior disclosure required by paragraphs (a), updated financial statements are not two fiscal years (including total assets, (b), (c), (d), (e), (f), (m), (p), (q), and (r) otherwise available. If more than 120 cash and cash equivalents, accounts of § 227.201. The report must be filed in days have passed since the end of the receivable, short-term debt, long-term accordance with the requirements of issuer’s most recently completed fiscal debt, revenues/sales, cost of goods sold, § 227.203 and Form C (§ 239.900 of this year, the issuer must use financial taxes paid and net income). statements for its most recently chapter) and no later than 120 days after (2) Amendments to Offering completed fiscal year. the end of the fiscal year covered by the Statement. An issuer must file with the Instruction 9 to paragraph (t). An report. Commission on EDGAR, provide to issuer must include a discussion of any (b) An issuer must continue to comply investors and the relevant intermediary, material changes in the financial with the ongoing reporting requirements and make available to potential condition of the issuer during any time until: investors an amendment to the offering period subsequent to the period for (1) The issuer becomes a reporting statement filed on Form C (§ 239.900 of which financial statements are company required to file reports under this chapter) to disclose any material provided, including changes in reported Section 13(a) or Section 15(d) of the changes, additions or updates to revenue or net income. Exchange Act (15 U.S.C. 78m(a) or information that it provides to investors Instruction 10 to paragraph (t). An 78o(d)); through the intermediary’s platform, issuer may voluntarily provide financial (2) The issuer or another party only if the offering has not yet been statements that meet the requirements repurchases all of the securities issued completed or terminated. The for a higher aggregate target offering in reliance on Section 4(a)(6) of the amendment must be filed on Form C: amount, even if the aggregate amounts Securities Act (15 U.S.C. 77d(a)(6)), Amendment (Form C–A) (§ 239.900 of sold in reliance on Section 4(a)(6) of the including any payment in full of debt this chapter), and if the amendment Securities Act (15 U.S.C. 77d(a)(6)) securities or any complete redemption reflects material changes, additions or within the preceding 12-month period of redeemable securities; or updates, the issuer shall check the box do not require it. (3) The issuer liquidates or dissolves indicating that investors must reconfirm (u) Any matters that would have its business in accordance with state an investment commitment within five triggered disqualification under law. business days or the investor’s § 227.503(a) had they occurred on or commitment will be considered after [effective date of final rule]. The § 227.203 Filing requirements and form. withdrawn. failure to furnish such disclosure timely (a) Form C—Offering Statement and Instruction to paragraph (a)(2). An shall not prevent an issuer from Amendments (§ 239.900 of this chapter). issuer may file an amendment on Form
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C–A (§ 239.900 of this chapter) to reflect (Form C–AR) (§ 239.900 of this chapter) platform, provided that an issuer changes, additions or updates that it with the Commission no later than 120 identifies itself as the issuer in all considers not material, and in such days after the end of the fiscal year communications. circumstance, an issuer should not covered by the report. The annual report Instruction to § 227.204. For purposes check the box indicating that investors shall include the information required of this section, terms of the offering must reconfirm the investment by § 227.202(a). means the amount of securities offered, commitment within five business days. Instruction to paragraph (b)(1). An the nature of the securities, the price of (3) Progress Updates. An issuer must issuer shall input the following the securities and the closing date of the file with the Commission on EDGAR, information in the XML-based portion offering period. provide to investors and the relevant of Form C–AR (§ 239.900 of this intermediary, and make available to chapter): Name, legal status and contact § 227.205 Promoter compensation. potential investors a Form C: Progress information of the issuer; current (a) An issuer shall be permitted to Update (Form C–U) (§ 239.900 of this number of employees; and selected compensate or commit to compensate, chapter) to disclose its progress in financial data for the prior two fiscal directly or indirectly, any person to meeting the target offering amount no years (including total assets, cash and promote its offerings in reliance on later than five business days after the cash equivalents, accounts receivable, Section 4(a)(6) of the Securities Act (15 issuer reaches one-half and 100 percent short-term debt, long-term debt, U.S.C. 77d(a)(6)) through of the target offering amount. If the revenues/sales, cost of goods sold, taxes communication channels provided by issuer will accept proceeds in excess of paid and net income). an intermediary on the intermediary’s the target offering amount, the issuer (2) An issuer eligible to terminate its platform, but only if the issuer takes must file with the Commission on obligation to file annual reports with the reasonable steps to ensure that such EDGAR, provide to investors and the Commission pursuant to § 227.202(b) person clearly discloses the receipt, past relevant intermediary, and make must file, within five business days or prospective, of such compensation available to potential investors, no later from the date on which the issuer with any such communication. A than five business days after the offering becomes eligible to terminate is founder or an employee of the issuer deadline, a final Form C–U to disclose reporting obligation, Form C: that engages in promotional activities on the total amount of securities sold in the Termination of Reporting (Form C–TR) behalf of the issuer through the offering. (§ 239.900 of this chapter) with the communication channels provided by Instruction 1 to paragraph (a)(3). An Commission to advise investors that the the intermediary must disclose, with issuer shall input the progress update in issuer will cease reporting pursuant to each posting, that he or she is engaging the XML-based portion of Form C–U this part. in those activities on behalf of the (§ 239.900 of this chapter). issuer. Instruction 2 to paragraph (a)(3). If § 227.204 Advertising. (b) Other than as set forth in multiple Forms C–U (§ 239.900 of this (a) An issuer may not advertise paragraph (a) of this section, an issuer chapter) are triggered within the same directly or indirectly the terms of an shall not compensate or commit to five business day period, the issuer may offering made in reliance on Section compensate, directly or indirectly, any consolidate such progress updates into 4(a)(6) of the Securities Act (15 U.S.C. person to promote its offerings in one Form C–U, so long as the Form C– 77d(a)(6)), except for notices that direct reliance on Section 4(a)(6) of the U discloses the most recent threshold investors to the intermediary’s platform. Securities Act (15 U.S.C. 77d(a)(6)), that was met and the Form C–U is filed (b) A notice regarding the terms of an unless such promotion is limited to with the Commission on EDGAR, issuer’s offering in reliance on Section notices permitted by, and in compliance provided to investors and the relevant 4(a)(6) of the Securities Act (15 U.S.C. with, § 227.204. intermediary, and made available to 77d(a)(6)) that directs investors to the potential investors by the day on which intermediary’s platform may include no Subpart C—Requirements for the first progress update is due. more than the following: Intermediaries Instruction 1 to paragraph (a). An (1) A statement that the issuer is issuer would satisfy the requirement to conducting an offering pursuant to § 227.300 Intermediaries. provide to the relevant intermediary the Section 4(a)(6) of the Securities Act (15 (a) Requirements. A person acting as information required by § 227.203(a) if U.S.C. 77d(a)(6)), the name of the an intermediary in a transaction the issuer provides to the relevant intermediary through which the offering involving the offer or sale of securities intermediary a copy of the disclosures is being conducted and a link directing in reliance on Section 4(a)(6) of the filed with the Commission on EDGAR. the potential investor to the Securities Act (15 U.S.C. 77d(a)(6)) Instruction 2 to paragraph (a). An intermediary’s platform; must: issuer would satisfy the requirement to (2) The terms of the offering; and (1) Be registered with the Commission provide to investors and to make (3) Factual information about the legal as a broker under Section 15(b) of the available to potential investors the identity and business location of the Exchange Act (15 U.S.C. 78o(b)) or as a information required by § 227.203(a) if issuer, limited to the name of the issuer funding portal in accordance with the the issuer refers investors to the of the security, the address, phone requirements of § 227.400; and information on the intermediary’s number and Web site of the issuer, the (2) Be a member of the Financial platform by means of a posting on the email address of a representative of the Industry Regulatory Authority or any issuer’s Web site or by email. issuer and a brief description of the other applicable national securities (b) Form C: Annual Report (§ 239.900 business of the issuer. association registered under Section of this chapter). (1) An issuer that sold (c) Notwithstanding the prohibition 15A of the Exchange Act (15 U.S.C. 78o- securities in reliance on Section 4(a)(6) on advertising the terms of the offering, 3). of the Securities Act (15 U.S.C. an issuer may communicate with (b) Prohibitions. An intermediary and 77d(a)(6)) and in accordance with investors and potential investors about any director, officer or partner, or any Section 4A of the Securities Act (15 the terms of the offering through person occupying a similar status or U.S.C. 77d–1) and this part must file an communication channels provided by performing a similar function may not annual report on Form C: Annual Report the intermediary on the intermediary’s have a financial interest in an issuer that
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is offering or selling securities in § 227.301 Measures to reduce risk of investor protection, the intermediary reliance on Section 4(a)(6) of the fraud. must promptly remove the offering from Securities Act (15 U.S.C. 77d(a)(6)) An intermediary in a transaction its platform, cancel the offering, and through the intermediary’s platform, or involving the offer or sale of securities return (or, for funding portals, direct the receive a financial interest in an issuer in reliance on Section 4(a)(6) of the return of) any funds that have been as compensation for the services Securities Act (15 U.S.C. 77d(a)(6)) committed by investors in the offering. provided to or for the benefit of the must: § 227.302 Account opening. issuer in connection with the offer or (a) Have a reasonable basis for sale of such securities. For purposes of believing that an issuer seeking to offer (a) Accounts and Electronic Delivery. this paragraph, a financial interest in an and sell securities in reliance on Section (1) No intermediary or associated person issuer means a direct or indirect 4(a)(6) of the Securities Act (15 U.S.C. of an intermediary may accept an ownership of, or economic interest in, 77d(a)(6)) through the intermediary’s investment commitment in a transaction any class of the issuer’s securities. platform complies with the involving the offer or sale of securities (c) Definitions. For purposes of this requirements in Section 4A(b) of the Act in reliance on Section 4(a)(6) of the part: (15 U.S.C. 77d-1(b)) and the related Securities Act (15 U.S.C. 77d(a)(6)) until (1) Associated person of a funding requirements in this part. In satisfying the investor has opened an account with portal or person associated with a this requirement, an intermediary may the intermediary and the intermediary funding portal means any partner, rely on the representations of the issuer has obtained from the investor consent officer, director or manager of a funding concerning compliance with these to electronic delivery of materials. portal (or any person occupying a requirements unless the intermediary (2) An intermediary must provide all similar status or performing similar has reason to question the reliability of information that is required to be functions), any person directly or those representations; provided by the intermediary under (b) Have a reasonable basis for indirectly controlling or controlled by Subpart C (§§ 227.300–305), including, believing that the issuer has established such funding portal, or any employee of but not limited to, educational means to keep accurate records of the a funding portal, except that any person materials, notices and confirmations, holders of the securities it would offer associated with a funding portal whose through electronic means. Unless and sell through the intermediary’s functions are solely clerical or otherwise indicated in the relevant rule platform. In satisfying this requirement, ministerial shall not be included in the of Subpart C, in satisfying this an intermediary may rely on the meaning of such term for purposes of requirement, an intermediary must representations of the issuer concerning Section 15(b) of the Exchange Act (15 provide the information through an compliance with this requirement electronic message that contains the U.S.C. 78o(b)) (other than paragraphs (4) unless the intermediary has reason to and (6) thereof). information, through an electronic question the reliability of those message that includes a specific link to (2) Funding portal means a broker representations. the information as posted on acting as an intermediary in a (c) Deny access to its platform to an intermediary’s platform, or through an transaction involving the offer or sale of issuer if the intermediary: electronic message that provides notice securities in reliance on Section 4(a)(6) (1) Has a reasonable basis for of what the information is and that it is of the Securities Act (15 U.S.C. believing that the issuer or any of its located on the intermediary’s platform 77d(a)(6)), that does not: officers, directors (or any person or on the issuer’s Web site. Electronic (i) Offer investment advice or occupying a similar status or performing messages include, but are not limited to, recommendations; a similar function) or beneficial owners email messages. (ii) Solicit purchases, sales or offers to of 20 percent or more of the issuer’s (b) Educational Materials. (1) In buy the securities displayed on its outstanding voting equity securities, connection with establishing an account platform; calculated on the basis of voting power, for an investor, an intermediary must (iii) Compensate employees, agents, or is subject to a disqualification under deliver educational materials to such other persons for such solicitation or § 227.503. In satisfying this requirement, investor that explain in plain language based on the sale of securities displayed an intermediary must, at a minimum, and are otherwise designed to or referenced on its platform; or conduct a background and securities communicate effectively and accurately: (iv) Hold, manage, possess, or enforcement regulatory history check on (i) The process for the offer, purchase otherwise handle investor funds or each issuer whose securities are to be and issuance of securities through the securities. offered by the intermediary and on each intermediary and the risks associated (3) Intermediary means a broker officer, director or beneficial owner of with purchasing securities offered and registered under Section 15(b) of the 20 percent or more of the issuer’s sold in reliance on Section 4(a)(6) of the Exchange Act (15 U.S.C. 78o(b)) or a outstanding voting equity securities, Securities Act (15 U.S.C. 77d(a)(6)); funding portal registered under calculated on the basis of voting power. (ii) The types of securities offered and § 227.400 and includes, where relevant, (2) Believes that the issuer or the sold in reliance on Section 4(a)(6) of the an associated person of the registered offering presents the potential for fraud Securities Act (15 U.S.C. 77d(a)(6)) broker or registered funding portal. or otherwise raises concerns regarding available for purchase on the (4) Investor refers to any investor or investor protection. In satisfying this intermediary’s platform and the risks any potential investor, as the context requirement, an intermediary must deny associated with each type of security, requires. access if it believes that it is unable to including the risk of having limited (5) Self-regulatory organization or adequately or effectively assess the risk voting power as a result of dilution; SRO has the meaning as defined in of fraud of the issuer or its potential (iii) The restrictions on the resale of Section 3(a)(26) of the Exchange Act (15 offering. In addition, if an intermediary a security offered and sold in reliance U.S.C. 78c(a)(26)), and includes the becomes aware of information after it on Section 4(a)(6) of the Securities Act Financial Industry Regulatory Authority has granted access that causes it to (15 U.S.C. 77d(a)(6)); (FINRA) and any other national believe that the issuer or the offering (iv) The types of information that an securities association registered with the presents the potential for fraud or issuer is required to provide under Commission. otherwise raises concerns regarding § 227.202, the frequency of the delivery
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of that information and the possibility provided by the issuer of the securities (C) Investing in securities offered and that those obligations may terminate in under §§ 227.201 and 203(a). sold in reliance on Section 4(a)(6) of the the future; (1) This information must be made Securities Act (15 U.S.C. 77d(a)(6)) (v) The limitations on the amounts an publicly available on the intermediary’s involves risk, and the investor should investor may invest pursuant to platform, in a manner that reasonably not invest any funds in an offering made § 227.100(a)(2); permits a person accessing the platform in reliance on Section 4(a)(6) of the (vi) The limitations on an investor’s to save, download, or otherwise store Securities Act unless he or she can right to cancel an investment the information; afford to lose the entire amount of his commitment and the circumstances in (2) This information must be made or her investment. which an investment commitment may publicly available on the intermediary’s (c) Communication Channels. An be cancelled by the issuer; platform for a minimum of 21 days intermediary must provide on its (vii) The need for the investor to before any securities are sold in the platform communication channels by consider whether investing in a security offering, during which time the which persons can communicate with offered and sold in reliance on Section intermediary may accept investment one another and with representatives of 4(a)(6) of the Securities Act (15 U.S.C. commitments; the issuer about offerings made 77d(a)(6)) is appropriate for that (3) This information, including any available on the intermediary’s investor; and additional information provided by the platform, provided: issuer, must remain publicly available (viii) That following completion of an (1) If the intermediary is a funding on the intermediary’s platform until the offering conducted through the portal, it does not participate in these offer and sale of securities in reliance on intermediary, there may or may not be communications other than to establish Section 4(a)(6) of the Securities Act (15 any ongoing relationship between the guidelines for communication and U.S.C. 77d(a)(6)) is completed or issuer and intermediary. remove abusive or potentially cancelled; and fraudulent communications; (2) An intermediary must make the (4) An intermediary may not require (2) The intermediary permits public most current version of its educational any person to establish an account with access to view the discussions made in material available on its platform at all the intermediary to access this the communication channels; times and, if at any time, the information. (3) The intermediary restricts posting intermediary makes a material revision (b) Investor Qualification. Each time of comments in the communication to its educational materials, it must before accepting any investment channels to those persons who have make the revised educational materials commitment (including any additional opened an account with the available to all investors before investment commitment from the same intermediary on its platform; and accepting any additional investment person), an intermediary must: (4) The intermediary requires that any commitments or effecting any further (1) Have a reasonable basis for person posting a comment in the transactions in securities offered and believing that the investor satisfies the communication channels clearly and sold in reliance on Section 4(a)(6) of the investment limitations established by prominently disclose with each posting Securities Act (15 U.S.C. 77d(a)(6)). Section 4(a)(6)(B) of the Act (15 U.S.C. whether he or she is a founder or an (c) Promoters. In connection with 77d(a)(6)(B)) and Regulation employee of an issuer engaging in establishing an account for an investor, Crowdfunding (§§ 227.100 et seq.). An promotional activities on behalf of the an intermediary must inform the intermediary may rely on an investor’s issuer, or is otherwise compensated, investor that any person who promotes representations concerning compliance whether in the past or prospectively, to an issuer’s offering for compensation, with the investment limitation promote the issuer’s offering. whether past or prospective, or who is requirements concerning the investor’s (d) Notice of Investment Commitment. a founder or an employee of an issuer annual income, net worth, and the An intermediary must promptly, upon that engages in promotional activities on amount of the investor’s other receipt of an investment commitment behalf of the issuer on the investments made pursuant to Section from an investor, give or send to the intermediary’s platform, must clearly 4(a)(6) of the Securities Act (15 U.S.C. investor a notification disclosing: disclose in all communications on the 77d(a)(6)) unless the intermediary has (1) The dollar amount of the intermediary’s platform, respectively, reason to question the reliability of the investment commitment; the receipt of the compensation and that representation. (2) The price of the securities, if he or she is engaging in promotional (2) Obtain from the investor: known; activities on behalf of the issuer. (i) A representation that the investor (3) The name of the issuer; and (d) Compensation Disclosure. When has reviewed the intermediary’s (4) The date and time by which the establishing an account for an investor, educational materials delivered investor may cancel the investment an intermediary must clearly disclose pursuant to § 227.302(b), understands commitment. the manner in which the intermediary is that the entire amount of his or her (e) Maintenance and Transmission of compensated in connection with investment may be lost, and is in a Funds. (1) An intermediary that is a offerings and sales of securities in financial condition to bear the loss of registered broker must comply with the reliance on Section 4(a)(6) of the the investment; and requirements of 17 CFR 240.15c2–4. Securities Act (15 U.S.C. 77d(a)(6)). (ii) A questionnaire completed by the (2) An intermediary that is a funding investor demonstrating the investor’s portal must direct investors to transmit § 227.303 Requirements with respect to understanding that: the money or other consideration transactions. (A) There are restrictions on the directly to a qualified third party that (a) Issuer Information. An investor’s ability to cancel an has agreed in writing to hold the funds intermediary in a transaction involving investment commitment and obtain a for the benefit of, and to promptly the offer or sale of securities in reliance return of his or her investment; transmit or return the funds to, the on Section 4(a)(6) of the Securities Act (B) It may be difficult for the investor persons entitled thereto in accordance (15 U.S.C. 77d(a)(6)) must make to resell securities acquired in reliance with paragraph (e)(3)of this section. For available to the Commission and to on Section 4(a)(6) of the Securities Act purposes of this Subpart C (§§ 227.300– investors any information required to be (15 U.S.C. 77d(a)(6)); and 305), a qualified third party means a
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bank that has agreed in writing either to (2) An intermediary satisfying the intermediary within five business days hold the funds in escrow for the persons requirements of paragraph (1) of this thereafter must: who have the beneficial interests therein section is exempt from the requirements (i) Give or send the investor a and to transmit or return such funds of 17 CFR 240.10b–10 with respect to a notification disclosing that the directly to the persons entitled thereto transaction in a security offered and commitment was cancelled, the reason when so directed by the funding portal sold in reliance on Section 4(a)(6) of the for the cancellation and the refund as described in paragraph (e)(3)of this Securities Act (15 U.S.C. 77d(a)(6)). amount that the investor is expected to section, or to maintain a bank account receive; and (or accounts) for the exclusive benefit of § 227.304 Completion of offerings, cancellations and reconfirmations. investors and the issuer. (ii) Direct the refund of investor (3) A funding portal that is an (a) Generally. An investor may cancel funds. intermediary in a transaction involving an investment commitment for any (2) If material changes to the offering the offer or sale of securities in reliance reason until 48 hours prior to the or to the information provided by the on Section 4(a)(6) of the Securities Act deadline identified in the issuer’s issuer regarding the offering occur (15 U.S.C. 77d(a)(6)) shall promptly offering materials. During the 48 hours within five business days of the direct the qualified third party to: prior to such deadline, an investment maximum number of days that an (i) Transmit funds from the qualified commitment may not be cancelled offering is to remain open, the offering third party to the issuer when the except as provided in paragraph (c) must be extended to allow for a period aggregate amount of investment below. of five business days for the investor to (b) Early Completion of Offering. If an commitments from all investors is equal reconfirm his or her investment. to or greater than the target amount of issuer reaches the target offering amount the offering and the cancellation period prior to the deadline identified in its (d) Return of Funds If Offering Is Not as set forth in § 227.304 has elapsed, offering materials pursuant to Completed. If an issuer does not provided that in no event may the § 227.201(g), the issuer may close the complete an offering, an intermediary funding portal direct this transmission offering on a date earlier than the must within five business days: of funds earlier than 21 days after the deadline identified in its offering (1) Give or send each investor a date on which the intermediary makes materials pursuant to § 227.201(g), notification of the cancellation, publicly available on its platform the provided that: disclosing the reason for the information required to be provided by (1) The offering remains open for a cancellation, and the refund amount the issuer under §§ 227.201 and 203(a); minimum of 21 days pursuant to that the investor is expected to receive; § 227.303(a); (ii) Return funds to an investor when (2) Direct the refund of investor funds; (2) The intermediary provides notice an investment commitment has been and cancelled in accordance with § 227.304 to any potential investors, and gives or (including for failure to obtain effective sends notice to investors that have made (3) Prevent investors from making reconfirmation as required under investment commitments in the investment commitments with respect § 227.304(c)); and offering, of: to that offering on its platform. (i) The new, anticipated deadline of (iii) Return funds to investors when § 227.305 Payments to third parties. an issuer does not complete the offering. the offering; (f) Confirmation of Transaction. (1) (ii) The right of investors to cancel (a) Prohibition on Payments for An intermediary must, at or before the investment commitments for any reason Personally Identifiable Information. An completion of a transaction in a security until 48 hours prior to the new offering intermediary may not compensate any in reliance on Section 4(a)(6) of the deadline; and person for providing the intermediary Securities Act (15 U.S.C. 77d(a)(6)), give (iii) Whether the issuer will continue with the personally identifiable or send to each investor a notification to accept investment commitments information of any investor or potential disclosing: during the 48-hour period prior to the investor in securities offered and sold in (i) The date of the transaction; new offering deadline. reliance on Section 4(a)(6) of the (ii) The type of security that the (3) The new offering deadline is Securities Act (15 U.S.C. 77d(a)(6)). scheduled for and occurs at least five investor is purchasing; (b) Certain permitted payments. (iii) The identity, price, and number business days after the notice required Subject to paragraph (a) of this section, of securities purchased by the investor, in paragraph b(2) of this section is an intermediary may compensate a as well as the number of securities sold provided; and person for directing issuers or potential by the issuer in the transaction and the (4) At the time of the new offering investors to the intermediary’s platform, price(s) at which the securities were deadline, the issuer continues to meet or provided that unless the compensation sold; exceed the target offering amount. is made to a registered broker or dealer, (iv) If a debt security, the interest rate (c) Cancellations and Reconfirmations the compensation is not based, directly and the yield to maturity calculated Based on Material Changes. (1) If there or indirectly, on the purchase or sale of from the price paid and the maturity is a material change to the terms of an a security offered in reliance on Section date; offering or to the information provided (v) If a callable security, the first date by the issuer, the intermediary must 4(a)(6) of the Securities Act (15 U.S.C. that the security can be called by the give or send to any investor who has 77d(a)(6)) on or through the issuer; and made an investment commitment notice intermediary’s platform. (vi) The source and amount of any of the material change and that the (c) For purposes of this rule, remuneration received or to be received investor’s investment commitment will personally identifiable information by the intermediary in connection with be cancelled unless the investor means information that can be used to the transaction, including the amount reconfirms his or her investment distinguish or trace an individual’s and form of any remuneration that is commitment within five business days identity, either alone or when combined received, or will be received, by the of receipt of the notice. If the investor with other personal or identifying intermediary from persons other than fails to reconfirm his or her investment information that is linked or linkable to the issuer. within those five business days, the a specific individual.
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Subpart D—Funding Portal Regulation receipt by the Commission, after the and power of attorney appointing an funding portal is no longer operational, agent in the United States, other than § 227.400 Registration of funding portals. or within such longer period of time as the Commission or a Commission (a) Registration. A funding portal to which the funding portal consents or member, official or employee, upon must register with the Commission, by which the Commission by order may whom may be served any process, filing a complete Form Funding Portal determine as necessary or appropriate in pleadings or other papers in any action. (§ 249.1500 of this chapter) in the public interest or for the protection This consent and power of attorney accordance with the instructions on the of investors. must be signed by the nonresident form, and become a member of the (e) Applications and Reports. The funding portal and the named agent(s) Financial Industry Regulatory Authority applications and reports provided for in for service of process. or any other applicable national this section shall be considered filed (ii) Each nonresident funding portal securities association registered under when a complete Form Funding Portal registered or applying for registration Section 15A of the Exchange Act (15 (§ 249.1500 of this chapter) is submitted pursuant to this section shall, at the U.S.C. 78o¥3). The registration will be with the Commission or its designee. time of filing its application on Form effective the later of: Duplicate originals of the applications Funding Portal (§ 249.1500 of this (1) 30 calendar days after the date that and reports provided for in this section chapter), furnish to the Commission the the registration is received by the must be filed with surveillance name and address of its United States Commission; or personnel designated by any registered agent for service of process on Schedule (2) The date the funding portal is national securities association of which C to the Form. approved for membership by the the funding portal is a member. (iii) Any change of a nonresident Financial Industry Regulatory Authority (f) Fidelity Bond. As a condition to funding portal’s agent for service of or any other applicable national becoming registered as a funding portal, process and any change of name or securities association registered under the funding portal must have in place address of a nonresident funding Section 15A of the Exchange Act (15 and thereafter maintain, for the duration portal’s existing agent for service of U.S.C. 78o¥3). of the period when it maintains such process shall be communicated (b) Amendments to Registration. A registration, fidelity bond coverage that: promptly to the Commission through funding portal must file an amendment (1) Has a minimum coverage of amendment of the Schedule C to Form to Form Funding Portal (§ 249.1500 of $100,000; Funding Portal (§ 249.1500 of this this chapter) within 30 days of any of (2) Covers any associated person of chapter). the information previously submitted on the funding portal unless otherwise (iv) Each nonresident funding portal Form Funding Portal becoming excepted in the rules set forth by the must promptly appoint a successor inaccurate for any reason. Financial Industry Regulatory Authority agent for service of process if the (c) Successor Registration. (1) If a or any applicable national securities nonresident funding portal discharges funding portal succeeds to and association that is registered under its identified agent for service of process continues the business of a registered Section 15A of the Exchange Act (15 or if its agent for service of process is funding portal, the registration of the U.S.C. 78o–3) of which it is a member; unwilling or unable to accept service on predecessor will remain effective as the and behalf of the nonresident funding portal. registration of the successor if the (3) Meets any other applicable (v) Each nonresident funding portal successor, within 30 days after such requirements as set forth by the must maintain, as part of its books and succession, files a registration on Form Financial Industry Regulatory Authority records, the written consent and power Funding Portal (§ 249.1500 of this or any applicable national securities of attorney identified in paragraph chapter) and the predecessor files a association that is registered under (g)(2)(i) of this section for at least three withdrawal on Form Funding Portal; Section 15A of the Exchange Act (15 years after the agreement is terminated. provided, however, that the registration U.S.C. 78o–3) of which it is a member. (3) Access to Books and Records. of the predecessor funding portal will be (g) Nonresident Funding Portals. (i) Certification and Opinion of deemed withdrawn 45 days after Registration pursuant to this section by Counsel. Any nonresident funding registration on Form Funding Portal is a nonresident funding portal shall be portal applying for registration pursuant filed by the successor. conditioned upon there being an to this section shall certify on Schedule (2) Notwithstanding paragraph (c)(1) information sharing arrangement in C to Form Funding Portal (§ 249.1500 of of this section, if a funding portal place between the Commission and the this chapter) and provide an opinion of succeeds to and continues the business competent regulator in the jurisdiction counsel that the nonresident funding of a registered funding portal and the under the laws of which the nonresident portal can, as a matter of law, provide succession is based solely on a change funding portal is organized or where it the Commission and any national of the predecessor’s date or state of has its principal place of business, that securities association of which it is a incorporation, form of organization, or is applicable to the nonresident funding member with prompt access to the composition of a partnership, the portal. books and records of such nonresident successor may, within 30 days after the (1) Definition. For purposes of this funding portal and can, as a matter of succession, amend the registration of section, the term nonresident funding law, submit to onsite inspection and the predecessor on Form Funding Portal portal shall mean a funding portal examination by the Commission and (§ 249.1500 of this chapter) to reflect incorporated in or organized under the any national securities association of these changes. laws of a jurisdiction outside of the which it is a member. (d) Withdrawal. A funding portal United States or its territories, or having (ii) Amendments. The nonresident must promptly file a withdrawal of its principal place of business in any funding portal shall re-certify, on registration on Form Funding Portal place not in the United States or its Schedule C to Form Funding Portal (§ 249.1500 of this chapter) in territories. (§ 249.1500 of this chapter), within 90 accordance with the instructions on the (2) Power of Attorney. (i) Each days after any changes in the legal or form upon ceasing to operate as a nonresident funding portal registered or regulatory framework that would impact funding portal. Withdrawal will be applying for registration pursuant to this the nonresident funding portal’s ability effective on the later of 30 days after section shall obtain a written consent to provide, or the manner in which it
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provides, the Commission, or any paragraph (b) of this section. The through the funding portal’s platform national securities association of which antifraud provisions and all other according to objective criteria where; it is a member, with prompt access to applicable provisions of the federal (i) The objective criteria may include, its books and records or that would securities laws continue to apply to the among other things, the type of impact the Commission’s or such activities described in paragraph (b) of securities being offered (for example, national securities association’s ability this section. common stock, preferred stock or debt to inspect and examine the nonresident (b) Permitted Activities. A funding securities); the geographic location of funding portal. The re-certification shall portal may, consistent with the the issuer; the industry or business be accompanied by a revised opinion of prohibitions under Section 3(a)(80) of segment of the issuer; the number or counsel describing how, as a matter of the Exchange Act (15 U.S.C. 78c(a)(80)) amount of investment commitments law, the nonresident funding portal can and this part: made, progress in meeting the issuer’s continue to meet its obligations to (1) Apply objective criteria to limit target offering amount or, if applicable, provide the Commission and such the securities offered in reliance on the maximum offering amount; and the national securities association with Section 4(a)(6) of the Securities Act (15 minimum or maximum investment prompt access to its books and records U.S.C. 77d(a)(6)) through the funding amount; and and to be subject to Commission and portal’s platform where: (ii) The objective criteria may not national securities association (i) The criteria are reasonably include, among other things, the inspection and examination under the designed to result in a broad selection advisability of investing in the issuer or new regulatory regime. of issuers offering securities through the its offering, or an assessment of any § 227.401 Exemption. funding portal’s platform, are applied characteristic of the issuer, its business consistently to all potential issuers and plan, its key management or risks (a) A funding portal that is registered offerings and are clearly displayed on associated with an investment. with the Commission pursuant to the funding portal’s platform; and (4) Provide communication channels § 227.400 is exempt from the broker (ii) The criteria may include, among by which investors can communicate registration requirements of Section other things, the type of securities being with one another and with 15(a)(1) of the Exchange Act (15 U.S.C. offered (for example, common stock, representatives of the issuer through the 78o(a)(1)) in connection with its preferred stock or debt securities), the funding portal’s platform about offerings activities as a funding portal. (b) Notwithstanding paragraph (a) of geographic location of the issuer and the through the platform, so long as the this section, for purposes of 31 CFR industry or business segment of the funding portal (and its associated chapter X, a funding portal is ‘‘required issuer, provided that a funding portal persons): to be registered’’ as a broker or dealer may not deny access to an issuer based (i) Does not participate in these with the Commission under the on the advisability of investing in the communications, other than to establish Exchange Act. issuer or its offering, except to the guidelines for communication and extent described in paragraph (b)(10) of remove abusive or potentially § 227.402 Conditional safe harbor. this section; fraudulent communications; (a) General. Under Section 3(a)(80) of (2) Apply objective criteria to (ii) Permits public access to view the the Exchange Act (15 U.S.C. 78c(a)(80)), highlight offerings on the funding discussions made in the communication a funding portal acting as an portal’s platform where: channels; intermediary in a transaction involving (i) The criteria are reasonably (iii) Restricts posting of comments in the offer or sale of securities in reliance designed to highlight a broad selection the communication channels to those on Section 4(a)(6) of the Securities Act of issuers offering securities through the persons who have opened an account on (15 U.S.C. 77d(a)(6)) may not: Offer funding portal’s platform, are applied its platform; and investment advice or recommendations; consistently to all issuers and offerings (iv) Requires that any person posting solicit purchases, sales, or offers to buy and are clearly displayed on the funding a comment in the communication the securities offered or displayed on its portal’s platform; channels clearly disclose with each platform or portal; compensate (ii) The criteria may include, among posting whether he or she is a founder employees, agents, or other persons for other things, the type of securities being or an employee of an issuer engaging in such solicitation or based on the sale of offered (for example, common stock, promotional activities on behalf of the securities displayed or referenced on its preferred stock or debt securities); the issuer, or is otherwise compensated, platform or portal; hold, manage, geographic location of the issuer; the whether in the past or prospectively, to possess, or otherwise handle investor industry or business segment of the promote an issuer’s offering; funds or securities; or engage in such issuer; the number or amount of (5) Advise an issuer about the other activities as the Commission, by investment commitments made, structure or content of the issuer’s rule, determines appropriate. This progress in meeting the issuer’s target offering, including assisting the issuer section is intended to provide clarity offering amount or, if applicable, the in preparing offering documentation; with respect to the ability of a funding maximum offering amount; and the (6) Compensate a third party for portal to engage in certain activities, minimum or maximum investment referring a person to the funding portal, consistent with the prohibitions under amount; provided that a funding portal so long as the third party does not Section 3(a)(80) of the Exchange Act. No may not highlight an issuer or offering provide the funding portal with presumption shall arise that a funding based on the advisability of investing in personally identifiable information of portal has violated the prohibitions the issuer or its offering; and any potential investor, and the under Section 3(a)(80) of the Exchange (iii) The funding portal does not compensation, other than that paid to a Act or this part by reason of the funding receive special or additional registered broker or dealer, is not based, portal or its associated persons engaging compensations for highlighting one or directly or indirectly, on the purchase or in activities in connection with the offer more issuers or offerings on its platform; sale of a security in reliance on Section or sale of securities in reliance on (3) Provide search functions or other 4(a)(6) of the Securities Act (15 U.S.C. Section 4(a)(6) of the Securities Act that tools that investors can use to search, 77d(a)(6)) offered on or through the do not meet the conditions specified in sort, or categorize the offerings available funding portal’s platform;
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(7) Pay or offer to pay any potential for fraud or otherwise raises requirements of Subparts C (§§ 227.300– compensation to a registered broker or investor protection concerns; 305) and D (§§ 227.400–404); dealer for services in connection with (11) Accept, on behalf of an issuer, an (6) All notices provided by such the offer or sale of securities by the investment commitment for securities funding portal to issuers and investors funding portal in reliance on Section offered in reliance on Section 4(a)(6) of generally through the funding portal’s 4(a)(6) of the Act(15 U.S.C. 77d(a)(6)), the Securities Act (15 U.S.C. 77d(a)(6)) platform or otherwise, including, but provided that: by that issuer on the funding portal’s not limited to, notices addressing hours (i) Such services are provided platform; of funding portal operations (if any), pursuant to a written agreement (12) Direct investors where to transmit funding portal malfunctions, changes to between the funding portal and the funds or remit payment in connection funding portal procedures, maintenance registered broker or dealer; with the purchase of securities offered of hardware and software, instructions (ii) Such compensation is permitted and sold in reliance on Section 4(a)(6) pertaining to access to the funding under this part and is not otherwise of the Securities Act (15 U.S.C. portal and denials of, or limitations on, prohibited under § 227.305; and 77d(a)(6)); and access to the funding portal; (iii) Such compensation complies (13) Direct a qualified third party, as (7) All written agreements (or copies with and is not prohibited by the rules required by § 227.303(e), to release thereof) entered into by such funding of any registered national securities proceeds to an issuer upon completion portal relating to its business as such; association of which the funding portal of a crowdfunding offering or to return (8) All daily, monthly and quarterly is required to be a member; proceeds to investors in the event an summaries of transactions effected (8) Receive any compensation from a investment commitment or an offering through the funding portal, including: registered broker or dealer for services is cancelled. (i) Issuers for which the target offering provided by the funding portal in § 227.403 Compliance. amount has been reached and funds connection with the offer or sale of distributed; and securities by the funding portal in (a) Policies and Procedures. A funding (ii) Transaction volume, expressed in: reliance on Section 4(a)(6) of the Act (15 portal must implement written policies (A) Number of transactions; U.S.C. 77d(a)(6)), provided that: and procedures reasonably designed to (B) Number of securities involved in (i) Such services are provided achieve compliance with the federal a transaction; pursuant to a written agreement securities laws and the rules and (C) Total amounts raised by, and between the funding portal and the regulations thereunder relating to its distributed to, issuers; and registered broker or dealer; business as a funding portal. (D) Total dollar amounts raised across (ii) Such compensation is permitted (b) Anti-Money Laundering. A funding all issuers, expressed in U.S. dollars; under this part; and portal must comply with the and (iii) Such compensation complies requirements of 31 CFR chapter X (9) A log reflecting the progress of with and is not prohibited by the rules applicable to registered brokers. each issuer who offers or sells securities of any registered national securities (c) Privacy. A funding portal must through the funding portal toward association of which the funding portal comply with the requirements of 17 CFR meeting the target offering amount. is required to be a member; 248 as they apply to brokers. (b) Organizational Documents. A (9) Advertise the existence of the (d) Inspections and Examinations. A funding portal shall make and preserve funding portal and identify one or more funding portal shall permit the during the operation of the funding issuers or offerings available on the examination and inspection of all of its portal and of any successor funding portal on the basis of objective criteria, business and business operations that portal, all organizational documents as long as: relate to its activities as a funding relating to the funding portal, including (i) The criteria are reasonably portal, such as its premises, systems, but not limited to, partnership designed to identify a broad selection of platforms, and records by agreements, articles of incorporation or issuers offering securities through the representatives of the Commission and charter, minute books and stock funding portal’s platform, and are of the national securities association of certificate books (or other similar type applied consistently to all potential which it is a member. documents). issuers and offerings; § 227.404 Records to be made and kept by (c) Format. The records required to be (ii) The criteria may include, among funding portals. maintained and preserved pursuant to other things, the type of securities being (a) Generally. A funding portal shall paragraph (a) of this section must be offered (for example, common stock, make and preserve the following records produced, reproduced, and maintained preferred stock or debt securities); the for five years, the first two years in an in the original, non-alterable format in geographic location of the issuer; the easily accessible place: which they were created or as permitted industry or business segment of the (1) All records related to an investor under 17 CFR 240.17a–4(f). issuer; the expressed interest by who purchases or attempts to purchase (d) Third Parties. The records investors, as measured by number or securities through the funding portal; required to be made and preserved amount of investment commitments (2) All records related to issuers who pursuant to this section may be made, progress in meeting the issuer’s offer and sell or attempt to offer and sell prepared or maintained by a third party target offering amount or, if applicable, securities through the funding portal on behalf of a funding portal. An the maximum offering amount; and the and the control persons of such issuers; agreement with a third party shall not minimum or maximum investment (3) Records of all communications relieve a funding portal from the amount; and that occur on or through its platform; responsibility to prepare and maintain (iii) The funding portal does not (4) All records related to persons that records as specified in this rule. A receive special or additional use communication channels provided funding portal must file with the compensation for identifying the issuer by a funding portal to promote an registered national securities association or offering in this manner; issuer’s securities or communicate with of which it is a member, a written (10) Deny access to its platform to, or potential investors; undertaking in a form acceptable to the cancel an offering of, an issuer that the (5) All records required to registered national securities funding portal believes may present the demonstrate compliance with the association, signed by a duly authorized
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person of the third party, stating in (b) For purposes of this § 227.501, the 77d(a)(6)) shall be available for a sale of effect that such records are the property term accredited investor shall have the securities if the issuer; any predecessor of the funding portal and will be same meaning given to such term in 17 of the issuer; any affiliated issuer; any surrendered promptly on request of the CFR 230.501. To transfer securities to an director, officer, general partner or funding portal. The undertaking shall accredited investor during the one-year managing member of the issuer; any include the following provision: period beginning on the date the beneficial owner of 20 percent or more With respect to any books and records securities were issued in a transaction of the issuer’s outstanding voting equity maintained or preserved on behalf of [name exempt from registration pursuant to securities, calculated on the basis of of funding portal], the undersigned hereby Section 4(a)(6) of the Securities Act (15 voting power; any promoter connected acknowledges that the books and records are U.S.C. 77d(a)(6)), the seller shall with the issuer in any capacity at the the property of [name of funding portal], and reasonably believe that the person time of such sale; any person that has hereby undertakes to permit examination of receiving such securities is an been or will be paid (directly or such books and records at any time, or from accredited investor. indirectly) remuneration for solicitation time to time, during business hours by (c) For purposes of this section, the of purchasers in connection with such representatives of the Securities and term member of the family of the Exchange Commission and the national sale of securities; or any general partner, securities association of which the funding purchaser or the equivalent includes a director, officer or managing member of portal is a member, and to promptly furnish child, stepchild, grandchild, parent, any such solicitor: to the Commission, and the national stepparent, grandparent, spouse or (1) Has been convicted, within 10 securities association of which the funding spousal equivalent, sibling, mother-in- years before the filing of the information portal is a member, a true, correct, complete law, father-in-law, son-in-law, daughter- required by Section 4A(b) of the and current hard copy of any, all, or any part in-law, brother-in-law, or sister-in-law Securities Act (15 U.S.C. 77d–1(b)) (or of, such books and records. of the purchaser, and shall include five years, in the case of issuers, their (e) Review of Records. All records of adoptive relationships. predecessors and affiliated issuers), of a funding portal are subject at any time, Instruction to paragraph (c). For any felony or misdemeanor: or from time to time, to reasonable purposes of this paragraph (c), the term (i) In connection with the purchase or periodic, special, or other examination spousal equivalent means a cohabitant sale of any security; by the representatives of the occupying a relationship generally (ii) Involving the making of any false Commission and the national securities equivalent to that of a spouse. filing with the Commission; or association of which a funding portal is (iii) Arising out of the conduct of the § 227.502 Insignificant deviations from a a member. business of an underwriter, broker, term, condition or requirement of dealer, municipal securities dealer, (f) Financial Recordkeeping and Regulation Crowdfunding. Reporting of Currency and Foreign investment adviser or paid solicitor of Transactions. Every funding portal, as it (a) A failure to comply with a term, purchasers of securities; is subject to the requirements of the condition, or requirement of this part (2) Is subject to any order, judgment Currency and Foreign Transactions will not result in the loss of the or decree of any court of competent Reporting Act of 1970 (15 U.S.C. 5311 exemption from the requirements of jurisdiction, entered within five years et seq.), shall comply with the reporting, Section 5 of the Securities Act (15 before the filing of the information recordkeeping and record retention U.S.C. 77e) for any offer or sale to a required by Section 4A(b) of the requirements of 31 CFR chapter X. particular individual or entity, if the Securities Act (15 U.S.C. 77d–1(b)) that, Where 31 CFR chapter X and issuer relying on the exemption shows: at the time of such filing, restrains or (1) The failure to comply was §§ 227.404(a) and 404(b) require the enjoins such person from engaging or insignificant with respect to the offering same records or reports to be preserved continuing to engage in any conduct or as a whole; for different periods of time, such practice: (2) The issuer made a good faith and records or reports shall be preserved for (i) In connection with the purchase or reasonable attempt to comply with all the longer period of time. sale of any security; applicable terms, conditions and (ii) Involving the making of any false Subpart E—Miscellaneous Provisions requirements this part; and filing with the Commission; or (3) The issuer did not know of such (iii) Arising out of the conduct of the § 227.501 Restrictions on resales. failure where the failure to comply with business of an underwriter, broker, (a) Securities issued in a transaction a term, condition or requirement of this dealer, municipal securities dealer, exempt from registration pursuant to part was the result of the failure of the investment adviser or paid solicitor of Section 4(a)(6) of the Securities Act (15 intermediary to comply with the purchasers of securities; U.S.C. 77d(a)(6)) may not be transferred requirements of Section 4A(a) of the (3) Is subject to a final order of a state by the purchaser of such securities Securities Act (15 U.S.C. 77d–1(a)) and securities commission (or an agency or during the one-year period beginning on the related rules, or such failure by the officer of a state performing like the date of purchase, unless such intermediary occurred solely in functions); a state authority that securities are transferred: offerings other than the issuer’s offering. supervises or examines banks, savings (1) To the issuer of the securities; (b) Notwithstanding the issuer’s associations or credit unions; a state (2) To an accredited investor; reliance on paragraph (a) of this section, insurance commission (or an agency or (3) As part of an offering registered the Commission may bring an officer of a state performing like with the Commission; or enforcement action seeking any functions); an appropriate federal (4) To a member of the family of the appropriate relief for the issuer’s failure banking agency; the U.S. Commodity purchaser or the equivalent, to a trust to comply with all applicable terms, Futures Trading Commission; or the controlled by the purchaser, to a trust conditions and requirements of this National Credit Union Administration created for the benefit of a member of part. that: the family of the purchaser or the (i) At the time of the filing of the equivalent, or in connection with the § 227.503 Disqualification information required by Section 4A(b) death or divorce of the purchaser or (a) No exemption under this Section of the Securities Act (15 U.S.C. 77d– other similar circumstance. 4(a)(6) of the Securities Act (15 U.S.C. 1(b)), bars the person from:
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(A) Association with an entity (6) Is suspended or expelled from that a disqualification existed under regulated by such commission, membership in, or suspended or barred paragraph (b) of this section. authority, agency or officer; from association with a member of, a Instruction to paragraph (b)(4). An (B) Engaging in the business of registered national securities exchange issuer will not be able to establish that securities, insurance or banking; or or a registered national or affiliated it has exercised reasonable care unless (C) Engaging in savings association or securities association for any act or it has made factual inquiry into whether credit union activities; or omission to act constituting conduct any disqualifications exist. The nature (ii) Constitutes a final order based on inconsistent with just and equitable and scope of the factual inquiry will a violation of any law or regulation that principles of trade; vary based on the facts and prohibits fraudulent, manipulative or (7) Has filed (as a registrant or issuer), circumstances concerning, among other deceptive conduct and for which the or was or was named as an underwriter things, the issuer and the other offering order was entered within the 10-year in, any registration statement or participants. period ending on the date of the filing Regulation A (17 CFR 230.251 et seq.) (c) For purposes of paragraph (a) of of the information required by Section offering statement filed with the this section, events relating to any 4A(b) of the Securities Act (15 U.S.C. Commission that, within five years affiliated issuer that occurred before the 77d–1(b)); before the filing of the information affiliation arose will be not considered Instruction to paragraph (a)(3). Final required by Section 4A(b) of the disqualifying if the affiliated entity is order shall mean a written directive or Securities Act (15 U.S.C. 77d–1(b)), was not: declaratory statement issued by a the subject of a refusal order, stop order, (1) In control of the issuer; or federal or state agency, described in or order suspending the Regulation A (2) Under common control with the § 227.503(a)(3), under applicable exemption, or is, at the time of such issuer by a third party that was in statutory authority that provides for filing, the subject of an investigation or control of the affiliated entity at the time notice and an opportunity for hearing, proceeding to determine whether a stop of such events. which constitutes a final disposition or order or suspension order should be (d) A person that is subject to a action by that federal or state agency. issued; or statutory disqualification as defined in Section 3(a)(39) of the Exchange Act (15 (4) Is subject to an order of the (8) Is subject to a United States Postal U.S.C. 78c(a)(39)) may not act as, or be Commission entered pursuant to Service false representation order an associated person of, an intermediary Section 15(b) or 15B(c) of the Exchange entered within five years before the in a transaction involving the offer or Act (15 U.S.C. 78o(b) or 78o–4(c)) or filing of the information required by sale of securities in reliance on Section Section 203(e) or (f) of the Investment Section 4A(b) of the Securities Act (15 4(a)(6) of the Securities Act (15 U.S.C. Advisers Act of 1940 (15 U.S.C. 80b– U.S.C. 77d–1(b)), or is, at the time of 77d(a)(6)) unless so permitted pursuant 3(e) or (f)) that, at the time of the filing such filing, subject to a temporary to Commission rule or order. of the information required by Section restraining order or preliminary Instruction to paragraph (d). 17 CFR 4A(b) of the Securities Act (15 U.S.C. injunction with respect to conduct 240.17f–2 generally requires the 77d–1(b)): alleged by the United States Postal (i) Suspends or revokes such person’s fingerprinting of every person who is a Service to constitute a scheme or device registration as a broker, dealer, partner, director, officer or employee of for obtaining money or property through municipal securities dealer or a broker, subject to certain exceptions. the mail by means of false investment adviser; (ii) Places limitations on the activities, representations. PART 232—REGULATION S–T— functions or operations of such person; (b) Paragraph (a) of this section shall GENERAL RULES AND REGULATIONS or not apply: FOR ELECTRONIC FILINGS (iii) Bars such person from being (1) With respect to any conviction, order, judgment, decree, suspension, ■ 4. The authority citation for part 232 associated with any entity or from continues to read, in part, as follows: participating in the offering of any expulsion or bar that occurred or was penny stock; issued before [effective date of final Authority: 15 U.S.C. 77f, 77g, 77h, 77j, (5) Is subject to any order of the rule]; 77s(a), 77z–3, 77sss(a), 78c(b), 781, 78m, 78n, Commission entered within five years (2) Upon a showing of good cause and 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29, without prejudice to any other action by 80a–30, 80a–37, and 7201 et seq.; and 18 before the filing of the information U.S.C. 1350. required by Section 4A(b) of the the Commission, if the Commission Securities Act (15 U.S.C. 77d–1(b)) that, determines that it is not necessary under * * * * * ■ 5. Amend § 232.101 by: at the time of such filing, orders the the circumstances that an exemption be ■ a. In paragraph (a)(1)(xii) removing person to cease and desist from denied; ‘‘and’’ at the end of the paragraph; committing or causing a violation or (3) If, before the filing of the ■ information required by Section 4A(b) b. In paragraph (a)(1)(xiii) removing future violation of: the period at the end of the paragraph (i) Any scienter-based anti-fraud of the Securities Act (15 U.S.C. 77d– 1(b)), the court or regulatory authority and adding in its place a semicolon; provision of the federal securities laws, ■ c. In paragraph (a)(1)(xvi) removing that entered the relevant order, including without limitation Section the period at the end of the paragraph judgment or decree advises in writing 17(a)(1) of the Securities Act (15 U.S.C. and adding in its place ‘‘; and’’; and 77q(a)(1)), Section 10(b) of the Exchange (whether contained in the relevant ■ d. Adding paragraph (a)(1)(xvii). Act (15 U.S.C. 78j(b)) and 17 CFR judgment, order or decree or separately The addition reads as follows: 240.10b–5, Section 15(c)(1) of the to the Commission or its staff) that Exchange Act (15 U.S.C. 78o(c)(1)) and disqualification under paragraph (b) of § 232.101 Mandated electronic Section 206(1) of the Investment this section should not arise as a submissions and exceptions. Advisers Act of 1940 (15 U.S.C. 80b– consequence of such order, judgment or (a) * * * 6(1)) or any other rule or regulation decree; (1) * * * thereunder; or (4) If the issuer establishes that it did (xvii) Form C (§ 239.900 of this (ii) Section 5 of the Securities Act (15 not know and, in the exercise of chapter). U.S.C. 77e); reasonable care, could not have known * * * * *
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PART 239—FORMS PRESCRIBED 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, § 239.900 Form C. UNDER THE SECURITIES ACT OF 1933 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, This form shall be used for filings 80a-13, 80a-24, 80a-26, 80a-29, 80a-30, and under Regulation Crowdfunding. ■ 6. The authority citation for part 239 80a-37, unless otherwise noted. continues to read, in part, as follows: Note: The text of Form C will not appear * * * * * in the Code of Federal Regulations. Authority: 15 U.S.C. 77f, 77g, 77h, 77j, ■ 77s, 77z-2, 77z-3, 77sss, 78c, 78l, 78m, 78n, 7. Add § 239.900 to read as follows: BILLING CODE 8011–01–P
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORMC UNDER THE SECURITIES ACT OF 1933 [ ] Form C: Offering Statement [ ] Form C-U: Progress Update: [ ] Form C-A: Amendment ( ] Check box if Amendment is material and investors will have five business days to reconfirm [ ] Form C-AR: Annual Report [ ] Form C-TR: Termination of Reporting
Name of issuer: Legal status of issuer (form, jurisdiction and date of organization): ______Physical address of issuer: Website of issuer: Name, Commission file number and CRD number (as applicable) ofinterrnediary through which the offering will be conducted:
Amount of compensation paid to the intermediary, including referral and other fees: ____ Type of security offered: ______Number of securities to be offered: ______Price (or method for determining price): Target offering amount: ______Maximum offering amount (if different from target offering amount): ______Oversubscriptions accepted: [ ] Yes [] No If yes, disclose how oversubscriptions will be allocated: [ ] Pro-rata basis [ ] First-corne, first-served basis [ ] Other provide a description
Deadline to reach the target offering amount: ______Current number of employees: Total Assets: Most recent fiscal year: ____ Prior fiscal year: ____ Cash & Cash Equivalents: Most recent fiscal year: Prior fiscal year: Accounts Receivable: Most recent fiscal year: Prior fiscal year: ____ Short-term Debt: Most recent fiscal year: Prior fiscal year: Long-term Debt: Most recent fiscal year: Prior fiscal year: ____ Revenues/Sales: Most recent fiscal year: Prior fiscal year: ____ Cost of Goods Sold: Most recent fiscal year: Prior fiscal year: ____ Taxes Paid: Most recent fiscal year: Prior fiscal year: ____ Net Income: Most recent fiscal year: Prior fiscal year: ____
BILLING CODE 8011–01–C
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GENERAL INSTRUCTIONS of the offering, including the merits and (Signature and Title) I. Eligibility Requirements for Use of risks involved. These securities have not Pursuant to the requirements of Form C been recommended or approved by any Sections 4(a)(6) and 4A of the Securities federal or state securities commission or Act of 1933 and Regulation This Form shall be filed by any issuer regulatory authority. Furthermore, these Crowdfunding (§ 227.100–503), this offering or selling securities in reliance authorities have not passed upon the Form C has been signed by the on the exemption in Securities Act accuracy or adequacy of this document. following persons in the capacities and Section 4(a)(6) and in accordance with The U.S. Securities and Exchange on the dates indicated. Section 4A and Regulation Commission does not pass upon the Crowdfunding (§ 227.100–503). This lllllllllllllllllll merits of any securities offered or the (Signature) Form also shall be used for an annual terms of the offering, nor does it pass lllllllllllllllllll report required pursuant to Rule 202 of upon the accuracy or completeness of Regulation Crowdfunding (§ 227.202) any offering document or literature. (Title) and for the termination of reporting These securities are offered under an lllllllllllllllllll required pursuant to Rule 203(b)(2) of exemption from registration; however, (Date) Regulation Crowdfunding the U.S. Securities and Exchange Instructions. (§ 227.203(b)(2)). Careful attention Commission has not made an 1. The form shall be signed by the should be directed to the terms, independent determination that these issuer, its principal executive officer or conditions and requirements of the securities are exempt from registration. officers, its principal financial officer, exemption. (b) An issuer filing this Form for an its controller or principal accounting II. Preparation and Filing of Form C offering in reliance on Section 4(a)(6) of officer and at least a majority of the the Securities Act and pursuant to board of directors or persons performing Information on the cover page will be Regulation Crowdfunding (§ 227.100– generated based on the information similar functions. 503) must disclose in the offering 2. The name of each person signing provided in XML format. Other than the statement that it will file a report on cover page, this Form is not to be used the form shall be typed or printed EDGAR annually and post the report on beneath the signature. as a blank form to be filled in, but only its Web site, no later than 120 days after as a guide in the preparation of Form C. the end of each fiscal year covered by PART 240—GENERAL RULES AND General information regarding the the report. The issuer must also disclose REGULATIONS, SECURITIES preparation, format and how to file this how an issuer may terminate its EXCHANGE ACT OF 1934 Form is contained in Regulation S–T, reporting obligations in the future in (§ 232 et seq.). accordance with Rule 202(b) of ■ 8. The authority citation for part 240 III. Information to be Included in the Regulation Crowdfunding (§ 227.202(b)). continues to read, in part, as follows: Form Authority: 15 U.S.C. 77c, 77d, 77g, 77j, Item 3. Annual Report Disclosure 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, Item 1. Offering Statement Disclosure Requirements 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, Requirements An issuer filing this Form for an 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, An issuer filing this Form for an annual report, as required by Regulation 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, offering in reliance on Section 4(a)(6) of Crowdfunding (§ 227.100–503), must 78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, the Securities Act and pursuant to file the Form no later than 120 days 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b– 4, 80b–11, 7201 et. seq., and 8302; 7 U.S.C. Regulation Crowdfunding (§ 227.100– after the issuer’s fiscal year end covered 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 503) must file the Form prior to the by the report and include the 1350; and Pub. L. 111–203, 939A, 124 Stat. commencement of the offering and information required by Rule 201(a), (b), 1376, (2010), unless otherwise noted. include the information required by (c), (d), (e), (f), (m), (p), (q), (r), (s), and ■ 9. Add § 240.12g–6 to read as follows: Rule 201 of Regulation Crowdfunding (t) of Regulation Crowdfunding (§ 227.201). (§§ 227.201(a), (b), (c), (d), (e), (f), (m), § 240.12g–6 Exemption for securities Other than the information required (p), (q), (r), (s), and (t)). For purposes of issued pursuant to Section 4(a)(6) of the Securities Act of 1933. to be provided in XML format, an issuer paragraph (t), the issuer shall provide may provide the required information in financial statements for the highest For purposes of determining whether the format included on the aggregate target offering amount an issuer is required to register a intermediary’s platform, including by previously provided in an offering security with the Commission pursuant submitting copies of screen shots of the statement. to Section 12(g)(1) of the Act (15 U.S.C. relevant information, as appropriate and 78l(g)(1)), the definition of held of necessary. SIGNATURE record shall not include securities Pursuant to the requirements of issued pursuant to the offering Item 2. Legends Sections 4(a)(6) and 4A of the Securities exemption under Section 4(a)(6) of the (a) An issuer filing this Form for an Act of 1933 and Regulation Securities Act (15 U.S.C. 77d(a)(6)). offering in reliance on Section 4(a)(6) of Crowdfunding (§ 227.100–503), the * * * * * the Securities Act and pursuant to issuer certifies that it has reasonable Regulation Crowdfunding (§ 227.100– grounds to believe that it meets all of PART 249—FORMS, SECURITIES 503) must include the following the requirements for filing on Form C EXCHANGE ACT OF 1934 legends: and has duly caused this Form to be ■ A crowdfunding investment involves 10. The authority citation for part 249 signed on its behalf by the duly continues to read, in part, as follows: a risk. You should not invest any funds authorized undersigned. in this offering unless you can afford to lllllllllllllllllll Authority: 15 U.S.C. 78a et seq. and 7201 lose your entire investment. et seq.; 12 U.S.C. 5461 et seq.; and 18 U.S.C. In making an investment decision, (Issuer) 1350, unless otherwise noted. investors must rely on their own By * * * * * examination of the issuer and the terms lllllllllllllllllll ■ 11. Add § 249.1500 to read as follows:
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§ 249.1500 Form Funding Portal Note: The text of Form Funding Portal will This form shall be used for filings by not appear in the Code of Federal funding portals under Regulation Regulations. Crowdfunding (§§ 227.100 et seq.). BILLING CODE 8011–01–P
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM FUNDING PORTAL UNDER THE SECURITIES EXCHANGE ACT OF 1934
WARNING: Failure to complete this form truthfully, to keep this form current and to file accurate supplementary information on a timely basis, or the failure to keep accurate books and records or otherwise to comply with the provisions of law applying to the conduct of business as a funding portal, would violate the Federal securities laws and may result in disciplinary, administrative, injunctive or criminal action.
Check the appropriate box: This is: D an initial application to register as afunding portal with the SEC. D an amendment to any part of the funding portal's most recent Form Funding Portal, including a successor registration. D a withdrawal of the funding portal's registration with the SEC.
Schedule A must be completed as part of all initial applications. Amendments to Schedule A must be provided on Schedule B.
Item 1 Identifying Information
Exact name, principal business address, mailing address, if different, and telephone number of the funding portal:
A. Full name of the funding portal: ______
B. Name(s) under which business is conducted, if different from Item lA:
C. IRS Empl. Ident. No.: ______
D. If full legal name has changed since thefunding portal's most recent Form Funding Portal, enter the previous name and specify whether the name change is of the Dfundingportal name (lA), or D business name (lB).
Previous name: ------E. Funding portal's main street address (Do not use a P.O. Box):
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F. Mailing addressees) (if different) and office locations (if more than one)
G. Contact Information Telephone Number: ------Facsimile number: ------Website(s) URL: ______
H. Contact employee
Name: ------Title: ------Direct Telephone Number: ______Facsimile:------Direct E-mail: ------1. Registrations
Was the applicant previously registered on Form Funding Portal as a funding portal or with the Commission in any other capacity?
DYes SEC File No. ------D No
J. Foreign registrations
1. Is the applicant registered with a foreign financial regulatory authority? Answer "no" even if affiliated with a business that is registered with a foreign financial regulatory authority.
DYes DNo
If "yes," complete Section J.2. below.
2. List the name, in English, of each foreign financial regulatory authority and country with which the applicant is registered. A separate entry must be completed for each foreign financial regulatory authority with which the applicant is registered.
Check only one box: D Add D Delete D Amend
English Name of Foreign Financial Regulatory Authority
Registration Number (if any) ______
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NameofCountry ______
Item 2 - Form of Organization
A. Indicate legal status of applicant. _Corporation _Sole Proprietorship _ Partnership _Limited Liability Company _Other (specify) ______
B. If other than a sole proprietor, indicate date and place applicant obtained its legal status (i.e., state or country where incorporated, where partnership agreement was filed, or where applicant entity was formed):
State/Country of formation" ______Date of Formation------Item 3 - Successions
A. Is the applicant at the time of this filing succeeding to the business of a currently registered funding portal?
DYes D No
Do not report previous successions already reported on Form Funding Portal. If "yes," complete Section 3.B. below. B. Complete the following information if succeeding to the business of a currently registeredfunding portal. If the applicant acquired more than one funding portal in the succession being reported on this Form Funding Portal, a separate entry must be completed for each acquired firm.
Check only one box: D Add D Delete D Amend
Name of Acquired Funding Portal
Acquired Funding Portal's SEC File No.: ___
A. Briefly describe details of the succession including any assets or liabilities not assumed by the successor.
Item 4 - Control Persons
In this Item, identify every person that, directly or indirectly, controls the applicant, controls management or policies of the applicant, or that the applicant directly or indirectly controls.
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If this is an initial application, the applicant also must complete Schedule A. Schedule A asks for information about direct owners and executive officers. If this is an amendment updating information reported on the Schedule A filed with the applicant's initial application, the applicant must complete Schedule B.
Item 5 Disclosure Information
In this Item, provide information about the applicant's disciplinary history and the disciplinary history of all associated persons of the applicant. This information is 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. One event may result in the requirement to answer "yes" to more than one of the questions below.
If the answer is "yes" to any question in this Item, the applicant must complete the appropriate Disclosure Reporting Page ("DRP") - Criminal, Regulatory, Civil Judicial, Bankruptcy, Bond, Judgment for which the corresponding DRP will pop-up automatically.
A. Criminal Action Disclosure
If the answer is "yes" to any question in Part A or B below, complete a Criminal Action DRP.
Check all that apply:
1. In the past ten years, has the applicant or any associated person:
(a) been convicted of any felony, or pled guilty or nolo contendere ("no contest") to any charge of afelony, in a domestic, foreign, or military court?
DYes D No
The response to the following question may be limited to charges that are currently pending:
(b) been charged with any felony?
DYes DNo
2. In the past ten years, has the applicant or any associated person:
(a) been convicted of any misdemeanor, or pled guilty or nolo contendere ("no contest"), in a domestic, foreign, or military court to any charge of a misdemeanor in a case involving: investment-related business, or any
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fraud, false statements, or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses?
DYes DNo
The response to the following question may be limited to charges that are currently pending:
(b) been charged with a misdemeanor listed in Item 5-A(2)(a)?
DYes DNo
B. Regulatory Action Disclosure
If the answer is "yes" to any question in Item 5-B below, complete a Regulatory Action DRP.
Check an that apply:
1. Has the SEC or the Commodities Futures Trading Commission ("CFTC") ever:
(a) found the applicant or any associated person to have made a false statement or omission?
DYes DNo
(b) found the applicant or any associated person to have been involved in a violation of any SEC or CFTC regulation or statute?
DYes DNo
(c) found the applicant or any associated person to have been a cause of the denial, suspension, revocation, or restriction of the authorization of an investment related business to operate?
DYes DNo
(d) entered an order against the applicant or any associated person in connection with investment-related activity?
DYes DNo
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(e) imposed a civil money penalty on the applicant or any associated person, or ordered the applicant or any associated person to cease and desist from any activity?
DYes oNo
2. Has any other federal regulatory agency, any state regulatory agency, or anyforeign,financial regulatory authority:
(a) ever found the applicant or any associated person to have made a false statement or omission, or been dishonest, unfair, or unethical?
DYes oNo
(b) ever found the applicant or any associated person to have been involved in a violation of investment-related regulations or statutes?
DYes oNo
(c) ever found the applicant or any associated person to have been the cause of a denial, suspension, revocation, or restriction of the authorization of an investment-related business to operate?
DYes oNo
(d) in the past ten years entered an order against the applicant or any associated person in connection with an investment-related activity?
DYes oNo
(e) ever denied, suspended, or revoked the registration or license of the applicant or that of any associated person, or otherwise prevented the applicant or any associated person of the applicant, by order, from associating with an investment-related business or restricted the activities of the applicant or any associated person?
DYes oNo
3. Has any self-regulatory organization or commodities exchange ever:
(a) found the applicant or any associated person to have made a false statement or omission?
DYes oNo
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(b) found the applicant or any associated person to have been involved in a violation of its rules (other than a violation designated as a "minor rule violation" under a plan approved by the SEC)?
DYes DNo
(c) found the applicant or any associated person to have been the cause of a denial, suspension, revocation or restriction of the authorization of an investment-related business to operate?
DYes DNo
(d) disciplined the applicant or any associated person by expelling or suspending the applicant or the associated person from membership, barring or suspending the applicant or the associated person from association with other members, or by otherwise restricting the activities of the applicant or the associated person?
DYes DNo
4. Has the applicant or any associated person ever had an authorization to act as an attorney, accountant, or federal contractor revoked or suspended?
DYes DNo
5. Is the applicant or any associated person currently the subject of any regulatory proceeding that could result in a "yes" answer to any part of Item 5-B(1), 5-B(2), or 5-B(3)?
DYes DNo
C. Civil Judicial Disclosure
If the answer is "yes" to a question below, complete a Civil Judicial Action DRP
Check all that apply:
1. Has any domestic or foreign court:
(a) in the past ten years enjoined the applicant or any associated person in connection with any investment-related activity?
DYes DNo
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(b) ever found that the applicant or any associated person was involved in a violation of investment-related statutes or regulations?
DYes DNo
(c) ever dismissed, pursuant to a settlement agreement, an investment related civil action brought against the applicant or any associated person by a state orforeignfinancial regulatory authority?
DYes DNo
2. Is the applicant or any associated person now the subject of any civil proceeding that could result in a "yes" answer to any part of Item 5-C(1)?
DYes DNo
3. In the past ten years, has the applicant or a control affiliate of the applicant ever been a securities firm or a control affiliate of a securities firm that:
(a) has been the subject of a bankruptcy petition?
DYes DNo
(b) has had a trustee appointed or a direct payment procedure initiated under the Securities Investor Protection Act?
DYes DNo
4. Has a bonding company ever denied, paid out on, or revoked a bond for the applicant?
DYes DNo
5. Does the applicant have any unsatisfied judgments or liens against it?
DYes DNo
Item 6 - Non-Securities Related Business
Does applicant engage in any non-securities related business?
DYes DNo
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If "yes," briefly describe the non-securities business.
Item 7 - Escrow Arrangements; Compensation Arrangements; and Fidelity Bond A. Escrow. Complete the following information for each person that will hold investor funds in escrow pursuant to the requirements of Rule 303(e) of Regulation Crowd funding (17 CFR 24_.309).
Check only one box: D Add D Delete D Amend
Name ofperson: ______
Phone Number: ------B. Compensation. Please describe any compensation arrangem ents funding portal has with Issuers.
C. Fidelity Bond. Does funding portal maintain fidelity bond coverage that has a minimum coverage of$100,000, 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 meets any other applicable requirements as set forth by FINRA or any applicable national securities association that is registered under Section 15A? DYes DNo
If "yes," provide the following information.
Bonding Company Name: ______Bonding Company Address: ______
Phone Number: ------Policy Expiration Date: ______
Item 8 - Withdrawal If this is a withdrawal of registration:
A. The date the funding portal ceased business or withdrew its registration request:
Date (MMIDDNYYY): ______
B. Location of Books and Records after Registration Withdrawal
Complete the following information for each location at which the applicant will keeps books and records after withdrawing its registration.
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Check only one box: 0 Add 0 Delete 0 Amend
Name and address of entity where books and records are kept:
(area code) (telephone number) (area code) ( fax number)
This is (check one): 0 one of applicant's branch offices or affiliates. o a third party unaffiliated recordkeeper. o other.
If this address is a private residence, check this box: 0
Briefly describe the books and records kept at this location.
C. Is the funding portal now the subject of or named in any investment-related
1. Investigation
DYes DNo
2. Investor initiated complaint
DYes DNo
3. Private civil litigation
DYes DNo
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EXECUTION
The funding portal consents that service of any civil action brought by or notice of any proceeding before the Securities and Exchange Commission or any self-regulatory organization 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, if different, given in Items I.E, I.F., and I.H. If the applicant is a nonresident funding portal, it must complete Schedule C to designate a U.S. agent for service of process.
The undersigned represents and warrants that he/she has executed this form on behalf of, and is duly authorized to bind, the funding portal. The undersigned and the funding portal represent that the information and statements contained herein and other information filed herewith, all of which are made a part hereof, are current, true and complete. The undersigned and the funding portal further represent that, if this is an amendment, to the extent that any information previously submitted is not amended, such information is currently accurate and complete.
Date: ------
Full Legal Name of Funding Portal: ______
By ______(signature)
Title: ------
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FORM FUNDING PORTAL SCHEDULE A
Direct Owners and Executive Officers
1. Complete Schedule A only if submitting an initial application. Schedule A asks for information about the applicant's direct owners and executive officers. Use Schedule B to amend this information.
2. Direct Owners and Executive Officers. List below the names of:
(a) each Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Legal Officer, Chief Compliance Officer, director and any other individuals with similar status or functions;
(b) if applicant is organized as a corporation, each shareholder that is a direct owner of 5% or more of a class of the applicant's voting securities, unless applicant is a public reporting company (a company subject to Section 13 or 15(d) of the Exchange Act);
Direct owners include any person that owns, beneficially owns, has the right to vote, or has the power to sell or direct the sale of 5% or more of a class of the applicant's voting securities. For purposes of this Schedule, a person beneficially owns any securities: (i) owned by his/her child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, sharing the same residence; or (ii) that he/she has the right to acquire, within 60 days, through the exercise of any option, warrant, or right to purchase the security.
(c) if the applicant is organized as a partnership, all general partners and those limited and special partners that have the right to receive upon dissolution, or have contributed, 5% or more ofthe applicant's capital;
(d) in the case of a trust, (i) a person that directly owns 5% or more of a class of the applicant's voting securities, or that has the right to receive upon dissolution, or has contributed, 5% or more of the applicant's capital, (ii) the trust and (iii) each trustee; and
(e) if the applicant is organized as a limited liability company ("LLC"), (i) those members that have the right to receive upon dissolution, or have contributed, 5% or more of the applicant's capital, and (ii) if managed by elected managers, all elected managers.
3. In the DE/FEINP column below, enter "DE" ifthe owner is a domestic entity, "FE" if the owner is an entity incorporated or domiciled in a foreign country, or "NP" if the owner or executive officer is a natural person.
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4. Complete the Title or Status column by entering board/management titles; status as partner, trustee, sole proprietor, elected manager, shareholder, or member; and for shareholders or members, the class of securities owned (if more than one is issued).
5. Ownership codes are:
NA -less than 5% B - 10% but less than 25% D - 50% but less than 75% A - 5% but less than lO% C - 25% but less than 50% E - 75% or more
6. (a) In the Control Affiliate column, enter "Yes" if the person has control as defined in the Glossary of Terms to Form Funding Portal, and enter "No" if the person does not have control. Note that under this definition, most executive officers and all 25% owners, general partners, elected managers, and trustees are control persons.
(b) In the PR column, enter "PR" if the owner is a public reporting company under Section 13 or 15(d) of the Exchange Act.
(c) Complete each column.
FULL DE/FE/NP Title or Date Title or Ownership Control CRDNo. LEGAL Status Status Code Affiliate (If None: NAME Acquired S.S. No. and (Natural MM YYYY Yes/No PR Date of Persons: Birth, IRS Last Name, Tax No., or First Employer Name, ID No.) Middle Name)
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FORM FUNDING PORTAL SCHEDULEB
Amendments to Schedule A
1. Use Schedule B only to amend information requested on Schedule A. Refer to Schedule A for specific instructions for completing this Schedule B. Complete each column. File with a completed Execution Page.
2. In the Type of Amendment column, indicate "A" (addition), "D" (deletion), or "C" (change in information about the same person).
3. Ownership codes are:
NA -less than 5% B - 10% but less than 25% D - 50% but less than 75% A - 5% but less than 10% C - 25% but less than 50% E - 75% or more
G - Other (general partner, trustee, or elected member)
4. List below all changes to Schedule A (Direct Owners and Executive Officers):
FULL LEGAL D Type of Title or Date Title Ownershi Control CRDNo. NAME EI Amend- Status or Status pCode Affiliate (If None: S.S. No. (Natural FE ment Acquired and Date of Birth, Persons: Last IN MM YYY Yes/N PR IRS Tax No., or Name, First P Y 0 Employer ID No.) Name, Middle Name)
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Schedule C of FORM FUNDING PORTAL Nonresident Funding Portals
Applicant Name: Date: _____ SEC File No: Official Use Service ofProcess and Certification Regarding Access to Records Each nonresident funding portal applicant shall use Fonn to identifY its United States agent for service of process and to certifY that it can (1) provide the Commission and the national securities association of which it is a member with prompt access to its books and records, and (2) submit to onsite inspection and examination by the Commission. 1. Service of Process: A. Name of United States person applicant designates and appoints as agent for service of process B. Address of United States person applicant designates and appoints as agent for service of process The above identified agent for service of process may be served any process, pleadings, subpoenas, or other papers in (a) any investigation or administrative proceeding conducted by the Commission that relates to the applicant or about which the applicant may have infonnation; and (b) any civil or criminal suit or action or proceeding brought against the applicant or to which the applicant has been joined as defendant or respondent, in any appropriate court in any place subject to the jurisdiction of any state or of the United States or of any of its territories or possessions or of the District of Columbia, to enforce the Exchange Act. The applicant has stipulated and agreed that any such suit, action or administrative proceeding may be commenced by the service of process upon, and that service of an administrative subpoena shall be effected by service upon, the above-named Agent for Service of Process, and that service as aforesaid shall be taken and held in all courts and administrative tribunals to be valid and binding as if personal service thereof had been made.
2. Certification regarding access to records:
Applicant can as a matter of law; (1) provide the Commission and any national securities association of which it is a member with prompt access to its books and records, and (2) submit to onsite inspection and examination by the Commission. Applicant must attach to this Form Funding Portal a copy of the opinion ofcounsel it is required to obtain in accordance with Rule 400(g) ofRegulation Crowdfunding.
Signature: Name and Title: Date:
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CRIMINAL ACTION DISCLOSURE REPORTING PAGE (FP)
General Instructions
This Disclosure Reporting Page (DRP FP) is an D INITIAL OR D AMENDED response used to report details for affirmative responses to Item 5-A of Form Funding Portal.
Check item(s) being responded to: D 5-A(1)(a) D 5-A(1)(b) D 5-A(2)(a) D 5-A(2)(b)
Use a separate DRP for each event or proceeding. The same event or proceeding may be reported for more than one person or entity using one DRP. File with a completed Execution Page.
Multiple counts of the same charge arising out of the same event(s) should be reported on the same DRP. Use this DRP to report all charges arising out of the same event. Unrelated criminal actions, including separate cases arising out of the same event, must be reported on separate DRPs. One event may result in more than one affirmative answer to the items listed above.
Part 1
Check all that apply:
A. The person(s) or entity(ies) for whom this DRP is being filed is (are) the:
D Applicant D Applicant and one or more associated persons D One or more of applicant's associated persons
If this DRP is being filed for the applicant, and it is an amendment that seeks to remove a DRP concerning the applicant from the record, the reason the DRP should be removed is:
D The applicant is registered or applying for registration, and the event or proceeding was resolved in the applicant's favor. D The DRP was filed in error.
If this DRP is being filed for an associated person:
This associated person is: D a firm D a natural person The associated person is: D registered with the SEC D not registered with the SEC
Full name of the associated person (including, for natural persons, last, first and middle names):
If the associated person has a CRD number, provide that number. _____
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If this is an amendment that seeks to remove a DRP concerning the associated person, the reason the DRP should be removed is:
D The associated person(s) is (are) no longer associated with the applicant. D The event or proceeding was resolved in the associated person's favor. D The event or proceeding occurred more than ten years ago. D The DRP was filed in error. Explain the circumstances:
Part 2
1. If charge(s) were brought against a firm or organization over which the applicant or an associated person exercised control:
Enter the firm or organization's name ______
Was the firm or organization engaged in an investment-related business? DYes D No
What was the relationship of the applicant with the firm or organization? (In the case of an associated person, include any position or title with the firm or organization.)
2. Formal charge(s) were brought in: (include the name of Federal, Military, State or Foreign Court, Location of Court - City or County and State or Country, and Docket/Case number).
Name of court: ------Location: ------Docket/Case number: ------3. Event Disclosure Detail (Use this for both organizational and individual charges.)
A. Date First Charged (MM/DDIYYYY): ______D Exact D Explanation
Ifnot exact, provide explanation:
B. Event Disclosure Detail (include charge(s)/charge Description(s), and for each charge provide: (1) number of counts, (2)felony or misdemeanor, (3) plea for each charge, and (4) product type if charge is investment-related).
C. Did any of the charge(s) within the event involve afelony? DYes DNo
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D. Current status of the event? 0 Pending 0 On Appeal 0 Final
E. Event status date (Complete unless status is pending) (MMIDD/YYYY):
o Exact o Explanation
Ifnot exact, provide explanation:
4. Disposition Disclosure Detail: Include for each charge (a) Disposition Type (~, convicted, acquitted, dismissed, pretrial, etc.), (b) Date, (c) Sentence/Penalty, (d) Duration (if sentence suspension, probation, etc.), (e) Start Date of Penalty, (t) Penalty/Fine Amount, and (g) Date Paid.
5. Provide a brief summary of circumstances leading to the chargee s) as well as the disposition. Include the relevant dates when the conduct that was the subject of the charge(s) occurred. (The response must fit within the space provided.)
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REGULATORY ACTION DISCLOSURE REPORTING PAGE (FP)
This Disclosure Reporting Page (DRP FP) is an D INITIAL OR D AMENDED response used to report details for affirmative responses to Item 5-B of Form Funding Portal.
Check item(s) being responded to: D 5-B(1)(a) D 5-B(1)(b) D 5-B(l)(c) D 5-B(l)(d) D 5-B(l)(e) D 5-B(2)(a) D 5-B(2)(b) D 5-B(2)(c) D 5-B(2)(d) D 5-B(2)(e) D 5-B(3)(a) D 5-B(3)(b) D 5-B(3)(c) D 5-B(3)(d) D 5-B(4) D 5-B(5)
Use a separate DRP for each event or proceeding. The same event or proceeding may be reported for more than one person or entity using one DRP. File with a completed Execution Page.
One event may result in more than one affirmative answer to Items 5-B(1), 5-B(2), 5-B(3), 5- B(4) or 5-B(5). Use only one DRP to report details related to the same event. Ifan event gives rise to actions by more than one regulator, provide details for each action on a separate ORP.
Part 1
The person(s) or entity(ies) for whom this DRP is being filed is (are) the:
D Applicant (the funding portal) D Applicant and one or more of the applicant's associated person(s) D One or more of applicant's associated person(s)
If this DRP is being filed for the applicant and it is an amendment that seeks to remove a DRP concerning the applicant from the record, the reason the DRP should be removed is:
D The applicant is registered or applying for registration, and the event or proceeding was resolved in the applicant's favor. D The DRP was filed in error.
If this DRP is being filed for an associated person:
This associated person is: D a firm D a natural person The associated person is: D registered with the SEC D not registered with the SEC
Full name of the associated person (including, for natural persons, last, first and middle names):
If the associated person has a CRD number, provide that number. ____
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If this is an amendment that seeks to remove a ORP concerning the associated person, the reason the DRP should be removed is:
D The associated person(s) is (are) no longer associated with the applicant. D The event or proceeding was resolved in the associated person's favor. D The DRP was filed in error. Explain the circumstances:
Part 2
1. Regulatory Action was initiated by:
D SEC D Other Federal Authority D State DSRO D Foreign Authority
(Full name ofregulator,/oreignjinancial regulatory authority, federal authority, state or SRO)
2. Principal Sanction (check appropriate item):
D Civil and Administrative Penalty(ies)/Fine(s) D Disgorgement D Restitution DBar D Expulsion D Revocation D Cease and Desist D Injunction D Suspension D Censure D Prohibition D Undertaking D Denial D Reprimand D Other
Other Sanctions:
3. Date Initiated (MMIDDIYYYY): ______D Exact D Explanation
If not exact, provide explanation:
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4. Docket/Case Number: ------5. Associated person's Employing Firm when activity occurred that led to the regulatory action (if applicable):
6. Principal Product Type (check appropriate item):
D Annuity(ies) - Fixed D Derivative(s) D Investment Contract(s) D Annuity(ies) - Variable D Direct Investment(s) - DPP & LP Interest(s) D Money Market Fund(s) D No Product D CD(s) D Equity - OTC D Mutual Fund(s) D Commodity Option(s) D Equity Listed (Common & Preferred Stock) D Debt - Asset Backed D Futures - Commodity D Options D Debt - Corporate D Futures - Financial D Penny Stock(s) D Debt - Government D Index Option(s) D Unit Investment Trust(s) D Debt - Municipal D Insurance D Other
Other Product Types:
7. Describe the allegations related to this regulatory action. (The response must fit within the space provided.)
8. Current status? D Pending D On Appeal D Final
9. If on appeal, to whom the regulatory action was appealed (SEC, SRO, Federal or State Court) and date appeal filed:
If Final or On Appeal, complete all items below. For Pending Actions, complete Item 13 only.
10. How was matter resolved (check appropriate item):
D Acceptance, Waiver & Consent (AWC) D Dismissed D Vacated D Consent D Order D Withdrawn D Decision D Settled D Other D Decision & Order of Offer of Settlement D Stipulation and Consent
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11. Resolution Date (MMIDD/YYYY): ______o Exact o Explanation
If not exact, provide explanation:
12. Resolution Detail:
A. Were any of the following Sanctions Ordered (check all appropriate items)?
o Monetary/Fine o Revocation/Expulsion/Denial o Disgorgement/Restitution Amount: o Censure o Cease and Desist/Injunction o Bar o Suspension
B. Other Sanctions Ordered:
C. Sanction detail: If suspended, enjoined or barred, provide duration including start date and capacities affected (General Securities Principal, Financial Operations Principal, etc.). If requalification by exam/retraining was a condition of the sanction, provide length of time given to requalify/retrain, type of exam required and whether condition has been satisfied. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary compensation, provide total amount, portion levied against the applicant or an associated person, date paid and if any portion of penalty was waived:
13. Provide a brief summary of details related to the action status and ( or) disposition, and include relevant terms, conditions and dates.
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CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE (FP)
I GENERAL INSTRUCTIONS
This Disclosure Reporting Page (DRP FP) is an D INITIAL OR D AMENDED response used to report details for affirmative responses to Item 5-C. of Form Funding Portal.
Check item(s) being responded to: D 5-C(1)(a) D 5-C(l)(b) D 5-C(l)(c) D 5-C(2) D 5-C(3)(a) D 5-C(3)(b)
Use a separate DRP for each event or proceeding. The same event or proceeding may be reported for more than one person or entity using one DRP. File with a completed Execution Page.
One event may result in more than one affirmative answer to Item 5-C. Use only one DRP to report details related to the same event. Unrelated civil judicial actions must be reported on separate DRPs.
Part 1
The person(s) or entity(ies) for whom this DRP is being filed is (are) the:
D Applicant (the funding portal) D Applicant and one or more of the applicant's associated person(s) D One or more of the applicant's associated person(s)
If this DRP is being filed for the applicant and it is an amendment that seeks to remove a DRP concerning the applicant from the record, the reason the DRP should be removed is:
D The applicant is registered or applying for registration, and the event or proceeding was resolved in the applicant's favor. D The DRP was filed in error.
If this DRP is being filed for an associated person:
This associated person is: D a firm D a natural person The associated person is: D registered with the SEC D not registered with the SEC
Full name ofthe associated person (including, for natural persons, last, first and middle names):
If the associated person has a CRD number, provide that number. _____
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If this is an amendment that seeks to remove a ORP concerning the associated person, the reason the DRP should be removed is:
D The associated person(s) is (are) no longer associated with the applicant. D The event or proceeding was resolved in the associated person's favor. D The DRP was filed in error. Explain the circumstances:
Part 2
1. Court Action initiated by: (Name of regulator,joreign financial regulatory authority, SRO, commodities exchange, agency, firm, private plaintiff, etc.)
2. Principal Relief Sought (check appropriate item):
D Cease and Desist D Disgorgement D Money Damages (Private/Civil Complaint) D Restraining Order D Civil Penalty(ies)/Fine(s) D Injunction D Restitution DOther ____
Other Relief Sought ______
3. Filing Date of Court Action (MM/DD/YYYY): ______D Exact D Explanation
If not exact, provide explanation:
4. Principal Product Type (check appropriate item):
D Annuity(ies) - Fixed D Derivative(s) D Investment Contract(s) D Annuity(ies) - Variable D Direct Investment(s) - DPP & LP Interest(s) D Money Market Fund(s) D CD(s) D Equity - OTC D Mutual Fund(s) D Commodity Option(s) D No Product D Equity Listed (Common & Preferred Stock) D Options D Debt - Asset Backed D Futures - Commodity D Penny Stock(s) D Debt - Corporate D Futures - Financial D Unit Investment Trust(s) D Debt - Government D Index Option(s) D Other D Debt - Municipal D Insurance
Other Product Types:
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5. Formal Action was brought in (include the name of the Federal, State or Foreign Court, Location of Court - City or County and State or Country, and Docket/Case Number):
6. Associated person's Employing Firm when activity occurred that led to the civil judicial action (if applicable):
7. Describe the allegations related to this civil action (the response must fit within the space provided):
8. Current status? D Pending D On Appeal D Final
9. If on appeal, court to which the action was appealed (provide name of the court) and Date Appeal Filed (MMIDD/YYYY):
10. If pending, date notice/process was served (MM/DD/YYYY): ______
D Exact D Explanation
If not exact, provide explanation:
If Final or On Appeal, complete all items below. For Pending Actions, complete Item 14 only.
11. How was matter resolved (check appropriate item):
D Consent D Judgment Rendered D Settled D Dismissed D Opinion D Withdrawn D Other ------12. Resolution Date (MM/DDNYYY): ______D Exact D Explanation
If not exact, provide explanation:
13. Resolution Detail:
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A. Were any of the following Sanctions Ordered or Relief Granted (check appropriate items)?
D Monetary/Fine D Revocation/ExpulsionlDenial D Disgorgement/Restitution Amount: $______D Censure D Cease and Desist/Injunction DBar D Suspension
B. Other Sanctions Ordered:
C. Sanction detail: If suspended, enjoined or barred, provide duration including start date and capacities affected (General Securities Principal, Financial Operations Principal, etc.). Ifrequalification by exam/retraining was a condition of the sanction, provide length of time given to requalify/retrain, type of exam required and whether condition has been satisfied. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary compensation, provide total amount, portion levied against the applicant or an associated person, date paid and if any portion of penalty was waived:
14. Provide a brief summary of circumstances related to the action(s), allegation(s), disposition(s) and/or finding(s) disclosed above.
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BANKRUPTCY/SIPC DISCLOSURE REPORTING PAGE (FP)
I GENERAL INSTRUCTIONS
This Disclosure Reporting Page (DRP FP) is an D INITIAL OR D AMENDED response used to report details for affirmative responses to Item 5-C(3) of Form Funding Portal.
Check item(s) being responded to: D 5-C(3)
Use a separate DRP for each event or proceeding. The same event or proceeding may be reported for more than one person or entity using one DRP. File with a completed Execution Page.
One event may result in more than one affirmative answer to Item 5-C(3). Use only one DRP to report details related to the same event. Unrelated civil judicial actions must be reported on separate DRPs.
Part 1 Check all that apply:
A. The person(s) or entity(ies) for whom this DRP is being filed is (are) the:
D Applicant D Applicant and one or more control affiliates D One or more of control affiliates
Ifthis DRP is being filed for a control affiliate, give the full name of the control affiliate below (for individuals, Last name, First name, Middle name).
If the control affiliate is registered with the CRD, provide the CRD number. Ifnot, indicate "non-registered" by checking the appropriate checkbox.
FP DRP - CONTROL AFFILIATE
Control Affiliate CRD Number This control affiliate is: D a finn D a natural person
Registered: DYes D No
Full name of the control affiliate (including, for natural persons, last, first and middle names):
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D This is an amendment that seeks to remove a DRP record because the control affiliate(s) is (are) no longer associated with the funding portal.
B. If the control affiliate is registered through the CRD, has the control affiliate submitted a DRP (with Form U-4) or BD DRP to the CRD System for the event? If the answer is "Yes," no other information on this DRP must be provided. DYes DNo NOTE: The completion of this Form does not relieve the control affiliate of its obligation to update its CRD records.
Part 2
1. Action Type: (check appropriate item)
D Bankruptcy D Declaration D Receivership
D Compromise D Liquidated D Other----- 2. Action Date (MM/DD/YYYY): ______D Exact D Explanation
Ifnot exact, provide explanation: ______
3. Ifthe financial action relates to an organization over which the applicant or control affiliate exercise(d) control, enter organization name and the applicant's or control affiliate's position, title or relationship:
Was the Organization investment-related? DYes DNo
4. Court action brought in (Name of Federal, State or Foreign Court), Location of Court (City or County and State or Country), Docket/Case Number and Bankruptcy Chapter Number (if Federal Bankruptcy Filing):
5. Is action currently pending? DYes DNo
6. Ifnot pending, provide Disposition Type: (check appropriate item)
D Direct Payment Procedure D Dismissed D Satisfied/Released D Discharged D Dissolved D SIP A Trustee Appointed
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DOther ___
7. Disposition Date (MM/DD/YYYY): D Exact D Explanation
If not exact, provide explanation: ______
8. Provide a brief summary of events leading to the action, and if not discharged, explain. (The information must fit within the space
9. If a SIP A trustee was appointed or a direct payment procedure was begun, enter the amount paid by you; or the name of
trustee: ------
Currently Open? DYes DNo
Date Direct Payment Initiated/Filed or Trustee Appointed (MM/DDIYYYY): ______
D Exact D Explanation
If not exact, provide explanation: ______
10. Provide details to any status disposition. Include details as to creditors, terms, conditions, amounts due and settlement schedule (if applicable): ______
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BOND DISCLOSURE REPORTING PAGE (FP)
I GENERAL INSTRUCTIONS
This Disclosure Reporting Page (DRP FP) is an D INITIAL OR D AMENDED response used to report details for affinnative responses to Item 5-C(4) ofFonn Funding Portal.
Check item(s) being responded to: D 5-C(4)
Use a separate DRP for each event or proceeding. The same event or proceeding may be reported for more than one person or entity using one DRP. File with a completed Execution Page.
One event may result in more than one affirmative answer to Item 5-C(4). Use only one DRP to report details related to the same event. If an event gives rise to actions by more than one regulator, provide details for each action on a separate DRP.
1. Finn Name: (Policy Holder)
2. Bonding Company Name:
3. Disposition Type: (check appropriate item)
D Denied D Payout D Revoked
4. Disposition Date (MMIDDNYYY): D Exact D Explanation
If not exact, provide explanation:
5. If disposition resulted in Payout, list Payout Amount and Date Paid:
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6. Summarize the details of circumstances leading to the necessity of the bonding company action:
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BILLING CODE 8011–01–C with the exception of certain personally (1) 30 calendar days after the date a FORM FUNDING PORTAL identifiable information or other complete Form Funding Portal is INSTRUCTIONS information with significant potential received by the Commission or (2) the for misuse (including the contact date the funding portal is approved for A. GENERAL INSTRUCTIONS employee’s direct phone number and membership by a national securities 1. EXPLANATION OF FORM email address and any IRS Employer association registered under Section Identification Number, social security 15A of the Securities Exchange Act of • This is the form that a funding number, date of birth, or any other 1934 (‘‘Exchange Act’’). portal must use to register with the similar information). Securities and Exchange Commission • A registered funding portal must (‘‘SEC’’ or ‘‘Commission’’), to amend its 2. WHEN TO FILE FORM FUNDING promptly file an amendment to Form registration and to withdraw from PORTAL Funding Portal when any information registration. • A funding portal’s registration must previously submitted on Form Funding • The Commission may make become effective before offering or Portal becomes inaccurate or incomplete publicly accessible all current Forms selling any securities in reliance on for any reason. Funding Portal, including amendments Section 4(a)(6) through a platform. • A successor funding portal may and registration withdrawal requests, Under Rule 400, a funding portal’s succeed to the registration of a which may be searchable by the public, registration will be effective the later of: registered funding portal by filing a
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registration on Form Funding Portal that are registering as funding portals 4. NONRESIDENT APPLICANTS— within 30 days after the succession. with the SEC. Any applicant that is a nonresident • If a funding portal succeeds to and • Any member of the public may funding portal must complete Schedule continues the business of a registered direct to the Commission any comments C and attach the opinion of counsel funding portal and the succession is concerning the accuracy of the burden referred to therein. estimate on this Form and any based solely on a change of the C. EXPLANATION OF TERMS predecessor’s date or state of suggestions for reducing this burden. incorporation, form of organization, or This collection of information has been 1. GENERAL reviewed by the Office of Management composition of a partnership or similar APPLICANT—The funding portal and Budget in accordance with the reason, the successor may, within 30 applying on or amending this form. days of the succession, amend the clearance requirements of 44 U.S.C. registration on Form Funding Portal to § 3507. The information contained in ASSOCIATED PERSON—Any reflect these changes. this form is part of a system of records partner, officer, director or manager of • A funding portal must also file a subject to the Privacy Act of 1974, as the funding portal (or any person withdrawal on Form Funding Portal amended. The Securities and Exchange occupying a similar status or performing promptly upon ceasing to operate as a Commission has published in the similar functions), any person directly funding portal. Withdrawal will be Federal Register the Privacy Act or indirectly controlling or controlled by effective on the later of 30 days after Systems of Records Notice for these the funding portal, or any employee of receipt by the Commission, after the records. the funding portal, except that any person associated with a funding portal funding portal is no longer operational, B. FILING INSTRUCTIONS or within such longer period of time as whose functions are solely clerical or to which the funding portal consents or 1. FORMAT ministerial shall not be included in the meaning of such term for purposes of which the Commission by order may • Items 1–7 must be answered and all determine as necessary or appropriate in section 15(b) of the Exchange Act (other fields requiring a response must be than paragraphs (4) and (6) thereof). the public interest or for the protection completed before the filing will be of investors. accepted. Item 8 must be answered if CONTROL—The power, directly or • A Form Funding Portal filing will the funding portal wishes to withdraw indirectly, to direct the management or not be considered complete unless it from registration. policies of the funding portal, whether complies with all applicable • Applicant must complete the through contract, or otherwise. A person requirements. execution screen certifying that Form is presumed to control a funding portal 3. ELECTRONIC FILING—The Funding Portal and amendments thereto if that person: (1) is a director, general applicant must file Form Funding Portal have been executed properly and that partner or officer exercising executive electronically using the web-enabled the information contained therein is responsibility (or has a similar status or system, and must utilize this system to accurate and complete. functions); (2) directly or indirectly has file and amend Form Funding Portal • To amend information, the the right to vote 25 percent or more of electronically to assure the timely applicant must update the appropriate a class of a voting security or has the acceptance and processing of those Form Funding Portal screens. power to sell or direct the sale of 25 filings. • A paper copy, with original manual percent or more of a class of voting 4. CONTACT EMPLOYEE—The signatures, of the initial Form Funding securities of the funding portal; or (3) in individual listed as the contact Portal filing and amendments to the case of a partnership, has employee must be authorized to receive Disclosure Reporting Pages must be contributed, or has a right to receive, 25 all compliance information, retained by the applicant and be made percent or more of the capital of the communications, and mailings, and be available for inspection upon a funding portal. (This definition is used responsible for disseminating it within regulatory request. solely for the purposes of Form Funding the applicant’s organization. 2. DISCLOSURE REPORTING PAGES Portal). (DRP)—Information concerning the CONTROL AFFILIATE—A person 5. FEDERAL INFORMATION LAW applicant or control affiliate that relates named in Item 4 [as a control person] or AND REQUIREMENTS to the occurrence of an event reportable any other individual or organization • The principal purpose of this form under Item 5 must be provided on the that directly or indirectly controls, is is to provide a mechanism by which a applicant’s appropriate DRP (FP). If a under common control with, or is funding portal can register with the control affiliate is an individual or controlled by, the applicant, including Commission, amend its registration and organization registered through the any current employee of the applicant withdraw from registration. The CRD, such control affiliate need only except one performing only clerical, Commission maintains a file of the complete the control affiliate name and administrative, support or similar information on this form and will make CRD number of the applicant’s functions, or who, regardless of title, certain information collected through appropriate DRP. Details for the event performs no executive duties or has no the form publicly available. The SEC must be submitted on the control senior policy making authority. will not accept forms that do not affiliate’s appropriate DRP or DRP(U–4). FOREIGN FINANCIAL include the required information. If a control affiliate is an individual or REGULATORY AUTHORITY—Includes • Section 4A(a) of the Securities Act organization not registered through the (1) a foreign securities authority; (2) of 1933 [15 U.S.C. § 77d–1(a)] and CRD, provide complete answers to all of other governmental body or foreign Sections 3(h) and 23(a) the Exchange the questions and complete all fields equivalent of a self-regulatory Act [15 U.S.C. §§ 78c(h) and 78w(a)] requiring a response on the applicant’s organization empowered by a foreign authorize the SEC to collect the appropriate DRP (FP) screen. government to administer or enforce its information required by Form Funding 3. DIRECT OWNERS—Amend the laws relating to the regulation of Portal. The SEC collects the information Direct Owners and Executive Officers investment or investment-related for regulatory purposes. Filing Form screen when changes in ownership activities; and (3) a foreign membership Funding Portal is mandatory for persons occur. organization, a function of which is to
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regulate the participation of its members FOUND—Includes adverse final misdemeanor criminal information (or in the activities listed above. actions, including consent decrees in equivalent formal charge). Does not FUNDING PORTAL—A broker acting which the respondent has neither include other civil litigation, as an intermediary in a transaction admitted nor denied the findings, but investigations, or arrests or similar involving the offer or sale of securities does not include agreements, deficiency charges effected in the absence of a offered and sold in reliance on Section letters, examination reports, memoranda formal criminal indictment or 4(a)(6), that does not, directly or of understanding, letters of caution, information (or equivalent formal indirectly: (1) offer investment advice or admonishments, and similar informal charge).[End follow lit] recommendations; (2) solicit purchases, resolutions of matters. Dated: October 23, 2013. sales or offers to buy the securities INVESTMENT OR INVESTMENT- By the Commission. RELATED—Pertaining to securities, displayed on its platform; (3) Elizabeth M. Murphy, commodities, banking, savings compensate employees, agents, or other Secretary. persons for such solicitation or based on association activities, credit union the sale of securities displayed or activities, insurance, or real estate Note: The following exhibit will not appear referenced on its platform; or (4) hold, (including, but not limited to, acting as in the Code of Federal Regulations. manage, possess, or otherwise handle or being associated with a funding investor funds or securities. portal broker-dealer, municipal Exhibit A JURISDICTION—Any state of the securities dealer, government securities Comments Letters Received Regarding broker or dealer, issuer, investment United States, the District of Columbia, Title III of the JOBS Act the Commonwealth of Puerto Rico, the company, investment adviser, futures U.S. Virgin Islands, any other territory sponsor, bank, security-based swap Proposal to Implement Regulation of the United States, or any subdivision dealer, major security-based swap Crowdfunding (File No. S7–09–13) or regulatory body thereof. participant, savings association, credit ABA Letter 1: Letter from Catherine T. NONRESIDENT FUNDING union, insurance company, or insurance Dixon, Chair, Federal Regulation of PORTAL—A funding portal agency). Securities Committee, American Bar INVOLVED—Doing an act or aiding, incorporated in or organized under the Association, Mar. 20, 2013 abetting, counseling, commanding, laws of a jurisdiction outside of the ABA Letter 2: Letter from Catherine T. inducing, conspiring with or failing United States or its territories, or having Dixon, Chair, Federal Regulation of reasonably to supervise another in doing Securities Committee, American Bar its principal place of business in any an act. place not in the United States or its Association, Jun. 26, 2013 MINOR RULE VIOLATION—A ACA Letter: Letter from Divina K. territories. violation of a self-regulatory PERSON—An individual, Westerfield, Esq., Manager, American organization rule that has been Crowdfunding Association Inc., Oct. partnership, corporation, trust, or other designated as ‘‘minor’’ pursuant to a organization. 8, 2013 plan approved by the SEC or ACFIA Letter 1: Letter from John SELF-REGULATORY Commodity Futures Trading ORGANIZATION (SRO)—The Vassilliw, American Crowdfunding Commission. A rule violation may be Investment Association, Dec. 15, 2012 Financial Industry Regulatory Authority designated as ‘‘minor’’ under a plan if (‘‘FINRA’’) or any other national ACFIA Letter 2: Letter from John the sanction imposed consists of a fine Vassilliw, American Crowdfunding securities association registered with the of $2,500 or less and if the sanctioned Commission or any national securities Investment Association, Jan. 3, 2013 person does not contest the fine. (Check ACFIA Letter 3: Letter from John exchange or registered clearing agency, with the appropriate self-regulatory Vassilliw, American Crowdfunding as such terms are defined in Section 3 organization to determine if a particular Investment Association, Jan. 3, 2013 of the Exchange Act. rule violation has been designated as Acos Letter: Letter from Jim Acos, Jun. SUCCESSOR—A funding portal that ‘‘minor’’ for these purposes). 10, 2012 assumes or acquires substantially all of MISDEMEANOR—For jurisdictions AKickInCrowd.com Letter: Letter from the assets and liabilities, and that that do not differentiate between a Tony Reynolds, Founder, continues the business of, a registered felony and a misdemeanor, a AKickInCrowd.Com, May 11, 2012 predecessor funding portal that ceases misdemeanor is an offense punishable Alabama Development Office Letter: its funding portal activities. See Rule by a sentence of less than one year Letter from S. Douglas Smith, 400(c) of Regulation Crowdfunding (17 imprisonment and/or a fine of less than Founding Director of the Alabama _ CFR 24 .400(c)). $1,000. The term also includes a special Development Office and the Alabama 2. FOR THE PURPOSE OF ITEM 5 court martial. Department of Economic and ORDER—A written directive issued Community Affairs, Oct. 22, 2012 CHARGED—Being accused of a crime pursuant to statutory authority and ASBC Letter: Letter from American in a formal complaint, information, or procedures, including orders of denial, Sustainable Business Council, Jul. 16, indictment (or equivalent formal suspension, or revocation; does not 2012 charge). include special stipulations, AngelList Letter: Letter from Naval ENJOINED—Includes being subject to undertakings or agreements relating to Ravikant, CEO, AngelList, May 23, a mandatory injunction, prohibitory payments, limitations on activity or 2012 injunction, preliminary injunction, or other restrictions unless they are AppleSeedz Letter: Letter from EL temporary restraining order. included in an order. Mazyck, President, AppleSeedz.com, FELONY—For jurisdictions that do PROCEEDING—Includes a formal Jul. 23, 2012 not differentiate between a felony and a administrative or civil action initiated Applied Dynamite Letter: Letter from misdemeanor, a felony is an offense by a governmental agency, self- Randall Lucas, CEO, Applied punishable by a sentence of at least one regulatory organization or a foreign Dynamite Inc., May 4, 2012 year imprisonment and/or a fine of at financial regulatory authority; a felony ARS Letter: Letter from Mark Norych, least $1,000. The term also includes a criminal indictment or information (or Esq., Executive Vice President, general court martial. equivalent formal charge); or a General Counsel, Board Member,
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Arbitration Resolution Services, Inc., CFIRA Letter 6: Letter from Lon David Crowdfunding Offerings Ltd. Letter 1: Jul. 19, 2013 Varvel, Founding Member, CFIRA, Letter from Anthony D. Edwards, Arctic Island Letter: Letter from Scott Sept. 14, 2012 Esq., Founder, Crowdfunding Purcell, Founder, Arctic Island CFIRA Letter 7: Letter from Chris Offerings, Ltd., May 11, 2012 Crowdfunding Portal, Jun. 26, 2012 Tyrrell, Kim Wales and Charles Crowdfunding Offerings Ltd. Letter 2: Ayeni Letter: Letter from Debo Ayeni, Sidman, Founding Members, CFIRA, Letter from Marshall Neel, Esq., Dec. 23, 2012 Oct. 10, 2012 Crowdfunding Offerings, Ltd., May Bach Letter: Letter from David Bach, CFIRA Letter 8: Letter from Chris 11, 2012 Apr. 18, 2012 Tyrrell, Kim Wales and Charles Crowdfunding Offerings Ltd. Letter 3: Barnes Letter: Letter from Ryan Barnes, Sidman, Founding Members, CFIRA, Letter from Marshall Neel, Esq., Co- Aug. 22, 2012 Oct. 29, 2012 Founder, Crowdfunding Offerings, Basko Letter: Letter from Sue Basko, CFIRA Letter 9: Letter from Kim Wales, Ltd., May 11, 2012 Lawyer, Jun. 18, 2012 Founding Member, CFIRA, Nov. 26, Crowdfunding Offerings Ltd. Letter 4: Becotte Letter: Letter from Chase 2012 Letter from Marshall Neel, Esq., Co- Becotte, Aug. 31, 2012 CFIRA Letter 10: Letter from Scott Founder, Crowdfunding Offerings, Bedford Letter: Letter from Shante Jones, Purcell, Board Member, CFIRA, Dec. Ltd., May 11, 2012 Vice President, Bedford Stuvyesant 3, 2012 Crowdfunding Offerings Ltd. Letter 5: Unity Youth Resources, Inc., Feb. 14, CFIRA Letter 11: Letter from Kim Wales, Letter from Anthony D. Edwards, 2013 Founding Member, CFIRA, Dec. 4, Esq., Founder, Crowdfunding BeFounders Letter: Letter from William 2012 Offerings, Ltd., May 11, 2012 J. Mills, JD, BeFounders, Apr. 24, CFIRA Letter 12: Letter from CFIRA, Jan. Crowdfunding Offerings Ltd. Letter 6: 2012 21, 2013 Letter from Anthony D. Edwards, Begich Letter: Letter from Sen. Mark CFIRA Letter 13: Letter from Ryan Feit, Esq., Founder, Crowdfunding Begich, U.S. Senator, Jul. 18, 2013 Co-Founder & CEO, SeedInvest, and Bennet Letter: Letter from Sen. Michael Offerings, Ltd., May 11, 2012 Kim Wales, Founding Member, Crowdfunding Offerings Ltd. Letter 7: F. Bennet, U.S. Senator, Dec. 12, 2012 CFIRA, Mar. 11, 2013 Letter from Marshall Neel, Esq., Co- Black Letter: Letter from Michael Black, City First Letter: Letter from John Founder, Crowdfunding Offerings, Nov. 4, 2012 Hamilton, President, City First Ltd., Aug. 15, 2012 Blechman Letter: Letter from Bruce Enterprises, Jul. 4, 2013 Blechman, Apr. 13, 2012 CitySpark Letter: Letter from David B. Crowdlever Letter 1: Letter from Matt BlueTree Letter: Letter from Catherine V. Haynie, CitySpark.com, Apr. 25, 2012 Morse, Sr., Feb. 1, 2013 Mott, Founder, BlueTree Allied Coan Letter: Letter from Marc C. Coan, Crowdlever Letter 2: Letter from Matt Angels, Aug. 21, 2012 Apr. 11, 2012 Morse, Sr., Apr. 15, 2013 BrainThrob Laboratories Letter: Letter Coleman Letter: Letter from Matthew R. Cunningham Letter: Letter from William from Erin C. DeSpain, President, Nutting, Esq., Coleman & Horowitt, Michael Cunningham, AM, MBA, Jan. BrainThrob Laboratories, Inc., Nov. 8, LLP, Jan. 28, 2013 15, 2013 2012 Commonwealth of Massachusetts Letter: CyberIssues.com Letter: Letter from T.W. Brandon W Letter: Letter from Brandon Letter from William F. Galvin, Kennedy, BE, CEO of W., Apr. 16, 2012 Secretary of the Commonwealth, CyberIssues.com, Jun. 28, 2013 Buffalo First Letter: Letter from Kelly A. Massachusetts, Aug. 8, 2012 Dex Offshore Letter 1: Letter from David Maurer, Treasurer, Buffalo First CommunityLeader Letter: Letter from E. Simpson, CFA, Founder, CEO of Member, Buffalo Common Wealth Richard Weintraub, Chief Compliance Dex Offshore Entertainment LLC, Apr. LLC Assistant Treasurer, Buffalo Officer, CommunityLeader, Aug. 17, 14, 2012 Cooperative FCU, Apr. 16, 2012 2012 Dex Offshore Letter 2: Letter from David Bulldog Investors Letter: Letter from CompTIA Letter: Letter from Lamar E. Simpson, Dex Offshore Philip Goldstein, Bulldog Investors, Whitman, Director, Public Advocacy, Entertainment LLC, Apr. 16, 2012 Jul. 18, 2012 CompTIA, Jun. 28, 2012 Dex Offshore Letter 3: Letter from David Cera Technology Letter: Letter from Cones Letter: Letter from John Cones, Simpson, Dex Offshore Entertainment Michael Mace, CEO, Cera Technology, Apr. 19, 2012 LLC, Jul. 23, 2012 Apr. 13, 2012 Corporate Resolutions Letter: Letter Dex Offshore Letter 4: Letter from David CFA Institute Letter: Letter from Kurt N. from Joelle Scott, Director of Business Simpson, Dex Offshore Entertainment Schacht and Linda L. Rittenhouse, Intelligence, Corporate Resolutions LLC, Jul. 24, 2012 CFA Institute, Aug. 16, 2012 Inc., Apr. 19, 2012 Donovan Letter: Letter from Doug CFIRA Letter 1: Letter from Sherwood E. Crowd Startup Capital Letter: Letter Donovan, Oct. 1, 2012 Neiss, Crowdfund Investing from Travis E. Chapman, Esq., Crowd Donovan P. Letter: Letter from Patrick Regulatory Advocates (CFIRA), May Startup Capital, May 11, 2012 Donovan, Sep. 27, 2013 15, 2012 CrowdCheck Letter 1: Letter from Sara Durward Letter: Letter from James CFIRA Letter 2: Letter from Candace S. Hanks, CEO, CrowdCheck, Inc., Apr. Durward, May 7, 2012 Klein, Chair and Vincent R. Molinari, 30, 2012 EarlyShares Letter 1: Letter from Co-Chair, CFIRA, May 30, 2012 CrowdCheck Letter 2: Letter from Brian Maurice Lopes, CEO, CFIRA Letter 3: Letter from Candace S. Knight, Vice President, CrowdCheck, EarlyShares.com, Inc., Jul. 10, 2012 Klein, Chair and Vincent R. Molinari, Inc., Dec. 5, 2012 EarlyShares Letter 2: Letter from Co-Chair, CFIRA, Jun. 5, 2012 CrowdFund Capital Markets Letter: Maurice Lopes, CEO, CFIRA Letter 4: Letter from Kim Wales Letter from Robert J. Thibodeau, EarlyShares.com, Inc., Aug. 16, 2012 and Christine Landon, CFIRA, Aug. 9, President, CrowdFund Capital EnVironmental Letter: Letter from 2012 Markets, May 7, 2012 Richard W. Marks, President, CFIRA Letter 5: Letter from Kim Wales, CrowdFund Connect Letter: Letter from EnVironmental Transportation Founding member, and DJ Paul, J. Randy Shipley, Founder, Solutions, LLC, Jun. 14, 2012 Founding Member & CSO, CFIRA, CrowdFund Connect, Social Gravity Equistratus Letter: Letter from T.H. Ison, Aug. 22, 2012 Inc., Jul. 28, 2012 Equistratus, Mar. 22, 2013.
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Escrow.com Letter: Letter from Brandon InitialCrowdOffering.com, May 4, University of Pennsylvania, Dec. 17, Abbey, President and Managing 2012 2012 Director, Escrow.com, Aug. 31, 2012 International Franchise Association Moore Letter: Letter from Jason Moore, ExpertBeacon Letter: Letter from Mark Letter: Letter from Jay Perron, Vice Manager, Apr. 23, 2012 Law, CEO, ExpertBeacon.com, Seattle, President, Government Relations and Moss Letter: Letter from Frank H. Moss, Washington, Apr. 14, 2012 Public Policy, International Franchise Jr., Adjunct Professor of Info Systems Fairhurst Letter: Letter from Kraig Association, Jan. 31, 2013 & Tech, Sept. 26, 2012 Fairhurst, Apr. 11, 2012 Isenberg Letter: Letter from Daniel Movie Stream Productions Letter: Letter Feldman Letter: Letter from Aleksandr Isenberg, Ph.D., Apr. 15, 2012 from Dorian S. Cole, Movie Stream Feldman, Aug. 17, 2012 Jain Letter: Letter from Runjan A. Jain, Productions, Jun. 1, 2012 Ferguson Letter: Letter from Zachary Apr. 12, 2012 NanoIVD Letter: Letter from Sunnie P. Ferguson, Jun. 13, 2013 Koller Letter: Letter from Jonathan Kim, Founder, CEO, NanoIVD, Inc., Franken Letter: Letter from Sen. Al Koller, May 2, 2012 May 18, 2012 Franken, U.S. Senator, Jan. 4, 2013 Le Jeune Letter: Letter from Yann Le NASAA Letter: Letter from Jack Frankfurt Letter: Letter from Thomas Jeune, CEO, French Crowdfund Herstein, President, North American Selz, et al., Frankfurt Kurnit Klein & Platform, Sept. 1, 2012 Securities Administrators Selz PC, Dec. 28, 2012 Landon Letter 1: Letter from Christine Association, Jul. 3, 2012 Friedman Letter: Letter from Howard M. Landon, Jul. 18, 2012 NCA Letter: Letter from National Friedman, Professor of Law Emeritus, Landon Letter 2: Letter from Christine Crowdfunding Association, May 11, University of Toledo, Apr. 27, 2012 Landon, Jul. 18, 2012 2012 Front Page Letter: Letter from Robert Larkey Letter: Letter from Caren L. NSBA Letter: Letter from David R. Hoskins, Vice President, Media Larkey, Film Producer, May 23, 2012 Burton, General Counsel, National Relations, Front Page Public LeGaye Letter: Letter from Daniel E. Small Business Association, Jun. 12, Relations, Mar. 2, 2013 LeGaye, The LeGaye Law Firm, P.C., 2012 Frost Letter: Letter from Henry Frost, Sept. 7, 2012 Ohio Division of Securities Letter: Letter Sept. 17, 2012 Li Letter: Letter from H. Bruce Li, Ph.D. from Andrea L. Seidt, Commissioner, FundaGeek Letter: Letter from Cary P.E., Apr. 27, 2012 Ohio Division of Securities, Jan. 9, Harwin, President, Co-Founder, Leonhardt Letter 1: Letter from Howard 2013 FundaGeek.com, May 26, 2012 J. Leonhardt, CEO, Leonhardt Old Takoma Letter: Letter from Patricia Genedyne Letter 1: Letter from Thomas Ventures and CalXStars Business Baker, Executive Director, Old Braun, Genedyne Corporation, Aug. Accelerator, Co-Leader Startup, Takoma Business Association, May 16, 2012 California, Sept. 29, 2012 24, 2013 Genedyne Letter 2: Letter from Thomas Leonhardt Letter 2: Letter from Howard P2PVenture.org Letter: Letter from Braun, Genedyne Corporation, Sept. J. Leonhardt, Founder, Leonhardt Frederic Baud, President 11, 2012 Ventures, Jul. 11, 2013 P2PVenture.org, France, Sept. 1, 2012 Gomez Letter 1: Letter from Christian Liles Letter 1: Letter from Mike Liles, Jr., Parker Letter: Letter from Joe Parker, Gomez, Hayward, California, Nov. 12, Seattle, Apr. 17, 2012 CEO, Apr. 12, 2012 Pearfunds Letter: Letter from Hector 2012 Liles Letter 2: Letter from Mike Liles, Jr., Vizcarrondo, Co-founder & CEO, Gomez Letter 2: Letter from Chris Apr. 18, 2012 Pearfunds, LLC, Jul. 30, 2012 Gomez, Hayward, California, Nov. 24, Lingam Letter 1: Letter from Kiran Pena Letter: Letter from Fred Pena, May 2012 Lingam, Esq., Apr. 11, 2012 10, 2012 Gornick Letter: Letter from Stephen Lingam Letter 2: Letter from Kiran Petazzoni Letter: Letter from Enrico Gornick, May 20, 2012 Lingam, Apr. 24, 2012 Petazzoni, Feb. 15, 2013 Gregory Letter: Letter from Paul M. Lingam Letter 3: Letter from Kiran Philipose Letter 1: Letter from Roy Gregory, Aug. 2, 2012 Lingam, May 1, 2012 Philipose, Jun. 28, 2012 Grow VC Letter: Letter from Jouko Litwak Letter: Letter from Mark Litwak, Philipose Letter 2: Letter from Roy Ahvenainen and Valto Loikkanen, Co- Apr. 17, 2012 Philipose, Jun. 30, 2012 founders, Grow VC, Jun. 15, 2012 Lumeo.com Letter: Letter from Brian PMIRARQ Letter: Letter from Steven A. Hakanson Letter: Letter from Sten Erik McDonough, CEO & Founder, Cinelli, Founder & CEO, PMIRARQ, Hakanson, Sep. 18, 2013 Lumeo.com, Sept. 6, 2012 Jul. 26, 2012 Hansen Letter: Letter from Brian G. Loofbourrow Letter: Letter from Joe PPM Logix Letter: Letter from Mike Hansen, Oct. 17, 2012 Loofbourrow, Apr. 24, 2012 Stapleton, PPM Logix, May 22, 2012 Hemlof Letter: Letter from Loris Hemlof, MacDonald Letter: Letter from Larry A. Priore Letter: Letter from Robert Priore, Australia, Sept. 1, 2012 MacDonald, May 1, 2012 May 2, 2012 Hensel Letter: Letter from Karl Hensel, Markay Letter: Letter from Mark W. PREA Letter: Letter from Paul White, May 15, 2012 Kanter, Founder, Markay Company, Professional Real Estate Advisors Inc., High Tide Letter: Letter from Albert Jun. 25, 2012 Jul. 22, 2013 Hartman, CEO, High Tide, Jun. 4, Markel Letter: Letter from Thomas O. Projectheureka Letter: Letter from 2012 Markel, Jr., Apr. 26, 2012 Anthony and Erika Endres, Holofy Letter: Letter from Chris Nunes, Matthew Letter: Letter from Matthew L., Projectheureka LLC, Sep. 10, 2013 Esq., CEO, Holofy, May 15, 2013 Aug. 19, 2012 Ramos Letter: Letter from Robert Ramos, Hutchens Letter: Letter from Matthew C. Maugain Letter: Letter from Etienne Aug. 14, 2013 Hutchens, Sep. 29, 2013 Maugain, Apr. 12, 2012 RDA Letter: Letter from Harry Shamir, Immix Letter: Letter from Jerry Carleton, Merkley Letter: Letter from Sen. Jeffrey Principal, RDA Co., Apr. 16, 2012 Robert Scott, Kane Lemley, and John A. Merkley, et al., U.S. Senate, Dec. RentalCompare Letter: Letter from French, Immix Law Group PC, Oct. 4, 10, 2012 Darryl Aken, RentalCompare, Apr. 24, 2012 Mollick Letter: Letter from Dr. Ethan 2013 InitialCrowdOffering Letter: Letter from Mollick, Assistant Professor of Replay Games Letter: Letter from Paul Perry D. West, Esq., Management, The Wharton School, Trowe, Replay Games, Sept. 4, 2012
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Rey Media Letter: Letter from David Rey, Sjogren Letter: Letter from Karl M. The Motley Fool Letter: Letter from Ilan Rey Media, Apr. 24, 2013 Sjogren, Apr. 25, 2013 L. Moscovitz and John Maxfield, The RFPIA Letter 1: Letter from T.W. Sklar Law Letter: Letter from Navid Motley Fool, Jun. 27, 2012 Kennedy, BE., CEO, Kennedy More, Associate Attorney, Sklar Law, Tomkinson Letter: Letter from Paul Associates, Apr. 20, 2012 P.C., Jun. 24, 2012 Tomkinson, Sept. 21, 2012 RFPIA Letter 2: Letter from T.W. Skweres Letter: Letter from Mary Ann Totsie Productions Letter: Letter from Kennedy, B.E., Regulated Funding Skweres, Independent Film Kevin J. Tostado, Producer, Totsie Portal Industry Association, Jul. 25, Professional, Jun. 3, 2012 Productions, Jan. 20, 2013 2012 Spinrad Letter 1: Letter from Paul RFPIA Letter 3: Letter from T.W. Spinrad, Jul. 26, 2012 Tri Valley Law Letter: Letter from Marc Kennedy, B.E., Regulated Funding Spinrad Letter 2: Letter from Paul A. Greendorfer, Tri Valley Law, Apr. Portal Industry Association, Aug. 18, Spinrad, Jan. 2, 2013 27, 2012 2012 STA Letter: Letter from Charles V. Rossi, Verdant Ventures Letter: Letter from RFPIA Letter 4: Letter from T.W. President, The Securities Transfer Ross Randrup, Managing Member, Kennedy, B.E., Regulated Funding Association, Inc., Sept. 17, 2012 Verdant Ventures LLC, Jun. 17, 2012 Portal Industry Association, Aug. 18, Stafford Letter: Letter from Darrell M. Vermont Investors Letter: Letter from 2012 Stafford, Apr. 11, 2012 Sebastian Sweatman, Vermont Start.ac Letter: Letter from Rod Turner, RFPIA Letter 5: Letter from T.W. Investors Forum, Apr. 25, 2012 Kennedy, B.E., Regulated Funding CEO and Founder, Start.ac Vim Funding Letter: Letter from Shane Portal Industry Association, Jul. 9, CrowdFunding business, Jun. 12, 2013 2012 M. Fleenor, Vim Funding, Inc., Risingtidefunding.com Letter: Letter Stephenson Letter: Letter from Andrew Creator of Funding Launchpan, Co- from Neal C. McCane, CFA, Co- D. Stephenson, Esq., Washington, founder and CLO, Apr. 27, 2012 Founder, risingtidefunding.com, Sept. May 14, 2012 Vogele Letter: Letter from John Vogele, 26, 2012 Sutter Securities Letter: Letter from Dec. 26, 2012 Richter Letter: Letter from Paul W. Robert A. Muh, Chief Executive VS Technology Letter: Letter from Richter, PW Richter PLC, Feb. 7. 2013 Officer, Sutter Securities Michael Van Steenburg, CEO of VS Roberts Letter: Letter from Ward Incorporated, Oct. 25, 2012 Technology Inc., Aug. 31, 2012 Sykes Letter: Letter from Chad Sykes, Roberts, May 25, 2012 VTNGLOBAL Letter: Letter from Peter Apr. 15, 2012 RocketHub Letter 1: Letter from Alon Ojo, CEO, VTNGLOBAL, May 31, Tally Letter: Letter from John Tally, May Hillel-Tuch, Co-Founder & CFO, 2012 RocketHub.com, May 1, 2012 28, 2012 RocketHub Letter 2: Letter from Alon TechnologyCrowdFund Letter 1: Letter West Letter: Letter from Perry D. West, Hillel-Tuch, Founder & CFO, from Robert B. Nami, CEO/President, Esq., Apr. 13, 2012 RocketHub.com, Nov. 14, 2012 TechnologyCrowdFund.com, May 1, Whitacre Letter: Letter from William L. Rocketjet Letter: Letter from Daniel E. 2012 Whitacre, Esq., Apr. 18, 2012 Nelson, Ph.D., JD, Chairman, TechnologyCrowdFund Letter 2: Letter Whitaker Letter: Letter from John R. Rocketjet Corporation, Apr. 13, 2012 from Robert B. Nami, President/CEO, Fahy, Partner, Whitaker Chalk Romano Letter: Letter from Robert TechnologyCrowdFund.com, May 30, Swindle Schwartz PLLC, Nov. 8, 2012 Romano, Apr. 12, 2012 2012 Windhom Letter: Letter from Stevario Schumer Letter: Letter from Jacob J. TechnologyCrowdFund Letter 3: Letter Windhom, Jun. 13, 2012 Schumer, Staff Editor, Vanderbilt from Robert B. Nami, President/CEO, Journal of Entertainment and TechnologyCrowdFund.com, Jun. 5, Winfiniti Letter: Letter from Dan Grady, Technology Law, Sept. 4, 2012 2012 CEO, Winfiniti, Inc., Apr. 11, 2012 Schwartz Letter: Letter from Andrew A. TechnologyCrowdFund Letter 4: Letter Williams Letter: Letter from John P. Schwartz, Associate Professor of Law, from Robert B. Nami, President/CEO, Williams, Feb. 7, 2013 University of Colorado, Jun. 13, 2013 TechnologyCrowdFund.com, Jun. 7, Williams K. Letter: Letter from Keith Shefman Letter: Letter from Michael 2012 Williams, Mar. 2, 2013 Shefman, Aug. 21, 2013 TechnologyCrowdFund Letter 5: Letter Wright Letter 1: Letter from Martin Sidman Letter 1: Letter from Charles L. from Robert B. Nami, CEO/President Wright, Aug. 7, 2012 Sidman, MBA, Ph.D., Manager, TechnologyCrowdFund, Jun. 28, 2012 Wright Letter 2: Letter from Martin Crowdfunding Investment Angels, TechnologyCrowdFund Letter 6: Letter Wright, Aug. 7, 2012 Nov. 30, 2012 from Robert B. Nami, CEO/President Sidman Letter 2: Letter from Charles L. TechnologyCrowdFund, Jan. 16, 2013 Wright Place Letter: Letter from Dr. Sidman, MBA, Ph.D., Manager, The Growth Group Letter: Letter from Letitia S. Wright, May 4, 2012 Crowdfunding Investment Angels, Elliott Dahan, Managing Partner, The [FR Doc. 2013–25355 Filed 11–4–13; 8:45 am] Mar. 8, 2013 Growth Group, May 1, 2012 BILLING CODE 8011–01–P
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